They say it’s a game changer.
A dream maker.
Supporters believe Union Row, the massive, $950-million office, retail and residential project in downtown Memphis’s blighted east edge will be a catalyst for enormous additional investment.
“That’s a Cinderella story,’’ Mark Billingsley said in December after he and fellow Shelby County Commissioners voted to pump $100 million into the project.
Developers contend Union Row will create 4,300 jobs and generate $16 million in annual property, sales and hotel taxes. If all phases are completed, the project will be among the largest, if not the largest “mixed-use’’ real estate development in Memphis history.
Here’s a crash course on the people, planning and financing behind the project.
The project will be built in stages. Phase One, with a construction price tag of about $512 million, represents about half of the overall $950-million venture.
Developers spent $25 million this year — much of it with cash — snatching up an array of parcels where Phase One will rise: Collectively, a 10.8-acre site roughly bounded by Union on the north, Danny Thomas on the east, Beale on the south and Fourth on the west.
Developer J. Kevin Adams believes Union Row will reshape downtown.
“This is the gateway to our downtown,’’ he told a gathering in April at East Memphis’ Crescent Club. “And it’s been blighted for a long time.’’
The site is in decay. Vacant or overgrown lots surrounded by razor wire line the streets amid bits of broken glass. Now out-of-place businesses have agreed to move, including auto repair shop Powerhouse Motors and Lit Restaurant Supply, housed in a repurposed car dealership first opened in 1935.
Demolition is set to begin in October or late fall.
Though the Downtown Memphis Commission’s design review board still must approve building plans, developers envision an urban renaissance:
Sleekly designed buildings. Sweeping walkways where tourists stroll along generous open spaces. Restaurants and shopping. Offices where hundreds of people will work.
The still-evolving design includes plans for two hotels — one large, another boutique — with a total of 300 rooms. There’s a residential apartment campus where 700 or more families could live. A medium-sized grocery. There would be enough office space — up to 300,000 to perhaps as much as 350,000 square feet — to fill or nearly fill downtown landmarks such as Brinkley Plaza and the 22-story Lincoln American Tower combined, and maybe even have some space left over.
Then throw in another 90,000 square feet of retail.
Inspiration for Union Row comes from Avalon, a tony mixed-use community in suburban Atlanta, and Water Street, a $3 billion mega-development in Tampa backed in part by Microsoft billionaire Bill Gates.
“They have a lot of this kind of green public space that gives the opportunity to do some really cool things,’’ says Adams, 58, who’s brought Looney Ricks Kiss architects and the Montgomery Martin construction firm to the project.
Adams, the former CEO of CB Richard Ellis’s Memphis office, has been involved in plenty of big projects in his 34 years in commercial real estate in Memphis, but nothing quite this grandiose.
The same goes for his partner, David Dlugolenski.
“We’re really trying to create a district within the downtown area,’’ said Dlugolenski, 43, of Atlanta, who specializes in raising private equity and has built several luxury senior living projects in the Southeast.
It’s that district concept that energizes Union Row’s supporters. It will fill a blighted gap — “Memphis’s “donut hole,’’ Dlugolenski calls it — to connect the Beale Street entertainment district to the medical district and tourist magnet Sun Studio.
One unique feature is a giant pedestrian land bridge — a half-acre park — that would run for 100 yards over Danny Thomas Boulevard. The overpass, which developers have labeled “The Lid,” would provide a direct link from the central entertainment district to The Edge, the fast-developing commercial and residential neighborhood east of downtown.
Adams said he hopes to include the land bridge in Phase One but will need to work out a plan with the Tennessee Department of Transportation first.
Phase One improvements would be paid for by a mixture of property tax revenue raised through Tax Increment Financing (TIF), public loans for parking, private equity from wealthy investors and private loans taken by the developers. Though numbers are in flux, about $512 million is needed to build Phase One.
The overall financing — the “capital stack’’ as developers like to say — essentially breaks down like this:
- TIF: $100 million
- Private borrowing: $225 million
- Private equity: $113 million
- Parking garage loans: $50 million
- Other sources: $24 million
The County Commission and the City Council agreed in separate votes in December to approve TIF funding for Phase One. Under state law, a TIF plan must receive approval from local taxing authorities that produce the revenue.
That plan aims to capture the increase in property taxes triggered by the improvements at the site. Instead of flowing into public coffers, that new property tax revenue will be diverted into the project.
It works like this:
- Currently, the 20 parcels comprising the site collectively generate about $190,000 a year in city and county property taxes.
- Once construction is completed, the developers expect those same 20 parcels to generate $9 million a year in property taxes. That increase – roughly $8.8 million in new annual taxes – is the ‘increment’ part of Tax Increment Financing.
- Not all of the $9 million goes back into the project. About $1.7 million goes to the city and county as tax payments. Other shares totaling $2.1 million go the County Trustee and toward paying long-standing debts owed by the city and county.
- The remaining $5.15 million in annual tax revenue would be steered to the project, according to tables presented to the state comptroller.
- The promise of receiving those revenues – as much as $155 million over 30 years – would be pledged by developers to secure financing. The financing would come either from private sources or from bonds issued by the Downtown Memphis Commission’s affiliate board, the Center City Revenue Finance Corporation.
A resolution passed by CCRFC allows for the sale of up to $100 million in bonds to be repaid with TIF tax revenue. The board must give final approval to the bond sale if developers choose to go that route.
An extra step
State law typically restricts TIFs to 20 years and limits the use of TIF tax revenue to “public infrastructure’’ such as roads, storm sewers and utility lines. Indeed, the Union Row developers proposed several public improvements in their TIF application, including $7.9 million for parks and “The Lid,” $4.5 million for street improvements and a new access road that will run through Union Row and $3.1 million for storm water drainage.
But with special approval from the state, this TIF allows two significant extra steps: it’s been extended to 30 years and the resulting dollars approved for private use. Citing the project’s anticipated positive impact, state Comptroller Justin P. Wilson and Economic and Community Development Commissioner Robert O. Rolfe issued letters in January approving the extension as in the “best interest’’ of Tennessee.
Union Row’s development team anticipates using $27 million in TIF revenue for land acquisition and closing costs and another $16.4 million for architectural, design and engineering services, paperwork shows.
Prompting the state’s “best interest’’ ruling was a study paid for by the developers. It estimates Union Row will create 4,317 direct and indirect jobs with an annual payroll of about $195 million, including some 1,900 employees working in retail and another 2,200 in the development’s office buildings. According to numbers presented to the state comptroller, the project also would generate about $15.9 million a year in property, sales and hotel taxes.
Downtown Memphis Commission President Jennifer Oswalt said this month her agency was still negotiating a development agreement with the Union Row team but neither her agency nor any government entity would have any liability to repay TIF bonds or loans.
“So they (the developers) are at risk for the bonds. If their projections run short, then they are at risk. And they’re on the hook for that,’’ Oswalt said.
A TIF is designed to allow developers to build a project that otherwise wouldn’t be economically possible “but for’’ the infusion of incentives.
Likewise, without private equity investors the project couldn’t move forward.
Dlugolenski is a bridge to that money. As founder of SageStone Partners, a private equity firm, he has ties to a dozen or so “family offices’’ – private wealth management advisory firms that, as defined by Investopedia.com, “serve ultra-high-net-worth investors.’’
Dlugolenski (the first ‘l’ is silent: it’s pronounced doo-go-len-ski), founded SageStone in 2017 as the outgrowth of a long career in fund management, investment banking and private equity. That includes 11 years at the French financial services company, Societe Generale, where he served as chief of staff to the head of the investment banking division for the Americas in New York.
Since 2013, he’s also run Aspire Development Partners, a real estate development firm that’s built a series of senior retirement homes in Georgia and Florida.
Dlugolenski declined to name the various family offices he teams with, but one that’s been made public is Third Lake Capital. Headed by longtime Republican Party insider Kenneth P. “Ken” Jones, Tampa Bay-based Third Lake manages investments for the family of Ashley Furniture founder Ron Wanek. Third Lake is also the majority equity partner in Union Row.
Dlugolenski said he anticipates half or perhaps even most of the project’s private equity to be raised from wealthy investors through a newly created federal tax shelter known as opportunity zone funds. Passed by Congress in 2017 as part of the Tax Cuts and Jobs Act of 2017, the provision promotes investment in distressed neighborhoods by limiting capital gains taxes on those investments.
Nationwide, as many as 8,762 Census tracts have been designated as opportunity zones, including 176 in Tennessee. In Shelby County, 32 tracts received the designation. Those local tracts are clustered in four areas: Millington, Whitehaven, the University Memphis area and a wide swath from north to south Memphis that runs along the eastern edge of downtown Memphis. That latter cluster includes the 11-acre site where Union Row would rise.
The tax break works like this:
- Investors can defer taxes on previously earned capital gains – typically, earnings made when selling stocks, businesses or other investments – by reinvesting those gains into qualified opportunity zone funds within 180 days.
- The deferment on those taxes continues until the end of 2026 or the investment is sold.
- Investors who keep earnings in an opportunity zone fund for five years can exempt 10 percent of gains from taxes. They can exclude 15 percent if they hold it for seven years.
- They can avoid paying taxes altogether on gains if they keep their opportunity zone investment for 10 years.
Dlugolenski plans to form a Union Row opportunity zone fund by year’s end but said it’s not a deal breaker – the project will move forward with or without it.
“The opportunity zone capital was just kind of the icing on the cake,’’ he said.
Union Row would create an immense demand for parking – as many as 2,000 or more spaces will be needed, according to estimates.
To help meet that demand, the City Council and County Commission freed up $50 million in public money to build two parking garages. Under the complex and still-evolving arrangement, the developers plan to build both garages by using money from an obscure pot of funds overseen by the Downtown Memphis Commission called the Payment In Lieu of Taxes Extension Fund. It was created in the late 1990s specifically for parking.
The developers would be required to repay the $50 million as part of a long-term loan arrangement.
Union Row’s original plan called for as many as 2,664 parking spaces, but Adams and DMC’s Oswalt said in July they’ve since agreed to scale back to between 2,000 to 2,200 spaces.
It’s expected two garages will cost more than the $50 million available through the extension fund. That higher parking cost is one reason DMC agreed to seek extra TIF money.
New markets tax credits
The developers’ application indicates they intend to use $10.8 million in so-called New Markets Tax Credits, benefits available through the U.S. Treasury Department’s Community Development Financial Institutions Fund. The benefits are made available to attract private investment to distressed communities.
This story first appeared at www.dailymemphian.com under exclusive use agreement with The Institute. Photos reprinted with permission of The Daily Memphian.