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The AHF 50: Top 50 Affordable Housing Developers, #29 Gorman & Company, Inc.

By Christine Serlin, Affordable Housing Finance, April/May 2014

#29, Gorman & Company, Inc.

Gorman and Co., based in Oregon, Wis., isn’t just a housing developer.  The company considers itself a community developer, too, building in revitalizing areas in Arizona, Florida, Illinois, and its home state.  One of Gorman’s major accomplishments for 2013 was finding new sources of financing for that work.

“We have to be prepared if there are real jolts to traditional funding, like low-income housing tax credits (LIHTCs) or historic tax credits,” says COO Tom Capp.  “That’s a bit of the motivation why we’re looking at new sources.”

The firm has had recent success with the government’s EB-5 program, which offers foreign citizens a Green Card if they’ll invest $1 million in an American project that creates or preserves jobs primarily in community development areas.

Gorman is redeveloping the Pabst Brewery site in Milwaukee with three projects.  The first was Blue Ribbon Lofts, 100 affordable units financed with LIHTCs and historic tax credits.  The second was a historic hotel and restaurant, where the company utilized the EB-5 investments.  The third will be market-rate workforce housing with equity from a Chinese developer.

“These financial sources are fueling projects like workforce housing and elements communities want to see us executing in the revitalizing areas,” says Capp.  “These sources are touching housing, but not intermingling with the LIHTC.”

The firm has also received approval from HUD’s Rental Assistance Demonstration program for a 300-unit public housing development in Phoenix.

Gorman & Company, Inc. Named in the Top 50 Affordable Housing Developers of 2013

April 10, 2014

Affordable Housing Finance named Gorman & Company, Inc. in the top 50 affordable housing developers for 2013.

Historic Tax Credit Tool Box: Three Historic Tax Credit Developers’ Plans for the Future

By John Tess, Heritage Consulting Group, Novogradac Journal of Tax Credits, March 2014

Since 1976, federal tax incentives have been provided to encourage developers to rehabilitate historic properties rather than replace them. Over the years, the preservation tax incentives program has seen significant changes in incentives. The current federal historic preservation tax incentives program provides a 20 percent historic perseveration tax credit (HTC) for qualified rehabilitation expenditures (QREs) incurred by property owners rehabbing certified historic structures for nonresidential or residential rental uses. A 10 percent HTC is available for older buildings placed in service prior to 1936. In addition, because of the success of the federal program, many local and state incentives have been created throughout the country to assist in rehabilitating historic buildings.

It is generally acknowledged that the federal HTC program has been one of the nation’s most successful and cost-effective urban revitalization programs. The National Trust for Historic Preservation reports that since 1981, the HTC has leveraged nearly $106 billion in private investment, created more than 2.35 million jobs and adapted more than 38,700 buildings.

However, the program’s decades of accomplishment faced a significant challenge in 2012, when a federal appeals court denied federal HTCs to an investor in what has become known as the Historic Boardwalk Hall Case. The Internal Revenue Service (IRS) added fuel to the fire when, shortly after the court case, it issued Office of Chief Counsel Memorandum (CCM) 20124002F, which disallowed tax credits claimed by an HTC investor. These two decisions upset the program’s history of success and disrupted many HTC developers’ plans.

Historic Boardwalk Hall and CCM 20124002F     The Novogradac Journal of Tax Credits and other publications have covered the two decisions extensively, but industry stakeholders are still exploring the implications of the latest development, Revenue Procedure 2014-12. In Rev. Proc. 2014-12, released Dec. 30, 2013 and updated Jan. 9, the IRS provided the long-awaited guidance that establishes a safe harbor for HTC equity transactions. As the HTC community reviews that guidance, three major developers share their plans for the future and discuss how the safe harbor affects those plans.

Kimpton Hotels and Restaurants Plans for Growth     Kimpton Hotels and Restaurants was founded in San Francisco in 1981 by Bill Kimpton, an investment banker turned hotelier. Kimpton is generally credited with the introduction of the first boutique hotel and specialty hotel collection in the United States. While Kimpton initially invested in San Francisco, the brand eventually moved into the Pacific Northwest and then across the country. Today, Kimpton owns or manages 62 hotels; more than half of the hotels are in old or historic rehabilitated buildings. Not initially a user of the HTC, Kimpton has found the tax credits to be an essential ingredient in its rehabilitation projects. One of Kimpton’s major historic renovations was the 2000 renovation of Washington, D.C.’s Tariff Building, which is a National Historic Landmark.

Kimpton is in the midst of a period of expansion and growth under the leadership and oversight of CEO and President Michael Depatie. “The time is right to grow our footprint; we will have twice the number of hotels in the next five years,” says Depatie. “Our growth will continue to focus on urban locations and the preservation and restoration of old or historic buildings through adaptive reuse, a practice that has allowed Kimpton to develop and restore prime real estate at the center of bustling urban locations.”

Ben Rowe, Kimpton’s chief financial officer, welcomed the IRS guidance and noted the importance of the HTC in the company’s work. “The Boardwalk situation created a lot of uncertainty in the marketplace, but did not keep us from looking for deals. It’s good to have this situation largely resolved. We expect to see more equity players coming back into the market. Hotel construction is challenging to finance and our historic building conversions would not be feasible without the help of historic tax credits,” Rowe said.

HRI Properties Expects Market to Normalize     Founded in 1982 by Edward B. Boettner and Pres Kabacoff, HRI is headquartered in New Orleans, La. HRI is a full-service real estate development company and is considered a national leader in the historic preservation development community. HRI says it is dedicated to the pursuit of rebuilding neighborhoods and recreating entire communities. Through its subsidiaries, HRI has completed 61 large-scale projects. The projects include 4,854 apartment units, 3,911 hotel rooms and more than 1.2 million square feet of office and retail space and have a total funding value of $1.8 billion. HRI continues its mission by developing technically innovative and aesthetically pleasing landmarks in cities throughout the country.

Hal Fairbanks, HRI’s vice-president of acquisitions, says HRI continues to be aggressive in the marketplace. During the time between the original Boardwalk Hall decision and the release of Rev. Proc. 2014-12, HRI continued to pursue deals under the assumption that the guidance would clarify rather than undermine the ability to use HTC. That is not to say that the market did not slow during the period between the Boardwalk Hall decision and the IRS guidance. Fairbanks noted that while HTC deals continued to be available, the ability to close was tough. Now that the guidance is out, Fairbanks looks forward to the market going back to normal, with some certainty. However, he does note that some investors have been slow to reenter the market place.

Fairbanks says that HRI continues to look for mixed -use projects in urban areas. HRI’s main focuses are the residential and hospitality markets with specialized retailing to support those activities.

Gorman & Company Welcomes Certainty     Gorman & Company was founded in 1984 by Gary Gorman, an attorney turned developer. After graduating from law school in 1980, Gorman represented developers and syndicators who were raising capital from investors. He gained a reputation for crafting complex financial arrangements. Gorman & Company has grown steadily and today the company employs 235 people nationwide with a development portfolio of approximately $560 million. The firm owns and manages nearly 4,000 housing units and manages another 1,100 for other owners, with satellite offices in Phoenix, Miami, Chicago and Milwaukee.

Gorman & Company has carved out a national reputation for downtown revitalization and historic renovations using HTCs and other creative financing vehicles. The firm often finds itself approached by cities interested in the renovation of old factory districts or troubled inner-city neighborhoods.

Tom Capp, Gorman & Company’s chief operating officer, said that the diversity of the company’s projects protected it somewhat from the effects of the Boardwalk Hall case and that he did not notice it to the same extent as other developers. “Every one of our deals generally have quite complex structures with many funding sources,” Capp said. “With resolution of the Boardwalk issues and the new guidance we are sure that it will help put more certainty in our historic deals. Without the credits it makes many of these difficult, if not impossible.”

Regarding growth, Capp said “over the last several years we have been expanding our market area. While we do new construction, we especially like historic deals.” Gorman & Company is continually looking for new deals. The company likes public-private partnerships and prefers housing, although the company finished its first hotel deal in Milwaukee at the Old Pabst Brewery site last year.

Conclusion     It’s safe to say that developers will be developers. Being the chameleons and risk-takers they are, developers will adjust to the marketplace and continue to develop regardless of market condition changes. With respect to the rehabilitation of historic properties, the developers quoted here are optimistic about the market. However, they also feel that historic rehabilitation projects would not occur if not for the federal HTC program. While other incentives are helpful in making these projects work, without the federal HTC program, they could not fill the critical financing gaps involved in rehabilitation projects. Although the Boardwalk Hall case may have temporarily cooled investors’ appetites for HTCs, it does not seem to have changed developers’ appetites for deals. The IRS’ safe harbor ruling has provided the framework for future deals and should foster a period of new projects.

John M. Tess is president and founder of Heritage Consulting Group, a national firm that assists property owners seeking local, state and federal historic tax incentives for the rehabilitation of historic properties. Since 1982 Heritage Consulting Group has represented historic projects totaling more than $3 billion in rehabilitation construction. He can be reached at 503-228-0272 or jmtess@heritage-consulting.com.

Former real estate lawyer Gary Gorman overcomes early challenges to build successful business

By Tom Daykin, Journal Sentinel, September 30, 2013

Gary Gorman was a real estate attorney when he decided he’d rather be a developer, instead of the guy who gives developers legal advice.

Gorman & Co. was launched in 1984. Within a few years the firm was focusing on apartment buildings, aimed at lower income renters, partly financed with federal affordable housing tax credits, along with projects that use historic preservation tax credits. Today, located in the Dane County community of Oregon, the firm has 230 employees, operates dozens of properties in Wisconsin, Illinois, Florida and Arizona, and annually develops apartment buildings and other projects costing around $75 million.

The firm’s Milwaukee-area developments include the new Brew House Inn & Suites, a hotel created at the former Pabst brew house, along with Blue Ribbon Lofts, apartments developed within the brewery’s former keg house. The company also plans for another apartment development at the Pabst complex, now known as The Brewery.

Gorman recently met at the Brew House Inn to talk about his early challenges as a developer — including a partner who was a cocaine addict — how the firm grew, and its new foray into the hotel sector. Here’s an edited transcript of that interview.

Q.How did you become a developer?

A. When I got out of law school (in 1980) I was hired by a firm and promoted by that law firm as somebody who knew something about real estate syndication, which is just a fancy term for putting together a group of investors to do deals. I represented developers and syndicators for four years.

Then they offered me a partnership. And I thought, if I become a partner, then I’m going to stay. And it really wasn’t what I wanted to do. I was more intrigued by the business side. So, June of ’84, I left the law firm. I teamed up with two other guys (including a marketing expert). One guy that was older, more experienced and allegedly had more money.

Q.Did it turn out he didn’t have any money?

A. Well, you’re guessing the rest of the story. Our basic strategy was that we were going to put existing properties under contract, we were going to raise the equity capital by selling limited partnership shares, buy the properties, have somebody else manage them, and then we sell them after five years and take a piece of the profits. That was the idea.

So, within about six months of leaving the law firm, the marketing guy and I started seeing these letters coming in from collection agencies, and dunning letters from banks and other creditors to this older guy. The bottom line is he had this white powder problem that I didn’t know about. Should have done better due diligence. His frequent trips to Jamaica were not just to lay in the sun.

Q.What happened?

A. The marketing guy and I left him and formed our own little shop. And we did one deal in 1985 called Seminary Park Apartments, in Evansville, Wis. It was a small deal, 24 units. It was a historic rehab of abandoned school buildings that had previously been a private school for boys. So it had been empty for a long time.

It was immensely complicated for a small deal, and we probably made about $1.50 an hour. But that created a track record. At the end of that deal, the marketing guy said, “I can’t live like this any more. I never know if we’re going to have the deal, not have the deal. I don’t know if I’m going to have a paycheck.” (So the partner left the firm.)

Q.How did it feel to be on your own?

A. It felt a little lonely. Then tax reform started heating up and it eventually passed in 1986. That changed the tax code completely, and it eliminated a lot of the benefits of investing in real estate. But it created a new tax credit, the affordable housing tax credit. So I thought maybe I could work with that.

Q.Did you just immediately think there’s just unlimited opportunity there?

A. No, God no. I thought: Would this ever work? And who would ever invest seeking this credit? And should I go back and beg my senior partner at the law firm to take me back? All those thoughts were going through my head. And there were times when I literally ran out of money.

I worked with a law firm and an accounting firm to put together four private placements in 1987 that were raising capital for (tax credit) deals that another builder built because I didn’t have the capacity to build anything. It was a lot of work.

I got a call one day (in 1987 from Boston Financial). They had a fund that had raised money to invest in these tax credits, and would I be interested in having that fund invest as the equity investor?

Q.And you said, “Would I?”

A. I kind of held the phone away like, is this really happening? Absolutely, I wanted to.

Q.With the advent of the fund, I assume your life got a lot easier in terms of financing.

A. It did. Trying to find investors that put in $5,000 apiece a year was tough. The first institutional deal was a big break-through.

Q.At what point were you starting to do multiple projects a year?

A. I think we did two a year in ’88 and ’89. (As the firm grew, it added in-house property management and construction divisions. In 1995, it hired Tom Capp, a former Fitchburg mayor who is now Gorman & Co.’s chief operating officer.)

Q.Was adding Tom a turning point?

A. It really was. It added a level of political sophistication that, frankly, I didn’t have. He really knows how to work with city planners, mayors, elected officials, plan commissions. He knew that mentality. He had a greater level of patience with the political process.

Then we started to grow, did more projects. All of the equity was from institutional investors. Then we thought we would internalize the architectural function. We did that in ’99. At that point we sort of had the bones of an integrated development firm. That’s where we are today.

Q.What percentage of your business comes from affordable housing developments?

A. Probably 85%.

Q.How did you first get involved in doing the Brew House Inn & Suites?

A. (During a presentation to some Chinese government officials who were visiting Madison, Gorman was impressed with the interpreter, University of Wisconsin-Madison law student Ying Chan. Gorman hired him as an intern.) I was paying him, but I really didn’t know what he was doing. He was going to seminars here and there, and then he left when he graduated from law school.

He called me about six months later and said that he had been successful raising money through this EB-5 program (in which foreign citizens receive green cards in return for job-creating investments in the United States) for an immigration attorney out of the state of Washington who had never done a development deal before. I said, Ying, if you can raise money for someone who has never done anything before in the development area, it ought to be easy for you to raise money for us.

We had done Blue Ribbon Lofts, and we thought, where can we find another historic (preservation) deal that was of some size? Talking to the Zilber folks (owners of the Pabst complex), they pointed us to this building. The reason it’s a hotel rather than an apartment building is that to attract EB-5 capital you have to create jobs. A hotel and (restaurant) produce a lot more jobs than an apartment building.

Q.You’ve never done a hotel before, right?

A. No, but we have a regional manager, Laura Narduzzi, who’s got 25 years experience (in the hotel industry). I completely defer to her judgment on designing the hotel, running the hotel. I’ve stayed in a thousand of them but I don’t know anything about running them. I’m learning a little bit now, though.

Q.What have you learned?

A. The staffing level is much higher than an apartment building. The service level is huge. You have to have skilled, well-paid people on site, all the time.

Q.Are you making money?

A. We’re doing OK. Is it belching cash? No, not in the early phases. But we’re doing a lot better than our projections showed.

Q.Are you going to do other hotel investments?

A. We have a deal in Kenosha, called Heritage House. It’s a historic building. We’re about to convert that into a boutique historic hotel. I just made a presentation to the mayor of Rockford, Ill., and his staff on a project there that would be a historic hotel combined with a conference center. I made a presentation in Butte, Mont., with a concept of a similar combination of a historic hotel and a conference center. It’s opened up another area for us.

Q.But you’re going to continue to primarily be an apartment developer, right?

A. Yeah, that’s our core competency.