Heritage Square, Golden Belt city incentives moving forward

There's a very good article by Ray Gronberg in today's Herald-Sun on the proposed incentive financing for the redevelopment of Heritage Square and the Golden Belt Manufacturing Co. sites by Scientific Properties, Andy Rothschild's Durham-based development firm that's tackled the Venable and several other downtown projects.

Some key points at hand from Gronberg's piece:

• The inclusion of GBMC -- which is intended to provide live/work space for artists, music performing spaces, and some office and restaurant space -- into the incentives package for Heritage Square is a new happening; previously, the incentives under discussion were just for the Heritage Square shopping center.
• The current plans for Heritage Square call for about 300,000 square feet of retail and 200,000 square feet of office and possibly hotel space; up to 100 apartments/condos are possible.
• The incentives for both projects would include $2 million in streetscape improvements and $4.1 million in tax breaks to the developer over ten years. The developer still needs an additional $6.2 million in gap financing to make the deal work.

Is this a good idea? I think many folks are at an inflection point in thinking about how these incentives work, and what the need is for them today. There's a strong current of thinking that downtown's success is proven, and that it's time for developers to stand on their own in bringing these projects to life. At the same time, there's also real concern that single-developer mega-projects overwhelm the ability of local developers to play (as discussed around the DAP proposal), and that massive developments like American Tobacco and West Village will tend to favor national firms from design/construction all the way to the selection of which retailers will get to lease on the site.

Personally, I think Rothschild's plan is a sound one and worthy of city investment, for a number of reasons:

• To my mind, city incentive dollars can make sense for existing large facilities like Golden Belt that, by dint of their need for all-at-once redevelopment under single ownership, require significant up-front investment. It also seems reasonable that incentives are more appropriate for developers willing to work in underfunded and more blighted districts, versus districts like Brightleaf that have already demonstrated their viability. Heritage Square and Golden Belt meet both of these challenges.
• There is tremendous concern that ongoing development downtown will price out small businesses in general and artists in particular. Rothschild has both contributed to but also been sensitive to this issue, as this Indy Weekly piece covered. To my mind, the fact that Golden Belt would have a focus on space for the arts and music performance is a plus, and not something most developers would try to do. Of course, from there we get into questions about who could afford the space, what the impact would be on initiatives like BCHQ and other more organic projects, and so forth.
• The inclusion of GBMC in the plan is a boost for East Durham in an area where the City has spent tremendous amounts of tax dollars on projects like Hope VI and Eastway Village. Shoring up residential with some commercial and arts activity cements this corner of the district and represents investment in East Durham, which has traditionally been neglected by developers.
• Although there's been sensitivity about the impact of Rothschild coming in to the vestiges of Hayti with the Heritage Square project, a number of business-owners in the existing complex have complained about the poor maintenance of the existing facility, and have expressed their support the redevelopment, having been offered the opportunity to re-open their businesses in the new complex.
• The inclusion of such a substantial retail component in the Heritage Square plan bodes well for the presence of more local businesses and businesses that will serve the surrounding neighborhoods.

To the extent that opposition is likely, it's doubtlessly going to be spearheaded by the Hesters, owners of the Phoenix Square and Phoenix Crossing shopping centers near Heritage Square, and active participants in the unsuccessful Rolling Hills project. The Hesters have been advocating vocally for a $25 million (or more) streetscape investment on Fayetteville Street. They've acknowledged this would be a major boon to their properties' value, but they've also argued that this would be an appropriate investment in this part of Durham.

I'm not convinced that they're wrong that Fayetteville Street needs aesthetic improvements. At the same time, however, the payback from the Heritage Square investment is substantial enough to justify this financial support. First, only $2 million of the $6 million are hard dollars; since the remainder are discounts on property and sales taxes, these incentives represent foregone tax dollars that wouldn't have come in anyway without the Rothschild redevelopment. Once the ten year discount window expires, there's a stronger tax base to provide the city with revenue.

At the same time, for this initial investment of $2 million in hard dollars, the City is estimating the creation of 1,300 jobs. Durham County earlier this year approved $1 million in County incentives for Merck for 60 jobs and a $100 million plant investment -- though only after $40 million in tax incentives and other governmental dollars from outside the county. And let's not talk about the ridiculous largess to Google out in western N.C. Frankly, from a return-on-investment perspective, this one looks pretty good.

Frankly, I'm not convinced the Hesters have a leg to stand on on this fight -- particularly in light of the fact that their Phoenix Crossing shopping center cost $4.2 million, with a staggering 20% of that coming in the form of city-backed grants and subsidized loans in the late 1990s. It's hard to take seriously an argument that spending $2 million of hard dollars and foregoing some of the new tax revenue is unfair when, as a percentage of the development, Scientific would be receiving a much smaller investment.

Comments

[Steve R]

I agree that this seems like a fair deal for all involved, but I hope the City has their eyes wide open when regarding Rothschild's capability. I recently conducted some research for an investment group interested in the various businesses working Downtown which involved speaking to various vendors, clients, employees etc of these companies. Rothschild appears to have little problem acquiring investment dollars for his projects but he is quickly developing a reputation as a sketchy business person and employer. Clients mentioned unresponsiveness to requests, vendors and contractors spoke of delinquent payments and bounced checks and his employee turnover has been 70-80% in the last 12 months. It is not remarkable that a new/small business would have any of these issues, but Rothschild is working on two projects that are much bigger than what he has completed already and it would be very unfortunate for Durham if he fails to deliver.

[Michael Bacon]

I like the way this deal is structured -- I'm getting more and more convinced that while all things called "incentives" aren't bad things, the giveaway of cash to a company is a mistake.

If I were doing economic development, I would structure incentives almost entirely in the form of tax relief and infrastructure improvements. On the former, as Kevin points out, the city is really just temporarily forgoing cash it wouldn't have had anyway. If done right, the latter is a semi-permanent improvement. If Dell or Google or whoever decides to pick up and move 10 years later, the infrastructre improvements remain. I'd happily spend $2 on improvements instead of $1 on cash incentives.

[DTH]

According to a more detailed article about this in the News & Observer Rothschild feels the incentives are needed so that he can get a 15% return on his/his backers investments. I have no problem with people making money, but don't think it is the responsibility of Durham taxpayers to help Rothschild realize this profit.

http://www.newsobserver.com/682/story/566288.html

[J Reardon]

Is no one else tired of hearing about rich white guys asking Durham for help funding their business projects? I am not sure I see how the Heritage Square project will be creating an estimated 1300 jobs(unless they are counting construction, but where will these jobs go when construction is complete?). I can see that it will create space for a bunch of people to work or live, should their company decide to lease this space instead of any of the other available nobody knows how many hundred thousand square feet of commercial property there will be Downtown in two years.

I am sure there will be some new businesses locating in Durham, provided they are incentivized properly. Presumably these companies will require employees to relocate here. Are these new residents going to require 50-80% less in terms of the civic resources that would be there without these tax breaks?

One of the reasons Durham (and the rest of NC) is considered to be a good place to live/do business is because we have lower taxes than much of the rest of the country. I think that is a pretty good incentive to do business here, especially if you can afford to send your kids to a private school.

Perhaps instead of asking for help Rothschild might consider what many smart business people would do when faced with a funding gap; cut back on either your expenses or your expected ROI.

[Lucy]

It is interesting to note a difference between the N&O and Herald Sun coverage of this story. The Herald Sun states that Scientific Properties needs an additional $6.2 million "from an as-yet unidentified source" to make this work. The N&O points out that Scientific Properties expects Durham County to cover this, but does not detail if this will be cash, tax concessions or something else. So the city/county donation will likely be $12-$13 million.

Assuming this all is approved. It is also interesting to note that Scientific Properties recently hired Don Moffitt, who is Chairman of The Durham Planning Commission. While having the DPC Chair on staff might not get you as many favors as, say, having someone like Durham's Mayor working for your property development company. But it probably does make dealing with the city a bit easier.