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Publication: Arkansas Democrat-Gazette;Date: Mar 10, 2009;Section: Front Section;Page: 1

Block 2 Lofts in LR for sale, owners confirm

BY AMYJO BROWN ARKANSAS DEMOCRAT-GAZETTE

The Block 2 Lofts, a collection of three historic buildings containing 145 apartments and nine
commercial spaces in downtown Little Rock that the state helped finance nine years ago, is for sale, a
spokesman for the property’s owner has confirmed.

The move follows the state’s early release of land-use restrictions that reserved more than half of the
$21 million development’s apartments for low-income tenants.

The restrictions, put in place in exchange for more than $12 million in tax-exempt revenue bonds and
$3.5 million in tax credits, were released in June 2008 after the prior owners of Block 2, the Block 2 Limited
Partnership, defaulted on the bonds. Lone Star Funds, a private global equity firm, purchased the debt in
2007 and foreclosed on the property in March 2008.

The land-use restrictions — released when Lone Star foreclosed on the property — thwarted an earlier
attempt to sell the property to Stephens Inc. in 2006 because the restrictions required Block 2 to remain a
housing development for 30 years and limited the number of apartments that could be rented at market
rate.

“I’m obviously disappointed,” said Paul Esterer, one of the original developers of the proj- ect, now chief
operating officer for Vanadis 3 Companies, LLC, in Bentonville.

Esterer and his partner in the development, Todd Rice, formed the Block 2 Lofts Limited Partnership to
build and manage the apartment complex. They sold their interest in the partnership in 2003 at the
request of their partners, an out-of-state collection of investors, Esterer said.

“We did everything right. It was leased up and stabilized and was cash-flowing,” he said, adding that it
has been rough watching the project’s demise.

Rice declined to comment on the project.

Of the 145 apartments in the three buildings at the corner of Markham and Main streets, only 73 were
occupied at the end of 2008, according to the annual rent roll submitted by the property’s owners Feb. 26
to the state Development Finance Authority, which provided the bonds and tax credits for the project.

Of those, 26 were occupied by low-income tenants, according to the report. Eighty-eight of the 145
units in the development were reserved for low-income when the project secured state assistance.
Low-income is defined as those earning less than 60 percent of the median gross income in Pulaski
County. In 2000, when Block 2 opened, the median gross income in Pulaski County was $47,100,
according to the federal Department of Housing and Urban Development. By 2008, that figure had risen to
$57,900.

Current tenants living in lowincome units have until June 2011 before deciding whether to move or pay
market-rate rents.

Interest in the future of Block 2 is high among those with a stake in the downtown area. The
development is located across the street from the Statehouse Convention Center and the Peabody Little
Rock hotel, both of which city officials have said are in need of more room for parking and meeting space.

The development is also part of the tourism corridor that connects the convention center to the River

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Market District.

“It’s a very important corner,” said Sharon Priest, executive director of the Downtown Little Rock
Partnership. “We would like to see something there that brings people to downtown.”

“It’s main street Arkansas,” said Little Rock Mayor Mark Stodola. “It’s probably the most important corner
in the state of Arkansas. I’d like to see it maximized.”

Ed Trissel, a spokesman for Lone Star Funds, declined to discuss the company’s plans for the property
beyond confirming it was for sale.

Calls to the firm’s management company, LBK Management Services, were not returned.

Stephens Inc. spokesman Frank Thomas said the Little Rock investment bank was no longer interested
in the property. The Little Rock Housing Authority, which expressed an interest last year in acquiring the
Kramer School Artist’s Cooperative, another of Esterer and Rice’s developments, is also not interested in
Block 2, Executive Director Shelly Ehenger said Monday.

Real estate brokers for Little Rock’s Advertising and Promotion Commission — which tried in June to
acquire the eastern half of Block 2 through condemnation but ended with only the block’s north corner
parking lot — are talking with the property owners, said the commission’s chairman, Jim Shamburger.

Shamburger said the commission’s interest is in knowing the future plans of its neighbors. He said that
for now, it’s unlikely the commission could afford to buy the rest of Block 2.

Stodola said the city’s purchase of the parking lot gives the city, at a minimum, a stake in the block’s
future.

This is not the first time city officials have been invested in the outcome of the Block 2 development.

The project has generated interest from the day Esterer and Rice began talking about converting the
properties that make up Block 2 into the space it is today, according to news accounts, public records and
interviews with those who were involved in the opening of the project in June 2000.

“It looked on paper like the perfect revitalization project for downtown Little Rock. How could you miss?”
said Derrick Rose, spokesman for the state Development Finance Authority, which issued the bonds and
credits that helped the developers renovate the three buildings that make up the 1.09-acre site known as
Block 2: the 1924 nine-story Wallace Building, the 1920 seven-story Beal and Burrow Building and the
1920 three-story Democrat Printing and Lithograph Building.

The Block 2 project is one of only three multifamily bond issues approved by the state that have
defaulted. The other two, Huntington Apartments in Little Rock (now Autumn Park) and Winberry
Apartments in West Memphis (now Steeple Chase), were foreclosed on in 2005.

The authority issued its last multifamily revenue bonds in 2004. Staff at the authority said they couldn’t
remember a project financed with tax credits ever failing.

Yet, “I don’t know that we wouldn’t make this deal again today. I certainly know we would entertain the
possibility of doing something like that again,” Rose said.

Former Mayor Jim Dailey also said the project was a worthwhile goal.

The city sold the Wallace Building to the developers for $400,000 in 1999. It also granted the
developers $288,260 in city funds — a controversial decision at the time that used state law meant to
subsidize the rehabilitation of housing in blighted neighborhoods.

“Things happen along the way; sometimes they don’t happen as well as you anticipated,” Dailey said.
“In one sense, it is easy to do a 20/20 hindsight. But if I had the same facts, I think I’d do it over again.”

Esterer said the project, at a minimum, was one of the catalysts for the renovation of downtown as a

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project that established a base for demand.

He said he blames Block 2’s financial problems on out-ofstate investors who felt they could profit more
with different management of the project.

“We made every one of our obligations,” Esterer said.

R. Lee Harris, president and chief operating officer of the Kansas City, Mo.-based NAI Cohen-Esrey
Real Estate Services Inc., however, said he believed the project could not have succeeded as originally
structured. Harris managed Block 2 for about a year beginning the fall of 2003 but left in a disagreement
with investors over the need to pay down the project’s debt.

Harris said his company realized the project couldn’t sustain itself.

“We determined that even with strong occupancy, the numbers just [didn’t] work on this deal,” he said.
“As we got more familiar with the project, it became very clear that there was no way we were going to be
able to get those rents at the level they were initially projected. We also realized they were counting way
too much on the commercial space and the income [those spaces] would provide.”

“This was a very nice property,” Harris said. “It just had way too much debt to be supported by the
income stream that was being generated.”

The project also had other trouble early on.

The Internal Revenue Service began auditing the project in 2002. According to a settlement agreement
signed Dec. 3, 2004, the IRS determined that 92.5 percent of the proceeds generated by the sale of the
tax-exempt revenue bonds were used in the construction of the Block 2 apartments — rather than the 95
percent required by federal law, meaning that some of the bond proceeds had been spent on ineligible
construction costs.

The project had also failed to get approval from the governor authorizing the sale of the bonds. The
approval was eventually received from the governor July 2, 2002.

The partnership, including Esterer and Rice, agreed to an early redemption of 2.5 percent of the original
bond amount — or $300,500. They also agreed to pay $110,000 to the IRS, half of which was paid by the
partnership and the other half paid by its bond counsel.

Esterer said he disagreed with Harris’ view that the project was over-extended from the beginning.

“We had 14 attorneys, 10 different underwriters, market studies, appraisals — everything supported it,”
he said. “It’s not like we guessed.”

He said criticism of the project is hard to take and that some don’t appreciate the work and money that
goes into preserving historic properties.

But Esterer said he’s still holding out hope that the Block 2 buildings stand forever, “Because we put a
lot into saving them.”

Dailey

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Stodola

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