The nonprofit Playhouse Square Foundation is using some of the proceeds of a tax-exempt, $80 million junk-bond offering to finance a $139 million, 34-story luxury apartment tower in downtown Cleveland’s theater district.
The bonds will be sold through Cleveland Cuyahoga County Port Authority.
KeyBanc Capital Markets is the senior manager on the transaction and Squire Patton Boggs is bond counsel. The bonds, rated BB-plus by S&P Global Ratings, are slated to price Tuesday.
“The basis for tax exemption here is the Internal Revenue Service 501(c)(3) status of the Playhouse Square and the fact that this is a residential rental property for family units is key to that,” said Tim Kelly, Director at KeyBanc Capital Markets. “The project is consistent with their mission of urban revitalization.”
Kelly said Playhouse Square’s nonprofit status came into question when it sought to do the tax-exempt bonds because of the real estate it owns. “Ultimately as long as it's consistent with their mission they can hold the not-for-profit status,” he said, adding that Playhouse has been strategic about what it has purchased and hosts tenants like Cleveland State University and other non-profit entities.
Since its founding, Playhouse Square's role has evolved from showcasing traditional entertainment and education programming to providing development services. Accordingly, Playhouse Square has two primary businesses: Playhouse Square foundation that is the traditional theatre operation and the Playhouse Square Real Estate Services that focuses on property management. The foundation owns and operates 11 performance spaces.
“We are turning what is already a parking lot into something much more beneficial for our neighborhood and for downtown Cleveland, which is really what Playhouse Square’s not-for-profit mission is about: driving economic vitality in the region,” said Art Falco, CEO and president of Playhouse Square. “This financing will further help bring together and connect the more than one million guests we welcome annually for more than 1,000 events.”
Roughly $50 million of bond proceeds will be used to finance a portion of the construction of the residential project called The Lumen and associated parking garage. The project will include about 318 apartments, 530 parking spaces and 22,000 square feet of resident amenities. Construction started in early April and is expected to be completed in 2020. Playhouse Square's financial projections place apartment rents at $2.35 per square foot or roughly $3,500 for a 1500-square-foot apartment.
Approximately $30 million will refinance existing debt tied to Playhouse Square’s other real estate and to prepay a portion of a loan to finance renovations to its Idea Center building.
The bonds are secured by Playhouse Square Foundation revenues. Kelly said that the loan agreement stipulates that if there were ever a deficiency in repayments, Playhouse Square would have to reach to other revenue sources to make sure the bonds paid off.
“It’s not entirely project based,” Kelly said. “Only a portion of proceeds are for the 34 story apartment building so it’s not like 100% of the bond financing hinges on success of that project.”
Kelly said that investors can be confident that there is significant cushion within the structure. He said that an investor presentation on pro forma coverage of the bond payments showed that even when assuming zero occupancy within the residential project, with no revenues flowing from the project building, the Playhouse Square going out as far as five years would still have coverage of more than 1.8 times.
The deal allows the nonprofit to lock in a low, fixed interest rate, free up more cash for the apartment project by accessing untapped equity in Playhouse Square's other buildings and take on a much smaller construction loan - $65 million, to be split among four banks - than a private developer would need.
Along with the bond proceeds the project will also use funding from a construction loan provided by KeyBank National Association and the Huntington National Bank, a $1 million grant from the state and a $1 million loan from the city of Cleveland. The bank loan will close in late June 2018. Playhouse Square has committed nearly $17 million in equity to the project, along with a $5 million reserve.
Playhouse Square currently has approximately $131 million in debt outstanding as of fiscal year end 2017.
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Corrected May 31, 2018 at 5:04PM: The original version of the story misspelled Tim Kelly's last name.