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February 18, 2008

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Comments

Jason G.

Don't be afraid of dropping into corporate finance speak... your readers aren't dumb, and it is a critical area that these deals depend on.

Fascinating stuff, keep up the good work.

KeepDurhamDifferent!

More corporate finance, please. Why aren't they using tax-increment financing? Float bonds based on the increased property tax revenues, and let the market decide whether the long-awaited Durham renaissance (at least the third in my lifetime) will come to fruition.

Bull City Rising

Hey, glad to see the financials are useful to folks.

David: Not sure I follow what the benefit of TIF would be relative to this deal. Though I'm not an expert in TIF, this deal actually seems "stronger" from the city's perspective relative to Greenfire's than TIF might be.

First off, TIF is usually used as a means to finance an up-front city capital investment that's then paid back by gains in property tax revenues over time. But much of those gains are siphoned off to pay the debt financing, and in some TIF instruments, the municipality is on the hook if the development doesn't bring materialized benefits.

In this case, the developer is funding the capital expense from equity or debt -- likely the former, if the rumors of Irish-based deep pockets behind Greenfire are accurate -- and the City is paying out incentives that are less than the property tax increment on the back end. The City's analysis doesn't factor in any rise in that tax revenue, and the incentives don't go up (I think) if the tax revenues rise. Plus, if Greenfire fails to carry through with all the buildings in the deal, they lose all their incentives going forward, but the City still has the increased tax base -- and any of the unimproved City lots revert back to Durham municipal control.

Seems like this is much less risky for the City than a TIF structure. Durham would be rewarding the developer for success, not participating in the risk.

Or am I missing something in my analysis? (Like I said, I'm no TIF expert.)

Johnny

Wow - lots of risk. I'm so glad for the charitable Greenfire that they would do all this just for us.

I think a little more digging into the total value of city/county/state/federal incentives needs to be disclosed. In addition to the direct benefits from the city somewhat disclosed in the documents there are: County incentives, State/Fed Historic Tax Credits, Landmark status credits, etc.. There are also some creative values with the air of legitimacy in terms of the value of the decks/land for purchase. I find it difficult to believe the E Chapel Hill Deck and Surface lot are valued at approx $2mil. I'm also struck by the value of the DAP properties, why are they valued at $3.4mil but the tax appraisal is roughly $1mil?? Is this a stealth subsidy, either that or we had a great December in the local economy.

Speaking of risk - How are the obvious and substantial risks of this project being disrupted during its execution being managed? Stopping future incentive payments seems pretty minor in reality. How about the immediate and unconditional transfer of all formerly public properties back to the city ownership so a replacement developer can continue the project (and no progress payments - it's all or nothing). I've seen too many urban renewal projects fail due to financial situations and sit idle for years - talk about urban blight, how about a mound of parking deck debris on East Chapel Hill.

Let me be clear - my desire is not to stop this project. My desire is to see a project successfully complete where everyone benefits in a fair manner and the result is a renewed and vibrant city center. However, I see a lot of positive PR coming through the press and blogs and nobody asking relevant questions and challenging the conclusion reached by the office of economic development. Projects of this magnitude require massive financial backing and as near as I can tell, each of these projects hinge on the predecessor to keep the ball rolling. Even the consulting is raising valid questions about Greenfires aggressive revenue picture. $21/sqft leasing - that is more than American Tobacco gets today even factoring 3% annual increase it will be a 5-7 years before they hit $21. Add to that the unlikely scenario of 95% occupancy in the first year, I see huge financial risks in these assumptions. Of course, I'm also advocating for those businesses and residents that have already made the investments in downtown that should not suffer as a result of this project.

What about other scenarios? This whole deal nets out to a Parking problem for Greenfire's existing holdings. Can't Greenfire take out one or more of their 22+ buildings and put parking in without public subsidies? Since the East Chapel Hill deck and surface lot at odd shaped (making development challenging) have other locations for parking been consider? What is happening with the lot attached to 202 Corcoran St? Wouldn't it be better to have a single deck that services the surrounding area more efficiently? Wouldn't rehabing the entire area around Parish/Corcoran/E Chapel Hill/Mangum be of more value to the City of Durham (yes, keep the historic buildings on Parish but everything else can go).

What is up with the 5,000 SqFt of Museum space? Who will pay the lease cost on that? Is this a gift from Greenfire or has some leasing agreement been reached.

I'm also curious about their holdings in the North Durham/DAP area. If all this focus is in the city center then it will be 2015 before something happens 3-5 blocks north. It would not be unheard of to force some divestiture before agreeing to the public subsidies. Would the result for Durham be better if projects could proceed in parallel? Ok, so there is nothing stopping other projects in the DAP area, but again Greenfire has done an excellent job of buying up various properties which impacts the surrounding area.

Given the perception that the public subsidies are so small in comparison to Greenfires $280m investment.. Why not just scale back the project slightly to cover this "gap" within the private funding?

cw

I am starting to understand Johnny's position more and more. I am of the opinion that Greenfire's proposal is more-or-less good for the city. However, I too am concerned about their ability to follow through on that vision. I am weary about Greenfire's ability to finance everything if previous development does not live up to their expectations. It would be preferable if Greenfire was able to secure financing so that ultimate success does not depend upon prior sales/leasing. How much of a problem, however, would it be to obtain financing? I personally know a few real estate developers who could finance this project to completion, and who have a very sold track record. The problem is, of course, that none of them would want to invest their time in a project this small, or a city this small. Given that Durham is still a city in turn around, I am of the opinion that sacrifices must be made - it would be ideal if everything could be restructured to impart a greater sense of security in terms of project completion, but can we get there from here?

I also like Johnny's suggestion that projects should be completed in parallel, which is why I initially suggested offering the public parcels to the general public, and not through a secret deal with Greenfire. I would much prefer competition and market forces to be the deciding factor in shaping the landscape of Downtown. But again, I don't really know what the best course of action is.

Another random point - what is happening with the 'We Want Oprah' building? Shouldn't that be a point of concern in terms of the Downtown landscape? I would much prefer that building be razed and that parcel developed to some other proposals.

David Rollins

With regards to the TIF, I guess reasonable people can differ as to the risk of the project. It'd be nice to put this risk on the bondholders rather than the public (assuming Durham would let it default, which I admit is a very low probability).

Parking: I don't think anyone will come forward to bid on the decks other than Greenfire, and the fair market value estimation seems about right to me. This is a slam dunk.

Projects completed in parallel? No way, this is too expensive. Sequential development allows the builder to adjust plans as market conditions change (while still holding their feet to the fire with respect to incenctives).

I agree with Johnny that there should be no public subsidy, but forced divestiture? What is this, the people's republic of carrboro?

Johnny

The "We Want Oprah" building is 202 Corcoran. As mentioned previously, this site is in desperate need of attention. It has a crumbling parking deck and due to its shape, the economics to replace it will challenge any developer. Given the proximity to the East Chapel Hill deck, it seems that one deck should be considered to support the entire area. Otherwise, when a developer looks at 202 Corcoran, they will be looking for their public incentive based on the Greenfire precedent. From a Durham Benefit perspective, the 202 Corcoran site will bring huge returns given it's strategic location and impact on the City center plaza. A single deck service both projects can be constructed more efficiently and serve the entire neighborhood. That does mean Orange St. would effectively go away. But as CW said, there have to be a few sacrifices.

David - to clarify, I wasn't suggesting that Greenfire's projects would go in parallel. What I was suggesting is that their holdings to the north can have a negative impact on potential projects there. Having them divest some or all of their holdings to enable other developers to proceed will bring added value to Durham. The DAP/MiLB is moving forward and so should the surrounding area. However, Greenfire won't be in a position to touch those parcels for 10 years give or take.. That can decrease the potential of the MiLB investment and stall the improvements in that region and further north as a consequence.

If you think divesting is some crazy idea, then re-read the deal points. That is exactly what is proposed for the 3 parcels that boarder the DAP. I'm not suggesting that Greenfire give away the parcels, just that they sell them for a modest gain over their purchase and let other developments proceed. That is where some offsetting value can be found from public property transfers in the city center IMHO.

As for attracting a more financially secure developer, we just won't know unless the process goes through an RFP. And if we can't attract a developer (that should say something in itself) then the ability for the City to recover the properties and/or transfer them to another developer is critical. That ability should not include a "progress payment" to the failed developer as that would encumber a transition and slow any progress and cost the public even more. That is the risk the developer needs to sign up to. If they are confident in their math and abilities then sign here please...

In terms of the incentives, this should be all or nothing. I can see paying installments along the way but if Phase 2 or Phase 3 don't move forward in the agreed timeline then Phase I incentives should be refunded to the city. Further, I would much rather see a lower public impacting project as Phase I. The removal of the E Chapel Hill deck after spending several million tax payer dollars to buy a 5+ more years of useful life seems pretty dumb to through away. Why not start on one of the surface lots that will have far less impact? This would go a long way to demonstrate competence and manage the public risk while maximizing the value of the investment to fix the exist deck structure.

cw

Why would the appropriation of 202 Corcoran as a parking deck entail that Orange St would go away? Couldn't the deck be built in such a way that the entrance remains where it is? I mean, there are a few buildings on Orange St, a few of them with residents, so I don't think that's a real option. You don't really need a structure that directly connects to both the properties, just one that is in the general proximity.

How is it that all these buildings can be acquired, but 202 Corcoran remains in private hands? From what I have read, Sturdivant isn't exactly the most financially secure individual, so how is he able to hang on the the structure? I don't understand why he doesn't just sell (well, I suppose that he is desperately trying to retain control in hopes that property values will rise dramatically). At any rate, I hate to see Downtown develop while 202 Corcoran remains an eyesore.

A bit off topic - does anyone happen to know the purchase prices for Downtown buildings like the Suntrust, Kress, etc?

Johnny

The impact on Orange St would come from building a single parking deck set in the center of that block (Corcoran, E Chapel Hill, Mangum & Parrish). Locating the deck centrally allows the reuse of the current access points but also sets the structure furthest from the streets to allow better Retail, Office and Residential structures to surround and utilize it.

The existing residents on Orange St, I think all two of them, could be persuaded to either move or receive a new penthouse in exchange. Same with the current offices. The current Greenfire proposal will put those buildings in the shadow of a large structure, not to mention years of construction on their front step. Giving them temporary housing and providing permanent space in the future project would be a small price for the overall gain to Durham. Also, the additional space recover from such an approach would allow for all refuse and services to be on the interior of the block.

Heck, if it was done right, the top floor of the parking deck could be a green roof with outdoor space for the tenants.

If that type of a project was undertaken (via RFP) then all the other developers could proceed with their individual holdings as they see fit and their financial proformas dictate. That's not to say that the deck in this scenario isn't publicly funded put I would hope it could remain in public hands albeit privately managed.


mike

Sweeeet! Let's demo the Mechanics and Farmers building and put up a parking deck. Awesome Johnny, just awesome!!

Johnny

Geeze Mike - did you actually read the comments? If you did then you would have seen that I specifically stated that I wouldn't touch the buildings on Parrish St which includes the Mechanics and Farmers building. Furthermore, if you actually paid attention, you would have realized that the intent on putting a parking deck where I've suggested was to pull it away from the street front on those major streets not to replace great buildings with a parking deck. This isn't a unique idea in so much as the Greenfire proposal suggests the same but on a smaller scale and limited to the property that current has the E Chapel Hill deck and surface lot.

Gary

I fail to see what demolishing the historic structures on Orange St., as well as 320-322 East Chapel Hill St., have to do with Greenfire's ability or inability to effectively implement this deal. I'm not sure what the agenda is there - except I had an anonymous commenter on my site a few days ago on a quite old Orange St. post, asking if there was any historic significance to Orange St. (and giving the old line that some buildings just need to go for the good of the community.) Sounds like someone may own some property on Orange St. and not like Greenfire's plans conflicting with their own.

We have too few historic buildings left in downtown to go around demolishing entire blocks. I've made this argument so many times that I get tired of going down the list of why it's bad to tear down buildings you get tax credits for renovating, buildings that attract tourists, and buildings that have pedestrian-scale architecture, but well, I guess I've done a bit already. Anybody who thinks otherwise should pool their money with like-minded folk and go buy University Ford. Go crazy down there - it could use your frontloaders. Historic buildings downtown are not standing in the way of the success of Durham - in fact, they've been the source of its renewal. While I can't make out the fate of 120-122 West Main St. on Greenfire's renderings, I credit their plans for, otherwise, respecting and enhancing the historic architecture downtown (by re-enlivening great currently-one-sided streets like Orange and Church.)

202 Corcoran isn't going anywhere unless Hank Scherich calls in his loan to Ronnie, or the city finds some reason to eminent domain it.

Regarding the main point, Greenfire, it sounds like more of a synthetic TIF structure - in which the risk is shifted onto the developer, verus the risk borne by the city (the developer takes out the loan rather than the city floating the bonds.) It's really a more appropriate structure here - I don't think it's necessary for the city to float bonds to finance this project, and have the risk of non-fruition borne by the city - us.

I'm not sure why there wasn't an official RFP put out to develop these parking decks/lots. Seems like it would have been a good idea to gauge the interest out there in the broader (I mean national) development world before settling in with any particular local developer. I'm concerned with everything that Greenfire has on their plate, but I'm happy to see a proposal to elimnate a few of these parking ulcers off the downtown map, backed up by analysis which shows what we all know - downtown parking is currently way over-capacitized.

GK

Johnny

My discussion point on combining the deck at 202 Corcoran and the East Chapel Hill deck has ZERO to do with Greenfire's ability (or lack there of) to deliver on their proposal. It is relevant because the deck and building at 202 Corcoran are in desperate need of redevelopment. When that happens there is a likely chance that more public funds will be required. If the East Chapel Hill deck is going to be replaced, there is an opportunity now to think about the entire block. That type of development will have a huge impact on the downtown office/retail and residential possibilities. It will create a far more attractive environment for Tier 1 tenants that will help drive and sustain the local economy and bring economic and workforce development. Does the Greenfire accomplish some of this, according their numbers - yes. But there proposal is largely self serving and doesn't address one of the largest issues in the City Center.

I'm a big fan of historic structures. However, I don't want to live in a museum and the thought that the buildings on Orange St attract tourists is a joke. One of the buildings has been redeveloped and looks great - it would be ashame to lose it but one building isn't justification enough to stand in the way of a grander downtown. The large office building in the center of Orange St is hideous. It's redevelopment removed any historical value of the structure, sure it may be hidden under a veneer but what happen there that makes it interesting.

Removing historical structures requires careful consideration. I don't suggest it on a whim. What does Historic mean, I hope it's not just an age criteria? Why is it important? Is it an architectural gem? Are there historical events of such significance that the public gains by it's preservation? I read your blog and I noticed you didn't answer the questions raised.

Bull City Rising

Johnny,

There's no question that 202 Corcoran is in need of major work. (BTW, a quick plug for Blue Coffee, which has some of the best regular coffee around and some of the nicest staff downtown to boot.)

Not that that's necessarily a demolition; the building has some interesting architecture working for it. The downtown master plan calls for a rebuild _or_ a massive renovation of the structure, IIRC.

That said, none of that's going to happen under the building's current ownership, which seems more interested in running a multi-level-marketing "wealth building" program than being a part of downtown renewal. (The same owner also owns the former hotel that's an eyesore at Chapel Hill St. and the Durham Freeway.)

I don't think anyone's talking about living in a museum here. The fact is, unique architecture is easily re-built and adapted to modern uses that draw plenty of interest. Have you had a chance to visit downtown Wilmington and Asheville, for instance? Or Greensboro? All have preserved their history; all have found new uses for their treasures, too. They don't sit empty.

Or check out Charlotte, which has lost much of its history to skyscrapers but has preserved some. What gets more weekend activity -- the modern structures around the BofA tower, with its mini-indoor shopping mall and food court, or the more historic structures down the street near the Hearst Tower and the Dillard, where street-level cafes, bars and shops dominate?

The Orange St. building with the fresh stucco face looks great. And it preserves first-floor retail/gallery opportunities and residential above.

I don't know if the Markham Jones Bldg. can be brought back -- but look at the transformation at 322 E. Chapel Hill St. since the veneer came off there. That's a building ready for new life. (A life that's more likely held back by the current owners' strategy in marketing its sale than by the bones of the building.)

Integrating new uses into preservation isn't a crazy idea. It's what every successful urban center in America is doing.

dtd

Old buildings give our downtown a sense of place and contribute to the fabric of the community. Even buildings that are only 20 or 30 years old can be historically significant and financially positive contributors to a revitalized city center. Durham needs to spend more time working with what it has, and correcting the many wrongs it has commited rather than focus on "urban planning" that removes more structures from our downtown.

Downtowns evolve and the buildings reflect that evolution, its the devolution of teardowns poor planning that create the voids we see today.

Greenfire's plan to plug the gaping holes in our business district with street level retail, hidden parking, upper level offices and residential is brilliant. Just think what they and Rothchild could be doing if we had not rushed to tear down the Geer Building, the Washington Duke Hotel, Four Acres, the Rialto Theatre, the Center Theatre, the Belk Building, many of our tobacco auction houses, the several A&P supermarkets that used to dot downtown, the homes along Pine and Mangum Streets, the YWCA, the Malbourne Hotel, and so many others. Stop the demolition!

Johnny

You don't need to convince me about preserving historical structures. I've been directly and indirectly involved in doing just that. I am advocating the discussion regarding what is the best plan for Durham, what will bring the best result. And unfortunately I don't think that discussion can completely ignore the potential impact on existing buildings. And of course it should not be ignored that what is built may be equally attractive to visitors and bring more economic gains and opportunity to the city.

What I'm also advocating is that we have ONE proposal that has been developed between career minded city employees and an aggressive/secretive developer. What we have not had the opportunity to consider are other plans that may offer better ideas, less public investment and lower risk to successfully implement.

My suggestion with including Corcoran is an idea, nothing more and it would need further development before a real financial model would be ready. Are there others, probably. Should we consider them before the city gives away public assets? I say yes.

I also agree with your point about the loss of so many historical buildings. It is a shame to loss so much. BTW - There are plenty of other developers working on historical renovations and there not Rothchild or Lemanski. There are limitations with historical renovations. One of the big issues Lemanski is having with the SunTrust building is that the upper floors are basically uninhabitable due to changes in building codes and safety. I suspect they will work it out but sometimes older structures just cannot work physically and financially. When they do, it is wonderful.

I would also love to see 202 Corcoran saved but from what I understand is that there are structural issues that will likely prevent that which is also a shame. It would be great to have a cool residence on the upper deck with the pool out front over looking the city center.

Gary

The buildings on Orange St. as a destination for tourists is not a joke; it's vision borne out by experience. With retail on the other side of Orange St, renovation of the remaining buildings on the west side of the street (including removal of the admittedly hideous veneer to expose the original facade) and some re-opening of the vista at the north end of the street that could accompany removal of the garage, you've got a great pedestrian street around the corner from Black Wall Street with a fantastic terminating vista at the end of the street - the post office.

There are times when historic buildings stand in the way of some desperately needed development in economically-depressed areas. Those are tough decisions, where one needs to weigh the pros and cons. We aren't in that situation. There is no reason why a single additional historic building downtown needs to be demolished - why would we need to sacrifice these for a "grander downtown" when the point of this post is a proposal that saves (and enhances the value of) these buildings? We should be against this proposal because it preserves our historic architecture? We should hold out a developer that proposes the same silly ideas floated in Durham from 1950-1995? That we will be great through demolition of downtown? It failed - again and again and again. The success of downtown has come almost exclusively through historic preservation. I am sure that the Lemanski bros. did their due diligence on the Hill Building before purchase and knew what to expect - I can't imagine they weren't well aware of code. Obviously their pro forma still worked.

Fortunately, downtown, including Orange St., is a local historic district and anybody who has a real proposal to tear something down would need to get approval from the HPC. Not that their power is as tough as it needs to be, but it does involve a public hearing, delay, and the opportunity to involve the public in opposition.

I don't at all suggest that we shouldn't, as the public, push to get the best deal possible on any proposed incentive to downtown development - no matter who the developer is. But I don't see why we would compromise something that isn't even on the table as a deal point.

GK

dtd

First I don't see anyone else offering ANY plans, paying for drawings, or buying up property in downtown to renovate or rehab. Those who have the stomach and cash to do so should be encouraged not castigated, particularly when they are doing a responsible job of it. At the end of the day I can't believe they are going to walk away from Durham with more than a fair return on their investment, if that.

Second I know for a fact from an architect very well aquainted with the CCB/Hill building that plans for stair wells to meet code even for the top floors have been drawn and could be implemented. I would imagine that a good creative architect could find ways to make ALL buildings in the downtown historic district work and work well.

Its been my experience if an architect or designer says it can't be done or its too expensive, that its time to find a new architect.

Saving historic building stock is always preferable, in my mind, to new, often inferior construction, even if renovation is more expensive. It has more character and is often of much better quality, not to mention the enviromental benefits of using existing infrastructure and materials. It certainly underscores the importance of the need for Durham to keep its tax incentives for historic property rehab.

Johnny

I guess you better get ready to oppose the buildings that lemanski may remove for his new tower. I haven't seen this in print but heard of the plans through the mill. Simply looking at their proposal, it shows two giant towers that will not fit within the vacant land on Parrish thus some buildings are likely going away. I haven't heard much complaint about that just yet...

Again, my proposal is simply an alternative idea and anyone is welcome to their opinion. The main difference is that it tries to anticipate what is obvious, namely the need to rehab 202 Corcorcan and the attached parking deck. By anticipating this, we can reduce the cost to the public, bring incremental benefit to downtown. This would also added value to Lemanski's holdings and nothing would stop them from completing many aspects of their plan.

lwn

I guess what this, and any develoment, comes down to is the willing participation of the property owners, which could be the City, Greenfire, Sturdivant, Self Help, Rothchild.... etc

Will Ronnie Sturdivant, like so many neglectful and poor stewards of property, ever allow his to be part of a larger plan and benefit us all?

BTW "Structural issues" is architect speak for "I don't want to be bothered by what's already there, give me a clean slate."

Johnny

Structural Issues can also mean just that and unless someone what's to donate a bucket of cash without any return then those issues will stand in the way of a meaningful rehab. Developers need to have a return on investment and structural issues can quickly become negative pro forma's and that's when properties sit idle.

For example, the East Chapel Hill deck has structural issues. It is now receiving over $2m in necessary repairs to extend its useful life. That $2m cost will never be recouped and worse, the structure may go away in Nov 2009 according to the current proposal from Greenfire. Those $2m was and is being thrown away. Perhaps a $2m incentive would overcome the structural issues at 202 Corcoran? I do know that Ronny wants a big tower on that parcel and the current structure cannot support any more vertical height - so are the issues applicable to rehabbing what is there - don't know. But I believe the deck is crumbling just like ECH and will require extensive work to bring it back to life.

KeepDurhamDifferent!

I'd love to see 202 Corcoran reopened as a retro motel. Ever been to Chicago? See the below picture of The Ohio House Motel:
http://www.flaggedforfollowup.com/images/2007/10/07/ohio_motel_bikes_small.jpg

Kirsten Kainz

Alongside architectural revitalization and commercial development, there is the social reality of urban renewal. Durham residents are intensely loyal to the businesses that invested early in downtown Durham, especially the restaurants. Key among those pioneering businesses is Rue Cler, a gem located in the heart of downtown Durham. Greenfire's ability to work cooperatively with existing businesses and to generate development strategies that benefit the greatest number of downtown institutions will certainly translate into maximum profit.

Johnny

Agreed - only no one from the city or Greenfire has contacted any of the existing businesses in downtown to figure this out.

CASSIESosa

Some time ago, I really needed to buy a house for my corporation but I didn't have enough cash and couldn't order anything. Thank goodness my brother proposed to try to take the loan from trustworthy bank. So, I did that and was satisfied with my consolidation loan.

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