Brokerage

From Concept to Reality

The municipal development process illustrates the promise and peril of public/provate initiatives.

The long-term goals of public/private real estate partnerships can be noble -- better downtowns, more livable communities, and a broadened tax base. In addition, these ventures often provide civic-minded commercial real estate professionals with opportunities to get in on the ground floor of major redevelopment projects, move into positions beyond traditional broker/developer roles, develop consensus-building and public-speaking skills, and take a firsthand look at how state, local, and federal governmental bodies work. Another plus is sometimes a higher public profile either personally or for one's company.

And in today's "no-new-taxes" environment, public/private opportunities are out there. "It's a pretty good market," says John Buttarazzi, executive vice president of public sector services at Cohn Real Estate in Washington, D.C. "Governments right now have had their backs up against the fiscal wall, but projects still need to be built. Raising taxes is not too appetizing; incurring more debt is not that much less painful, so you really have to look for a third way ? tapping the private sector. And the good thing is, the private sector has the money."

While many aspects of creating and developing public/private projects require familiar commercial real estate skills, they also demand a whole set of finely honed supplemental ones. And it's important to understand how such partnerships work before taking them on, Buttarazzi says. The following case studies highlight the various issues at work in these high-maintenance but highly rewarding ventures.

Know Where the Resources Are

Success in public/private partnerships is sometimes knowing where to look. "Brokers are leaving dollars on the table simply because they don't understand the large number of incentives that are available to their clients through the public sector 'whether local or state,'" says Eric Davis, CCIM, president of the Greater Owensboro Development Corp. in Owensboro, Ky.

Davis manages and markets Mid-America Airpark, an industrial park owned by the city, Daviess County, and the Owensboro-Daviess County Industrial Foundation, a group of private citizens and investors.

Built in 1995, the 450-acre park is about half-sold, and its occupants include a national distribution center, several first-tier auto parts vendors, regional distributors, and a biotechnology company.

Public/private industrial parks are not uncommon in small markets, Davis says. Developers are more eager to build in large markets, but smaller communities --where the need may be greater -- often are overlooked. "I've been involved mostly in cities of less than 150,000, and as an economic developer, you have to have product on the ground in order to attract business," Davis says. "It's appropriate for public sector to do them, because the private sector isn't doing them."

Communities develop parks in a variety of ways, he says. Some towns offer land for free or a reduced rate in exchange for a guarantee of new jobs and businesses. Other communities build parks on spec or develop and manage parks start to finish. ?If developers can learn to interface with the public sector, they can often make their deals work in smaller communities," he adds.

He adds that brokers who work in several areas may not be aware of available incentives because each state and city is different. "Incentives aren't always published and aren't always offered the same way," he says. "If I were a broker, I would start at the economic development office before anywhere else. Get to know the economic development director."

Some developers shy away from the public sector, fearing unwarranted -- and unwanted -- publicity, he says. "There's sometimes a lack of trust in the confidentiality side. [Developers may be] worried that I'll take it to the newspaper because I'm a public-sector guy, and we live and breathe by an announcement [of new business]. But good economic developers certainly understand confidentiality."

However, understanding the open process is part of the learning curve in these partnerships, Buttarazzi notes. "In the public-sector decision-making process, everything is done in the open," he says.

Economic Viability

While a lot of public money goes into these joint ventures, the projects still must be economically attractive to private investors.

Carey Overstreet, CCIM, helped develop a mixed-income community of 58 townhomes in Chicago in the 1990s; 25 percent were bought by the Chicago Housing Authority to rent to displaced public-housing residents; the remaining 75 percent were sold at market rates.

It was one of the first projects of its kind in the country. "We were out to prove that market-rate buyers would buy in a development like this where there's a 75/25 split," says Overstreet, "as long as there's good controls and good management."

The project also used conventional financing. "That was another point we wanted to show," he says. "We didn't seek or get many grants;?"instead it was financed primarily through several banks.

Overstreet worked for Chicago Dwellings Association, a not-for-profit developer of affordable housing, which partnered with the CHA to construct Orchard Park Townhomes on three acres of CHA land, not far from Chicago's notorious Cabrini-Green public housing high-rises, which are in the process of being dismantled.

The project took five years to complete, but all the units sold. Initial asking prices were $175,000 for two-bedroom units and $225,000 for three-bedroom units. However, the project helped pave the way for a wave of development in the area, and prices have shot up. "Some of the initial buyers doubled their money in three or four years," says Overstreet, who's now president of Lincoln Realty in Chicago. "The last unit I sold in 2000 was a three-bedroom for $420,000."

Opportunities exist for private entrepreneurs to become involved in projects like Orchard Park, as developers or brokers, or by assembling land or having developers, or even the housing authority as clients, Overstreet says. He advises checking out opportunities with government housing agencies or development offices or talking to developers who have worked on similar projects.

Despite the financial success though, Overstreet notes a familiar caution. "You have to have the resources to deal with the long term. These are not the easy deals, and you have to be willing to dig in -- it takes years to put the pieces together. Communication is really important, because you're dealing with all different kinds of levels of people in all different agencies. And there's a community process as well as a governmental process, and that's another layer of deals."

Patience Is a Virtue

Along with extra layers of process, public/private deals also are affected by public sentiment. Deals that aren't even on the radar can come up against formidable barriers that are far beyond any real estate professional's control.

In 2000, Wayne D'Amico, CCIM, president of Real Property Consultants in Essex, Conn., got involved in the revitalization of Meriden, Conn., once a center for silverware manufacturing. The town "has tremendous assets," D'Amico says. "Its land and location are great in most real estate models. So, the question is how to capitalize on that."

As project coordinator for the Meriden Economic Resources Group, D'Amico studied one of the downtown's biggest liabilities: a nearly deserted 220,000-square-foot enclosed mall, which had already been redeveloped in the 1980s into a "combination strip center/industrial facility," he says.

"We analyzed the viability of the site, ... If it's not just the brick and mortar problem, what is [the problem]? We came up with the external issues: General trends in the marketplace, flood-control issues, traffic and circulation issues, general issues with workforce development " all the kinds of cookie-cutter issues that are standard in economic development."

But the market analysis clearly identified the project's path. Given the scope of the improvements, MERG had to tap both state and federal governments for money, and to do that, "it became clear that we needed a documented vision."

In early 2001, D'Amico began working on a plan and, after two months of trying, scheduled a Sept. 19 meeting with the state economic development department to get planning funds.

Because of the Sept. 11 attacks, the meeting never occurred. The state rescheduled, but the group "knew then it wasn't going to be a priority, when people are worried about security," D'Amico says. "And then, the day before the meeting, the state announced that after a decade of growth, it was going to be in a deficit budget situation for the first time ever. The world had changed."

By December the group had found other resources: another economic development group, SBC, the chamber of commerce, and a local cable company. The city had no money to give, but lent personnel. MERG commissioned a master plan study, which was released in July 2002. It featured a number of proposed redevelopment areas including a new city green, a redeveloped commercial center and arts district, and reconfigured highway and traffic patterns. It also called for $90 million in private spending and $40 million in public funds.

In September 2002, MERG received $250,000 from the state for further planning. D'Amico spent the next year negotiating the grant and the first seven months of this year conducting vendor selection for the study. The project's next phase is to refine some of the concepts and present a realistic assessment of public improvement costs and private developer needs.

As D'Amico's experience illustrates, public/private ventures move at glacial speed when compared with privately funded projects. But for good reason, he adds. "Whenever there's public resources, you've got to go through the scrutiny of who benefits. So you have to have documentation from legitimate, credible sources, so you can stand up in the public domain and feel confident."

Also, unlike private developments, public/private ventures have much greater planning expenses. "There's a lot of money that goes into public/private projects; you often end up doing two market analyses or two market appraisals. The resources needed to incubate these are tremendous," D'Amico says.

And finally, there are many more opinions to consider. "It's all about building consensus from a whole bunch of constituencies to move forward. That model works in private business, but here you've got a lot more people to deal with."

Working With All the Players

Public/private partnerships inevitably involve a wide range of interested parties, from businesses to the community to investors, says Conie Mac Darnell, CCIM. As president of Center City Investments in Macon, Ga., Darnell now provides commercial service to investors and businesses in downtown Macon. In 1999 he was president and chief executive officer of NewTown Macon, a nonprofit public/private community development corporation that organized to revitalize downtown Macon. "You've got a heavy dose of dealing with all kinds of different people with all kinds of different motivations."

The initiatives NewTown developed included the Urban Design Center, which serves as a coordinator for redevelopment projects; a 10-acre mixed-use riverfront development project along Ocmulgee River; the 10-mile Ocmulgee Heritage Trail, redevelopment of the downtown's rail station; and a downtown plaza, designed for public activities.

In 1999, two foundations pledged $6 million, Darnell says, and by fall 2002 NewTown had raised another $30 million from property, city revenue bonds, county and federal grants, as well as private funds from banks and individuals.

The group also developed strategic partnerships with other public/private entities such as the urban development authority, the chamber of commerce, banks, the Macon Historic Foundation, and Mercer University, which is downtown. Volunteer work came from attorneys, general contractors, and engineers.

So far, the most successful element has been the "one everyone has agreed on: Heritage Trail," Darnell says. "It has become the icon of downtown rebirth." Three miles of the trail are completed, the result of "public and private cooperation; it just flat out would not have happened without it. The county stepped up to the plate with revenue bonds to help support that, and private funds helped build sections of the trail."

However, other parts of the redevelopment project are more complicated. "Public/private partnerships are a forum for bringing people together, but that doesn't mean that they always agree," Darnell says. "There are different agendas. There have been lots of things that we all couldn't agree on, so we'd set them aside and find something that we could agree on, to keep the momentum going."

Awareness of such agendas, as well as a keen understanding of the necessary politics, is key to keeping public/private deals moving along, Buttarazzi says. "The real estate professional wanting to do business with the public sector needs to understand the public sector's policy objectives as well as the private sector's economic imperatives."

Keep Sight of the Big Picture

Keeping the momentum going often is difficult given the size and complexity of some public/private projects. One of the keys, says Cathy Crenshaw, CCIM, president of Sloss Real Estate Service in Birmingham, Ala., is developing a clear set of guidelines and goals early in the process.

Since 1998, Crenshaw's company, in partnership with Atlanta-based Integral Properties, has headed Park Place, the redevelopment of a 12-block area in the middle of Birmingham's downtown. The plans call for replacing blighted public housing projects with an ambitious interlinked community that will include housing, a new YMCA youth development center, a renovated park, a redeveloped elementary and middle school, a community garden, and a culinary incubator that will provide training and business assistance for the restaurant and food industry. "When we did our planning, we had to think bigger picture than just the housing if we're going to build a successful neighborhood," Crenshaw says.

The 637 housing units will include a mix of styles and sizes " apartments and townhouses" with 581 homes and apartments for rent and 56 for sale. About 40 percent will be subsidized housing through the Birmingham housing authority; about 20 percent will be low-income tax credit housing and about 40 percent will be rented or sold at market rate.

Originally funded by a $35 million Housing and Urban Development grant, the project involves between $100 million and $120 million in funding, as well as partnerships with numerous public and private entities. The main reason for its complexity, Crenshaw says, is the careful planning that needs to go into reconstructing a community. "You need to think holistically," she says, "respecting the sense of place that's there and how it works with its neighbors. Because this is such a strategic property to our city, we really had to be sensitive to that."

Crenshaw notes that the Park Place project serves as a cornerstone for future public/private projects. "Our urban core is starting to rebuild," she says, "and what we do not want to see happen is just that these great old historic neighborhoods gentrify. What we're trying to do is not force folks who don't have enough money out of the city where there's no transportation to jobs. So, we're looking at this as a model to look at some formulas that we might apply to the contiguous neighborhoods, so that we can protect some affordability in terms of housing and space."

In order to preserve such intangibles as affordability, green space, and a sense of neighborhood, the project's leaders put those issues on the table early on. "At our [committee's] first meeting," Crenshaw says, "we put together a series of guiding principles that we wanted to use to move this forward. We talked a lot on design, but other principles emerged pretty quickly. They were things like: we wanted it to look urban, and not suburban in design. We wanted to avoid a "sea of sameness' in the apartment design. We wanted people to be able to walk to work. Connectivity was important" we designed the neighborhood to fit right into the adjacent neighborhoods. Greener is better; we wanted to save old-growth trees, put in green space and incorporate green development. We said, "Let's think about what we all believe in and try to hold these principles in front of us as we move down the road.' And that has helped us a lot."

Personal Rewards

They can be frustrating, intricate, and lengthy. But real estate professionals involved in public/private partnerships say they can also be rewarding.

"There's a sense of personal satisfaction," Overstreet says. "You can do good as well as do well -- you can do well financially and still effect a good social purpose. That's the key."

A real estate professional "working in these has to wear a lot of different hats," Darnell says. "And it is complicated and it can be frustrating. But if you're working with the right folks, and you keep your eye on the horizon, and you have a passion about it, it works. You've got to be motivated by lots of different things."

"First of all, I like seeing the projects go up," Buttarazzi says. "Secondly, you kind of feel like you're saving the taxpayers some money. And being one, I like that."

Sarah Hoban

Sarah Hoban is a business writer based in Chicago.

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