Philadelphia’s Musical Fund Hall – Case Study for a Real Estate Development Project

In the mid-twentieth century, some of the nation’s concert halls experienced financial challenges and fell into disrepair as the orchestras they incubated moved on to other performing locations.

In the face of the New York Philharmonic’s move to newly-constructed Lincoln Center, Carnegie Hall in New York City was nearly demolished in 1960. Fortunately, the Citizens Committee for Carnegie Hall, headed by violinist Isaac Stern and other influential New Yorkers, persuaded the State of New York to purchase Carnegie Hall. They then formed a nonprofit to restore Carnegie Hall to the glory it now experiences.[1]

The Musical Fund Hall,[2] which was the Philadelphia Orchestra's first home in the 19th century, faced a similar fate in the mid-20th century. Although Musical Fund Hall was not demolished, unlike Carnegie Hall, it no longer hosts concerts. Rather, in 1981, a developer (which I will call the “MFH Developer”) purchased Musical Fund Hall and redeveloped it as condominiums.[3]

Real Estate Development Financing Structure

Historical articles about Musical Fund Hall's redevelopment don't describe the developer's financing structure. So, using the Musical Fund Hall's redevelopment as an example, this blog will examine how the financing might have looked.

To start, we will need a cast of participants:

  • MFH Developer– assembles the capital stack (described below) and manages Musical Fund Hall's restoration
  • Construction Lender–the mortgage lender for the Construction Loan
  • MFH Fund– owns Musical Fund Hall, provides equity, and uses the funds from the Construction Loan to pay for the restoration and construction. The MFH Fund also will sell the condo units.
  • Real Estate Broker–the real estate broker will sell the condos to the ultimate owners
  • Condo Mortgage Lender–the MFH Fund and Real Estate Broker might team up with a mortgage lender to facilitate mortgage loans for condo buyers. This may or may not be the same as the Construction Lender.

A capital stack includes all debt and all forms of equity that used to finance the project. Let’s assume that the MFH Developer utilized a typical capital stack involving a construction loan (let’s assume 60-65% of the cost).  The rest of the redevelopment would be funded with equity. The MFH Developer might provide about five percent (5%) of the equity.  The remaining equity would come from outside investors into a real estate development fund (which we will call the MFH Fund).

If there is a plan to presell as many condo units as possible, there might be two classes of equity in the MFH Fund. The first would be a shorter-term, preferred class redeemable as deposits for pre-sales of condo units are received. The remainder of the equity would be a common class. The common equity would only be redeemed after completion of construction and final sale of the condo units.

Who Gets Paid When?

With this structure, from highest to lowest priority (i.e. who gets paid back first), the typical capital stack likely would be as follows:

Construction Loan (60-65% of capital stack)–the Construction Lender will provide a mortgage loan to MFH Fund to redevelop Musical Fund Hall. Although the loan documents and mortgage for the full amount would be signed before the reconstruction starts, typically Construction Lender will only disperse funds from the Construction Loan as work is completed. This not only protects the Construction Lender from a disreputable developer, but it also can benefit MFH Fund. Typically, interest will not accrue on Construction Loan funds until they are dispersed.

The Construction Lender would receive only payments of principal and interest on the Construction Loan. The Construction Lender would not otherwise share in profits from the development.

  • Preferred Equity in the MFH Fund (5-10% of capital stack)–the MFH Fund might have a preferred class of equity. Preferred equity in real estate funds may be used in lieu of a short-term mezzanine or bridge loan.  Here, Preferred Equity might provide temporary financing for anticipated pre-sales of condominium units. 

Preferred Equity typically receives only a fixed return plus return of its capital. It is called preferred equity, because it is paid before the Common Equity holders receive their return. Unlike Common Equity holders (described below), Preferred Equity holders would not otherwise share in the profits from the project. 

The Preferred Equity would be redeemed using deposits from condo pre-sales. The ratio of Preferred Equity to Common Equity would depend upon the project's underwriting.

  • Common Equity in the MFH Fund from outside investors (19%-28% of capital stack)–The bulk of the equity likely would be common equity. Like Preferred Equity, Common Equity typically receives a minimum return and return of its equity. Common Equity also typically receives a percentage of any profits from the project after all capital has been returned.  The remainder of the profits would go to the MFH Developer for its “carried interest” (described below). If condominium sales do not go as well as planned, it is the Common Equity holders who stand the most to lose, but they also have the most to gain if things go well.
  • Equity in MFH Fund from MFH Developer (2%-6% of the capital stack)–Most Construction Lenders require that the project developer contribute at least five percent (5%) of the equity. MFH Developer likely would acquire Common Equity.  If the Common Equity investors include a private equity fund, MFH Developer’s equity might be subordinate to the Common Equity.
  • MFH Developer carried interest (0% of capital stack)–The carried interest isn't part of the capital stack. MFH Fund’s carried interest would entitle it to receive percentage of the profits with the Common Equity holders once all capital has been returned. 

MFH Developer might receive payments on its carried interest before return of capital to the Common Equity holders. If so, there probably would be a “clawback."  A clawback would require MFH Developer to pay back any amounts it received if Common Equity holders otherwise would not receive return of their capital.

The IRS Gets its Share Too

Most development projects are set up to build or renovate a project with a goal of selling it for a profit. For tax purposes, the real estate (condo units) is considered akin to “inventory.” It is not considered real estate held for business or investment purposes.

This tax distinction is important for two reasons:

  • Income from the sale of the condo units will be taxed at ordinary income rates, rather than capital gains rates.
  • Because the real estate is not held for business or investment purposes, it is not eligible for deferral of the gains upon sale under Section 1031.

Likewise, payments to MFH Developer due to its carried interest also will be taxed as ordinary income.

However, all is not lost under the tax code. Since MFH Fund would be considered a partnership for tax purposes, the MFH Fund is the classic “pass-through” entity under the tax law. As such, investors in the MFH Fund likely will be eligible for a tax deduction equal to 20% of their income from the fund, provided the MFH Fund meets certain criteria.

Don’t Try This at Home on Your Own!

This is just a case study of a possible real estate development capital stack and real estate fund. These are complex transactions, which require specific expertise in real estate, finance, tax, and securities law. Plus, each project has its own, unique, needs, which should be incorporated into the structure.

However, properly structured, a real estate development project can save a historic property like Musical Fund Hall, help to revitalize a city through provision of walkable housing, and also make money for the developer and investors involved.

© 2018 by Elizabeth A. Whitman

DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice to any person. No one should take any action regarding the information contained in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless and until a written contract is signed by all parties and any conditions in such contract are fully satisfied.


[1] To learn about the amazing history of Carnegie Hall, check out “Carnegie Hall Then and Now.”

[2] Music Fund Hall opened on December 29, 1824 by the Musical Fund Society. It was the site of many important political events, as well as music concerts and authors. Violinists Ole Bull, Camillo, and Henri Vieuxtemps and singers Jenny Lind and Henrietta Sontag all appeared there in the 19th century. Marquis de Lafayette attended a reception in his honor there in 1825. In 1837, Pennsylvania’s first Constitutional Convention was held there, and in 1856, the first Republican national convention was held at Music Fund Hall. Charles Dickens, Ralph Waldo Emerson, and Arthur Conan Doyle all spoke there.

[3] Musical Fund Hall was purchased by a developer in 1980, after decades of decline into a dilapidated condition. See Musical Fund Hall by Sarah Carroll on Phila Place. After the renovation, Musical Fund Hall lost its Landmark designation from the National Park Services, but it continues to be listed on the National Register of Historic Places. See National Park Service website for more information.