Rolling Hills/Southside: Of non-profit partners and the rifleshot approach
City staff respond on Rolling Hills/Southside

Rolling Hills/Southside: Does the plan make dollars and sense for the City?

This is the second in a two-part series today looking at tonight's City Council meeting on the Rolling Hills/Southside redevelopment project. In this story: What are the pro's and con's of such a deal, even if concentrated investment is a good idea? See Part I for more on the impact of the City's proposal to target significant amounts of funding towards just one 120 acre area for the better part of ten years or more?

Rh-ss-conceptual Even if it's the case that such a concentrated investment in Rolling Hills/Southside makes sense -- and assuming that the City can work out the questions as to whether it should be funding more of code enforcement and administration overhead costs for Community Development itself, or finding other sources of funds for community improvements -- there's a second important question to ask:

Does the proposal by Community Development in support of McCormack Baron Salazar's tax credit application make sense?

It's a big investment by the City, and not just in terms of the CDBG/HOME grant investments we talked about in Part I.

The bottom line that's worrying some folks? The deal will see the City, state and feds contribute seven out of eight dollars towards a total $52 million cost for the first two phase's 250 or so rental housing units.

The developer and their limited partnership would take out or hold a mortgage for the remaining eighth of the cost, but wouldn't be putting in any equity towards the project.Yet when all is said and done, the development team would own the housing units generated by the plan.

It's issues like that that have even supporters of the Rolling Hills effort concerned about whether this is the right way to go about this massive redevelopment project.

Who's Putting In Money? Mind you, that's the key element to tonight's vote, an endorsement of municipal support in time to meet a key application deadline that St. Louis-based MBS faces in order to apply for North Carolina Housing Finance Agency (NCHFA), which would be providing tax credits and incentives that amount to about 10% of the $20m cost of Phase I and the $19m cost of Phase II.

In fact, when you look at the numbers, almost all of the cost of constructing the project's first phase comes from state and federal tax credits, or from the City of Durham itself:

Rhss-phase-1-sources-funds

But that's just one part of the picture.  And as the chart title notes, it excludes acquisition costs -- the nearly $6.6 million the City has spent to date to buy up the failed housing development of Rolling Hills. It also counts only construction costs, the monies the developer would be spending to actually build the housing; there are additional site preparation and infrastructure development costs that the City would be facing for Phase I.

When you factor in the acquisition and infrastructure costs over Phase I and Phase II -- 248 rental housing units total, not inclusive at all of any of the support to Self-Help or other developers for home ownership opportunities in Southside -- the picture grows even starker.

Rhss-phase-1-2-sources-funds
That City number will rise even further as the municipality buys up the last hold-outs in Rolling Hills.

Across these two graphs, one thing stands out: there's very little in the way of buy-in (pun intended) by McCormack Baron Salazar.

Essentially, their and their LP's role will be to build and operate mixed-income apartments with rents ranging from the $300/mo. to nearly $1,000/mo. range, depending on income. The mortgage they take out on the project will have debt service met by the cash flows from those rentals.

But the LIHTC money is listed as equity in the project documents, suggesting to this observer that they'll be using the cash value of federal tax credits to meet their required equity stake in the project.

Bottom line: MBS and their partners, as it looks at this time, would largely be working off of governmental funds and bit of debt to build this. Besides whatever profits they earn from the apartment rentals, they're also entitled to $800,000 in development fees in each of Phase I and Phase II.

An important question for civic leaders: is that lack of an equity stake due to the current economic climate? And if so, should that impact who gets an ownership stake in the project?

Who Owns The Project?: One of the challenges of Rolling Hills/Southside is that it is, as the City staff note in their memo, effectively a dead zone for development, and there's no proof that market rate housing can work there, not to mention no rationale for the private sector to hop back on board.

As we'll talk about a bit later, the success of Rolling Hills/Southside could spur more redevelopment, from Fayette Place to Heritage Square to other local neighborhoods, in turn creating revitalization that stretches from NCCU to downtown.

But if that work is successful, who benefits at Rolling Hills/Southside?

Well, the homeowners who buy owner-occupied housing to be built by Self-Help and possibly others, of course. But as BCR has come to understand the deal, McCormack Baron Salazar's limited partnership would end up owning the apartment units they've built largely on debt and public dollars.

This isn't something new for MBS; from what we've seen in brief research, in cities from St. Louis to Providence to New Orleans this is the model they use across the country.

Some on the left have criticized the model for including market-rate housing at all rather than devoting funds to the neediest in society -- though it's not clear that that's not exactly the point of why Durham wants to go after this project in the first place.

In fact, one of the arguments we've seen from HOPE VI to other redevelopment efforts has been the challenge of concentrated poverty, and the need to integrate market-rate earners with the poor to avoid the marginalization and economic isolation of communities.

Mind you, the housing at Rolling Hills -- assuming MBS' past history is a guide and this isn't prevented through the nature of housing credits or the deal with the City -- is unlikely to stay affordable forever. MBS' model has been to eventually, in 15 or perhaps 20 years, transition more and more units to market rate as the nearby neighborhood improves.

One instructive example: Quality Hill, an historic neighborhood in downtown Kansas City, Mo. The neighborhood fell into disrepair in the 1970s, despite its high-bluff locations overlooking the city center (sound familiar?) A number of foundations stepped in to try to save the neighborhood, bringing in MBS to redevelop eight blocks.

Those eight blocks became redeveloped apartment units, helping to revitalize this part of the city. And in fact, Quality Hill underwent something of a renaissance that continues to this day.

Eventually, though, MBS came under some criticism in the KCMO press for the declining condition of the units, something the firm's head admitted and expressed regret over:

Throughout the neighborhood, mature trees have begun to muscle out of the sidewalk, thrusting the metal grates at odd angles. On some streets, vegetation has withered, leaving nothing but dirt patches framed by cracking pavement. Rust bleeds from virtually every wrought-iron railing and, on one corner, an ornamental fence — more than 100 feet long — has been left sprawled on its side for months.

Concrete stoops are cracking, and stairs are crumbling at the edges. Wood around the windows is rotting. Roof shingles are deteriorating, revealing discolored patches on the buildings' crowns. "You can look at the roofs on some of the buildings and wonder when they're going to finish putting the [replacement] tiles on," says Shelly Doris, a former Quality Hill resident who is now the president of the Downtown Neighborhood Association.

The subsidized developer isn't living up to the responsibility of being a good landlord, says Sean O'Byrne, vice president of business relations for the Downtown Council....

"It's a scary, scary indicator of things to come," O'Byrne says. "The fact of the matter is, they need to reinvest, or it's going to be the slums of tomorrow."

Salazar says he doesn't disagree. "We have 17,000 units that we manage, so some are always in a rebuilding process and some are on hold," he says. "I agree that it [Quality Hill] was getting a little run-down. Paint was peeling, and there are cracks here and there, so we're going through a major campaign to repaint, renew, refurbish it as much as possible."

Only a few months after that interview -- and a few years before tax abatement was scheduled to expire on the project -- MBS sold off the units to a private development firm, with the intent that they'd be rehabbed and sold as condominium units.

Mind you, I raise this example not to criticize MBS or to say that they're not a good partner to work with. 

On the contrary: there's few firms with as a good a track record, or as strong a history in the space. And in fact, the private ownership actually makes sense to the extent that you want to have a firm have the financial incentives to want to have an exit strategy that involves eventual market-rate conversion.

After all, the best way to avoid the long-term disinvestment that has proven much worse in mistakes like Few Gardens is to continuously renew affordable housing stock. But once that stock ends up in the hands of an organization like the Durham Housing Authority, you find it's much easier to build it than it is to rehab or invest major capital in revitalization.

As taxpayers, and as people who want a better Durham tomorrow, there's something very attractive in the idea that today's quality affordable housing becomes tomorrow's (probably affordably-priced) downtown condos, after the initial investment has helped to mature and revitalize neighboring areas. And that's much more likely to happen if there's a private-sector owner that can eventually let affordable units burn off -- to be replaced, then, with new investment.

Yet there's a fundamental question that City leaders must answer. 

If the current deal doesn't give the City the right to enjoy any of that future prosperity or profits, why?

It would seem to make sense to follow this model, but for the City to hold a percentage ownership in the equity stake that's commisurate with the sunk and future investment -- even, I'd argue, if they forego any stake of the annual operating profit over the units' life as rentals.

That way, today's investment in acquisition and infrastructure eventually pays off as dollars that can be poured back into tomorrow's new affordable housing stock.

More to the point, though -- it's hard even for project supporters to understand a model in which MBS and their partners put in no equity to get started, yet end up with all the equity at deal's end.

How Big's The Payoff?: So much of the prospects of this deal rest on just how transformative the deal will be of the neighborhood's surroundings.

That's something that gets emphasized early and often in the City's memo on the deal:

The Rolling Hills/Southside redevelopment project is an ambitious undertaking and in many respects, could parallel such projects as the Durham Bulls Athletic Park in terms of its impact on the City. To make the project possible, an equally ambitious financial commitment will be required.

Although it has affordable housing elements, the Rolling Hills/Southside project is first and foremost a neighborhood revitalization strategy with the objective of attracting private, profit- motivated investment over the long term. Within the 120 acre project area, there are more vacant and deteriorated properties than available local and federal funding could feasibly address. The centerpiece of that strategy is a phased “tipping point” project characterized by superior design elements and a mixture of rental and homeownership opportunities for a broad range of incomes. 

In effect, the goal is to create market demand in a portion of the City where none currently exists. Beyond the approximately 290 units that will be created by these two initial phases, the potential exists for an additional 1,000 units over the next six to eight years given the catalytic effect it could have on the timing of the Heritage Square project, the redevelopment of Fayette Place and other private investments. 

Well, yes -- as we've noted above, that's the key to this whole project.

It's not really about what happens just at Rolling Hills and Southside. It's about what the impact is on other parts of the community. 

Certainly there are some parallels to American Tobacco, in which local leaders came under tremendous pressure for "handing over" so many dollars to the private sector developer, Capitol Broadcasting. Why, many asked, is the City spending dollars to support just one development?

Of course, the naysayers were wrong.

Those dollars went to one development, yes. But they further leveraged existing investment (the City-owned and once-controversial Durham Bulls Athletic Park) and future investment (downtown streetscape work) that have together paid off richly in attracting still more development, businesses, and visitors downtown.

Downtown's now back on the tax map, and instead of being a dying, wart-filled embarrassment to a city eager instead to shuttle businesses and workers to South Square or RTP, it's front and center as a reason why some new businesses are looking to come to Durham in the first place.

Perhaps it's MBS' argument that this is why they're justified in keeping the operating profits and long-term financial gain from Rolling Hills, since the spin-off development that wouldn't be possible without their work just wouldn't happen -- and that the City gains more net in this scenario than it would if it struggled to do Rolling Hills at all, much less with a ragamuffin collection of local developers.

And let's be clear. This is not a project I want the same local yokels who screwed it up twice before having anything to do with.

There is a big benefit to letting the experts, well, do an expert job with it. And the extra economic benefit the project throws off could be worth it.

Still, it would be good to see more analysis from City staff on that -- or at least justifying why the deal is structured as it is.

Will It Pass?: That's a hard question to forecast the answer to.

Mayor Bell is certainly a yes vote; so too Cora Cole-McFadden. Eugene Brown seems certain to be a no.

Beyond that, it's hazier.

Mike Woodard and Diane Catotti see the big-picture benefits of what could be possible with overall economic development in the area and have seemed inclined to support -- but also are likely to have the biggest reservations over some of the financial questions, notably the strain the project will put on affordable housing block grants for twenty years' time.

Farad Ali and Howard Clement seem likely to want to go along with what the mayor wants on this, and both have supported redevelopment of Rolling Hills in the past. But both can have independent streaks; Ali brings his banking and financial background, while Clement, a former Republican, can find new conservatism on fiscal matters if he starts feeling wary.

Our guess: it passes, but with questions.

See you at the meeting tonight.

Comments

Dwayne

Thanks alot for all this information, being born and raised in Durham(now living in NYC) I'm hoping Rolling Hills is the catalyst the city expects it to be, being a construction manager focusing on sustainable building, I would love to jump two feet into some of those houses on the south side. It's exactly the opportunity i've been waiting for.

I just hope the city is prudent and has forsight to demand conditions out of "MBS" in terms of upkeep and maintenance, the last thing Durham needs is to see it fall apart. I would have strict guidelines about upkeep and maintenance, maybe make them set aside a portion of their profits for inspections and upkeep. I think the city is making a huge gamble, one that could pay off if Heritage Square is a success as well as Fayette place.

I think the key to this entire area is NCCU. If they openly embrace what this means for their campus and image then Durham could have something on it's hand. NCCU has an opportunity to have a campus life for their students in that area, restaurants/bars/stores/etc outside of whats there....which has never been much to begin with. Imagine the students that NCCU could attract if the campus was more connected to the area and the city as a whole.

Again Thanks alot for this type of information guys, people like me really appreciate being able to keep up with the everything thats happening in Durham. You guys are really doing something awesome.

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