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Multifamily Trends - January/February 2006 - Feature

Rebuilding the Nation’s Urban Foundation

by Patricia L. Kirk

Good infrastructure is crucial to downtown revitalization efforts, attracting both residents and developers. But who is willing to pay for it?

One of the most basic underpinnings of a healthy and vibrant community is its infrastructure—roads, bridges, transportation, schools, and community amenities. The redevelopment and rebirth of the nation’s urban centers depend in large part on reestablishing the necessary high-quality infrastructure in areas where it is run down or inadequate.

However, the federal government essentially has withdrawn its support for urban redevelopment, contends Richard Baron, CEO of St. Louis–based development firm McCormack Baron Salazar, Inc., limiting cash handouts for infrastructure to new projects, such as highways, bridges, and light rail, and awarding funding based on political favors, rather than investing in projects that make the most sense or affect the most people.

Investment banker Felix G. Rohatyn and former Senator Warren Rudman (R-NH) pointed out in a recent Washington Post editorial that state and local governments currently spend at least three times as much on infrastructure as the federal government. Rohatyn and Rudman, who now chairs the Commission on Public Infrastructure at the Center for Strategic and International Studies in Washington, D.C., noted that this contrasts with the 1960s, when the federal government shared the financial burden for infrastructure improvements and maintenance with state and local governments.

The overall public investment in infrastructure as a percentage of gross national product (GNP) declined 0.083 percentage points over two decades, from 0.489 percent in 1970 to 0.406 percent in 1990, according John F. McDonald, professor of economics at the University of Illinois at Chicago. He notes that much of that drop can be attributed to the decline in the ratio of state and local highway and street infrastructure spending to GNP from 0.178 percent to 0.130 percent, but investment in other infrastructure categories, such as public buildings and flood control projects, declined as well, he points out.

An advocate for establishing a bipartisan federal-funding mechanism dedicated to improving and maintaining existing infrastructure in the nation’s cities, Baron points out that the recent $350 billion transportation bill passed by Congress is a prime example of how the federal government distributes funding for infrastructure. The bill contains more than 6,000 earmarks for specific projects in particular congressional districts, some of which may not be needed, according to Baron and other critics of the legislation.

Consequently, a greater share of the burden for infrastructure development has shifted to already overtaxed state and local governments, and the private sector is being asked to do jobs that historically have been the responsibility of the public sector, Baron says, noting that most federal assistance for urban redevelopment involves noncash programs that provide tax breaks and low interest loans to stimulate private investment in high-risk, inner-city neighborhoods.

The 2000 Community Renewal Tax Relief Act established federal empowerment zones, for example, which are designed to encourage public/private partnerships in urban areas suffering from high unemployment. The program provides business owners and developers with tax deductions, bond financing, and capital gains tax relief to locate in these areas and hire local workers.

The public commonly perceives infrastructure as comprising roads, sidewalks, parking facilities, public transportation, and basic services like water and sewer lines. Webster’s Dictionary defines infrastructure as a substructure or underlying foundation, especially the basic installations and facilities on which the continuance and growth of a community depends. Baron and redevelopment professionals would argue that this foundation includes public facilities like libraries, schools, and parks; jobs; a supermarket and other neighborhood retail services; and adequate police and fire protection—everything needed for a neighborhood to be successful.

Community leaders, however, realize that without a commitment from the public sector, private investors are unlikely to get involved and are using every resource available to set the stage for private investment, providing tax and policy incentives to help developers make projects pencil out and investing in infrastructure to provide a foundation for neighborhood revitalization and community building. The biggest successes come from local governments that have undertaken dramatic downtown revitalization efforts and, in the process, have attracted private developers to their cities.

The Rochester, New York, Downtown Development Corporation (RDDC), a private, nonprofit, economic development organization, is leveraging $230 million in federal New Market Tax Credits and state funds to spark private investment in downtown residential and retail development.

Hit hard by businesses downsizing and off-shore manufacturing, Rochester is in the process of reshaping its economic base and considers a vibrant downtown crucial to recasting the city’s future, notes Heidi N. Zimmer-Meyer, president of RDDC.

The Renaissance Square project will result in a new performing arts center and transit center and an expansion of the downtown campus of Monroe Community College. With a student population of more than 5,500 expected by 2009, the new campus will create demand for student housing. But with a vibrant mix of dining choices, coffeehouses, art galleries, and shops, along with entertainment facilities, such as the Kodak Theater and the Blue Cross Arena, other adults are beginning to move into downtown as well, creating demand for upscale housing, points out Zimmer-Meyer. About 800 units have been completed so far, and 13 new projects are underway.

Zimmer-Meyer says the biggest challenge for cities is deciding how best to leverage infrastructure to create market demand for private investment. In one case, she notes that a large mixed-use, condominium project on the riverfront is being built in downtown Rochester with minimal public support because people are attracted to living on the waterfront, as well as increasingly drawn to living in Rochester’s downtown. The performing arts center, with two theaters and state-of-the art entertainment technology, will help the city’s nearby convention center attract larger groups. “Piecing infrastructure together to create synergies like that allows you to do more than before if you play your cards right,” Zimmer-Meyer adds.

Nearly 3,000 miles away, the last piece of downtown Anaheim’s transformation is about to fall into place, notes Elisa Stipkovich, executive director of the Anaheim Redevelopment Agency, with CIM Group underway on a new mixed-use development in the city’s historic core that will provide a focus for the downtown community.

Planning for the long term, however, the city created a foundation for downtown’s transformation over three decades, with infrastructure improvements involving upgrading of sewers and storm drains, realigning streets, widening and enhancing sidewalks to create a pedestrian-friendly ambience, and locating utilities underground, notes Kerry Kemp, senior project manager for the downtown redevelopment project. The city also is investing $26 million in a new public plaza, streetscapes, public parking facilities, and a new cultural and heritage center at the CIM site, he says, noting that local bond issues and property tax increment financing have funded all infrastructure improvements.

In addition, the city has rezoned an industrial area on the southeast side of downtown to create a residential community of both multifamily and single-family dwellings, which includes a significant number of affordable housing units, Kemp says.

Steve Kellenberg, a principal at the Irvine office of the architecture, planning, and urban design firm EDAW, which developed Anaheim’s master plan, notes that infrastructure is a huge issue, and needs funding sources other than city governments to help pay for improvements. He says that developers are finding themselves in the position of having to build bridges and replace basic infrastructure like water mains, which may require replacing a half-mile system to bring utilities on site. Such improvements are driving up the cost of housing, he notes, because developers have to pass the costs through to homeowners.

Federal assistance that is available for urban redevelopment can sometimes be inadequate or too difficult to obtain. The federal government offers cash grants for brownfield cleanup, but with an estimated 600,000 to 1 million sites nationwide, the $75 million appropriated annually for this purpose is just a drop in the bucket, notes Miami attorney Michael Goldstein, president of the Florida Brownfields Association, who contends that the amount of funding should be quadrupled.

Accessing federal brownfield funding often takes more time and effort than it is worth, according to Percy Vaz, president of AMCAL, a Los Angeles affordable housing developer. The firm has underway a $105 million, mixed-use project, comprising 534 affordable rental units and median-income condominiums, on a ten-acre brownfield site in Lincoln Heights, which is located in the Los Angeles empowerment zone. The firm, however, chose to forgo federal help for cleanup. “It takes a long time to get federal brownfield funding, and the amount of funding available wouldn’t even have made a dent in the $6 million cost to clean up this site,” Vaz says, noting that with the deadline for affordable housing tax credits, “we couldn’t wait for this funding source.”

What made this site worth such a large cleanup investment to AMCAL and its equity partners, AIG and Phoenix Realty Group, is the infrastructure the city already had put in place. The site is adjacent to a light-rail transit station of the Gold Line, which runs between Pasadena and downtown Los Angeles, and already has utilities and street improvements, which would run up the cost of development, Vaz adds.

Although the city did work with AMCAL to process permits and plan reviews in time to meet the deadline for tax credits, Vaz suggests that if city and state governments want development in empowerment zones, they should help developers with financing, cleaning up, and expediting brownfield projects. If local governments hope to attract private capital into empowerment zones, “developers shouldn’t have to jump through hoops,” Vaz adds. “There should be a consensus of the political powers and support, because with land costs skyrocketing, it’s getting very difficult to make these projects pencil out.”

Significant public investments in central business district (CBD) infrastructure in both Oklahoma City and Houston are beginning to show dividends in the form of demand for downtown housing. Oklahoma City launched its redevelopment effort in the early 1990s, after United Airlines rejected the idea of locating its headquarters there, citing the deplorable condition of the city’s CBD, notes Dave Lopez, president of Downtown OKC, Inc., the city’s business improvement district. “When a visiting executive said he couldn’t imagine his people living here, that was a very defining moment for us, and it was when we decided to make this a better place to live for us and other people.”

The city levied a one cent sales tax increase in 1993 to provide a pay-as-you-go program to fund redevelopment of the CBD; issued bonds to build major facilities; and established the Downtown Empowerment Zone, which provides tax credits to business owners for hiring downtown residents. To date, the city has funded $1.6 billion in infrastructure and public facilities, including the SBC Bricktown Ballpark, the Bricktown Canal, a multipurpose arena, a recreation area along seven miles of the Oklahoma River, a $300 million Native American Cultural Center, and public artworks representing hallmarks of Oklahoma history.

With public investment creating a lively downtown atmosphere, restaurants, cafés, and nightclubs have opened along the canal and throughout the entertainment district, and Dell Computer is building its new headquarters here, says Lopez. The next piece of the city’s makeover is now falling into place, with private residential developers planning to build 1,000 units next year, he says, noting that demand for downtown housing was demonstrated when an old Montgomery Ward store in Deep Duce, the city’s cultural district, was converted to upscale housing and was leased up in two months.

Houston also began revitalizing its CBD in the mid-1990s, converting historic structures—including the Rice Hotel and 1920s-era Commerce Tower office building—to residential use with ground-floor retail and creating an eclectic nightclub and restaurant district along Buffalo Bayou, which has undergone a $40 million overhaul to establish a premiere recreational area for the downtown community.

Plans to convert 23 more historic buildings to housing were put on hold for about three years, however, while the city rebuilt streets and sidewalks in a 100-block area and added parking, streetscapes, a large public plaza, fountains, and other public amenities to make the CBD more pedestrian friendly.

Meanwhile, the city completed construction of the $286 million Minute Maid Park baseball stadium, the $202 million Toyota Center multipurpose arena, a $165 million expansion of the George R. Brown Convention Center, and the $88 million Hobby Center for the Performing Arts.

Now that the street works have been completed and a new seven-mile Metrorail light-rail system connects the downtown with the entertainment, museum, and medical center districts, the University of Houston, and Reliant Stadium to the south, residential development is getting back on track. With more than 3,100 housing units completed and many more in the pipeline, the CBD’s current population of 3,600 is expected to quadruple by 2010.

Additional retail development, which had been soft due to street construction, is also expected to get underway, with a mixed-used development along Main Street, proposed by Miami-based Entertainment Development Group, Inc., to add 350,000 square feet of retail space, as well as office space and residential units, to connect the center city to the entertainment district, notes Guy Hagstette, director of planning for the Houston Downtown Management District. And with downtown becoming the hip place to live and work, major corporations that would not have considered locating in the CBD a few years ago are moving their headquarters there, he says.

All Houston infrastructure improvements completed to date have been funded locally—with bond issues, sales tax increases, parking meter revenues, and private donations. “It’s obvious that private development decisions are linked to public investment,” Hagstette says. “Private investors would have viewed us as too risky if the public sector had not demonstrated commitment and a willingness to see things through. We gave them solid evidence on the ground of the public’s commitment, which is important psychologically for investors,” he adds, noting that private investors are not going to invest in a vacuum.

Sarasota, Florida, invested five years of planning and $40 million in infrastructure improvements to attract a private investor that would create a new urban fabric for the city’s downtown center.

The city created a community redevelopment agency and tax increment financing district to fund infrastructure improvements that included reconfiguring the street grid to create roundabouts and improve mobility; widening and landscaping sidewalks to make them more pedestrian friendly; and building a new bus station, parking structure, bridge to the Barrier Islands, and parks. Fifty acres of city-owned land on the bayfront also has been set aside for a cultural arts center and marina that will include a hotel, shops, and restaurants.

In addition, the city established an affordable housing land trust to ensure housing for lower-income residents and rezoned the CBD to accommodate high-density, mixed-use development. “In 1986, we said let’s challenge ourselves to get 1,000 housing units in downtown,” says Jane Robinson, Sarasota’s director of planning. “We now have 3,000 to 4,000 units and many more in the pipeline.”

The centerpiece of downtown’s transformation is a new mixed-use project developed by Charlotte-based Casto Lifestyle Properties, with 60,000 square feet of retail on the ground floor, including a 36,000-square-foot Whole Foods supermarket, topped with several levels of parking and 95 condominiums.

Casto principal Brett Hutchins says his firm is taking the lead in developing workforce housing, proposing the development of 350 to 400 multi- and single-family units priced from $170,000 to $225,000, on 58 acres adjacent to a new upscale master-planned community Casto is building on the bayfront, called the Quay.

“The city had to take a risk to develop downtown,” Robinson says. “For every dollar we put into the TIF, we’re getting back $20.”

Durham, North Carolina, recently completed a $10.5 million streets improvement program that created a new town center plaza, with brick and stamped-concrete sidewalks, and a corridor with a mix of uses that connect the town center with new mixed-use developments to the west and south.

In Durham’s case, however, private investors sparked the city’s transformation, with Capital Broadcasting Company and Blue Devil Ventures, a partnership of former Duke University Blue Devil basketball stars Brian Adams and Christian Laettner, investing about $200 million each to convert historic abandoned tobacco warehouses and manufacturing facilities into mixed-use developments.

Capital Broadcasting is converting the former American Tobacco Company campus and Bull Durham Tobacco Manufacturing facility on the south side of the CBD to a mixed-use complex that includes office and laboratory space, as well as residential and retail space. The initial phase of the project was completed in 2004 and new tenants, including GlaxoSmithKline, Duke University, Compuware, and McKinney & Silver, have moved in.

Blue Devil Ventures’ West Village project, which is being redeveloped in phases, is transforming historic tobacco warehouse and manufacturing buildings on the west side of the CBD into 375,000 square feet of retail space and 800 residential units. “Our project has generated the redevelopment of 2.5 to 3 million square feet around us,” Davis says, noting that when Blue Devil Ventures started this project ten years ago, 40 people lived in downtown; today, the downtown population is about 4,000. He predicts that downtown Durham will have a housing stock of 10,000 to 15,000 units by 2015.

Alan DeLisle, director of the city’s Office of Economic and Employment Development, notes that total investment in downtown redevelopment so far totals about $800 million, with $600 million in private capital and $200 million in public investment, which includes a new performing arts center and central park. Future plans call for a new $15 million transportation center that will serve city buses and a proposed light-rail system that will connect with Amtrak. DeLisle points out, however, that developing a supermarket will depend on the residential factor. “Once residential gets built out, we’ll have the critical mass to support a grocery store,” says DeLisle, predicting that this will happen within the next few years.

In fact, the grocery store is an essential component in building a neighborhood. A supermarket was considered so important to Harlem’s redevelopment that Abyssinian Development Corporation (ADC), a private nonprofit redevelopment agency dedicated to rebuilding Harlem’s socioeconomic fabric, literally gave away the store, notes Sheena Wright, ADC CEO, building the structure and leasing it to Pathmark supermarkets for below-market-rate rents. She notes, however, that this move lured a number of national retailers to the district, creating more than 500 jobs.

The promise of a new Safeway market also won Lowe Enterprises the contract to develop a $200 million, mixed-use project in the area north of Massachusetts Avenue (NOMA) in the District of Columbia and generated additional residential development in the surrounding neighborhood, says Mike Balaban, president of the Lowe Enterprises’ Real Estate Group East. Lowe Enterprises, along with equity partner CIM Group and local developers Bundy Development and Neighborhood Development Company, is building a mixed-use project in NOMA, an area that suffers from disinvestment, in a public/private partnership with the National Community Reinvestment Coalition.

The project includes 115,000 square feet of neighborhood retail services and 685 residential units, of which 20 percent are designated for affordable housing. The incentives for Lowe Enterprises were density bonuses, a tax abatement for the Safeway, and the offer of a two-acre site for $6 million in the heart of a city with the best office market and lowest unemployment in the nation.

“It was the enlightened posture of the city to foster a project with a food store,” Balaban says, noting that there is a traditional base of residents in the area that has been underserved for a long time. “The consensus is the market has improved because of the store,” he says, noting that several thousand new NOMA residential units have been absorbed since the announcement of the supermarket.

In the end, Baron, of McCormack Baron Salazar, emphasizes that good planning is key to rebuilding the nation’s communities. With current national economic constraints removing federal dollars from the redevelopment scenario for the foreseeable future, he suggests concentrating resources on urban communities that have the greatest potential for success.

Baron says that urban intervention strategies must involve identification of forces that promote urban decay and new initiatives that will reknit the fabric of communities, all of which combine knowledge of real estate and the built environment with an understanding of human capital programs, particularly the relationship among good schools, residential development, job creation, security, and related social services that are essential to viable, sustainable neighborhoods.

Observing that bureaucracies have been relatively ineffective in intervening in neighborhood redevelopment, Baron maintains that the private sector and public/private entities are best equipped to tackle this job, because it requires entrepreneurial vision and knowledge of design, finance, and human capital programs to be successful.

Patricia L. Kirk is a freelance writer based in Texas.