Breaking the Cycle of Disinvestment Downtown OEDA 10/20/2015 heritageohio.org THE KEY TO DOWNTOWN DEVELOPMENT IS TO INTERRUPT THE CYCLE OF DISINVESTMENT AND CREATE ECONOMICALLY VIABLE BUILDINGS. HOW DID WE GET HERE? Most Downtowns developed in the late 1800s early 1900s Buildings were developed and owned locally Buildings were built to specific standards which created design consistency Most downtown buildings were multi-use with a mix of commercial, retail and residential In time, communities did not uphold design restrictions, resulting in inappropriate treatments of facades and interiors 1
UNFORTUNATE POLICIES UNFORTUNATE POLICIES Development trends that hurt downtown NEW is better Mall development and commercial strips Green field development on the edge of town for certain types of uses Highway system and suburban development Buildings inherited by multiple children, sold to owners out of town, seen as investment opportunities (and in some cases as a tax write off) These policies lead to the CYCLE OF DISINVESTMENT A Developer INTERRUPTS that cycle TIME VALUE PROPOSITION $250,000 Value $200,000 $150,000 $100,000 $50,000 $0 19001920193019401950196019701980199020002010 2
REAL ESTATE LIFE CYCLE Value Increases Develop/Reinvest Maintain Lease THE CYCLE IS BROKEN When one property owner breaks the cycle, the district retains value and the cycle continues In many cities, a majority of the property owners stop investing and maintaining and the district breaks the real estate life cycle REAL ESTATE LIFE CYCLE Value Increases Develop/Reinvest Maintain Lease 3
THE COST OF VACANCY Municipalities can t afford vacancy Vacancies reduce property values Vacancies don t generate income tax Vacancies don t generate sales tax Vacancies dampen civic pride Vacancies discourage additional business development Vacancies deter tourism COST OF VACANCY >$8,400 in rents >$5,040 in property value >$100 in property tax $5,000 in sales tax $15,000 in sales tax >$4,700 for utilities, telephone and internet >$39,500 in loan demand $2,200 in bank fees and interest $17,000 in deposits >$1,300 in maintenance and repairs $500 in printing and copying >$900 in supplies >$2,700 in insurance premiums $900 in legal and accounting fees $500 in property management fees >$6,200 in advertising, marketing and PR expenditures >$56,800 as employees of that business >$31,500 in business owner s compensation and profit $24,100 workers elsewhere in the community SOURCE: Estimates of the cost of an empty building were based, in part, on RMA Annual Statement Studies. YOU HAVE TWO CHOICES 4
YOU HAVE TWO STRATEGIES WHY IS DOWNTOWN DIFFERENT? WHY IS DOWNTOWN DIFFERENT? 5
THE APPROACH INCENTIVIZE DEVELOPERS DILEMMA The cost to renovate is relatively fixed, but in a depressed downtown, the lease rates do not generate enough revenue to cover the debt Depending on the physical state of the building, even healthy lease rates may not cover the full investment of returning the building to an economically viable state 6
DEVELOPERS DILEMMA Gross Residential Rent $6,000.00 - Residential Vacancy (5%) $140.00 = Residential Income $5,860.00 Gross Commercial Rent $2,333.33 + Tenant Contributions $300.00 = Commercial Rent $2,633.33 - Commercial Vacancy $(300.00) =Commercial Income $2,933.33 = Effective Gross Income $8,793.33 Operating Expenses Management Fees $367.60 Real Estate Property Tax $200.00 Insurance $100.00 Other $- = Total Operating Expenses $667.60 = Net Operating Income $8,125.73 - Debt Service (p+i) bank $9,500.00 = Cash Flow $(1,374.27) KNOW THE NUMBER What is the difference between the cost to renovate a building and the revenue the building will generate? What incentives/financing can be used to bridge the gap? The property owner must know the number City leaders must know the number BRIDGING THE GAP Tax abatements Tax exemption Tax credits Low interest loans Grants Neighborhood Assistance Program Other 7
DEVELOPERS DELIGHT Gross Residential Rent $6,000.00 - Residential Vacancy (5%) $140.00 = Residential Income $5,860.00 Gross Commercial Rent $2,333.33 + Tenant Contributions $300.00 = Commercial Rent $2,633.33 - Commercial Vacancy $(300.00) =Commercial Income $2,933.33 = Effective Gross Income $8,793.33 Operating Expenses Management Fees $367.60 Real Estate Property Tax $200.00 Insurance $100.00 Other $- = Total Operating Expenses $667.60 = Net Operating Income $8,125.73 - Debt Service (p+i) bank (less FHTC) $6,500.00 = Cash Flow $1,635.73 RETURN ON INVESTMENT Municipalities are wise to invest in urban mixed use projects These projects generate greater sustainable return on investment than strip commercial development These projects impact the heart of the whole community Once the properties are returned to the cycle of investment, the city no longer has to intercede The tax base will grow and the city will recover the expense of investment PENALIZE 8
WHEN INCENTIVES DON T WORK Municipalities have to be willing to take the stick approach when property owners are not willing to maintain their buildings and incentives don t work Make it fiscally painful for property owners to allow buildings to become blighted Vacant property registries should be considered Aggressive code enforcement Demolition by neglect/ minimum maintenance ordinances VACANT PROPERTY REGISTRY The purpose of this ordinance is to establish a program for identifying and registering vacant residential and commercial buildings; to determine the responsibilities of owners of vacant buildings and structures; and to speed the rehabilitation of the vacant buildings. Shifting the cost of burden from the general citizenry to the owners of the blighted buildings will be the result of this ordinance. EVIDENCE OF VACANCY - means any condition that on its own or combined with other conditions present would lead a reasonable person to believe the property is vacant. Such conditions include, but are not limited to: significantly below standard utility usage, overgrown and/or dead vegetation, accumulation of newspapers, circulars, flyers and/or mail, accumulation of trash, junk, and/or debris, broken or boarded up windows, abandoned vehicles, auto parts or materials, the absence of window coverings, such as curtains, blinds, and/or shutters, the absence of furnishings and/or personal items consistent with habitation or occupation, statement(s) by governmental employee(s) that the property is vacant. VACANT PROPERTY REGISTRY If the owner does not reside in Lake County or within 10 miles of Painesville City limits, the name and address of any third party who the owner has entered into a contract or agreement with for property management. By designating an authorized agent under the provisions of this section, the owner is consenting that the third party is authorized to receive any and all notices relating to the property and conformance of any and all ordinances. The Community Development Department shall inspect any premises in the City for the purpose of enforcing and assuring compliance with the provisions of this Ordinance. Upon the request of the Property Maintenance Officer or Chief Building Official, an owner may provide access to all interior portions of an unoccupied building in order to permit a complete inspection. Nothing contained herein, however, shall diminish the owner s right to insist upon the procurement of a search warrant from a court of competent jurisdiction by a Property Maintenance Officer, Chief Building Official or his or her designee in order to enable such inspection. The Property Maintenance Officer or Chief Building Official shall be required to obtain a search warrant whenever an owner refuses to permit a warrantless inspection of the premises. COMMERCIAL. The owner of a vacant commercial building shall pay an annual fee of four hundred ($400) dollars for the first year the building remain vacant. For every consecutive year that the building remains vacant, the annual fee will be assessed at double the previous year s fee amount for a maximum annual fee equaling the five (5) year fee of six thousand four hundred ($6,400) dollars to be used for the fifth and for all consecutive, subsequent years of vacancy. LATE REGISTRATION FEE. Late fees shall be paid in addition to the annual registration and will be equal to the annual fee or one thousand ($1,000) dollars, whichever is less. 9
ECONOMIC DEVELOPMENT DOWNTOWN You are charged with doing economic development downtown What tools are you given to create spaces for businesses to locate? Do you have the same resources and tools as your city or county economic development director? BAD SPACES = BAD BUSINESSES If you don t have space for quality businesses, you won t have quality businesses If you have a $300 apartment to let, expect a $300 tenant LOCAL GOVERNMENT S ROLE If the cost to renovate the building is not covered by the amount of income the renovation will produce, Local Government can step in with incentives and gap financing If the incentives available are not enough to bridge the gap, a more creative solution is needed Attract additional local equity Example: Over the Rhine in Cincinnati Remove risk, reduce cost 10
CASE STUDY - PAINESVILLE 1) Initiated Vacant Property Ordinance: Requiring Property Owners to List Property with a Commercial Real Estate Broker. 2) List Property with Broker: Worked with Real Estate Brokers to make sure cost was competitive with what was in the region of the type of space they were marketing. 3) Perform Property Inspections: Started doing routine property inspections on all vacant buildings and requiring property owners to make improvements to the buildings to meet code CASE STUDY - PAINESVILLE 4) Get Contractor Quote for Interior/Exterior Improvements Needed: Took contractors through the buildings to provide estimates on interior improvements 5) Negotiate and Get Broker to List at a Fair Price: We also made sure that the broker got a quote of the work needed done on the interior of the building, so they knew how much an investor would have to put into that building, therefore making them reconsider the building listing price 6) Pro-Forma: Did a pro-forma with the local SBA. They provided us some financial data showing what the monthly mortgage rent would be, and then a separate pro-forma on the monthly payment for a loan on the improvements. 11
CASE STUDY - PAINESVILLE 7) Down Payment Assistance: We requested assistance from our Lake County Revolving Loan Fund to pay the down payment, so the investors cash could be put into building repairs versus a down payment on the loans. 8) Market the Property: We put together a marketing sheet to market the property and starting meeting with several local people that we felt could take on these projects and would have an interest in being a part of the renovations. We even thought about taking on the project as the DPO at one point, but were fortunate to have someone step forward. A local construction company agreed to purchase 2 properties with an outside investor. The construction company is making the improvements and we are helping them identify tenants for the buildings. CASE STUDY - PAINESVILLE 9) Work with the City: Before and after title transferred we worked with the City to make sure that the City Manager s Office and Building Department was on-board with assisting the new owners with leniency on time lines to meet code on property maintenance issues, working to make small steps towards big improvements and helping guide them so that the permit process was not something overwhelming to the new investors. 10) Volunteers: A group of volunteers was scheduled to come in and help with some of the items on the quote that could be done with volunteers, painting, flooring, landscaping, etc. 12
ESTHETICS = ECONOMICS WHERE WOULD YOU SHOP? 13
Questions? Thank You! Jeff Siegler Heritage Ohio 614.258.6200 x24 Jsiegler@HeritageOhio.org 14