Tax Credits, TIF, and a $2M Sculpture: How One Developer Fills the Gap

In 2017, almost nobody knew what C-PACE was, and most deals were well under $1 million. Josh Krsnak needed $7 million of it to help put the Minnesota Wild's practice rink on the roof of an old Macy's in downtown Saint Paul, and that loan made Hempel Real Estate the first-ever client of PACE Loan Group. In Episode 5 of The Chameleon of the Cap Stack, Josh Krsnak, CEO of Hempel Real Estate, sits down with PLG CEO Rafi Golberstein to walk through nearly a decade of creative capital stacks: a dead mall reborn in Milwaukee, senior living planned at the start of Covid, a downtown Minneapolis office tower bought at roughly 50 cents on the dollar, and a historic conversion whose last $2 million may come from a totem pole. The rule underneath all of it is that the cheapest cost of capital wins, and PACE is the piece of the stack you can qualify for in days, not months. Real deals, real cap stacks, real decisions. For more on C-PACE and PACE Loan Group, visit http://goPLG.com and subscribe wherever you listen. What we get into: • Treasure Island Center: a $72M Macy's conversion with the Minnesota Wild's practice facility on the roof, $7M short • Why a 10% gap could not carry equity pricing, and how a $7M PACE loan closed it when most PACE deals were a fraction of that • Sponsorship as credit: lender in 2011, equity partners in 2013, first PACE deal in 2017 • PACE on roughly 75% of Hempel projects, financed almost entirely with local and regional banks • Not always about rate: recourse exposure and bank lending limits as reasons to bring in PACE • PACE at ~8% vs. equity costing mid to high teens • The Avenue, Milwaukee: a mall found on a website called Dead Malls, now 250,000 SF of office, just under 300 apartments, ~100,000 SF of retail, and a 23- restaurant food hall • Senior living in Wisconsin: 25-year fixed PACE around 7%, ~5% of the stack, leverage near 65%, and all equity back through cash flow and refi • LaSalle Plaza, Minneapolis: bought through the note at ~50 cents on the dollar and a ~16% cap rate, with PACE funding the elevator upgrade • The Pence Building: a $14M gap on 114 units, closed with ~$9M of historic tax credits, city TIF, and a ~$2M totem pole CHAPTERS • 0:00 Cold open: "That's a very unique name" • 0:44 Intro: Josh Krsnak, PLG's first-ever C-PACE client • 1:52 Treasure Island Center: a Wild practice rink on a Macy's roof, $7M short • 4:37 Who Hempel Real Estate is, and why the cheapest cost of capital wins • 7:08 Closing a $7M PACE loan in 2017: lender consent, CAM pass-through, and sponsorship • 10:07 Why ~75% of Hempel deals use PACE: recourse, bank limits, and cheaper- than-equity pricing • 13:12 The Avenue: rebuilding a Milwaukee dead mall piece by piece • 15:58 Renaming the mall and reshaping downtown Milwaukee • 17:18 Senior living at the start of Covid: 25-year fixed PACE and all equity back • 19:51 Re-tenanting an office when the lender won't add debt • 20:55 LaSalle Plaza: a foreclosed Minneapolis office tower at ~50 cents on the dollar • 23:04 PACE for the elevators, and seven pieces in one office capital stack • 24:57 The Pence Building: a Class B bet becomes 114 units, $14M short • 28:11 The three T's of development: tax credits, TIF, and a $2M totem pole • 30:07 Advice to developers: PACE qualifies in days, HTC and TIF take months • 32:21 The secret sauce: 8% money instead of 15 to 18%, and wrap • 33:33 Outro