|
|
|
Turning the Corner?
Developers see light at
the end of the tunnel for Ninth Square's laggard commercial component
|
Business New Haven
3/9/1998
By: Alexander Applebaum
|
The Ninth Square project has two faces.
One shows blocks of restored brick towers, high occupancy rates for upscale and subsidized housing in a previously uninhabited stretch of downtown New Haven, and a standard of maintenance that neighbors and boosters praise. This face shows the promise of economic recovery in the city's core.
The other face shows waves of empty storefronts, dashed retail initiatives and persistent economic shortfall for developers and tax collectors.
For three years, the city has shown off one face and hidden the other. Today, as the development gears up for a second phase on Chapel Street, its operators and tenants are acknowledging the second face and forecasting changes to it for the first time.
“There was a lot of anticipation that other activity was going to be taking place, not recognizing that real estate was going to bottom out,” says Barbara Lamb, director of special projects for the city's development administrator and captain of the second phase. “It became difficult to lease space out for commercial in that neighborhood because it wasn't seen and it wasn't accessible.”
Commercial growth in the area is taking place “not as quickly as we wanted to, but we will get there,” says Kathleen Etkin, a former city administrator who since 1988 has managed the project for national developers McCormack Baron Associates and the Related Companies. “The slowness was a surprise.”
The developer, operating as the Ninth Square Partnership, has 50,000 net rentable square feet of ground floor commercial space. Of these, 27,828 square feet, or 55.7 percent, are leased and 15,828 (31.7 percent) actually occupied.
Current commercial tenants include the United Way of Greater New Haven (4,200 square feet), Diebolt & Co. (1,648 square feet), Bentara Restaurant (2,850 feet), the Old New Haven Restaurant & Bar (6,000 feet), and Coliseum News Depot (1,130 feet). The Old New Haven and Bentara opened in the past nine months.
Thomas Jurewicz signed a lease on January 26 to open C'dell'Arte, a restaurant and 250-seat comedy club, in the Chamberlain Building at Orange and Crown. This use would add 8,000 square feet to the active storefront area.
Jurewicz, 30, says he has rented 4,000 square feet across the street to house the offices of the Urban Renaissance Foundation and the Ninth Square Merchants' Association, two non-profit entities he plans to fund with club revenues and tenant dues. Like Jurewicz, most tenants say they sought a place in the new neighborhood and were not wooed by developers.
Bentara and Diebolt are expansions of businesses that had established themselves in East Haven and Old Lyme, respectively. Coliseum News had stood at the corner of Orange and George before the project commenced; its owner sold it to the current owner once development began.
At that time, 26 businesses either closed or were relocated by the city with city bond funds to make room for the project, Etkin says.
Among the seven new operators, some express surprise at the pace of retail growth. Mark Diebolt, who leased his corner space for a Xerox sales showroom in 1996, says a number of potential commercial tenants “backed out” due to the high concentration of affordable apartments. “This is downtown, so [prospective tenants] are looking for restaurants or some kind of commercial business” rather than service uses, he says.
Bentara owner William Christian says he was “aware that this was going to take a while to develop.” He says loyal clientele from the Foxon Road location and a steady lunch business have enabled his store to beat sales projections in its first eight months. “We'd like to see it move a little faster,” Christian concludes, “but it hasn't affected us too badly.”
Elsewhere in the blocks east of Church and south of Chapel, activity has picked up a bit. Wil Bradford relocated his advertising agency from Forbes Avenue to 100 Crown last year. Bill Silverman of Levey Miller Maretz & Proto reports a building sale this month of 99 Orange Street to Eliot Sheiman for “$30,000 and back taxes of around $30,000.” Shaiman plans to convert the building into artists' lofts, Silverman says.
Silverman also leased the ground floor of 15 Orange, across George Street from the Old New Haven Restaurant and Bar, to Spencer Luddington, who with a partner plans to open a pasta restaurant called La Buonah Nottah this spring. But Silverman, who is charging $8.50 per square foot for the space, acknowledges the site's limitations.
“It is a perception of fear that is keeping more retail from going to that area,” argues Silverman. “People are missing the opportunity because of an imagined fear.”
Etkin takes a broader view. “We closed in 1986, Connecticut suffered a depression in 1989-90, that affected overall retail until probably the last year,” she says. “There's not much new retail anywhere in New Haven - that affected us because we were untested.”
The project's location between the railroad station and lower Chapel Street also represents uncharted territory for most retailers, Etkin says. “We're a little off the beaten track in terms of pedestrian retail traffic. We're not going to attract a national chain at this time.”
Maureen Donaldson, part of the family that owns the Old New Haven, agrees. “People in outlying towns are like, 'Ooh - big city, big trouble,'” she says. The return of hockey to Veterans Memorial Coliseum across the street has helped Old New Haven's business since its December opening.
The Best-Laid Plans
The Connecticut Housing Finance Authority, which holds a $31.8 million mortgage on Ninth Square, approved a marketing plan as part of its underwriting. That plan called for segmenting retail uses between convenience and service on the lower blocks, and specialty and restaurant uses above Crown Street.
It forecast a grocery/general merchandise anchor in the building the Old New Haven now occupies. In the plan, the developer proposed to engage an aggressive local leasing agent and advertise the space.
Beazley got the nod to broker the commercial spaces in 1994, though the United Way had negotiated its lease before it went on the market, recalls broker John Tischio.
“We did plenty of mailouts and person-to-person calls,” he says. “We were trying to pre-lease all we could, but no actual deals came together.”
In 1992, says Etkin, projections called for storefront rents of $16.50 per square foot. Today, they rent for $10. Elizabeth Brochin, who shares the account with John Tischio, says the current rent makes sense for occupants and the owner.
“We've been at $10 a foot for a long time,” she says. “It has been our feeling from the beginning that that was the price, though at first there was an effort to price the property higher.”
Brochin estimates that comparable square-footage runs $20 to $25 in the College & Chapel entertainment district and $8 east of Church and Chapel.
Many vacant spaces elsewhere downtown are less raw than the Ninth Square storefronts; Brochin says tenants gets up to $30-per-foot improvement allowances, though Diebolt and the Old New Haven's Maureen Donaldson say they paid significant costs themselves.
Brochin argues that Ninth Square offers excess value. “We have a setting that enhances a lot of businesses in the way buildings are maintained and cleaned; the design factor is outstanding.”
Wil Bradford purchased a building on Crown Street for his advertising agency from Dow Realty in June. He says he chose the site for its “distinctive character,” and says he has been pleased with the friendliness of the neighborhood.
Alan Greenberg, owner of Acme Office Furniture on Crown Street, agrees about the space's appearance. “I think the Ninth Square certainly has a good name,” says Greenberg, who is trying to sell his store and move to a larger location. “I will tell you that McCormack Baron [and Related] have done a magnificent job at rehabbing the buildings.”
However, he suggests the broker's initial posture and the city's handling of relocation did early harm to Ninth Square's retail fortunes.
Greenberg, whose family has worked in the area since 1966, says its-then landlord, Connecticut Savings Bank, evicted him from the Chamberlain building in 1990. As “relocation assistance,” he claims, the city forced Acme to store its wares in 75 trailers for nine months until it found a warehouse in East Haven. Meanwhile, Connecticut Savings failed, and the current development team took shape.
“Originally, [the developer] did not want startup businesses and you had to put all the mechanicals and everything in [spaces],” he says. The marketing plan, dated November 13, 1990, mentions a $30-per-square-foot buildout allowance. Greenberg believes that the asking “rent was high; they have softened their demand and are coming down to reality.”
Despite the $30 improvement allowance, Etkin and Tischio say the challenges of building out raw space may have been enough to dissuade many prospective tenants.
“Because of the way the retail bays work out, with structural walls,” says Etkin, configurations usually run less than 6,000 square feet. “And because the space is raw it's somewhat daunting to a small retailer. We worked with a clothing store, a beauty parlor - people who are very good at what they do [and then] have to deal with buildout of their own space.”
The financing of Jurewicz' C'Dell'Arte, like that of Old New Haven, blends tenant improvements budgeted to the developer with personal equity. Jurewicz and executive chef and partner Kenneth Collins, a former chef at the Four Seasons in Dallas, negotiated the Chamberlain lease directly with McCormack Baron and Related.
Jurewicz says he is building on a five-year, $27-per-square-foot loan from Related at nine percent, a $100,000 personal loan, the tenant allowance, $110,000 in leased equipment from Kitteridge Restaurant Equipment, and between $170,000 and $200,000 in equity. The lease and the note begin payment July 1, says Jurewicz, a few weeks after his target opening date.
Christian says he paid for Bentara's relocation with unspecified financing from the developer and his partners' own equity.
Just as Jurewicz talks of creating a vibrant entertainment zone in the Ninth Square, Etkin and Brochin say these restaurants and other forms of “destination retail” now guide the retail strategy. “Until this part of downtown gets more of an office population, it is going to be less trafficked,” says Etkin. “A lot of pharmacies want drive-through facilities. For the meantime, our tenants can walk over to the mall. We were going to try to get [convenience uses], but if they're not interested we're going to continue to go with destination uses.”
Greenberg questions this strategy's wisdom. “I'm a little bit puzzled that they are opening up several restaurants in this locale,” he says. “The few restaurants that were here [before the development] closed - I don't think the new ones will survive.”
Etkin says a restaurant strip attracts customers who might not wander across Church Street without an incentive, and Brochin says restaurants are recession-proof attractions to people from outside the city who want to celebrate special occasions.
“The theory is good,” says Greenberg, “but parking is an issue, rent is an issue, and locale is an issue. Even at $10 a foot, that rent is considerable.”
Brochin points out that the rent does not include utilities but does cover base-year taxes on the tax-agreement area and a special services district tax. La Buonah Nottah's $8.50-per-foot rent covers frozen taxes and the tenant's share of a condominium fee.
Maureen Donaldson and Mark Diebolt both say they are pleased with the cost of their ten-year leases, though both paid substantially for site improvements out of their own pockets. Diebolt says he spent between $10,000 and $15,000 to lower his showroom's ceilings, and Old New Haven delayed its opening from September to December while awaiting the state fire marshal's approval of changes in its wood-exhaust system designed to insulate upstairs apartments from kitchen fumes. Donaldson's husband and partner, Jim, is a general contractor who did the rehab work.
Tenants pledge to support a merchants association as a condition of their leases. Jurewicz is working with Related's Jeff Bradsky on dues structures and hopes to begin collecting in March. “The association will have input toward the tenancy makeup we'd like to have here,” he says, forecasting a mix of “restaurants and entertainment as well as some services that will support the tenant base.” Lawyers, dentists and the like make attractive feeders for restaurants, he says.
Curbside Woes
If merchants agree on the property's promise and fair price, they also agree on one of its weaknesses: the dearth of accessible, cheap parking.
Donaldson expresses a “minor gripe” with the zealousness of parking enforcement in the area, saying that the property's garages are full of employees during the day and officers “go through two or three times a day and ticket.”
“Maybe as a group, the [Ninth Square merchants] could write a letter and ask for two-hour spaces,” she says.
Part of Jurewicz' design, which he admits is preliminary, involves the creation of “cooperative valet parking.” Under this arrangement, which he says he hopes to negotiate with LAZ Parking President Michael Kuziak, customers would pay between $4 and $6 a night to have valets shuttle cars to 225 dedicated spaces in lots across State Street. As with all Jurewicz' plans, this would divert $1 per park to his foundation and 50 cents per park to the merchants' association.
Greater New Haven Chamber of Commerce President Matthew Nemerson affirms parking's importance and says he oversees several groups developing similar strategies.
“It takes a long time for people's perceptions to change,” says Nemerson. “The Ninth Square still has one more hurdle to deal with, which is creating well-lit pathways to parking. People say, 'I'm not going to walk down that street even if the destination is worth it.'”
“It's imperative that we get a well-lit pathway from the Omni,” agrees Christian.
Parking's high cost creates a point of vulnerability in the destination retail strategy. One development expert speaking on condition of anonymity discusses another
“With residential, people want to see a model of where they'll be living,” justifying pre-lease construction, says the development official. “With retail, you have to sell the vision, which means you need to work out the arrangements before opening - 'Jack is here so we can put this person here' - and plan all that beforehand to induce other potential tenants to come.”
The expert also points out that timing of retail demand lags timing of apartment demand, making commercial pre-commitments more economically vital. “The people at Ninth Square are excellent apartment developers [but] they do not know retail,” the expert concludes. The retail will “come along,” but the way it progresses is “tortuous.”
Tischio and Brochin say they are continually in discussions with convenience retailers but that their next lease, which they hope to announce soon, will also be “in the restaurant vein.”
'No Game Plan'
From his vantage on Crown Street, Greenberg suggests this strategy came together under a lack of coordination from City Hall. “I don't think there was ever a game plan,” he says.
“If you go way back to the early '60s in city redevelopment, there's no long–term planning. They jump from one project to another and there's no game plan.”
The city may have seemed absent from the district's marketing, but it did fold Ninth Square into the new Town Green Special Services District last year. New district Executive Director Jane Snaider says her group has made a consensus on parking its next priority.
A veteran of the old redevelopment agency, Snaider recently returned from Fairfield County to run the new district. She says the district has begun uniting to produce a game plan that will foster commercial prosperity throughout downtown.
The district collects .075 percent on its buildings' assessed valuation, including those in Ninth Square. Snaider says the budget came in at 109 percent of projection and will fund an overall marketing and sales strategy for downtown.
“So far we're focused on clean and safe. Our security program is pretty well in place, and [police report] auto thefts are almost down to nothing,” says Snaider. “The next big issue we're going to tackle is parking. We'll go block by block and just listen.”
The district, on whose board Etkin sits, comprises 27 square blocks. Its special tax got 72-percent support in a property owners' vote, Snaider says. She also says the best way it can enhance Ninth Square and the downtown in general is by “teaching basic communication skills.”
“In Ninth Square, Audubon [Street], the financial district, and Chapel-College, we need to listen to find out what it is they want to do. Hopefully we're going to do a guide to the downtown which everybody will post. Linkages and cooperative projects are the best way we can help Ninth Square and all of downtown.”
“There has not been a coordinated effort in the downtown for years,” Snaider says. Still, she is sunny on Ninth Square, calling it an “enhancement to the district. Once we create a destination, we can get people to move around. There are enough people here to support their restaurants.”
Underwriters apparently thought so, too. According to CHFA, its underwriters forecast 20 percent of the project's cash flow would derive from retail revenues. To date, that contribution has been closer to five percent. “We are pleased with the development over the past 12 to 18 months,” notes Carol DeRosa, a CHFA spokesperson.
The Total Project
Above the storefronts, approximately 500 people occupy 335 new apartments, says Etkin, a 95-percent occupancy rate. Forty-two of the units rent at market rates, between $695 and $750 for a one-bedroom as of last April.
The rest are designated as “affordable,” which means their maximum rent is 30 percent of household income for a family earning 60 percent or less of the metropolitan area's median. In New Haven, this puts the income cutoff at $34,320 for a family of four. According to Etkin, median rent in a designated affordable one-bedroom is around $614.
Because the project provides apartments at partial subsidies, the IRS issues Low-Income Housing Tax Credits on a formula basis through CHFA to its owner.
Like many non-profit developers, McCormack Baron and Related created a limited partnership with a private investor, SunAmerica Financial Services, to syndicate the tax credits. In this partnership, SunAmerica buys the credits and writes them off its annual tax bill each year that the property serves its target income. The developer uses the proceeds from the credits' sale as equity to attract mortgages for development.
McCormack Baron has developed many of its 4,000 mixed-income-housing units nationwide in this manner. SunAmerica has partnered with McCormack Baron before; last year, it invested $15 million in McCormack Baron's conversion of a public housing complex in San Francisco.
In Ninth Square, SunAmerica invested $14.8 million in equity to buy the tax credits CHFA allocated in 1991. CHFA assumed a $31.8 million mortgage by issuing tax-free bonds, Yale purchased $10 million in bonds, and the city floated $9.5 million in special obligation bonds to be paid back by incremental revenues to the district. (The remainder came from a combination of city and state loans and grants.)
SunAmerica guaranteed the mortgage. Today the city has prepaid its bond principal and both Yale and CHFA receive timely monthly coupons. The developer, though, has had to refrain from collecting a budgeted development fee in order to meet payment obligations. “A standard development fee is usually ten to 12 percent,” says Etkin. “Ours is back in the project and that's where it's going to stay.”
Though Etkin says the developer “never projected cash flows from the project” for its own cost recovery, she points out that McCormack Baron and Related put $11 million of their own capital on the line during the project's abeyance between 1991 and 1993. Though they did not commit permanent financial capital, she says, the developers assumed a “huge upfront risk” by covering pre-development expenses such as site control, drawings and engineering, and real estate taxes.
“Pre-development moneys are the riskiest moneys,” she says. “They have the highest interest rates and sometimes involve personal guarantees [to back corporate credit on short-term debt].”
Etkin also says the property pays its fair share on taxes. Initially, the property was supposed to pay the higher of an agreed payment or a revenue-based tax in boom conditions. The Board of Aldermen approved a simplified PILOT structure in 1992 under which the property's assessed valuation comes from the 1991 revaluation and gets phased in over five years.
Since 1992, the property has had a 20-year tax agreement in which it pays semiannual sums totaling $580,066. Reassessments don't affect this amount. It also pays its Special Services District Tax, bringing its total payment to $641,000. According to Etkin, the partnership saves only $10,000 a year by paying the agreed sum instead of ordinary taxes.
In the Ninth Square saga, valuations have changed and partners shuffled rapidly enough to impute a high discount rate to the developers' $11 million. “The developer has had severe difficulties with this project and sticks with it,” Etkin says.
History Lessons
Headquartered in St. Louis, McCormack Baron arrived in town in 1985 at the invitation of the now-defunct Downtown Council, recalls Etkin. “McCormack Baron got very intent on doing a deal with the city,” she says.
Nemerson, who had joined the chamber two years earlier, remembers the firm's arrival. “The Downtown Council had [revitalization] as its major task in the early '80s and came up with a developer and concept and scheme,” says Nemerson. “A man named Conrad True of Texas wanted to spin off a series of limited partnerships to share historic tax credits. It was more funky, focused on old stuff and Chapel Street. It had nothing to do with below-market housing.”
The next year, as part of the 1986 tax revolt, Congress scaled back the historic tax credit and introduced the idea of a low-income housing tax credit. With that change, McCormack Baron's expertise in building mixed-income housing using low-income housing tax credits as the equity base came into play. It replaced True that year and, with the administration of Mayor Biagio DiLieto, began writing an application for an Urban Development Action Grant from Washington.
These grants, which the Department of Housing & Urban Development has since replaced with locally parceled block grants, funded so-called “but-for” projects, which cities claimed would not succeed absent federal help.
“The project today looks superficially very much as one might have imagined in 1983,” says Nemerson. “This is actually much more of a community, which has energy too.”
In 1988, the Board of Aldermen approved McCormack Baron as the developer with the city's sponsorship; in 1989, the board amended the development agreement to issue special obligation bonds for acquisition and site preparation.
Etkin says the developer negotiated with Yale and CHFA, always envisioned as the primary lender, until 1990. That year, Lowell P. Weicker Jr. was elected governor, recession hit the state, and Connecticut Savings, part of a coalition of local banks originally slated to buy tax credits, failed. In March 1991, CHFA's board voted against underwriting the massive project.
The developer had already begun acquisition and committed to the site, Etkin says. Mayor John Daniels, with Yale President Benno C. Schmidt Jr., lobbied the state to reconsider. Yale pledged to reduce the state's exposure, and Weicker publicly changed his mind on the site in July 1991.
In September, CHFA voted to underwrite the project. By spring 1993, SunAmerica guaranteed CHFA's $31.8 million mortgage and bought all tax credits. Etkin says the developer spent $11 million, including $4.8 million in local bank loans, before closing in 1993.
Construction was complete by spring 1995.
The Future
Ninth Square's future also has two faces. Both seem likely to appear on Chapel Street. “We're talking very seriously [with the city's Office of Business Development] about ways to enhance our connection to the Green and Wooster Square,” says Etkin, who declines comment on whether the new phase on Chapel Street figures in those discussions.
She does say that a second phase began making more sense last September, when CHFA expressed satisfaction with the developer's documentation, reporting and certification. This “close-out” cleared the way for SunAmerica, the project's equity investor, to guarantee the overall mortgage. A second phase on the project, which would stay within the area forecast in its original plan, would be more feasible under an insured mortgage.
According to Lamb, this second phase would use the $1.8 million balance which went unspent from the original UDAG grant. Lamb also says the next phase will scale back the retail component at the outset.
“The developer owns W.T. Grant and the city owns the space where Phoenix building was,” says Lamb. “We don't intend to do much with retail. We'd like to do some façade improvement along the entryway to Ninth Square - the city would undertake the expense of improving the façade.”
The original Ninth Square agreement allowed independent merchants to apply to the developer for improvement funds through parcel development agreements. Lamb claims that “almost nobody applied; two agreements were executed just before December 31, when they expired.” Lamb, a relative newcomer to the cast, acknowledges earlier miscalculations.
“We would like to see more retail, but we realize that more activity should have been focused on Chapel to make the Ninth Square more visible from the Green,” she says. “The focal point of the first interval was at the corner of Orange and Crown. I think it was a strategic decision: If they focused a new development there then the growth would radiate out from there.”
But Lamb praises the mixed-income housing that will dominate the next phase. “The successful income mix is the most important element of Ninth Square,” she says. “It's something we would like to see emulated in other parts of the city, but with housing stock in place it's hard. Here we can exercise some control.”
Lamb says housing demand runs high in the city, but acknowledges that it exceeds supply in some neighborhoods and falls below supply in others. She says the mixed-income approach makes sense for the developer and the city for Ninth Square's next phase. “There was a long discussion about 100-percent market rate, but the numbers didn't pencil out.”
Christian welcomes any expansion. “The majority of people drive down lower Chapel and never make that right on Orange,” he says. “When people come, it's a real awakening for them.”
Grandiose downtown projects that hope for retail to grow around subsidized centerpieces are not uncommon in the Northeast. The New Jersey Performing Arts Center in downtown Newark and the MetroTech back office project in downtown Brooklyn both produced massive buildings with public assistance in part to draw new retailers. Smaller communities like Northampton, Mass. and Portsmouth, N.H. can trace some of their revitalization to public moneys.
“You have to look at this as gaining back a block at a time,” says Nemerson. “Over a 30-year period, reusing urban spaces becomes more affordable to society than finding more apple orchards to pave over in the suburbs. Over a ten-year period, apple orchards have a much higher return.” But other cities' eventual successes suggest Ninth Square may not be too far behind.
“People would like a model for development where you say if we move people downtown everything will follow,” says Jim Spencer of the Ford Foundation. “But if [the revitalization project] is the only neighborhood there, you're asking a lot for businesses to invest.”
Spencer notes that in some downtown revitalization efforts, such as Charlotte, N.C.'s, the business community participated in city growth and traffic management.
Bradford also seems pacific. “Once we get a couple of anchor-type tenants in, it will build from there,” he says. “It's going to take time, but we're pretty much on track.”
Despite the corner site and reasonable rent, Mark Diebolt is not sure he would lease his Ninth Square space all over again. “It is going to grow, but it's growing slow,” he says. “A tenant in general is able to do more business when all storefronts are full. If we had more traffic and different types of commercial businesses, it would enhance us tremendously.”
“I've seen a lot of people come in and try different things, but unfortunately they pull out. It's a flip-flop here. Nothing concrete comes in,” says Diebolt. “The chamber of commerce and the Ninth Square promise things are going to change. We hope the right people come in.”
With his new lease, Bill Silverman is enthusiastic about Ninth Square. He says he has two offers on 84 Orange, one for a nightclub and one for an office. If it matches La Buonah Nottah's terms, the occupant will pay $8.50 per square foot, including the frozen 1991 taxes.
Jurewicz talks broadly of Orange Street as an avenue of arts and gastronomic spark, with professional appointment-based services such as law and banking sprouting to support the residents. He talks about centralizing trash removal, insurance and advertising through the merchants association and rehabbing old buildings with vendor discounts and customer tips that feed his charitable foundation. “An awful lot of people want to help us because they see we want to help the city,” he says.
But Jurewicz' plans are, by his own admission, contingent on luck and patience. “It's going to take a little more movement, a little more guts from individuals to take the chance,” says Silverman, citing Crown Street above Church as an example of how a market grows. “Eventually somebody is going to have the chutzpah to open up a convenience store over there, and then a package store to cater to the neighborhood.”
For now, Diebolt is watching both faces from his Orange Street corner.
“We're waiting,” he says. “Patiently.”
|
Go FirstGo PreviousGo
NextGo LastGo
to Index
|
|
