INC NEWS - Greenfire Development - Frequently Asked Questions

[Mickle, Joy]

Greenfire Development

Frequently Asked Questions

 

 

1.                   How did the City come up with a $20 million dollar
incentive for the project?

 

            The City hired a nationally recognized outside consultant to
review the project's financial plan.  Their analysis showed that, in
order to make the project work, the developers would need about $18.3
million in additional funding (not counting the extra costs of the
affordable housing component upon which the City insisted).  The $18.3
million "gap" exists after the deduction of any tax credits for the
project, but does include providing a reasonable rate of return to the
developer (without which investors would not be willing to fund the
project).  This gap analysis does not include expenses the developer
will incur for providing affordable housing units, nor extra parking
costs desired by the developer.  If these elements are added to the gap
projection, the gap widens to $20 - $23 million.

 

            This, the City's standard approach, is the same as that used
for both the West Village II project and the proposed Heritage Square
project.

 

            Once the gap was identified, City staff analyzed the amount
of additional money the City might receive (over and above what we now
receive on the properties) in the form of increased property taxes,
money from the sale or lease of land, sales tax revenues, and parking
revenues.  The amount of "new money" we receive as a result of the
project is used to determine the City's ability (financial capacity) to
fund the difference between what the developer can finance and what the
project needs to be successful (the gap).  City staff also calculated
the ratio of public investment to private investment.  

 

            The proposed incentive package for Greenfire Development
represents approximately 7% of the total project cost.  The private
investment versus the public investment in the Greenfire Development
project is at a ratio of 14.2 to 1.  

 

            The City proposed an investment of $20 million in cash
incentives spread over 17 years.  The value of that same money to the
developer is $12 million because they can use the promise of future City
incentive money to leverage their private financing for the project.

 

2.                  Why does Greenfire Development need the City's
money?

 

In order to meet the parking needs for the commercial and retail
portions of the project, the developers need additional funding - to
help close the gap.  The City incentive money is based on the
non-residential (commercial, retail) portions of the project, not on the
residential portions (apartments, condominiums).  The residential
development stands on its own.  

 

Keep in mind, though, that the $20 million City incentive does not
entirely close the financing gap for the project:  the developer's will
need to find an additional $10 to $13 million to completely close it.

 

3.                  How will the project be financed?

 

            Greenfire Development must find its own private financing
for the project - and show proof of that financing as well as
construction contracts - before the City commits to any funding, sale of
land, or leases.  This means that private investors, banks and other
financial institutions will do their homework first, and then they must
be convinced that the project will work - or they won't be willing to
put their money into the project.  Again, the developer's financing must
be in place before the City gets involved.

 

            This financing process is the same as that done with/for
American Tobacco, West Village II, and the proposed Heritage Square
projects.  No redevelopment/revitalization project of this type receives
City financing prior to the Council's approval of a Development
Agreement (legally binding contract) with the City or prior to
pre-leasing on the project.

 

4.                  Does Greenfire Development have the financial
capacity to make the project work?

 

            So far, Greenfire has invested $60 million in acquisitions
and renovations in downtown;  more than the combined land purchases made
by Capitol Broadcasting (American Tobacco), Blue Devil Partners (West
Village II) or Scientific Properties (Heritage Square).  Their ability
to fund acquisitions and renovations of such magnitude speaks very
highly of their ability to finance this development project.

 

5.                  Could the project be smaller and therefore, the City
investment less?

 

            Yes.  American Tobacco could have been smaller, too.  West
Village II could have been smaller.  Heritage Square could have been
smaller.  But would they be as successful?

 

            The issue with Greenfire's development plan is creating
enough critical mass to attract tenants and to change the built
environment into a transformational, sustainable "place".  Without the
residents and employees this project will bring to the City's core, the
retail businesses would not be able to survive and the "feet on the
street" would be severely reduced.  Without the retail, the residents
would not be attracted to the area - because they wouldn't have the
services/products in a convenient location.  Without the commercial
businesses, the residents would not be driven to locate in the downtown
area to be close to work and the "urban lifestyle".  The project's
components are all intertwined.  If one part is "off", the project
doesn't work --- much like missing ingredients for a cake recipe.  

 

            Would American Tobacco have had the same impact on Durham's
downtown vitality if it were smaller?  Would the American Tobacco
project have worked if it were done as a piecemeal development?  Would
the impact on the downtown area be as profound?

 

6.                    Why is the Woolworth office building so big?

 

            The Woolworth office building will be a "signature" building
(a distinct, place-making, identifiable building) at Corcoran, Main and
Parrish Streets - perhaps the most important property in our downtown.
The just-updated Downtown Master Plan as well as the downtown community
have told us loudly and clearly that they really want a signature
building at this location to help transform the City's center.  The
Woolworth building will front on three streets - Corcoran, Main, and
Parrish Streets.  The Woolworth site is the linchpin - the essential
element - of the Historic Parrish Street project's success.

 

7.                  Can the project be disaggregated (separated into
parts)?

 

            City staff recommends that the City invest in the Greenfire
Development project because of its scale, its close relationship to the
goals of the updated Downtown Master Plan, and the profound effect it
will have on the downtown.  Separating the project into pieces will make
it non-fundable by financiers.  The project must be taken as a whole in
order to make it financeable from a parking perspective and a cash flow
perspective.  Sufficient cash needs to flow in from the project to be
able to pay the debt from the project.  The City needs to be able to
assure that there is enough of an "increment" (difference between City
income from the properties before and after development) from the
project to fund the incentives tied to it.

 

8                     Are there tax credits or abatements and, if so,
why would they receive cash incentives as well?

 

Tax abatements are illegal per North Carolina law.  

 

Applications for historic landmark designation for the Rogers Alley
properties have been received by the City.  The Hill Building already
has historic landmark designation, but it has not been "activated".
Since it costs significantly more to redevelop or renovate the historic
buildings we so treasure, the state has allowed cities to approve
Landmark designation - which provides a 50% reduction in property taxes
- for historic renovations.  This tax reduction serves as an inducement
for property owners to redevelop these cherished historic properties.  

 

In calculating the difference in tax revenues before the Greenfire
project and after the Greenfire project, we have factored in the
Landmark designation discount.  Incentives for these properties,
therefore, are based on the smaller tax return to the City from Landmark
designations.

 

This is similar to what was done with both the West Village II and
Golden Belt projects.  The City's financial analysis (and determination
of incentives) also took into account other tax credit financing
alternatives such as the New Markets Tax Credit.  Because the majority
of Greenfire's development is new construction, most of the projects are
not eligible for federal or state historic tax credits.

 

9                    What is the overall net impact on City-owned
parking space?

 

The City's current plans are to not replace 167 existing public parking
spaces in downtown after full build-out.  But, we have reserved the
right and the flexibility to have Greenfire build more public parking
(in Lot 20 and Parrish/Church Street) if we decide we need more.  This
gives us the opportunity to assess how the first few projects impact the
City's parking capacity - and to determine whether additional parking is
needed.  

 

Of the 167 parking spaces, 91 are located at the Parrish/Church Street
lot - now used primarily for the Court House.  The Court House - and its
parking demand - will move to the south side of the railroad tracks in
2012 - before the Parrish/Church Street lot begins construction.

 

            Seventy-six spaces from Lot 20 (Ramseur Street) will be
relocated to the Church and Corcoran Street decks.

 

            We may want to keep in mind, however, that with escalating
gasoline costs, increased transit and rail ridership, along with the new
"urbanization" and Smart Growth trends, we may not need the same amount
of parking space per person as we now have.  The Greenfire Development
project hopes to increase foot traffic and reduce auto traffic within
the City's core.

 

10                Is the City losing 380 spaces at the Chapel Hill
Street Deck?

 

            No.  The City is maintaining 380 spaces within the new deck.
The 380 spaces will function the same way they do now.  The City sets
the prices and policies for the spaces.  The City is essentially selling
or leasing the rest of the deck to Greenfire.

 

11                Why is the City building a new deck instead of simply
renovating the Chapel Hill Deck?  What's the deal?

 

            The Chapel Hill Street deck has outlived its useful life.
It is 37 years old - and in very poor condition.  In fact, the City
recently spent $1 million on emergency repairs - just to keep the deck
operating.  If the City chose to maintain the existing deck, rather than
a new deck, it would spend a minimum of $3.2 million to $6 million just
to give it additional life.  The City's contracted Construction Manager
at Risk (CMAR) estimates for repair of the deck were quite conservative
at $3.2 million.  In fact, the City's Department of General Services
requested $6 million from the CIP budget, this year, for deck repairs.  

 

            The Deal Points call for a not-to-exceed cost of $22,000 to
construct each new parking space at the Chapel Hill Street Deck.  (It
may be less than this).  This equals an $8.3 million total cost to the
City to replace the deck.  Using the $8.3 million City cost (and taking
into account how much repairing the existing Chapel Hill Street deck
would cost (from $3.2 to $6 million)), the total amount spent to have a
brand new deck, versus the old deck is, at most, $2.8 million.

            

Item

Repairs cost $3.2 M

Repairs cost $6.0 M

Construction Cost for a new deck (380 spaces at a cost of $22,000/space)

$8.3 M

$8.3 M

Amount Greenfire pays to purchase deck property

$-2.3 M

$-2.3 M

Amount City pays Greenfire for construction over 15 years

$6.0 M

$6.0 M

Amount City won't have to pay for Deck repairs

$-3.2 M

-$6.0 M

Total cost to City for a new Chapel Hill Street parking deck in
Greenfire proposal

$2.8 M

$0.00

 

            We used very conservative numbers - and didn't add in the
annual maintenance savings realized from having a new deck instead of an
old one ($45,000 per year).   We didn't include any increases in monthly
parking either, although they would increase the City's parking
revenues.

 

            The City would not fund the Chapel Hill Street deck from the
General Fund.  (This would save from $3.2 to $ 6.0 million in debt
against the City's General Fund.)  Rather, the project itself pays for
the new deck using the new cash flow generated by project revenue.
Since project revenues will be deposited into the Downtown
Revitalization Fund account, debt service payments (like a mortgage) for
the new deck will be made from the Downtown Revitalization Fund - not
from the General Fund.  Parking revenue from the new deck, however, will
continue to go into the General Fund.  

 

            The City gets a much better deck wrapped with attractive
retail shops on the ground level facing Orange Street and Chapel Hill
Street, and gets rid of an old, obsolete, poorly designed deck.  The net
result makes the City's core much more attractive.

 

12                Doesn't the City have to issue an RFP (Request for
Proposals) in order to sell City-owned parcels?

 

North Carolina law (GS 160A - 458.3) allows cities to participate in
public/private partnerships in the central business district (Downtown
Tier), if they will have a significant effect on the revitalization of
the area - including entering into binding contracts with private
developers for the acquisition, construction, ownership, or operations
of a project.  GS 160A-457 specifies that, in these instances, cities
can convey their property interests to private parties to encourage
certain significant downtown revitalization projects. 

 

North Carolina law gives the City the legal right to enter into these
public/private partnerships if the City determines that it is in the
common good of the City to do so, as long as the City's investment in
the project is not more than 50% of the total project cost.  

 

This same section of North Carolina law has enabled the City to
participate in the American Tobacco, West Village II, and the proposed
Heritage Square projects.

 

If a developer approaches the City with a well-thought-out plan that is
catalytic/transformational and that meets the needs and the plans of the
City (e.g. updated Downtown Master Plan), the City can move forward with
due diligence on that project.

 

City staff supports Greenfire Development's proposed project for many
reasons.  First, it directly addresses the goals of the updated Downtown
Master Plan - increased residential, retail, and hotel uses along with
Parrish Street redevelopment - all within the core of the City.  Second,
Greenfire's catalytic investment is $284 million. Their master vision
will have a tremendous positive impact on the redevelopment of downtown
Durham and aligns very positively with the Downtown Master Plan.

 

            Greenfire already owns 29 properties in downtown Durham, 19
of which are within the "loop".  In total, Greenfire has spent $60
million to purchase and redevelop properties.  This level of financial
commitment, along with the future level of financial commitment,
influences the City's view.

 

            A review by a third-party consultant hired by the City
determined that while the project has its challenges, it is feasible, if
given public assistance.  The project elements were proposed by
Greenfire and carefully reviewed by City staff.   

 

13                How much will the City pay for the Parrish Street
Museum within the Woolworth office building?

 

The City supports the prospect of a history museum and the Parrish
Street museum.  We are now undertaking a study, as part of our efforts
to implement the Cultural Master Plan, to see whether it would be wise
to combine both museum projects into one.

 

While our Contract of Sale for the Woolworth site stipulates that the
developer must set aside 5,000 SF for a museum, the City can choose to
either use that space or not - depending on whether or not it feels that
the Woolworth site is the best, most economical choice for the museum.
The cost to lease space is estimated at $65,000 to $90,000 per year,
some of which may be able to come from the Parrish Street set-aside
monies, state or federal funding.

 

14                Why are some of the tax values higher than investment
levels?

 

We often think of the value of a property as the amount of money we
spend on its construction.  That's not, however, the way properties are
valued by the Tax Office.  In assessing properties the Tax Assessor uses
the "per square foot" market value of properties by class (A, B, or C,
etc.) by type (residential, office, retail) in the area, then adds in
extra for elevators, etc.   The recent revaluation of downtown
properties resulted in market values increasing by 135%.

 

15                What do we do about parking during construction?

 

            The City worked with is parking management firm, Central
Parking, to develop a detailed parking plan for use during construction
of the Greenfire project.  Make no mistake - there will be disruptions.
But the City, along with its new parking management firm, will work very
closely with downtown interests to accommodate as many parking needs as
possible.  

 

            The major parking issue with the Greenfire Development
project occurs when the new Chapel Hill Street deck goes under
construction.  At that time, current Chapel Hill Street deck parkers
will move to City employee lots adjacent to City Hall and to Church
Street, Corcoran Street, and the Durham Centre Deck, and, possibly, some
will go to Lot 14.  The City and the development team will work closely
with downtown small business owners, churches, and other key
stakeholders, to make sure their parking needs are addressed.

 

16                Will there be adequate long-term parking within the
City's public parking system during and after the Greenfire project?

 

            Yes.  Long-term parking needs are detailed in the agenda
item now before Council.  The parking study was produced by Central
Parking.  It shows that with a projected 4% growth in demand above and
beyond the demand created by the Greenfire project, the lowest
availability for spaces in any year is 379 spaces.  The lowest with
on-street parking is 419 spaces.  

 

            Currently, the City's overall parking occupancy rate for
decks and lots is about 57%.  One of the City's goals in brokering the
Greenfire Development project's incentives was to maximize the use of
existing spaces within the existing system.  

 

            The terms of the Deal Points state that Greenfire
Development will lease 380 existing spaces from the City at market rates
(See agenda item # 4777).

 

17                Why is the City leasing 380 parking spaces to
Greenfire?

 

Any entity now has the ability to lease spaces from the City at market
rate.  Most deck spaces cost $45 per space per month.  Most surface lot
spaces are at $30 per space per month.  

 

Greenfire approached the City with a request for parking to meet the
needs of its proposed development.  With a current 57% parking occupancy
rate, the City determined that the proposed parking plan is a positive
way to both increase occupancy in existing parking spaces and to
increase revenues to the City.  

 

The approach includes leasing to Greenfire Development 150 spaces in the
Durham Centre deck and 230 spaces from a combination of the Corcoran
Street Deck, Lot 14 and the Church Street Deck.  

 

So that financing can be secured for the project (similar to the
long-term parking lease between the City's North Deck and Capitol
Broadcasting at American Tobacco), the City is proposing a 20-year lease
with escalating lease payments in Year 11.

 

20.       Greenfire's development includes a significant residential
component.  How will the current state of the residential markets impact
the development?

 

            It is difficult to predict what the real estate markets will
look like over time.  The majority of Greenfire's residential units will
be constructed a few years from now.  Out of a proposed 430 residential
units, 305 do not get built until Component Three of the project.  This
means they are not likely to be under construction until 2012 and 2013.
By then, the economy and markets are likely to recover, and Greenfire's
residential product will be in a good position for the market's
recuperation.

 

Having more residential units in the downtown is in concert with the
conclusions of the Downtown Master Plan:

            "A key strategy to achieve the level of activity and
economic sustainability that the Durham community desires to bring to
downtown is to dramatically increase the rate of growth of residential
units in downtown.  In particular, this will help support the growth of
retail and commercial services that existing Durham residents already
demand."

 

 

Joy Mickle, Downtown Development Coordinator

City of Durham, Office of Economic 
and Workforce Development

302 East Pettigrew Street, Suite 190

Durham, NC 27701

 

P 919-560-4965 x 208

F 919-560-4986
www.DurhamEconomicDevelopment.org


E-mail correspondence to and from this sender may be subject to the
North Carolina Public Records Law and can be disclosed to third parties.

 

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