University Marketplace wants to be an incentives candidate -- but what kind of incentive makes sense?

Interesting read in Sunday's Herald-Sun, and picked up in the comments here: the proposal by Charlotte-based Hawthorne Retail Partners that their University Marketplace project in the South Square area get economic incentives in order to be built.

We've followed the proposed $75 million project here since 2007, and it's gotten generally positive comments and feedback for looking to mix in residential units, retail, and commercial space in an existing development site along a major thoroughfare -- and an easy commute to employment centers like Duke, UNC and downtown to boot.

Gourmet grocer Poppies was linked to the project, which would have rehabbed the one building left at the onetime Kroger Plaza to the east side of 15-501 Business and constructed parking decks and new structures throughout the site.

It's no secret that the tanked market for real estate -- which, nationally, focuses on concerns over a major price adjustment and bust to come in commercial properties, and a fear that retail space is overbuilt especially in light of the failure of national players like Circuit City and Linens 'n Things -- plays a role in the project's deferral. Shoff Allison from Hawthorne last year noted the difficulty in getting financing in the credit markets for the effort, for instance, and the project timeline continues to push back.

Now the question comes up: would financial incentives from the City and county make this a reality? And even if they would -- is it the best use of municipal dollars?

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I can't speak to what the incentives request was and what analysis was given (though we'll see if the City will make those available via a public records request.)

One of the generic difficulties I struggle with in thinking about this project, though -- and which I would hope would be a question for economic development and elected officials -- is how to balance a desire for good development with the likely strong economic underpinnings of the site.

After all, we traditionally see economic development incentives used in two places in Durham:

• To close the gap for development projects and businesses seeking to operate in districts that are underserved or seen as less economically viable -- such as Durham's investments in downtown redevelopment and in targeted neighborhood incentives in East Durham, the Fayetteville St. corridor and elsewhere; and,
• To attract to Durham companies and jobs that are being courted by a variety of municipalities or states.

On the first point, there's no question that parts of the South Square area seem to be hurting -- though it's fair to describe some of the wounds as self-inflicted. It's a badly-designed, automobile-centric district, where the priority seems to be getting you and your car shuttled between way-off-highway strip malls, big-box retail, and major highways as soon as possible.

Between Business 15-501 and the putative University Marketplace site sits one now-closed car dealership; a second waits nearby, victims of the downturn in the auto industry.

But it's not clear that these issues make the district not economically viable.

Take South Square Mall, the 1970s development that was the economic engine of the area in the first place -- and which invented the trick of splitting the Durham and Chapel Hill retail markets long before Southpoint came along and out-southed it.

The mall withered in the 1990s and died a perfunctory (and rapid) death with the advent of Southpoint.

But unlike a lot of mall sites, it didn't sit vacant for very long.

It was fairly rapidly transformed into a big-box home for Super Target and Sam's Club, surrounded by outparcel retailers and restaurants.

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One could look at that history as a sign that the market seems perfectly willing to fund the right concept in this part of Durham, and that economic incentives aren't needed.

On the other hand, there are plenty of people who would have preferred that something other than big-box retail got built at the South Square site.

The group of architects and planners at Durham Area Designers held charrettes and the like to plan out better options for South Square once the mall's doom was clear. Out of those came a variety of ideas that fit the same pedestrian-friendly, mixed-use-supportive model that's proposed for University Marketplace.

But obviously, those ideals didn't win out in a development world in which, too often, what's easy is what gets built. And sites for big-box stores like Sam's Club and Target are harder to find closer to existing urban core areas.

Therein lies one of the few glimmers of possibilities of a University Marketplace incentive package I'd support: to upsize a viable but undesirable project into a bigger, mixed-use effort.

If the developer could build a retail plaza on the site, for instance, but had a gap in making it a denser, mixed-use residential, commercial and retail center, it would seem to be fair to at least look at the question as to what that gap is and how it could be addressed.

Still, you'd have to prove to me at least that the gap comes down to a question of viability, not a question of financing.

Typically, opportunities for higher density make projects more viable, not less, since they increase the cash flow out of a project and support a more intensive capital cost.

The case of midtown Raleigh's North Hills project is instructive. Powerful Raleigh developer John Kane insisted that the project's second phase depended on a synthetic or actual TIF to be viable. (A TIF is a method whereby municipalities leverage the future cash flow of taxes on a development to provide incentives, or in some cases to use public borrowing to directly support private development.)

Raleigh's Mayor Meeker said no thanks, and Kane went off smarting -- and promptly built the thing anyway. And while I haven't followed that project too closely, it seems to me it's being built just as densely without public incentives as Kane said it would be with them.

That's Raleigh, and this is Durham. And South Square isn't exactly North Hills -- though North Hills also wasn't that much to look at a few years ago. 

Durham has every bit the incentive to want to get a North Hills-style impact out of the University Marketplace project. And if there's good evidence that the only gap between a routine retail redevelopment and that quality a project was public-sector help, in my mind a window for support exists -- but it's a pretty narrow window.

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That said, there's a more interesting way to approach incentives for South Square's redevelopment -- even if it's not exactly what University Marketplace would be looking for.

Put bluntly, the realization of a western Triangle transit vision.

Take today's University Marketplace and its environs and plug in a light-rail or bus rapid transit service connecting UNC, Chapel Hill, Duke and downtown Durham. South Square's well-positioned in the heart of both those zones.

The lesson from Charlotte is instructive: create a rail corridor, allow high density along it, then watch development happen in an economically-sustainable in-fill fashion.

Similarly, improved transit service through the South Square corridor would make the region amazingly attractive to the phalanx of Duke and UNC grad students and staff flowing in and out of the universities, who end up everywhere from Cary to Woodcroft to central Durham to Carrboro each year.

The ability to live in a University Marketplace-style development with walk-to retail, and to be able to hop a bus or train to get to either Duke or UNC is a "killer app" for that market -- many of whom move in from Boston, Chicago or DC for their studies, and often end up investing in a car (or an additional car) to make the whole program work.

And unlike incentives dedicated for a single development effort, the arrival of good transit would spur better development at all the parcels around South Square -- from the struggling Westgate Plaza on the other side of South Square, to the mall-sprawl lining either side of 15-501 Business.

With a functioning transit corridor along the route (something already a part of regional plans), you'd likely have no trouble making an intensive redevelopment a rapid go.

Now, transit planning is moving at its own speed, and is unquestionably dependent upon passage of a half-cent local option sales tax in the future.

But I'd suggest it's time for leaders to scrutinize doing the same thing along the 15-501 rail corridor that Triangle Transit did with the initial TTA line: look to the economic development potential of transit-oriented high density as a way of funding the capital expense of transit.

If we wanted to do incentives to help get a better outcome in the South Square area, it's worth thinking about transit as the real catalyst to make that change happen.

Comments

[Rob Gillespie]

The link to transit is a very interesting perspective.

After thinking about it, I agree that University Marketplace doesn't appear to qualify for Durham's ED subsidies. We have yet to see evidence that it can't be built without the subsidies. City policy was very clearly written to move investment to community development areas (CDAs), and this investment is not within a CDA. Granted, Hawthorne's proposed investment is more than the $20 million minimum for development outside a CDA, but I'm not sure the project won't and can't go forth without the city incentive.

Additionally, Hawthorne doesn't really appear to care about benefiting the city. That is why they tore the buildings down so quickly-- they wanted to reduce their property tax burden as they sit on the property and wait for its value to increase again after the recession. This is a very different developer than previous recipients (a la Joe Bushfan), who really care about the community before profits.

[AR]

I'd be careful about making assumptions like those in Rob's last paragraph. It's very much to Hawthorne's advantage to build out this project as soon as possible. Thier demo/start date just happened to coincide with a worldwide financial meltdown! I think their Hope Valley Square re-do shows that they are a quality devloper. Let's not denigrate Hawthorne by making negative assumptions. They are trying to re-develop the site the "right" way.

[Bullicious]

It seems to me that a long term view results in providing incentives to ANY interested developer. Let's say a site currently provides $100,000 in property taxes and $0 in sales taxes. Let's say that after completion the project will yield $900,000 in property taxes and oodles of sales taxes, plus jobs, plus increased property values on properties around it (which equal increased taxes as well). How does it harm us as a community to give them, say $800,000 a year for five years AFTER they complete the project? I know I'm probably missing something here, but if it creates value for citizens, I think we should do it, without worrying about whether it's actually required to make the project work.

And as BCR implies, with incentives we can start tying strings to the project to make sure that it's a better project for the community.

[Khalid]

If incentives were tied to public benefit such as infrastructure, a synthetic TIF could be used. This is basically borrowing against future tax revenues (similar to Bullicious' comment).

Will every developer want an incentive then???

Requirements could be put in place to ensure the projects are transit-oriented (in actual corridor) and dense with accompanying structured parking (still a necessity...# of spaces by code as well).

[DBL]

Infrastructure is indeed the best incentive.