Guidelines for Urban Renewal Land Disposition DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT OFFICE OF COMMUNITY PLANNING AND DEVELOPMENT OFFICE OF EVALUATION Ex Safaris SEYMOUR DURST When you leave, please leave this book Because it has been said " Ever'thing comes t' him who waits Except a loaned book." OLD YORK LIBRARY — OLD YORK FOUNDATION Avery Architectural and Fine Arts Library Gin of Seymour B. Durst Old York Library Guidelines for Urban Renewal Land Disposition DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT OFFICE OF COMMUNITY PLANNING AND DEVELOPMENT OFFICE OF EVALUATION REAL ESTATE RESEARCH CORPORATION with RTKL ASSOCIATES INC. This report was prepared for the U.S. Department of Housing and Urban Development, under contract H— 3610-R. Its contents reflect the views of the contractor and do not necessarily reflect the policy or views of the U.S. Department of Housing and Urban Development. For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402 - Price $5 .05 TABLE OF CONTENTS Page Chapter Number 1 INTRODUCTION 1 A. Background of Study 1 B. Purpose of the Guidelines 1 C. Uses and Limitations of These Guidelines ... 2 D. Other Study Products 3 E. Organization of These Guidelines 3 2 REVIEW OF RESEARCH FINDINGS 5 A. Research Finding One: Rates at Which Key Renewal Activities Are Completed 6 B. Research Finding Two: Effect of Various Factors on Land Disposition 16 C. Research Finding Three: Delay Causing and Accelerating Factors in Land Disposition . . 20 3 BASIC STRATEGY TO OVERCOMING LAND DISPOSITION PROBLEMS 37 A. Are Key Local Actors Participating Actively in Renewal? 37 B. Does the LPA Provide Maximum Technical Assistance to Developers? 38 C. Does the LPA Regularly Consider Alternative Disposition Methods? 39 D. Do Planned Reuses Reflect Market and Financial Reality? 40 E. Is There a Willingness to Provide Sufficient Developer Incentives? 45 F. Has the LPA Fully Pursued Potential Developers? 46 G. Have All Funding Sources Been Explored?. ... 47 H. Is the Phasing of Other Aspects of Renewal Related to Land Disposition Requirements?. . 48 I. Are Overall Renewal Staff Capabilities Appropriate? 49 J. Has the LPA Established Appropriate Priorities for its Projects? 49 K. Have Contingency Plans Been Developed for Long-Term Delays? 50 L. Are Marketing Efforts Operating Counter to National or Local Trends? 51 4 HOW TO USE THESE GUIDELINES. 65 A. Introduction 65 B. Chapter Format and Organization 67 5 OVERPRICED LAND 71 6 INADEQUATE INTEREST IN RESIDENTIAL LAND 85 7 INADEQUATE INTEREST IN RETAIL LAND 113 8 INADEQUATE INTEREST IN OFFICE LAND 143 9 INADEQUATE INTEREST IN HOTEL-MOTEL LAND 173 10 INADEQUATE INTEREST IN INDUSTRIAL LAND 203 11 SCATTERED RESIDENTIAL LOTS 231 -i- Page Chapter Number 12 SCATTERED NONRESIDENTIAL PARCELS 245 13 INFLEXIBILITY OF PROJECT PLAN 259 14 SMALL OR POORLY CONFIGURED PARCELS 269 15 PREDISPOSITION NONPERFORMANCE BY DEVELOPER 281 16 TIMING OF PUBLIC FACILITY CONSTRUCTION 297 17 REHABILITATION MANAGEMENT 315 18 INSUFFICIENT DISPOSITION STAFF CAPABILITIES . . . .335 19 TIMING OF PROJECT IMPROVEMENT CONSTRUCTION 345 20 SELECTION PROCESS FOR MULTIPLE DEVELOPMENT PROPOSALS 357 21 INTERIM PROPERTY MANAGEMENT 375 22 CITIZEN PARTICIPATION 399 23 WHETHER TO OFFER PARCELS TO SINGLE OR MULTIPLE DEVELOPERS 419 24 APPROPRIATE METHOD OF ADVERTISING DISPOSITION PARCELS 431 DECISION TREES Sample of Decision Tree Format 68 Problem: Overpriced Land 73-74 Inadequate Interest in Residential Land . 87-8 9 Inadequate Interest in Retail Land. . . .115-117 Inadequate Interest in Office Land. . . .145-147 Inadequate Interest in Hotel-Motel Land .175-177 Inadequate Interest in Industrial Land. .205-207 Scattered Residential Lots 234-235 Scattered Nonresidential Parcels 248-249 Inflexibility of Project Plan 261-262 Small or Poorly Configured Parcels. . . .272-273 Predisposition Nonperformance by Developer 283-284 Timing of Public Facility Construction. .300-301 Rehabilitation Management 318-319 Insufficient Disposition Staff Capabilities 337-338 Timing of Project Improvement Construction 347-348 Selection Process for Multiple Develop- ment Proposals 359-360 Interim Property Management . 384-385 Citizen Participation , .402-403 Whether to Offer Parcels to Single or Multiple Developers 421-422 Determination of .Appropriate Method of Advertising Disposition Parcels .... 433 -ii- CHART S /ILLU STRATIONS Page Number Location of Study Cities 7 National Means for Key Execution Activities Conventional Projects: Residential Land .... 8 National Means for Key Execution Activities Conventional Projects: Nonresidential Land. . . 9 Annual Average Rates of Execution Activities Based on National Experience 11 National Mean Rate of Land Disposition Conventional and NDP 12 Study Cities Means for Key Execution Activities Conventional Projects: Residential 14 Study Cities Means for Key Execution Activities Conventional Projects: Nonresidential 15 Study Cities Rate of Land Disposition Conventional Projects: Residential 17 Study Cities Rate of Land Disposition Conventional Projects: Nonresidential 18 Key Delay Causes in Urban Renewal Land Disposition 22 Key Accelerating Factors in Urban Renewal Land Disposition 23 Distribution of Delay-Causing Factors by Frequency 24 Sensitivity of Selected Key Land Disposition Delay Causes by Project /Management Type .... 35 The Positive and Negative Aspects of Alternative Disposition Methods 41-43 Catalog of Major Urban Trends 53-64 Step-by-Step Process for Appropriately Adjusting High Land Prices 80 Organization of Work Elements: Market Analysis. . 94,123, 152,182, 213 Investment Analysis of Projected Mult i -Family Residential Development 103-104 Investment Analysis of Projected Shopping Center . 133-134 Investment Analysis of Projected Office Facility . 162-163, 371-372 Investment Analysis of Projected Motel Facility - 165 Rooms 195-196 Investment Analysis of Projected Multi-Lease Warehouse/Office Facility 221-222 Typical Pattern of Scattered Residential Lots. . . 232 Typical Access Problems of Scattered Residential Lots 242,278 Typical Pattern of Scattered Nonresidential Lots . 246 Innovative Interim Uses 257 -iii- Page Number Maintenance of Old Layout of Streets and/or . Utilities Limits Reuse Flexibility 270 Public Facilities Act as an Incentive for Private Investment 303 Preferred Staging of Rehabilitation in Project . . Adjacent to CBD and Desirable Residential Area 325 Priority Areas for Catalytic Rehabilitation. . . . 327 Property Management Problems and Opportunities by Property Type 378 Key Elements in the Development of a Comprehensive Property Management Program 381 Potential Interim Uses for Acquired Properties . . 392 Examples of Appropriate and Inappropriate Site Maintenance 395 iv- 1 INTRODUCTION A. Background of Study In June of 1973, the U.S. Department of Housing and Urban De- velopment selected Real Estate Research Corporation, in assoc- iation with RTKL, Inc., to undertake a 15-month nationwide study of urban renewal land disposition. This research fo- cused on renewal activities in 22 cities and involved in-depth analysis of more than 70 urban renewal projects- -both conven- tional and NDP. This study is one of the most detailed exami- nations of the urban renewal program ever conducted during its 25-year history. The primary orientation of this study has been on questions relating to land disposition. Therefore, our analysis of other aspects of renewal (planning, acquisition, relocation, etc.) has been in the context of how they relate to questions of land disposition. B . Purpose of the Guidelines The purpose of this study--and particularly of this volume- is to provide technical assistance to local renewal agencies. It is hoped that the guidelines presented here will assist in the solution of land disposition problems that LPAs across the country may be facing. In light of the adoption of Community Development Block Grants to replace such categorical programs as urban renewal, there has been increased interest in the timely completion of renewal projects currently underway. -1- This volume is intended to provide suggestions and recommen- dations that will aid in this respect. Specifically, our in- tent is to provide assistance for two types of situations: • Projects that have been in execution for some time, and may be experiencing difficulties in the disposition of remaining parcels, and • Projects that are just entering execution and are just beginning to focus on questions of land disposition. In the former case, our aim is to help in the solution of existing problems. In the latter instance, our intent is to provide guidance that will prevent land disposition problems from arising. An additional purpose of this volume is to provide insights that will offer guidance in the selection and execution of new projects under the Community Development Block Grants program. C . Uses and Limitations of These Guidelines The urban renewal program is intrinsically one of the most complex and difficult domestic programs ever undertaken. The range of activities covered by renewal is extensive. Furthermore, renewal has been used in cities with extreme variations in size, ranging from the largest to the smallest. Renewal agencies themselves vary considerably in their organi- zation, their size, their local power and the range of capa- bilities contained within their staffs. These are but a few of the reasons why there are so few absolutes with respect to renewal. Almost without exception, the material contained in this report is illustrative rather than definitive; suggestive rather than absolute. Many of the suggestions and guidelines contained herein are based upon the experiences of renewal agencies throughout the country. Some will undoubtedly have been tried unsuccessfully by other LPAs we did not visit. Still others may be applicable to certain kinds of agencies, projects, or situations. An additional factor to bear in mind is that this volume deals in general only with those problems over which a city or LPA can exercise some control. A number of problems that have delayed land disposition are exogenous factors. That is, they are broad problems, generally operating at the national level, over which a city or LPA can exercise little, if any, control. Examples include high interest rates, lack of mort- gage availability, or broad socioeconomic trends that operate nationwide to the detriment of renewal. Dealing with factors such as these is clearly beyond the scope of these guidelines. -2- D. Other Study Products In addition to these guidelines for urban renewal land dis- position, Real Estate Research Corporation has prepared two other volumes as part of the total study. The other two volumes are : • Local Policy Considerations --a guide for local policy makers focusing on the need for future renewal, with general recommendations as to the most appropriate forms of future renewal activity in light of Community Develop- ment Block Grants . • Local Evaluation Design - -suggested guidelines for evalu- ating the overall effectiveness of current renewal ac- tivities . Each of these three volumes was prepared by Real Estate Research Corporation, with assistance from RTKL, Inc. The Contractor is solely responsible for the statements, findings, conclusions, and recommendations. We gratefully acknowledge the cooperation given us by officials in each of the 22 test case cities, while accepting full responsibility for the con- clusions drawn. E. Organization of These Guidelines This volume is organized in 24 chapters. Chapter 2 summarizes briefly the key findings from the more than 70 renewal projects studied in 22 cities. Chapter 3 sets the framework for the chapters that follow by summarizing major land offering ap- proaches and briefly discussing major on-going forces and factors that may help or hinder land disposition. Chapter 4 describes how to use the 20 chapters that follow. Chapters 5 through 24 each deals with a major problem area that we have found can delay land disposition, and provides suggestions and guidelines for counteracting these problems. -3- REVIEW OF RESEARCH FINDINGS Since 1950, over 2,500 urban renewal projects have been started in the United States; almost half are still in execution. The pervasive appearance of major time delays at nearly all stages of urban renewal have: 1) prolonged many projects far beyond their initially planned completion dates, 2) seriously reduced the overall effectiveness of many such projects, 3) discouraged many private developers from participating in urban renewal, 4) called into question the ultimate value of the entire urban renewal process, and 5) led to increased costs due to inflation, staff and interest costs. The potential benefits of urban renewal make the undue delays in their execution both frustrating and undesirable. Over the past two decades, urban renewal has been a catalytic force for urban revitalization. Most significantly, the urban renewal program provides a vehicle for the private and public sectors to work together in attempting to solve one of the most urgent domestic problems of our country -- the rebuilding of our cities. Thus, in an effort to counteract untimely delays and "prolonged" vacancies in the urban renewal process, HUD commissioned Real Estate Research Corporation and RTKL, Inc. to undertake a nation- wide study of the urban renewal program. The primary objectives of this project included: • Identification and determination of the major causes of de- lays in the land conversion process, especially those lead- ing to "prolonged" vacancy. -5- • Formulation of alternative strategies and tactics for counter- acting these vacancies, and preventing them from arising. The results of this 15-month research and analysis are presented in this volume. The data base for these guidelines was derived from an in-depth analysis of over 70 renewal projects located in 22 cities throughout the nation. Detailed studies of 51 projects in 11 test case cities were completed, and less comprehensive studies were conducted for 23 projects in 11 supplementary cities. Test case cities were studied for periods of up to four months each, whereas supplementary cities were studied much less in- tensively, but added considerably to our data base. Of the projects studied, 51 were conventional projects and 23 were Neighborhood Development Program projects (NDPs). The map that follows shows the names, locations, and geographic distribution of the cities that were studied. This chapter summarizes our research findings in three areas. First, it summarizes the rates at which renewal projects dispose of land. Second, it includes information on those factors which affect land disposition. Finally, the causes of delay and ac- celeration in the land disposition process that were identified in the study cities are summarized. The remainder of these guide- lines is devoted to alternative strategies and tactics appropriate in counteracting these and additional problems encountered in urban renewal land disposition. A. Research Finding One: Rates at Which Key Renewal Activities Are Completed " Contrary to popular concepts, the renewal program as a whole disposes of land at a relatively rapid rate considering the program's complexity. From a national perspective the key problems in urban renewal disposition occur in the last 5-10 years of the program. National figures indicate that by the end of the tenth year, more than 207 o of the land remains to be sold. 1. National Means Local Public Agencies have been reporting their progress in completing execution activities for each project to the Department of Housing and Urban Development on an annual basis. Using these reported data, national means for rates of key execution activities have been computed and are shown on the following graphs. This information is more complete for conventional than for NDP projects because the former have a longer history and a more reliable reporting mechanism. The first two graphs in this chapter illustrate progress for residential land separately and for nonresidential -6- -8- z _ iii o o° UJ Q. o TT* w \l \i -4- w o 00 o o o o o CO o CM w v\ w w w w *4\ % \ \ \ \ -9- land, with both types divided into public and private re- uses. An analysis of the overall rates of renewal activi- ties measured over a 10-year period from the date of ex- ecution reveals the following findings. On a national basis : • In the residential category, land designated for pub- TTc reuse was disposed at a faster rate than that for private reuse " The average annual disposition rate for public residential land was 9.2 percent, as com- pared to 7.5 percent for private residential land. • Nonresidential public and private parcels were dis- posed at approximately the same rates . The average annual disposition rates were 8.0 and 7.8 percent respectively. Although the public and private rates of disposition are almost identical after 10 years, the public rate leads in the first 8 years and then levels off. • Acquisition activities experienced a 9.7 percent average annual completion rate for all land uses" . It is significant to note, however, that acquisition averages 25 to 28 percent complete per year in the first two years of execution. • The rate at which land is made available for disposi- tion reflects the speed at which relocation and demo- lition occur . The rate of completion for these activities is basically the same for all land uses. The overall rates vary only from 8.9 to 9.3 percent. • The rate at which project improvements were completed was not available on a national basis, but a similar analysis for the study cities revealed that project improvements for residential projects are completed at a faster rate than for nonresidential projects , particularly in the first five years . The respective average annual rates are 7.2 and 5.1. • In attempting to classify renewal projects into mean- ingful categories, we found that the only valid dis- tinction among projects is that between res identially oriented projects and nonres identially oriented § ro jects . Trie latter type is generally represented y CBD projects. Other distinctions appear to be either arbitrary or artificial and have little or no correlation with land disposition. A summary of the annual average rates of execution activi- ties measured over a 10-year period is shown below. All of the data except those referring to project improvements are based on the experience of all conventional renewal projects (national norms) . Project improvements data are based on an analysis of study city experience. -10- ANNUAL AVERAGE RATES OF EXECUTION ACTIVITIES BASED ON NATIONAL EXPERIENCE Residential Nonresidential Activities Public Private Public Private Acquisition* (all land uses) 9.7% Demolition 9.0% 9.3% 8.9% 9.2% Project Improvements (study cities) 7.2% 5.1% Disposition 9.2% 7.5% 8.0% 7.8% * Acquisition averages 20% per year for the first 2 years. Source: Department of Housing and Urban Development, except as noted. Reference to the graph entitled "National Mean Rate of Land Disposition: Conventional and NDP" shows that: • NDP and conventional programs disposed of land desig- nated for both private residential and private non- residential reuses at comparable rates during the first four years of execution. • NDP projects appear to be slower than conventional ones, however, in conveying land designated for pub- lic uses. For example, by the fourth year of execu- tion, the NDP projects had disposed of only 8 percent of their public residential land, compared to 42 per- cent in the conventional program. This finding must remain tentative, however, because the sample of land involved ranged from 36 acres designated "public residential" in NDP projects to 200 to 300 acres in conventional projects. Because of this variance, the results may be somewhat skewed. 2 . Study Cities Time Lines Time lines of project activities for the study cities have been prepared, based on the mean rate of completion for acquisition, demolition, project improvement con- struction, and disposition. The sample includes 23 -11- residential and 28 nonresidential projects. A comparison of the study cities' means with the national means shows that: • Acquisition and demolition activities proceeded more quickly in the study cities. Acquisition reached 97 percent complete in the eighth year after execution in the study cities, two years ahead of the national norm. Although the average annual rate for demoli- tion did not vary substantially between the study cities and the national norm after 10 years, demoli- tion activity proceeded at a much faster rate during the first six years in the study cities. • The study cities' rate of land disposition in resi- dential projects is comparable to the rate of resi- dential land conveyance indicated by the national mean. • Nonresidential projects in the study cities experi- enced a much slower rate of disposition than found nationally. For the first four years, the study cities' rate of disposition is almost identical to the national norm. After the fourth year, the pace slackens off considerably, however, resulting in an annual disposition rate after 10 years of 6.0, as compared to the national rate of 7.8 percent. Additional analysis of the study cities' disposition experience indicates several interesting relationships: • The average length of time that elapses between the first acquisition and the first disposition is ap- proximately 1.7 years for the entire study sample. Further breakdown by type is as follows : Nonres idential Residential Conventional 24.9 mo. 22.5 mo. NDP 8.3 mo. 7.1 mo. Mean 21.5 mo. 17.2 mo. or 1.8 yrs. or 1.4 yrs. • However, one-half (10 of 20) of the residential projects did not dispose of any land until the third year of execution and one half (15 of 28) of the non- residential projects did not convey any land until the fourth year. -13- -14- u c QC "O c O a V. o o CO 0> v> £ QC 0) CO CO »/> uj O 75 UJ CO s = QC

-15- • NDP projects conveyed their first parcels much sooner than the conventional projects, but did not proceed faster thereafter. • Nonresidential projects that experienced early land disposition (during the first 3 years) maintained a faster average annual rate than projects with later starts. (The data sample for residential projects was too small to test this finding.) The disposition history of each project reviewed in the study cities has been plotted against the national mean for both residential and nonresidential projects. These graphs demonstrate the variance that exists in the dis- position experience of these projects. Research Finding Two: Effect of Various Factors on Land Disposition - The study found that a number of factors commonly believed to affect land disposition really have little or no impact. On the other hand, there are several factors that do have a greater or lesser impact on the rate at which land is marketed. 1. No relationship was found between the rate of land dispo- sition and gross project size. Large and small projects show comparable rates of disposition. 2. No relationship was found between city size and the rate at which land is conveyed. 3. No relationship was found between a city's population change from 1960 and 1970 and the rate of land disposition. 4. The rate of land disposition in residential projects did not vary significantly with changes in selected market forces. In other words, residential land disposition has been relatively insensitive to such factors as interest rates, mortgage availability, residential vacancy rates, or the strength of the residential housing market. 5. However, the rate of land disposition in nonresidential projects varied in response to: • The rate at which project improvements were imple- mented (a reflection of the readiness and desirability of the site) . • The prime rate (a reflection of financing availability) . • The median family income of residents in the city (a measure of economic strength) . -16- -17- -18- Nonresidential projects' sensitivity to market forces is much greater than that of residential projects. Perhaps the greater amount of Federal money invested in residen- tial projects (i.e., public and assisted housing units) stabilizes these projects by making a vehicle for redevel- opment more readily accessible than in nonresidential projects . 6. There is evidence that the volume of residential disposi- tion in conventional projects is closely related to the availability of housing subsidy funds. However, compari- son with U.S. subsidized housing starts shows approxi- mately a two-year lag in disposition of renewal land. 7 . Success as measured by the rate at which land is disposed cannot always be correlated with success in terms of meeting the broader objectives of the urban renewal pro- gram (for example, halting the decline of an area, en- couraging new private investment, strengthening the local tax base, etc . ) . 8 . Success in the disposition of land is closely correlated with the capability of the renewal director . By "capa- bility," we refer to astuteness as to local political conditions, involvement in the local power structure (either as a member or as a person whose opinions and recommendations are actively solicited by its members) , and personal motivation to have the renewal program succeed. It is these characteristics -- rather than such factors as education, length of experience, or tech- nical capabilities -- that appear to distinguish the "good" urban renewal director from the "average" one, and that can be closely correlated to success in land dispo- sition, holding other factors constant. 9 . No significant relationship has been found between suc- cess in land disposition and such facets of city dynamics as size, metropolitan dominance of a region, population growth, strength and diversity of the economic base, or characteristics of the population . Nonresidential projects appear to be more sensitive to these factors than residential; however, our research suggests that no one city size or type has a greater probability of success in land disposition than any other. 10 . Our research indicates no corrrelation between the struc- ture and organization of local government and success in ~ land disposition . Initially, we hypothesized that a strong mayor form of government might lend itself to faster land disposition. We have not found this to be true; nor have we been able to establish any meaningful -19- correlation between local governmental organization and rates of land disposition. 11 . The vast majority of redevelqpers who participated in the test case projects were based in the city or immediate - area in which the project was located . Major national developers have not participated extensively in the urban renewal projects studied. 12. With regard to commercial development, our findings s~trongly suggest that expectations of developing profit- able neighborhood shopping facilities in predominantly residential projects are unrealistic . In most instances , it has been impossible to get such centers built. In the few that have been built, performance results have been largely negative. 13 . The phase-out of the conventional urban renewal program , accompanied by considerable uncertainty regarding the future of renewal and of local agencies, appears to have caused considerable "foot dragging" with respect to land dispos ition . Uncertainty as to future job opportunities, together with a pronounced shift away from independent LPAs and toward city departments, have undoubtedly con- tributed to this situation. Research Finding Three: Delay Causing and Accelerating Factors in Land Disposition Our study revealed that there is no single, specific factor, or even set of factors, that represents a major delay common to all urban renewal projects. Rather, there are a series of complex, interrelated causes -- some that are within the control of the LPA, others that are not -- that contribute to delay at various points in the execution process. Never- theless, because of the inherently complex nature of the urban renewal process, it is estimated that the cumulative effect of all delays in the average project is to extend the execution time only 1.5 to 2 years for those projects re- quiring 10 to 15 years for implementation . Interestingly, the same factors found to cause delay in land disposition in one city actually accelerated disposition in another city. This phenomenon even occurred among different projects in the same city. Furthermore, factors that caused delays in the early years of the urban renewal program (such as relocation), may today actually accelerate projects, and vice versa (such as the environmental legislation). Despite the wide diversity of causes of delay and acceleration, cer- tain common patterns or themes did appear. For those within -20- the control of the LPA, these themes have been developed into problem statements with recommended solutions in later chap- ters of these guidelines. 1 . Types of Factors* We have identified 92 factors that^ to one degree or another, account for most of the 1.5 to 2 year delay re- ferred to above, as shown in the following pages. They can be classified into one of four broad categories: exogenous, national program-related, local management- related, and local market-related. • Exogenous Factors Twenty -five factors are in this category. These are fundamental economic, demographic, and social trends and changes in society that influence progress of urban renewal projects and their ability to market land. They provide the national context within which the program has operated. All LPAs are subject to these factors, which are largely beyond their control. They include such things as national money markets, suburbanization trends, poverty, and racism. • National Program-Related Factors Twenty -one factors are in this category . These are the legislative and departmental (HUD or other Federal government) rules and regulations within which the LPA administers the national program. These * In determining the principal factors that have delayed or accelerated the disposition of land in urban renewal projects, teams of RERC/RTKL analysts examined documents, plans, and maps and interviewed key individuals in each of the 22 cities studied. Relevant factors were identified and assigned a weighting factor by the analysts in terms of their judgments of the relative importance of each factor to the progress of each project examined. At the conclusion of the city studies, the results from a standardized list of factors and the ratings assigned by each analyst team were synthesized. Because of the technical problems of wide regional variations and considerable latitude in analysts judgment despite careful guidelines for use of the rating system, no effort was made to undertake statistical correlations. Rather, we aggregated de- lay causes in terms of frequency of mention for the total sample. These were further aggregated by categories of delay or acceleration. -21- KEY DELAY CAUSES IN URBAN RENEWAL LAND DISPOSITION Those Identified In 20 or More Projects Local Management-Related ♦Inadequate Developer Selection Process Insufficient Local Government Support/ Inadequate Inter Agency Coordination Inadequate Relocation Resources/ Management Inappropriate Timing of Marketing Effort National Program-Related ♦Inadequate and Unreliable Funding of New & Rehab/ Housing Programs Inadequate Monitoring of disposition by HUD Local Market-Related Lack of Marketability for Commercial Uses Declining Population/Buying Power for Market Support Exogenous Increased Auto Use High Level of Total Housing Production (especially Suburban) Rising Urban Crime Rates "Tight" Money Markets Outlying Shopping Centers Those Identified in 15 to 19 Projects Local Management -Related ♦Insufficient "Establishment" Support for Project /Program *Lag In Construction of Project Improvements ♦Lack of Soundness in Original Plan ♦Lack of Aggressiveness in LPA Marketing Program Ineffective LPA Leadership Lack of Continuity of LPA Leadership Inexperienced LPA Staff Insufficiently Stringent Developer Performance Requirements Inflexibility in Terminating a Developer's Contract National Program-Related ♦Miscellaneous Administrative Procedures (HUD "Red Tape") National Program-Related (continued) Decrease in Federal Commitment to Renewal/Housing Programs Conflicting National Goals Local Market -Re lated ♦Inability of Developer to Perform Inappropriate Initial Project Scale Lag In Restoring Investor Confidence in Area Exogenous ♦Racially -Segregated Housing Markets ♦Minority Group Expansion ♦Racial Disorders ♦Relative Decline of Perceived Quality of Schools Spacial Expansion of Urban Growth Rising Dependency Among Public Housing Occupants Those Identified in 10 to 14 Projects Local Management-Related ♦Excessive Reliance on Future Transportation Plans Poor Staff Morale/Turnover Inadequate Community Support Lawsuits Against Project/Program Inappropriate Timing of Renewal Intervention Inflexibility in Considering Reuse Changes Inflexibility in Interpreting Development Controls Lack of Integrity of Plan through the Execution Stage Lack of Priority for Project in Program Highly Restrictive State Laws on Property Condemnation National Program-Related ♦Frequently Changing, Often Contradictory Policies /Procedures Ineffective HUD Regional Area Office Leadership More Stringent Citizen Participation Requirements National Program-Re lated (continued) Extensive Delays in Approving Loan 6c Grant Application Changing Priorities in Application Processing/Funding Delays in FHA Processing Local Market-Related ♦Inappropriate Project Boundaries ♦Inherent Complexity of Scattered Residential Sites ♦Inappropriate Parcelization Ineffectiveness in Establishing Linkages from Project to Strong Abutting Uses Surplus of Space/Units and Competition of Uses Questionable Validity to Market Analysis Exogenous ♦Radial Highway Construction ♦Obsolescence of Infrastructure Circumferential Highway Construction Redlining Those Identified in 9 Projects or Less Local Management-Related Inadequate Interim Property Management Inadequate Budget for Marketing Emphasis Upon Disposition to Local Res idents /Bus inesses Ineffective Rehabilitation Administration Inflexibility in Land Pricing National Program-Related Lack of Continuity in HUD Leadership Staff Morale and Turnover at HUD Inadequate Relocation Allowances (in early years) Environmental Protection Act Slow Processing of Plan Changes/ Proclaimers Slow Processing of Other Documents Requirements for Developer Financial Disclosure Antispeculation Provisions Limitations on Transfer Rights between Developers Local Market-Related Inappropriate Initial Reuse Lack of Marketability of Private Market Residential Uses Local Market-Related (.continued) Impact of Changed Access Continued Stigma in Areas Abutting Project Lag in Restoration of Investor Confidence in Project Itself Competition of - Alternative Lower-Price Sites Developer Unwillingness to Participate in Public Program Exogenous ♦UnequaT Housing Code Enforcement ♦High Construction Costs Especially Impacting Subsidy Housing ♦Spatial Expansion Needs of Industry Decline in Public Transportation Outlying Subsidized Housing Production Exclusionary Housing Laws Increased Size of New Housing Units Rapid Changes in Housing Technology Rising Real Income and Consumption Standards Accelerating Decentralisation Aging Central City Structures ♦Indicates analysts' judgment that this factor was "very important" in more than half the cases cited. -22- KEY ACCELERATING FACTORS IN URBAN RENEWAL LAND DISPOSITION Those Identified in 20 or More Projects Local Management-Related High Degree of Local Government Support High Degree of "Establishment" Support for Project for Project Those Identified in 15 to 19 Projects Local Management-Related National Program-Related Especially Effective LPA Leadership Timely Availability of Funding of Aggressive, Extensive Marketing Effort Federal Housing Subsidy Programs Local Management-Related High Degree of Community Support for Project High Priority of Project in Program Especially Effective Property Management During Marketing Emphasis on Disposition to Local Res idents/Bus inesses (Especially Replacement Demand) National Program-Related Importance of Land Assembly and Write- Down to Stimulating Developer Interest Those Identified in 10 to 14 Projects Local Market -Related Appropriate Project Scale Especially Appropriate Initial Reuse Mix Especially Successful in Removing Stigma, Restoring Investor Confidence Early in Project Execution Exogenous Availability of Local Institutional or Industrial Resources Those Identified in 9 Projects or Less Local Management-Related Especially Experienced LPA Staff Especially High Degree of Flexibility in Reuse Changes Flexibility in Interpreting Development Controls Staging of Acquisition to Developer Response Good Timing of Marketing Effort Flexibility in Developer's Take Down Schedule Flexibility in Land Pricing Innovative Use of Public Financing as Incentive to Developer Especially Appropriate Timing of "High Visibility Project Improvements to Show "Progress" State Housing Assistance Financing Programs Tax Increment or Tax Abatement Provisions Local Management-Related (continued) Especially Good Quality of New Construction to Help Restore Confidence in Remainder of Project Area National Program-Related Favorable Relocation Allowances After the 1970 Uniform Relocation Act Local Market-Related Availability of Subsidy Residential Sites During "High Production" Year Rapid Disposition for Public Facilities and Uses Exogenous Increased Use of Office Space Involvement of Large Corporations in Real Estate -23- include "red tape" items that affect all LPAs but can be influenced to varying degrees, depending upon the personalities Involved. • Local Management -Related Factors Twenty-eight factors are in this category. These are factors largely within the control of the LPA governing board and its staff or the governing board of the locality responsible for the management and administration of the urban renewal program. This category includes all critical decisions throughout the planning and execution process including: the soundness of the original plan; the flexibility of its implementation over time; acquisition, relocation, and marketing-disposition strategies; intergovern- mental coordination; the nature and effectiveness of citizen involvement; and other such elements relative to implementation of renewal activities. • Local Market-Related Factors Eighteen factors are in this category. These are local socioeconomic trends and dynamics that influence market demand for alternative uses in the context of existing competition, of changes in areas abutting or proximate to the project, and other matters relating to the magnitude or timing of land disposition. These are "micro-" factors, as distinct from the "macro-" national economic conditions. To some extent, these can be influenced by staging and timing of marketing by the local Agency. The following table shows the distribution of the key delay -caus ing factors identified in the study, grouped by type according to the frequency by which they were mentioned. DISTRIBUTION OF DELAY -CAUS ING FACTORS BY FREQUENCY Number of Projects in Which Local National Local Factor Management Program Market Was Cited Related Related Related Exogenous Total Over 20 4 2 2 5 13 15 - 19 9 4 3 6 22 10 - 14 10 6 6 4 26 9 or Less _5 _9 _7 10 31 Total 28 21 18 25 92 Source: Real Estate Research Corporation and RTKL, Inc. -24- 2. Susceptibility of the Factors to Influence by the Locality Clearly, no locality is in a position to influence all of these factors. All urban renewal projects have operated within the context of the national economy and broad societal trends and conditions (exogenous factors), such as population and buying power decentralization, concen- tration of poverty in the central city, rising crime, declining city services, and aging housing stocks. At the micro level, LPAs were by definition selecting projects in areas with the most severe blight. Thus, they were usually operating counter to societal trends in the areas of weakest markets where stigma existed and private in- vestors were reluctant to enter. These local market condi- tions clearly slowed the progress of urban renewal pro- jects . Despite these common exogenous, local market, and national program constraints, we found vast differences in the rate of land disposition among various projects in different parts of the country (as was discussed in Section A) . This suggests that success in land disposition (and im- plicitly the entire renewal process) is largely within the control of the local LPA and governing board of the municipality . We estimate, in fact, that about 50 percent of the 1.5-2 year delay that occurs in projects lasting 10-15 years is due to factors over which the locality has di- rect control. Another 20 percent is due to factors the locality can influence but not control, while another 30 percent is due to factors beyond its control. 3 . The Most Significant Factors The delay-causing factors listed on page 22 do not have equal significance. Some of them are likely to occur more frequently to create greater time delays than others. Local management -related factors are the most numerous and most important, suggesting that much of the disposi- tion process is within the control of the LPA and local government . They appear to account for 35 percent of the delays that can be fully or partially controlled by the LPAs , whereas local market factors account for 20 percent , national program factors 15 percent and exogenous factors 30 percent . The key delay-causing factors are listed by the categories outlined above (exogenous, local market -related, etc.) and are discussed by closely-related subject group in the fol- lowing sections. This enables us to show the sensitivity of factors among residential and nonresidential and con- ventional and NDP projects. The sensitivity analysis is summarized in a table at the end of this discussion. -25- a. Local Management-Related 1. Degree of Proj ect/ Program Support A prime consideration in the success of an urban renewal project is the degree to which it has attained support from the LPA, local government, the "establishment," and the general community. Lack of LPA support may be demonstrated by a relatively low priority for the project within the city's entire renewal program. Examples that were found include "low-key" residential projects that lacked the "glamour" of large-scale CBD undertakings, projects carried out by the city LPA under contract to less experienced jurisdic- tions, and deliberate stalling by an LPA to take advantage of HUD funding availability. Lack of priority was identified as a delay cause in 14 of the projects studied. NDP residential and conventional nonresidential projects seem to be more sensitive to delays caused by low priority than the average. Insufficient local government support was a major delay-causing factor in 22 projects examined, while a high degree of support actually accelerated 20 others . The degree and quality of government sup- port ranged from total apathy and actual inter- ference by elected officials such as the mayor or councilmen, to positive support via direct policy initiatives by elected officials serving as the LPA board. Support may be "moral," political, financial, or simply the degree to which inter- agency coordination and management of the complex processes is carried out. Closely related to local government support is the support that a project (and program) are provided by the "establishment" or informal power structure of the community. Residential neighborhood projects in particular are more sensitive to "establishment" support. Often this group is less supportive of those areas than it is, for example, of CBD- oriented projects. We found 15 projects where lack of establishment support delayed the project; yet in 20 different projects, excellent support expedited land disposition. Finally, community support is important for the urban r enewa 1 p ro g r am . Lack of community support in the early years of renewal resulted in law- suits raising the issue of the constitutionality of the use of eminent domain powers. In more -26- recent years, lack of community support has often derived from those impacted by renewal, who tend to be better organized. 2 . Quality of LPA Leadership A composite of factors including the effectiveness of leadership of the LPA director , the continuity of leadership and staff, and the cumu lative ex- perience of LPA staff have important bearing upon the progress of urban renewal projects. These factors can and do vary widely over time. In re- cent years, however, it was observed that the quality of leadership has declined in many Agen- cies, corresponding to declining commitment and funding for the program by the Federal government. This often leads to lack of continuity in policy direction and therefore ineffectiveness in the critical decisions of land disposition. Conversely, the long-term tenure of many of the staff specialists in LPAs , especially those in- volved in real estate, has provided a cumulative experience that has helped in land disposition. More often than not, however, LPA leadership and staff experience/capability were found to be nega- tive rather than positive. Analysts reported that ineffective leadership contributed to delays in 16 test case projects, while good leadership ac- celerated 15 others. Insufficient information was available to make an assessment on the others. Again, it should be emphasized that there is a correlation over time in the same project between effective and ineffective leadership and the rate of land disposition. Leadership effectiveness was found less signifi- cant as a delay cause in conventional residential projects, but far more important as a delay cause in NDP nonresidential projects. This is logical as the latter projects normally require careful prenegotiation with a developer in advance to enable appropriate staging of activities to match the annual funding mechanism. 3 . Market ing/Developer Selection One of the more important groups of delay causes that fall largely within the control of the LPA relates to aspects of marketing and developer selection. -27- Delay is often caused by the initial inappro- priateness of timing of the marketing effort . In some cases, this involved attempting to market land, especially in CBD-oriented areas, where significant amounts of blight remained. Either the proposed clearance sites had not been cleared -- creating uncertainty in the minds of prospec- tive developers that the Agency could deliver on time -- or an insufficient amount of land sur- rounding those tracts being marketed had been cleared. This created a situation of abutting blight that very much reduced a developer 's ability to "control his environment." Other ex- amples of inappropriate timing were caused by placing too much land of a particular reuse on the market at one time, creating competition within the project, or marketing at a time of particularly acute money market "crunches . " Twenty-two projects were identified as experi- encing delay in disposition due to inappropriate timing of the marketing effort. Conventional residential projects were found to be far less sensitive to delays caused by inappropriate timing of marketing, perhaps because many were designated for reuse with subsidized rather than market rate housing units. Conversely, the NDP projects were more sensitive to this type of delay, probably for a number of reasons including the need for more careful coordination of rehabilitation man- agement and disposition for new construction. Few LPAs were found to have a carefully designed land marketing .strategy . The degree of aggres- siveness of marketing efforts and extensiveness of the marketing/ advertising campaign varied widely among LPAs over time and by type of reuse. The range of LPA postures towards marketing and attempting to attract developers was from a com- pletely passive role of "waiting for the developer to come in," to an active effort to create devel- opers by grouping potential participants to create joint venture partnerships. The breadth of marketing and advertising activity ranged from publication in national business or professional journals to local word-of -mouth contacts. How- ever, some LPAs had no discernible understanding of which approach was best for a particular dis- position offering. In 17 of the projects examined, lack of marketing aggressiveness was deemed delay -causing; whereas -28- especially aggressive efforts paid off in 16 other projects in terms of accelerated disposition. Ag- gressiveness is more important in conventional nonresidential projects because greater efforts are often required to attract developers to inner- city, formerly blighted areas when more attractive suburban opportunities are often available to them. Inadequate developer selection procedures proved to be one of the most significant delay-caus ing factors in the projects examined. In 22 of the test case projects, analysts felt this to be a serious problem. Developer selection was particu- larly troublesome in the early renewal projects, especially large-scale CBD projects. Inexperi- enced LPA and city officials were confronted alternatively by inexperienced and often under- capitalized local developers and by somewhat experienced and financially resourceful national developers who had little commitment to the local community. In both cases, the developers often failed to perform. Greater scrutiny by LPAs of the developers' past "track record, financial resources, and motivation could have prevented delays. Having learned from the "school of hard knocks," many Agencies are now more carefully scrutinizing their developers -- especially "master developers" to whom major tracts are designated for development over a relatively long take-down period. Many LPAs are now moving toward project completion after the failure of two to three (or more) "pioneer" developers on key sites. Typically, nonresidential projects are far more sensitive to delays from inadequate developer selection procedures, although this is less true of NDP nonresidential projects, probably because of the lower number and smaller scale of such projects and the necessity for firmer precommit- ments by developers as required by the annual funding arrangements. 4. Adequacy of Management of Execution Processes Land disposition cannot be isolated from the other execution activities -- acquisition, relocation, demolition, construction of project improvements, etc. The degree to which these activities are appropriately staged and adequately managed may delay or accelerate land sales. -29- Lag in the construction of project improvements created delays in 15 projects, whereas timely or advance construction was found to have accelerated disposition in nine projects. Acceleration of scheduled improvements was often the direct re- sult of comments from prospective developers who reported that the absence of these improvements retarded their ability to procure tenants or f inane ing . The quality of interim property management was also found important as a factor influencing the pace of land disposition. In most cases, the close staging of acquisition, relocation, and demolition activities removed the impediment of blight, which tends to mitigate investor interest in an area. Thus, adequate property management was found to be an accelerating factor in 10 projects. In five other cases, however, poor maintenance of remain- ing structures or vacant sites was found to cause land disposition delays. Residential projects are somewhat more sensitive to the quality of property management in the area -- especially where market rate housing is involved -- than other types of proj ects . The adequacy of rehabilitation management is im- portant in residential projects and has become especially so in recent years since the focus has shifted away from total clearance and since favor- able acquisition and relocation payments have actually competed with rehabilitation programs. This has placed an even greater burden on local officials to carefully plan and implement their rehabilitation efforts. Relocation was a major delay cause in a number of projects in the early years of the program, and remained a prime cause of lawsuits until fairly recently. The sharp drop in relocation activities since fewer projects have been started that re- quire extensive clearance, plus the Uniform Relo- cation Assistance Act, make unclear the impact of relocation on the rate of land disposition. It is probable, however, that relocation is now a less significant delay cause than before and may actually accelerate acquisition because of the favorable payments to displacees . -30- 5. Plan Flexibility The rate of land disposition in any renewal project is related to the appropriateness of the proposed reuse mix and the flexibility of the plan to meet changing conditions. Many of the disposition delays encountered were a direct re- sult of an originally unsound reuse plan. This factor was felt to have delayed 15 projects ex- amined, whereas a sound and flexible plan was felt to have been especially important in accelerating nine others . As important as the plan is , the flexibility of its interpretation by the LPA was often found to be of more significance. The LPAs that adopted more general plans in terms of per- mitted reuses and development restrictions had greater latitude in responding to market condi- tions and were able to avoid reapprovals by local government and HUD, reappraisals, and other re- strictive provisions of the urban renewal planning process. Inflexibility in considering reuse changes was found to be a delay cause in 14 projects, and flexibility served to accelerate six. Inflexibility of interpretation of develop- ment controls was delaying in only 10 projects, and flexible interpretation was found to be ac- celerating in five projects. Flexibility in land pricing also affects the rate of disposition. Inflexibility was found to delay eight projects , whereas flexible pricing acceler- ated six others. This factor was often accommo- dated in negotiations with developers through such mechanisms as extended take-down periods at a fixed price, construction of supporting facili- ties such as parking garages by the LPA, or other financial incentives to the developer. Local Market -Related 1. Adequacy of Developer Performance Failure of developers to perform once they have had land under contract has been a pervasive prob- lem in urban renewal projects, especially nonresi- dential ones . Often this is attributable to in-^ suf f iciently stringent conditions in the disposition agreement forcing timely developer performance. This was cited as a delay cause in 18 projects examined, suggesting that this prob- lem is sufficiently common to require some remedy. -31- Some Agencies are now shortening the time of the disposition agreement considerably -- and even implementing a "preselection process" that allows developers time prior to the actual signing of a disposition agreement to secure firmer commit- ments for permanent project financing and/or tenants . Perhaps as significant as a delay cause in this group is the reluctance of an LPA to terminate a disposition agreement once a commitment is made to a developer. This situation is understandable. Often an LPA is anxious to demonstrate to local political leaders or to HUD that progress is being made in land disposition for a complex project that had a long planning period. However, after an agreement is negotiated with a developer, the LPA may find that it is unable to deliver on some of its conditions such as timely site assembly. The developer, meanwhile, may face "tight money markets" and/or high interest rates or other factors that entail his ability to perform. When legitimate delays are encountered, LPA governing boards frequently grant contract extensions. How- ever, these extensions may go beyond the time when it is apparent that the developer is unable to perform. The Agency's reluctance is understand- able as they are confronted with a reversion of the land and probably no immediate prospect for disposition to others. Fifteen projects were found to have experienced delay for this reason. Again, nonresidential and especially CBD-oriented projects were the most sensitive to this type of delay . National Program-Related 1. HUD Leadership The direct impact of effective HUD leadership on the rate of land disposition in individual projects in particular cities is ambiguous. In the early days of urban renewal, HUD was aggressively sell- ing the program; their leadership was effective in generating projects. It is far less evident that their leadership was ever directed to as- sistance in land disposition. The high housing production emphasis of Secretary Romney during the period from 1968 to 1972 undoubtedly contributed to the expeditious disposition of sites for sub- sidy housing in residential projects. But it also -32- contributed to the production of housing in sub- urban locations (mainly unsubsidized) , which weakened residential markets for close-in loca- tions, including urban renewal projects. 2. HUD Administration We did not find that HUD was a major source of delay once projects reached the execution stage, which is a conclusion that is contrary to popular belief. Our findings were that HUD, in general, provided insufficient monitoring of the land dis- position program of LPAs , rather than excessive monitoring. Had HUD offered more positive tech- nical assistance and made aggressive efforts to ensure timely disposition, some of the delays we encountered could have been avoided. The level and timeliness of delivery of program funding have caused the most serious delays in urban renewal projects in recent years. This con- dition was found to have been a delay cause in every city we examined. In many of these cities, uncertainty over funding rather than inadequate funding has been a key problem facing LPAs . d. Exogenous 1. Exogenous Financial /Economic Factors Two f inane ial/economic exogenous factors were identified as paramount delay -causing factors in the urban renewal projects examined, but they are largely beyond the control of LPAs. Tight money markets were identified by analysts in all cities studied as having caused delay at some time in most urban renewal projects. Such conditions affect all real estate investment, both inside and outside renewal areas, and cannot be influenced by LPAs. In 31 of the projects we studied, the prevalence of outlying shopping centers was found to be a delay-causing factor. The trend toward suburbani- zation of retail shopping centers -- following the decentralization of population -- was well under- way by the mid-1950s. This created a signifi- cantly weakened market for the traditional retail functions of "downtowns" across the nation, which neither urban renewal nor any other program has successfully retarded. -33- 2 . Exogenous Population Factors Although a number of broad population and housing trends have had an influence on the urban renewal program, two were found to have particular sig- nificance in the rate of land disposition: minority group expansion and rising crime rates. The expan- sion of minority groups into formerly white- occupied housing in in-city areas was identified as a delay cause in 17 of the projects examined. This phenomenon was far more significant as a dis- position delay cause in NDP residential areas, which often had the objective of trying to pre- serve inner-city residential neighborhoods. Closely related to this phenomenon is the overall problem of rising urban crime rates (or at least peoples' perception of increased crime) , which was identi- fied as a delay-causing factor in 24 projects we studied. Obviously, these are complex societal problems that are pervasive across the nation and do not lend themselves to simplistic solution. In this section, we have highlighted only the most preva- lent of these, which were felt by our analysts to have significant direct linkage to land disposi- tion. These national urban trends are set forth in more detail in Chapter 3. -34- SENSITIVITY OF SELECTED KEY LAND DISPOSITION DELAY CAUSES BY PROJECT/MANAGEMENT TYPE Degree of Support : -By Local Government -By "Establishment" -By Community -LPA Project Priority LPA Leadership Qualities Marketing/Developer Selection : Residential Conventional + + Nonresidential Timing of Marketability -Aggressiveness of Marketing -Developer Selection Process Developer Performance : -Contract Performance Requirement -Contract Termination Management of Execution Processes : -Project Improvements -Relocation -Rehabilitation -Interim Property Management HUD Leadership National Legislation : -Citizen Participation Requirements -NEPA HUD Administration : -FHA Processing -Monitoring of Disposition -"Red Tape" -Level /Timeliness of Funding Plan Flexibility : -Reuse Changes -Development Controls -Land Pricing Exogenous F inane ial /Economic : -Tight Money -Outlying Shopping Centers Exogenous Population Factors : -Minority Group Expansion -Rising Urban Crime + + NDP + ++ + + + + Conventional + NDP + + + + + + + * + + + LEGEND ++ Far More Sensitive than other types of projects + More Sensitive than other types of projects Average Sensitivity Less Sensitive than other types of projects Far Less Sensitive than other types of projects * Insufficient Data Base Source: Real Estate Research Corporation and RTKL, Inc. BASIC STRATEGY TO OVERCOMING LAND DISPOSITION PROBLEMS The land disposition problems cited in the previous chapter can be addressed in a variety of ways, as will be discussed in Chap- ters 5 through 24. Every locality/LPA. however, should have a coordinated land disposition "strategy that enables it to deal with the key elements of its land disposition situation. It is the purpose of this chapter to outline the elements that the locality /LPA needs to consider in such a strategy and to list some of the techniques , procedures and guidelines that will aid in this respect. Many of the themes presented here underlie the guidelines set forth in Chapters 5 through 24. Insofar as possible, this chapter, and indeed this entire study, is designed to assist LPAs in completing their land disposition activities in as timely a fashion as possible. Our study of more than 70 conventional and NDP projects in 22 cities has revealed a number of techniques, procedures, and suggested guidelines to aid in this respect. The key factors that we found to be behind ef- fective land disposition are discussed briefly in the remainder of this chapter. Many of the themes presented here underlie the guidelines set forth in Chapters 5 through 24. A. Are Key Local Actors Participating Actively in Renewal ? Cities have varied considerably in their response to renewal. In some, renewal activities are autonomous or semi -autonomous , divorced from other city functions and key local actors. In -37- others, renewal activities are meshed well with other city functions, and renewal has strong support and cooperation from elected and appointed officials, other city agencies, authorities, or special districts, and key business and civic leaders. Our studies have clearly indicated that the greater the integration of functions, the greater the cooperation re- ceived; and the more key actors actively involved in renewal activities, the more successful such activities have been. With respect to land disposition, we have found that it is generally advantageous to involve key local actors (the mayor, city council members, renewal commission members, or other local officials) in discussions and negotiations with poten- tial developers. Assurances of city support with respect to such factors as temporary street closings needed to facili- tate construction, prompt issuance of needed permits, assis- tance in meeting any special local regulations, and timely completion of necessary project improvements or public facili- ties can all be important in convincing a potential developer to participate in a city's renewal program. Another critical factor that should be given careful con- sideration concerns the potential role of private business- men -- as well as civic leaders -- in land disposition. Both can play important roles in two areas: (1) identifying and locating potential purchasers of renewal land, and (2) as- sisting in the negotiations with such developers. A number of cities have made particularly effective use of key busi- ness leaders in identifying organizations or firms in need of additional facilities, those contemplating moving into a city from outside the region, and those seeking to upgrade existing facilities. Although this tends to be most common for commercial- and industrially-oriented projects, it also has applicability in residential areas. Religious and other neighborhood leaders can play an important role in identifying potential sponsors of nonprofit housing, in encouraging their participation in the renewal effort, and often in assisting in actual negotiations for land disposition. Does the LPA Provide Maximum Technical Assistance to Developers ? Developers participating in the urban renewal program vary enormously in their capabilities, experience, and sophistica- tion. Some developers require very little from an LPA in the way of technical assistance because of their size, their own staff capabilities, their prior experience with renewal or, particularly, familiarity with a specific city or project. Others -- especially nonprofit housing developers -- are often in need of considerable technical assistance, which the LPA can and should provide. Examples of needed technical assis- tance include: -38- • Preparation of detailed and current marketability studies. • Analysis of financial feasibility. • Appraisal of land to establish up-to-date values for the proposed reuse. • Assistance in obtaining construction and permanent fi- nanc ing . • Assistance in negotiations with major tenants. • Preparation of environmental impact statements. • Preparation of forms or documents for such agencies as HUD, FHA, VA, Small Business Administration or other applicable local, state, or federal agencies. • Assistance in the development ~f architectural plans. • Guidance in tenant selection, leasing, and marketing. LPAs have varied widely in their response to these needs. Some maintain that these are areas beyond their competence and provide little, if any, such assistance. Others turn to outside consultants (appraisers, economists, advertising agencies, marketing consultants, etc.). Still others, gen- erally the larger and more sophisticated LPAs, are in a position to provide some or all of this assistance on an in- house basis. Renewal agencies seeking to dispose of land are in a similar position to real estate brokers selling land on the private market. They must provide services of comparable quality, whether performed in-house or by outside experts. This is particularly true of formerly blighted parcels, where past stigmas must be overcome and possibly weak marketability bolstered. In the case of nonprofit developers, first- time developers, or developers with limited capabilities and experience, the LPA must be prepared to provide technical assistance not only prior to disposition, but until the project has been devel- oped and occupied. If in-house capabilities either do not exist or are insufficient, they should be supplemented when at all possible through the use of borrowed staff from other agencies or city departments, or outside experts. Does the LPA Regularly Consider Alternative Disposition Methods ? There are no identical disposition parcels. Each one differs with respect to its permitted uses, size, price, access, and other characteristics. So, too, there is no ideal disposition -39- method for selling renewal parcels. The table that follows outlines eight alternative methods of land disposition and offers an indication of the positive and negative considera- tions of each. The first six methods are taken directly from the urban renewal manual. Methods 7 and 8 are options that, although permitted, have generally not been pursued by many LPAs. Because of special state or local legislation, not all of these options are necessarily applicable in all cities. Some state enabling legislation, for example, prohibits direct negotiations with one or more redevelopers . To the extent that these options are available to an LPA, we suggest that the application of each be evaluated for any par eel that has not been sold within one year from the start of active marketing. Frequently, an LPA will adopt one disposi- tion method and use it for all parcels, whether or not it is the most appropriate for the particular situation. Agencies with diverse inventories should usually be using several of- fering methods for different types of parcels. Do Planned Reuses Reflect Market and Financial Reality ? RERC found numerous instances of unrealistic expectations on the part of LPAs with respect to proposed private or, oc- casionally, public reuses. In most instances, this was because of one of several factors : • Poor coordination between project planners and project economists . • Poorly executed, inappropriate, or out-of-date market analysis . • Inappropriate pressures applied to market analysts by LPA staff members. • Changes in market conditions during the lifetime of the project. • Fundamental misunderstanding of the nature of the eco- nomics of real estate development. It has been a common failing of many renewal projects to have poor coordination between the project's planners and econo- mists. Perhaps the most common occurrence has been to bring economists into the picture only after the plan for the proje has been formulated and often approved. The economists are then in the awkward position of trying to justify a plan that may or may not be valid. For projects that are just now -40- I (0 ■ E co COO ■h o a o CD C W J3 Ma •H X! 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Market analysis is generally only as strong as the capabilities of those performing such studies. It behooves an LPA to use the utmost care in selecting its project economists. Further- more, studies should be updated as frequently as changed con- ditions warrant. One of the most common reasons for designated reuses not fully reflecting market and financial reality stems from the fact that LPAs frequently apply inappropriate pressures to their market analysts to justify or rationalize decisions that have previously been made -- either in physical planning or in project budgeting. In the long run, this invariably works to the detriment of the project, often delaying land disposition and requiring amendatory applications for supplementary fund- ing. The long time needed to complete many urban renewal projects has often meant that the original market analysis -- no matter how well done initially -- is no longer applicable. In some instances, market strength has increased; in others, it has decreased. If land remains unsold for a period of more than two to, at most, three years from the time of the last market review, an update is called for. Unquestionably, the most important reason for reuse plans to inadequately reflect market and financial reality has to do with LPAs 1 misconceptions or misunderstanding of real estate economics. Although there are many such misconceptions, the most important one we found has to do with basic profitability. Real estate development -- whether in a renewal area or in newly developing suburban areas -- can be a great deal less profitable than is often assumed. Rates of return in excess of 10 to 12 percent are atypical, whereas the average rate of re- turn on invested capital is often considerably less in renewal areas. Virtually every requirement imposed by an LPA has market and financial implications, which can strongly inhibit developer interest. Requirements as to a building s design, size, placement, density, open space, and parking all have important implications for market and financial feasibility. An LPA has every right to make reasonable demands on potential developers. However, when restrictions become excessive, market and financial feasibility declines; potential developer interest falls off; and land becomes unmarketable. There is no substitution for an LPA's including among its key staff persons with a strong understanding of real estate -44- economics. If for some reason this is not feasible, reliance upon outside experts, whether drawn from the local banking and development community or consulting firms, is the only realistic option. Is There a Willingness to Provide Sufficient Developer Incentives ? Renewal, by its very nature, deals with land that has his- torically had limited appeal to private market forces. One of the major purposes of renewal has been to reverse these trends, increasing interest in and commitment to an area. If the market for reuse were exceptionally strong, there would, in most instances, be no need for renewal actions. Precisely because this is not normally true, there has generally been a need to increase developer incentives in order to encourage land disposition. The most common methods of increasing developer incentives are as follows : 1. Provide Parking -- In many cities the LPA, usually work- ing with the city ' s parking authority, has undertaken the provision of parking to accommodate a private reuse. This has typically been financed with local revenue bonds. 2. Offer Tax Abatements In order to stimulate the desired development and make it financially feasible, a number of cities have provided property tax abatements for key de- velopments -- often as high as 50 percent of the normal assessed valuation. 3. Reduce Land Prices -- A number of LPAs have, with HUD concurrence, reduced their land prices, in some instances very substantially, to increase developer incentives and to increase the marketability and financial feasibility of a given project. 4. Modify Take-Down Schedule -- If potential developers con- template taking down land in stages, rather than all at one time, the take-down schedule can be modified to re- duce the front-end cash outlay and to guarantee subse- quent take downs at an agreed-upon price. 5. Provide Public Amenities -- Public provision of small parks, plazas, and other such amenities in conjunction with a proposed development can, once again, positively affect marketability. This, in turn, affects financial feasibility . -45- 6. Construct Public Improvements and Facilities -- The kind, as well as the timing, of public improvements and public facilities can be of considerable benefit to a potential developer, often making the difference between whether a parcel is disposed of or not. 7. Reduce Development Standards If existing development standards (governing such factors as parking requirements, open space provisions, floor area ratios, or architec- tural treatment) have been found to be discouraging po- tential developers, serious consideration should be given to minor changes that are consistent with sound planning but may increase developer interest. In general, the LPA should adopt a realistic -- but flexible - posture with respect to steps it can take, either alone or in conjunction with other governmental agencies , to increase de- veloper incentives. F . Has the LPA Fully Pursued Potential Developers ? Some LPAs have aggressively pursued potential developers, whereas others have adopted a much more passive attitude, waiting in effect for the telephone to ring. Five actions are possible that can help to make marketing of land more effective : 1 . More extensive use can be made of real estate brokers . Some LPAs have categorically refused to do this, and others have done so only as a last resort. Full advan- tage should be made of the real estate expertise that exists in virtually all communities. 2 . Well-designed, attractive signs and high quality main- tenance or vacant sites can help in overcoming marketing obstacles . HUD normally requires that signs advertising disposition parcels be placed on each site. Many are shabby, poorly maintained, and graphically uninteresting. The importance of good site maintenance, including "for sale" signs, cannot be overemphasized. 3 . Advertising in local, regional, or (occasionally) national media can be a highly effective vehicle for locating po- tential developers . It should be used whenever possible. The choice of media will be dictated by the size, loca- tion and reuse potential of the parcel in question. Normally, use of major national media is only justified for large or highly specialized parcels intended for major new development. Regional and local media are usually more effective for most residential and smaller industrial or commercial parcels. -46- 4 . Promotional material should be well designed and contain at least sufficient information to "whet the appetite" of potential developers^ LPAs often make insufficient use of promotional material, including mailers and small brochures and other handouts, designed to provide basic information on a particular project or parcel. 5 . Last -- and perhaps the most important --the LPA should actively and aggressively seek potential developers - through such means as direct personal visits to local real estate developers and brokers and speeches to realty and civic organizations and others concerned with the city's development . LPAs often make inadequate use of their own contacts, as well as those of Agency board mem- bers or city officials. The LPA should, if it is not already doing so, work closely with its Chamber of Com- merce, industrial development commission, and all other such organizations. G. Have All Funding Sources Been Explored ? Although there are no clear and obvious solutions to very real problems of inadequate funding for renewal, there are several possibilities that may provide some assistance. These include: 1. General City Funds -- Many LPAs can offer a very good case for additional local funding of renewal activities that are now underway. If supplementary local funding will assist in speeding up land disposition, substantial additions can be made to the property tax rolls in many instances, which may well justify the commitment of local monies. It may also be demonstrated that the completion of renewal tasks that are now pending or in abeyance may, in turn, spur additional private development, which is unlikely to pro- ceed until public commitments have been honored. Although this situation may not exist in all cities, a very con- vincing and solid argument can undoubtedly be made in many cities . 2. Community Development Block Grant Funds -- In many cities, it can be shown that the use of CDBG funds to speed up the completion of existing renewal projects represents a pru- dent use of these funds. Many LPAs can present a very convincing argument that the quantifiable benefits will substantially exceed the dollar costs. 3. Foundation Support -- In some cities, charitable founda- tions represent a possible source for limited additions to renewal funding. In particular, several foundations either -47- specialize or have a major interest in the provision of low- and mode rate -income housing. Foundations are often interested in innovative programs, and consideration should be given to this possible source of limited fund- ing. 4. Business Support -- Although businesses have often been asked to contribute both money and staff help to the development of planning efforts, particularly in the cen- tral area, they have rarely been asked to contribute to the implementation of programs such as renewal. A number of firms -- including those with heavy financial and social commitments to the continued revitalization of a city -- might be interested in such an endeavor. In one major eastern city, a private firm undertook to pay more than two-thirds of the cost of a small park. Although such support and assistance cannot be counted on, neither should they be ignored or ruled out arbitrarily. 5. Tax Increment Financing -- Nearly a dozen states now have provisions for tax increment financing, which enables re- newal to be financed by means of local revenue bonds. Repayment of these bonds is normally made from the dif- ferential in the assessed valuation of the project area at the initiation of renewal, and at its conclusion. Thus, it is most usable for nonresidential projects where the tax base can be expected to increase substantially. Such an approach to financing is probably more applicable for future renewal projects than for projects currently underway, but its use should be considered in those states that have authorized this form of renewal financing. Cities in states that do not have such provisions should push actively for its passage. Is the Phasing of Other Aspects of Renewal Related to Land Disposition Requirements ? The timely scheduling of project improvements and public facilities can be of considerable assistance in facilitating land disposition. LPAs have generally taken one of two ap- proaches in this respect. Some have pushed for speedy com- pletion of public improvements and public facilities at the earliest possible time. Others have preferred to wait until land disposition agreements have been finalized before going ahead with many improvements. In general, we have found the former approach to be far more successful in aiding land dis- position. An attractive, well-maintained site, with most if not all public improvements completed, usually generates far more potential developer interest. -48- Inasmuch as the completion of public improvements and public facilities is often the responsibility of agencies other than the LPA (public works department, highway department, school district, etc.)» strong interagency coordination is essential. In almost all of our 22 test case cities, we encountered major coordination and timing difficulties between renewal land dis- position on the one hand, and highway planning and execution on the other. This problem has been particularly acute in cases where highway planning was handled by a regional or state agency outside the city's jurisdiction. In virtually every instance, renewal land disposition has been negatively impacted by the timing of proposed highway construction. I . Are Overall Renewal Staff Capabilities Appropriate ? It is perhaps self-evident that an effective renewal director defines a good urban renewal program. Our research clearly demonstrated this in case after case. In addition to tech- nical capabilities, astuteness as to local political factors, and involvement in the community power structure (either as a member or as a person whose opinions are actively solicited by its members) , the renewal director plays a critical role in setting the proper tone for Agency operations. The most effective directors have generally taken an aggressive and strongly activist role in promoting renewal -- not only within the Agency, but within the community at large. LPAs vary considerably with respect to land disposition capa- bilities. Some have extremely competent personnel with con- siderable understanding and expertise in real estate. Other LPAs have less effective in-house land disposition capabili- ties, and some smaller agencies have very limited capabilities. In part, these limitations may be caused by small agency size and limited budgets. However, in many LPAs, land disposition has not received the attention, the support, and the funding that are required if timely development is to take place. We recommend that LPAs carefully evaluate their land disposi- tion staff capabilities, using the suggestions contained in these guidelines. J. Has the LPA Established Appropriate Priorities for Its Projects ? A number of instances have been found of an LPA focusing most or all of its attention on one project, while neglecting others. Typically, CBD-oriented projects have received con- siderable attention, staff time, and funding, while other less "dramatic" projects have been given substantially less attention, relative to their size and scale. Conversely, there have been a number of examples of an LPA competing with itself, either by flooding the market with more land than can -49- possibly be absorbed all at once, or putting land on the market that is directly competitive to land in a second project. Clearly, it is in an LPA's best interest to review each of its projects currently in execution to determine whether or not it is overemphasizing one project at the expense of others or whether it is competing with itself by simultane- ously offering more land than can be successfully absorbed in the marketplace at one time. Where appropriate, adjust- ments should be made in land marketing efforts, which may actually result in both more efficient and more timely land disposition with concomitant cost savings to the LPA in site maintenance, administrative, and interest costs. Have Contingency Plans Been Developed for Long-Term Delays ? Sometimes, because of factors beyond an LPA's control, major long-term delays have brought renewal projects to a virtual standstill because of such factors as law suits, problems with environmental impact statements, major changes in trans- portation planning, political stalemates, or long-term funding difficulties. In some instances, projects that we encountered appeared to have no end-term solution in sight. In other in- stances, delays that had major impacts could reasonably be expected to be corrected in the not-too-distant future. If these delays become lengthy enough, they can sometimes destroy the future probability of success of a renewal project. Rapid cost increases, particularly in times of high inflation, can make project financing difficult, if not impossible. Present market potential for the intended uses may be satu- rated, making later completion of the project unrealistic. Potential developers who had expressed interest in the project may move on to other commitments. Spiraling costs for project administration, site maintenance, and interest charges may destroy the LPA's carefully worked out project economics. In short, major delays -- if significant enough -- can jeopardize future chances of success for completing renewal activities. If factors such as these have delayed a project for a period in excess of two years, and if future improvements in the situation cannot be seen within one year to 18 months, an LPA should undertake a full reevaluation of its actions to date, and begin to formulate alternative strategies that take present realities into account. In some instances, substantial changes in planned reuses may be sufficient to start a project moving again. In others, a change in tactics and strategies may be appropriate. In still other cases, the only feasible solution may be to terminate the project and landbank any presently available disposition parcels. -50- Land banking is a tactic that has been infrequently applied by LPAs and then somewhat sheepishly. The successful elimination of blight may in itself be sufficient justifica- tion for considering a renewal project a complete success. Recognition of the fact that a reuse market may not exist or that legal or other problems have totally stymied a program is both prudent and wise. Furthermore, if all maintenance, administrative, and interest costs are fully taken into ac- count, it may actually be less costly to close out a project prior to land disposition, holding remaining parcels in a land bank until the situation changes, the market improves, or a decision is made as to the most appropriate use of the site or sites. Although this tactic may not be appropriate in the majority of cases described above, it is undoubtedly applicable to some projects and should receive careful con- sideration. Are Marketing Efforts Operating Counter to National or Local Trends ? By their very nature, many renewal programs have operated counter to national or local trends. Renewal has been CBD- oriented, while growth potential in most cities has been in suburban areas. Many renewal efforts have had a strong com- mercial component, particularly in the central business dis- trict, while national trends have often favored decentrali- zation. In part because of land economics, renewal has often opted towards higher density residential development, while in many areas overall residential trends have moved towards lower density development. These are but a few of the many national and local trends that have tended to work against successful land disposition in urban renewal. A fuller description of these major urban trends is contained in the tables that follow. Not all have negative implications for renewal; nor do all operate in any given city or metropolitan area. However, all of them are widespread trends that should be taken into account by LPAs marketing renewal land. A second important factor with respect to trends has to do with their timing. In a number of cities, the timing of downtown renewal, for example, coincided with a major office building boom in the 1960s and renewal was able to take ad- vantage of this trend. In other cities, the timing of resi- dential renewal projects coincided with civil disturbances, a major fiscal squeeze on cities, a decline in public trans- portation, and declines in the quality of central-city school systems. In this case, the timing of trends was such as to cause a negative impact on renewal, making land disposition far more difficult than anticipated. In the early and mid- 1970s, housing moratoria, rising interest rates, inflation, and other broad external factors operated to the detriment of renewal . -51- The one characteristic of these factors is that each is gen- erally beyond the control of any given LPA or city. They represent broad forces that are operating, usually at the national level, and often are not susceptible to change at the local level, particularly in the immediate future. These factors, by their very nature, are beyond the sphere and scope of these land disposition guidelines. We do sug- gest, however, that an LPA review the following list of factors, if only to determine which of them may be operating to the detriment of renewal land disposition. If a project has been stalemated by factors such as those described above, an LPA should consider the development of contingency plans (as described in Section K above) that bet- ter reflect these national trends and, where possible, modify plans in such a way as to move with trends rather than against them. -52- 1 1 •3 —■ * | £ P cfl O 4-> C co 60 O *H •H O o 60 co O 4J ON Li r3 . t>~> Cu C i—l CO O CO •H M L P] O p i ' i * " CO 4-> •H i— 1 •1-1 CO CU L 1 i— 1 *H CU P •H CO •H in S-i a ai t— 1 w X ».-t- p. 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It is the purpose of the re- mainder of this set of guidelines (Chapters 5-24) to: a) de- scribe in more detail the most significant land disposition problems, discussed in Chapter 2, over which the locality/ LPA has full or partial control, and b) outline a checklist of questions, findings and actions that will aid the locality/ LPA in overcoming each of these problems . To use these guidelines properly, the user must first identify the land disposition problem that he/she believes to be most significant in the project by skimming the "problems" state- ment in Chapters 5-24, looking for the ones that have appli- cability. He/she then can follow the sequential checklist of questions, findings and actions that may be taken with respect to the specific problem(s) involved. Twenty major problem areas are outlined. The problems, and the chapters in which they are discussed, are: -65- Problem Chapter Page Overpriced Land 5 71 Inadequate Interest in Residential Land. . 6 85 Inadequate Interest in Retail Land .... 7 113 Inadequate Interest in Office Land .... 8 143 Inadequate Interest in Hotel-Motel Land. . 9 173 Inadequate Interest in Industrial Land . . 10 203 Scattered Residential Lots 11 231 Scattered Nonresidential Parcels 12 245 Inflexibility of Project Plan 13 259 Small or Poorly Configured Parcels .... 14 269 Predisposition Nonperformance by Developer 15 281 Timing of Public Facility Construction . . 16 297 Rehabilitation Management 17 315 Insufficient Disposition Staff Capabilities 18 335 Timing of Project Improvement Construction 19 345 Selection Process for Multiple Development Proposals 20 357 Interim Property Management 21 375 Citizen Participation 22 399 Whether to Offer Parcels to Single or Multiple Developers 23 419 Determination of Appropriate Method of Advertising Disposition Parcels 24 431 Two important points should be emphasized about the chapters that follow: 1 . Each deals only with problems over which the LPA or city has control . In some cases , this control is total ; in other cases, it is partial. Each of the chapters con- tains ideas, suggestions, and recommendations that can be acted upon by the LPA, either by itself or in con- junction with other local agencies and groups. No at- tempt has been made to deal with broad national problems or delay causing factors over which an LPA has little, if any, control. 2 . The material contained in these guidelines is generally illustrative rather than definitive . Because renewal is such a complex and diverse program that operates in very different ways in different cities, it is often difficult to generalize findings and conclusions. Organization of renewal agencies varies considerably from city to city, as does the nature of their work. Cities vary in size and in political structure; therefore, LPAs vary in their -66- capabilities, their size, and their sophistication. Re- newal agencies with staffs of several hundred persons are not uncommon; neither are agencies with a total staff of only a few persons. Finally, for some of the reasons mentioned above, tactics that have worked well in one LPA for a given problem may not be applicable in another agency that has ostensibly the same problem. For these reasons, the material in the chapters that follow should be considered as illustrative and suggestive, rather than as definitive or absolute. Chapter Format and Organization The chapters that follow are each organized around a Decision Tree , a sample of which is included on the next page. Essen- tially, this Decision Tree is a sequential checklist of ques- tions, findings, and actions composed of the following: • Basic Alternatives -- The two to four basic options that an LPA has for dealing with the problem area covered by the Decision Tree. In the sample cited on the next page, for example, the LPA can pursue one of two courses of action if there is inadequate interest in office land: Continue to market land under present or modified reuse, or Hold land for future marketing. • Tests -- In order to determine which of these two alter- natives should be pursued, a series of sequential test questions is posed. Each question refers to the par- ticular parcel or pro i ect that is of concern to the LPA. The sample shows the first four questions about the alternative, "continue to market land under present or modified reuse." Each question, or test, can be answered by "yes" or "no." The questions are designed to be answered sequentially. • Findings -- Each test, when being considered by the LPA, should be answered by a finding of " yes " or "no." In most instances, a question can be answered immediately by a person in the LPA knowledgeable as to the specifics of the parcel or the project . 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Most of the questions are straightforward and self-explanatory and can be answered quickly. However, some of the specific actions are stated in an abbreviated form and may need elaboration before they can be accepted or rejected. Therefore, the rest of the text in this chapter is devoted to discussion of the issues in- volved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions discovered in Real Estate Research Corporation's analysis of urban renewal land disposition across the country. Please turn to the decision tree before reading further in the text. The remaining paragraphs in this chapter simply elaborat upon the test questions posed in the decision tree. Specific Observations /Suggestions The numbering of the following paragraphs matches the numbered tests, or questions, in the decision tree table titled "Over- priced Land." Each test is discussed, though the extent of the commentary differs. Some of the questions and suggested ac- tions in the decision tree are obvious and require little ex- planation. Others are not so clear or involve complicated ac- tions that need to be described in detail. In other cases, the text includes descriptions of specific situations or actions discovered during our research that might be helpful to other cities. We have included as many examples and illustrations as possible of successful tactics and policies adopted by renewal agencies that we have visited or have heard about. Again, the text that follows is directly correlated with the numbered tests in the preceding decision tree . The numbering is consecutive, but the three alternatives are included as sub- headings to clarify the context of the discussion of the tests. • Lower Reuse Value or Price 1. In many instances, any adjustment of the approved total disposition proceeds for an urban renewal project will create significant problems with the financing plan, particularly regarding the availability of additional cash funds if established prices for disposition sites are reduced significantly. This is especially true if the city government cannot provide additional funds to meet the project's adjusted financing requirements. We found this to be the major reason why LPAs across the country would not reduce established disposition prices Frequently, such refusal caused significant delays in the disposition and redevelopment process. It is extremely important for the LPA to explore every alternative if the established reuse value is too high -75- and is reducing the marketability of sites in the project. Some of the alternatives to consider are as follows : Evaluate non-cash credits to see if they can be adjusted to make up the loss in disposition pro- ceeds . Evaluate possible ways to achieve an effective lower price through averaging one parcel with an adjacent, higher priced parcel, as further explained under Test 6 . Update the reuse appraisal to determine whether any of the minimum prices can be increased without re- ducing the marketability of sites or delaying dis- position . Determine whether community development block grant funds can be allocated over future years to meet the city's required share of project costs (cash) if they increase as the LPA moves toward close-out of the project. Project the maintenance, interest, and administra- tive costs that will accrue while the land is held prior to sale. Saving these carrying costs could compensate for all or most of the difference in proceeds that would result from lowering the disposi- tion price to make a particular site more market- able. In one community that RERC studied, more flexibility in negotiations with developers is being realized be- cause no minimum price has been set for parcels being offered. The LPA s experience so far indicates that this practice has had no major effect on project eco- nomics. In most cases, the savings to the city achieved by reducing the reuse value of overpriced sites to en- courage redevelopment will outweigh the losses incurred. It is extremely important that the established reuse values for disposition parcels be kept current to ef- fectively market the land in the shortest period of time. This is especially true in projects where mar- ket demand has decreased for the designated reuses. To date, it appears that there has not been the kind of catalytic development in or near most urban renewal projects that causes land values to increase signifi- cantly. Most of the demand for urban development has been on the suburban fringes where land is relatively -76- cheaper and more abundant. Given this perspective, it is imperative that LPAs closely monitor their land prices so that feasible large- and small-scale projects will not be curtailed because of excessive reuse ap- praisal values. If demand increases and redevelopers begin to compete for sites, an updated reuse appraisal would reflect the higher obtainable value. In case after case, we found that an updating and sub- sequent reduction of reuse values for specific prob- lem sites were justified by increased competition from non-urban renewal land. Often the primary competition was from suburban areas where land is cheaper and there are fewer development problems than in central cities. The revalued sites in renewal projects were generally marketed in a timely fashion after price adjustment. In one specific example, the LPA wanted to lower the price of a large residential site, and HUD initially refused. Finally, the price was lowered to below the competitive going price for residential land and the tract was then sold and redeveloped. In another case, the residential redeveloper said, "The lower price was the real incentive for me to go ahead." In some in- stances, however, a reduction in the price of a parcel does not provide enough incentive to developers to mar- ket the land. In such cases, additional concessions must be made by the LPA and /or city to interest a de- veloper in the parcel (e.g., a favorable take-down schedule, construction or operation of parking facili- ties, reduction of development restrictions, etc.). Although the qualified fee appraiser considers all three basic approaches to value in an update of a re- use appraisal, the usual appraisal method used to de- termine the value of renewal land is the "Market Data" or "Comparison Approach" to value. This method uses sales of comparable sites as the basis for estimating the market value of disposition parcels for planned re- uses. We found that the problem of overpriced project sites was often directly correlated to use of this com- mon method of appraising property. The final value estimate for sites with diminishing market demand is usually affected by unmeasurable vari- ables and inherent appraiser subjectivity because of the numerous adjustments required to account for loca- tional characteristics of comparable sales, variations in size, development restrictions imposed on urban re- newal sites, and other differences that result in a less than objective determination of value. In addi- tion, at the time a reuse appraisal is being made, the -77- qualified fee appraiser makes a value judgment based on a plan that is usually general in nature (e.g., the plan might call for a commercial reuse rather than a specific type of neighborhood retail development). Without a precise development proposal to analyze, it is very difficult for an appraiser to specify a single value conclusion. The appraiser should, however, be able to estimate a range of values for a given site by analyzing the minimum and optimum potential develop- ments that would be in accordance with both the plan and the local zoning ordinance. If a value range were established, an LPA would have more flexibility in mar- keting its properties. Once specific development proposals are received and evaluated by an LPA or its consultant and once recom- mendations are made, the appraiser should submit an up- dated appraisal that derives a specific value based on the particular development plan being proposed. In addition to the market data or comparison approach, the appraiser would then be able to apply a development an- alysis or a land residual approach. The major benefits of a land residual approach are that it minimizes the possibility of pricing the land at a prohibitively high level, and it leads to a land value that reflects a specific development proposal. An updated reuse ap- praisal performed in this manner would markedly reduce the subjectivity inherent in land values derived under existing procedures. To illustrate the use of the land residual approach we have constructed a hypothetical example wherein a de- partment store site in a CBD core project has been de- termined to be overpriced for the proposed reuse. The appraiser employed the standard market data approach to arrive at the upset reuse value. Since there were no recent comparable land sales for retail development lo- cated in proximity to the site, the comparable sales were based on recent office developments located near the site and department store development that had taken place in outlying suburban areas. After numerous ad- justments were made to reflect various differences among the sites, the value was set at $20 per square foot . When the prime potential developer examined the cost of land in relation to his proposed facilities, however, he determined that the projected income -- given his costs of development, the operating expenses, and the profit to the entrepreneur -- dictated a lower land cost to make the construction of the department store feasible. The LPA therefore asked the appraiser to -78- update and reevaluate the previously established land price. Being able at that point to take into considera- tion a specific planned development, the appraiser was able to look at the development in terms of timing, marketing, size of the building, costs of construction, expenses, financing, income that would be generated from leasing, and a developer's profit. Along with this more specific analysis, the appraiser was able to apply the land residual approach and qualify a lower land value based upon the net income that could be generated. Although the above example is hypothetical, RERC found many examples of situations where the incentive of lower land prices in conjunction with specific develop- ment proposals helped an LPA to sell a disposition par- cel , especially where there was a decreasing market demand for the site. The process RERC suggests for re- vising land prices is diagrammed on the following page. 3. The difficulty of marketing remnant parcels that have failed to attract potential buyers is a major problem that faces most LPAs . Most often, remnants are the result of forced acquisition for highways and other public improvements. As discussed in more detail in Chapter 14 ("Small or Poorly Configured Parcels"), the size and shape of remnants are frequently undesirable and are useable only for adjoining property owners. Because these factors are not necessarily recognized fully, the parcels are often overpriced. A reassessment of the established reuse values may be needed, aimed toward attempted sale of the sites to adjoining property owners. A negotiated sales price with adjoining owners to encourage them to buy remnants for their immediate or future use could remove a con- siderable amount of marginal land that remains to be sold in numerous projects. Although LPAs might experience difficulties in reapprais- ing remnant parcels to reduce their reuse values, the fact that the carrying costs, (i.e., maintenance, inter- est, and administrative charges) would be eliminated would probably satisfy HUD and justify the sale of rem- nant parcels at lower prices. Other offering methods that can be considered to dispose of remnant parcels include competitive bids, auction, purchase by the city, and sale through negotiation to adjoining property own- ers over a long-term basis with low monthly or annual payments. For more information about the possible meth- ods of disposition see Chapter 3 and the following five chapters dealing with inappropriate land use. -79- STEP-BY-STEP PROCESS FOR APPROPRIATELY ADJUSTING HIGH LAND PRICES Updated Market Study Confirms Demand for Proposed Reuse Qualified Fee Appraiser Determines Estimated Reuse Value of Disposition Site for Designated Reuse V Reuse Value Estimate Confirmed by HUD Based on Designated Reuse LPA Advertises for Proposals for Redevelopment With Designated Reuse Developer's Proposal Accepted by LPA Developer Clain Overpriced for ] As Proposed is Land is His Development LPA Appraiser Confirms or Adjusts Reuse Value Based on Developer's Proposal Appraiser Ascribes Land Value to Reflect Optimum Value of Land for Develop- ment as Specifically Proposed HUD Approves Final Reuse Value Estimate for Site Disposition Parcel is Put Under Contract and Sold to Redeveloper Prepared By: REAL ESTATE RESEARCH CORPORATION -80- If it is determined that remnant parcels have no al- ternate reuse and are not freely marketable, they could be deeded to adjoining property owners who will accept ownership for token payments and will agree to maintain the parcels. Elimination of the maintenance cost to the LPA and/or city would no doubt justify this approach. We found that LPAs have had some prob- lem in obtaining HUD concurrance for the above proce- dure . If it is determined that there is a possible alternate reuse for remnants and that they would be marketable in the future through assemblage or some other action, consideration should be given to interim use of the parcel, preferably under a short-term lease at a price that would cover all or part of the carrying costs. 4. In many instances, the marketing and promotional ef- forts of LPAs for the disposition sites available in a project are based on outdated market conclusions that were determined during the survey and planning period. If the land were to be designated for an up-to-date, appropriate reuse, the time required for disposition could be reduced. If there is inadequate developer in- terest in a project's land, the present and future mar- kets should be reanalyzed and then changes should be made in the plan. These actions are discussed in more detail in the following five chapters concerning mar- keting problems for planned reuses. 5A. If there is a lack of interest for specific reuses, it is possible that the market has been flooded with land for a certain use. In some instances, we found, for example, that lowering of reuse values offered a strong incentive for potential redevelopers because the lower prices made renewal sites more competitive with sub- urban locations and offset some of the additional risks a developer assumes in working in a renewal area. If lack of interest still exists but a parcel is in a prime location, consideration should be given to en- couraging an interim use or land banking the property until market conditions are more favorable. If this is the case, Tests 12 through 15 should be applied. 5B. If large amounts of cheaper land are available at com- parable or better locations in the metropolitan area, the LPA should consider lowering prices to be more com- petitive and to increase the likelihood of attracting a redeveloper. Otherwise, if land is competitively overpriced but the LPA believes the situation is tem- porary, Tests 12 through 15 under the "Do Not Sell" al- ternative should be applied. -81- 5C . Special incentives are usually necessary to attract a developer for a proposed reuse that would run counter to national or local market related factors or trends. An example would be a major multi-use project, includ- ing high-rise apartments, condominiums, office space, and retail facilities, in the core area of a city. Another example would be the first major development in almost any urban renewal project. An important in- centive to encourage such development is a lower reuse price, which could be achieved through negotiation, competitive bidding, or leasing of the land to the re- developer at an escalating rate with low payments in the early years. For more details about the positive and negative aspects of various disposition methods, see Chapter 3 . There are many examples of LPAs providing special in- centives to initial redevelopers . The City of Louis- ville, Kentucky, had difficulty attracting development to its CBD Riverfront project for several years. Fi- nally, the city floated a bond issue and built a park- ing garage and plaza on the riverfront . Then the LPA was able to negotiate a lease of air rights over a portion of the plaza at reasonable terms to a hotel de- veloper. In this instance, the city's creation of ex- tensive public facilities to increase the attractive- ness of the riverfront was a major incentive in at- tracting other potential developers to sites in the project area. In addition, the LPA was willing to of- fer financial incentives to potential redevelopers. 6. If marketing efforts have been unsuccessful because the price of land is considered too high, the LPA should evaluate the possibilities of marketing one parcel in combination with an adjoining parcel of lower value to effectively lower the price. This method cannot be used widely, but it has proven feasible in conjunction with some LPAs 1 marketing efforts of smaller tracts. 7. For large tracts that will be developed over time, an LPA can sell the land for the established reuse price, but allow partial payment and takedown of land as the development proceeds through a negotiated purchase- option agreement. This reduces the developer's in- itial cash outlay. If the land was valued at $600,000, for example, and the agreement stipulated a takedown at four intervals over a two-year development period, the developer's payment schedule could be in install- ments of $200,000/$100,000/$150,000/$150,000 instead of the entire price being paid at the beginning of de- velopment. This approach provides flexibility and can be a strong incentive to attract developers. -82- 8. The use of competitive bidding and negotiation instead of offering a parcel at an established or fixed reuse price can create more interest and possibly speed up redevelopment. This assumes, however, that a market exists for the planned reuse as stipulated by the LPA. Agencies frequently adopt one overall method of of- fering land and then stick to it rigidly for disposi- tion of all parcels. We have found that particular land offering methods are better suited than others for some reuses and some situations. For more discus- sion of the methods of offering land for sale, please see Chapter 3 . Enhance Attractiveness of Land 9. If marketing efforts have not been fruitful, particular ly with smaller parcels, the LPA should evaluate the feasibility of acquiring adjacent tracts of land to enlarge the parcels that are presently vacant. This should be considered if an adjacent owner is not going to perform needed rehabilitation of his facilities or if the joining of two parcels would make the original site more marketable. A higher price might be obtain- able for the larger parcel because of increased util- ity and possible higher intensity of the reuse. As- suming the availability of a potential buyer, the LPA could assist in negotiations to purchase the adjacent property or the LPA could acquire the property outright This approach is limited by the flexibility of the land use plan and the LPA's budgetary requirements and/or restrictions . 10. The appearance of the area immediately surrounding available sites is an extremely important factor in land marketing. All vacant sites should be maintained in a neat and orderly manner, (i.e., graded, grass cut, trash removed, etc.). We found that the timing of project improvement construction has correlated with marketing success in many cities. A buyer today is cau tious and moves slowly if he cannot physically see the way the renewed area will look around the site under consideration. Thus, it is important for the LPA to have completed sidewalks, streets, alleys, etc. before land is intensively marketed (see Chapter 19, "Timing of Project Improvement Construction") . 11. We have found in many instances that the marketability of sites improves when the city moves ahead with major public facilities. Conversely, disposition often lags when public facilities are delayed. This is particu- larly true for extensive public facilities such as were described in the example in Test 6. Completed new pub- -83- lie facilities provide a developer with evidence that the city is committed to changing the environment of the project area. Such construction also improves the confidence of residents and businesses staying in the area and may encourage reinvestment in existing facil- ities. For more details on the timing of public fac- ility construction, see Chapter 16. • Do Not Sell 12. If the LPA's extensive marketing efforts are unsuccess- ful and/or the market for reuses is limited, interim uses should be considered that could produce income to defray carrying costs and would be supportive of the redevelopment program and surrounding environs. We have found that such interim uses as parking lots, pocket parks, and just wall and street graphics serve the public interest and improve the appearance of a project area. An excellent example of interim use oc- curred in the Evansville, Indiana, CBD project where wall graphics and a pocket park helped the program at a time when problems were causing undue delays. 13. Leasing of disposition parcels instead of selling the land to the developer is another way of accelerating development. As discussed in Tests 3, 5C, and 6, the LPA could actually realize the established reuse value and provide an incentive for both rapid initiation and completion of development by leasing project land. For additional discussion of this land offering approach, please refer to Chapter 3. 14. The LPA should consider land banking as one means of closing out a project. This will also reduce market- ing expenditures if a site is being held for future development and there is a good probability of that redevelopment occurring within five years . Before this action is taken, however, all other tests in this chapter should be considered carefully. 15. The donation of land, especially large, well-located parcels, should be a "last resort" approach for an LPA. The one exception would be if carrying costs were pro- hibitively high and if the period before development could be expected to occur were determined to be in- definite. Before donating land, the LPA should recon- sider Test 12 to try to identify a feasible interim use that would cover all or a portion of the carrying costs . -84- INADEQUATE INTEREST IN RESIDENTIAL LAND Statement of the Problem One of the key general problems encountered in urban renewal land disposition is private developer lack of interest in the cleared and improved sites. Once projects are ready for marketing, disposition just has not occurred as rapidly as most LPAs have expected. Developers have been hesitant about undertaking projects on renewal land for many reasons, in- cluding the following: Because the city is declining and there is little replace- ment demand for space. Because new construction has traditionally occurred in the suburbs and the urban renewal areas are unfamiliar "turf" for developers. Because the local market has been temporarily overbuilt. Because builders are unwilling to take the added risks of pioneering in urban renewal areas , especially with the attendant restrictions and red tape. Because the land prices are not low enough to offset devel- opment risks . Because only a limited number of developers have the ex- perience and financial capability to undertake some of the planned large projects, and the LPAs have not contacted them, or have not approached them persuasively enough. -85- Because the LPA is not adept in dealing with private developers . Because some of the planned projects are out of scale for their local market . In addressing these and other marketing problems, we have focused on separate land uses in five different chapters. This chapter concerns residential land. Other chapters deal with retail, industrial, office, and hotel -motel land. Though there is con- siderable repetition among the five chapters concerned with urban renewal reuse market resistance, large sections of each chapter are devoted specifically to one reuse. With the text on this general subject divided into five chapters, readers can concentrate on their problems with one particular reuse without being distracted by questions and answers relating to other uses. Persons who have problems in marketing properties of several types can easily skip over repetitive material in the various chapters they are using. B . Basic Strategy Alternatives There are two basic alternative ways of trying to deal with the problem of inadequate interest in residential land. These may be summarized as follows : • Continue to Market Land Under Present or Modified Reuse — This involves intensifying and/or redirecting the marketing program to take full account of local market conditions, the potential for the site, the needs and realistic de- mands of a residential developer, and possible tradeoffs or assistance that the LPA could offer a potential developer. • Hold Land for Future Marketing -- This alternative involves consideration of interim uses, leasing of sites for tempo- rary use, land banking the property in anticipation of im- provement in market conditions, and the "last resort" of donating the site to eliminate LPA maintenance costs. Tests to determine which of these two alternatives would offer the most appropriate means of dealing with an individual Agen- cy's problem are set forth in the decision tree on the follow- ing page. Each of the 17 tests is stated as a question that can be answered with a "yes" or a "no." In the right-hand col- umn, we have suggested specific actions to be taken for each of the two possible answers to the test questions. We recommend that a person evaluating the problem of inadequate interest in residential land read through the entire decision tree before deciding upon a specific action to follow. 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However, some of the specific actions are stated in an abbreviated form and may need elabora- tion before they can be accepted or rejected. Therefore, the rest of the text in this chapter is devoted to discussion of the issues involved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions discovered in Real Estate Research Corporation's analysis of urban renewal land disposition across the country. Please turn to the decision tree before reading further in the text . The remaining paragraphs in this chapter simply elaborate upon the test questions posed in the decision tree. C . Specific Observations /Suggestions The numbering of the following paragraphs matches the numbered tests, or questions, in the decision tree table titled "Inade- quate Interest in Residential Land." Each test is discussed, though the extent of the commentary differs. Some of the ques- tions and suggested actions in the decision tree are obvious and require little explanation. Others are not so clear or in- volve complicated actions that need to be described in detail. In other cases, the text includes descriptions of specific situations or actions discovered during our research that might be helpful to other cities. We have included as many examples and illustrations as possible of successful tactics and policies adopted by renewal agencies that we visited or have heard about. Again , the text that follows is directly correlated with the numbered tests in the preceding decision tree . The numbering is consecutive, but the two alternatives are included as sub- headings to clarify the context of the discussion of the tests. It should be noted that the problems involved with marketing scattered residential lots are treated in Chapter 11 . When we speak of residential reuse in this chapter, we are referring to any type of housing that might be constructed in an urban renewal project area. This includes all types of public housing, all forms of subsidized and FHA insured housing, and private market rate housing. It includes single-family homes and both low-rise and high-rise multi-family units. Rental, sale, and condominium units are included. We have differentiated among these different forms where we believe such clarification is necessary . • Continue to Market Land Under Present or Modified Reuse 1A. If land planned for residential use is attracting little interest among potential developers, various aspects of the project's planning should be re-examined. When residential reuse parcels have remained unsold over several -90- years' time, other portions of the project area, or surrounding land uses, may have undergone considerable change. Sometimes these changes had been foreseen in the original land use plan. But often the actual re- development that has taken place varies significantly from earlier expectations in terms of type or character of the reuse. For example, in one city we found that certain parcels were designated for private market high-rise residential development, despite the fact that adjacent parcels had been altered from their orig- inally planned reuse and had been developed with low- income and moderate-income subsidized housing. In an- other city, several parcels originally designated for residential reuse were, in our opinion, appropriately changed to commercial or institutional use in order to accommodate a large community college campus. Thus, the unsold inventory of residential land should be re- evaluated in light of completed or firmly committed de- velopments and changes that have occurred within and surrounding the residential reuse area. Conducting an effective marketing program for unsold sites usually requires a specific concept of the types of users who should be interested in locating there. Re-evaluating unsold parcels in terms of recently es- tablished surrounding uses may reveal the need for basic changes in the urban renewal plan. The pitfalls of an inflexible plan are discussed at length in Chapter 13. Whether or not an experienced residential developer can make a reasonable profit on a single-family or multi- family venture often depends on the number of units that he is allowed to build on the site. By planning a moderate density for low- and moderate -income multi- family units, or a generous lot size for single-family units, the LPA makes certain that parking and open- space on the site will be sufficient. By specifying floor area ratios, setback requirements, parking re- quirements, and acceptable materials, the LPA attempts to set development standards that will produce a favor- able residential environment. The problem is that a responsible developer may not be able to make a reason - able profit if he operates under the development re - strictions. In that case, the land lies vacant and no new homes or apartments are built . If the LPA has had difficulty in disposing of residen- tial sites (for reasons other than the federal morator- ium on subsidized housing) , consideration should be given to one of two possible alternatives: lowering the price of the land to make the development feasible -91- for a responsible developer, or reducing the restric- tions on density and/or other development standards. The "middle -road" is difficult to attain. In our studies, we have seen land continue to lie vacant because standards were too restrictive, but we have also seen relatively new subsidized housing develop- ments that suggest that the project area will be little better ten years from now that it was a decade ago. The latter can hardly be called renewal. In Test 13A, we will show how sensitive a developer's profit margin can be in relation to density and materi- al requirements, interest rates, and several other vari ables . Prior to the approval of Loan and Grant - Part II, a marketability study and reuse appraisals were completed for each project and submitted to HUD. At that time the planned reuses had been declared marketable, and an estimated rate of land absorption was normally in- cluded. Nevertheless, if sizeable portions of land designated for residential reuse have remained unsold over a period of years, the original market study has probably become outdated. Perhaps it was not realistic from the beginning. In some cases, the obvious reason for failure to market the land has been unavailability of subsidized housing programs that would make new con- struction for low- and moderate-income households fea- sible. In other cases we have encountered, however, market demand should be re-examined (i.e., regarding proposed high-rise luxury units) . We have found that, for various reasons, many LPAs placed little stock in the conclusions and recommenda- tions of the original market analysis. We believe such market analysis is important, and when the land has remained unsold over several years' time, the LPA should carefully review the original market study to see whether developments and trends that have taken place in the interim may have radically changed the marketability of certain reuses in the project area. The question of the marketability of various uses on a particular site is so basic that promotion, market - ing efforts, and public improvements can be wasted if the market simply is not there and cannot reasonably be expected to appear in the future . If, after its review of the earlier market study, the LPA suspects a pronounced absence of current and future marketability for the proposed residential reuse, we recommend that reliable and up-to-date market informa- tion should be developed and analyzed by an appropriate -92- professional person or firm. Such a re-evaluation should include recommendations for an alternate, more marketable reuse if the originally designated reuse is found to be unmarketable. A study of this type should also provide a probable rate of absorption regarding unsold land in light of current and expected develop- ments and trends. This can serve to guide the LPA's expectations for the rate of disposition. The Agency must realize however, that the actual rate of absorp - tion will depend significantly on the quality of its marketing effort . Even when the market for residential land is relatively strong and the price of the land is competitive, deter- mination of the type and intensity of development that will be financially feasible on a given site requires further technical consideration. Thus, it will often be wise for the LPA to request a feasibility component within the market study to indicate the scale and char- acter of development that the LPA can realistically seek and the price that a typical developer could af- ford to pay. It is important to note here that the LPA should not apply pressure upon the market analyst to recommend a high type of reuse just because such a reuse fits ideally into the project plan and will generate higher revenue ! If the market conclusions are virtually dic- tated by the LPA rather than by the data, method, and objective judgment of the analyst, a decade can easily be lost in attempting to dispose of the land according to a favorable but financially unrealistic redevelop- ment scheme . The chart on the following page indicates the compon- ents of a typical market study. The feasibility com- ponent is described in Test 13 of this chapter. 2B. As mentioned in Test IB, the question of land pricing can be critical regarding residential sites. The fundamental problem of overpriced land is discussed in detail in Chapter 5, and the advantages to be gained in reappraising the unsold land with a land residual appraisal approach are presented there. The signifi- cance of the price of land in rendering residential development economically feasible will be illustrated in Test 13 of this chapter. 3. It is the LPA's responsibility to see that the stage is set for showing available residential tracts to their best advantage. If the site or the overall project area has a negative appearance or if the basic functional -93- ORGANIZATION OF WORK ELEMENTS: MARKET ANALYSIS Analyze physical and locational factors bearing on project Analyze regional, economic & demographic patterns a trends I Define market areas relevant to project Study existing supply and demand conditions in market area Estimate market size, characteristics and growth trends T Project market area demand - types, prices and quantities £ Prepare a general project development concept Project project absorption during study period - types, prices, quantities •EITHER- 3 [ OR- Begin Financial Feasibility Study 1 Evaluate quality of existing or planned competition Outline general approach to marketing subject project Prepare Report Prepared By REAL ESTATE RESEARCH CORPORATION -94- improvements have not yet been made, potential resi- dential developers may be repelled without the LPA ever knowing that they were interested. In one of the test case cities we studied, several local leaders described the frustration of showing their riverfront renewal area to national developers while the extensive physical improvements were still underway in the project area. With a railroad line to be relocated, a highway under construction, a massive electrical substation being modified, and a flood-wall under construction, the project area presented an enor- mously negative impression to prospective developers, and for years no outside developer would commit himself to the project. Although this example involves an un- avoidable temporary condition, it serves to illustrate the strength of the negative reactions that prospective developers may have regarding an unsightly project area. In order to enhance the marketability of it's residen- tial sites, the LPA should be certain that the follow- ing actions are performed: Trash should be removed regularly. Buildings that are to be removed should be demol- ished. Sidewalks, curbs, and on-site utilities should be in good condition. Sites should be graded and planted with grass, spread with wood chips, or otherwise surfaced in a neat and orderly manner. Regular maintenance should be provided to keep weeds under control. This benefits the surrounding area and enhances the marketability of the specific disposition sites . For many reasons, the implementation of public improve - ments is of fundamental significance in preparing the way for effective marketing of land. This is of par - ticular importance for residential land . The visual and functional qualities of the site and the surround- ing area are of major concern to a potential residen- tial developer. If basic project improvements (new and improved streets, street lighting, storm and sani- tary sewers) have already been completed or at least are well underway, a prospective developer is assured -95- that his project will not be delayed or inhibited by the failure to implement public improvements. Plans and promises are not very effective when an LPA is trying to encourage major investments. Regarding major high-rise luxury apartment develop- ments, it is common for the city to have planned a ma- jor public facility that is calculated to enhance the project area and to act as a catalyst for securing high-quality surrounding development. We must em- phasize that such facilities should be completed or well underway before the LPA can hope to engage in ag- gressive marketing of prime sites. Particularly when the LPA is attempting to interest a major national de- veloper, the psychological and visual impact of a city that has accomplished what it set out to do can be the LPA's strongest marketing tool. Conversely, a city's failure to accomplish promised investments in its urban renewal areas constitutes a poor context for marketing high-cost residential land in the downtown area. We found evidence of the extremely positive effect of public improvements on large tracts for single -family and/or multi -family development in one project for sub- sidized housing in a semi -rural area that had once been the city's worst slum. In the center of the new resi- dential community is a beautifully designed public park and recreation area, which is comparable to the types of amenities that semi-luxury apartment complexes offer The design quality of the park and its timely implemen- tation, along with other public improvements, aided the LPA in attracting a national developer for the entire project and has subsequently aided the developer in attracting residents to what was formerly a stigmatized area on the periphery of the city. We have found that renewal agencies throughout the na- tion vary widely in their use of promotional materials and approaches . The importance of good promotional materials and use of a variety of marketing techniques and approaches are discussed in Chapter 3. Regarding promotion of available residential land, we believe that an attractive and informative brochure to advertise available land will pay for itself in terms of accelerating disposition. Effective promotional material need not be expensive but should be adapted to the character of the planned reuse of the area. In some instances, the LPA is attempting to attract a single major developer to build several hundred units on a site. If such is the case, promotional materials should be of high quality and widely circulated by mail -96- We have seen such promotional materials used very ef- fectively to announce a design competition for subsid- ized or FHA-insured housing. In the case of large tracts for low-rise housing, local residential redevelopers should be asked to help in promoting the site, even if they do not wish to develop the site themselves. We have found that a major de- veloper who has participated in development of subsid- ized housing on urban renewal land, without negative reactions toward "governmental red tape," can be ex- tremely effective in allaying the fears of other build- ers. When enlisting the aid of local redevelopers in promotion, care must be taken not to give individuals the idea that their own proposal would unquestionably be accepted if they bid, unless this is in fact the LPA's intention. We have seen considerable animosity arise on the local scene when an outside developer was chosen in a design competition. Regarding the promotion of land for high-rise luxury apartments in the CBD, it is advisable to enlist the aid of local civic leaders and organizations whose function includes publicizing the city nationally. In many cities there are a number of promotional groups with differing emphases and varying levels of promo- tional activity. In Louisville, Kentucky, for example, we found three civic organizations that engaged effec- tively in promoting the city regionally and/or nation- ally. It is important for the LPA in any city to be familiar with such organizations and to maintain con - tact with their officials . "For sale" signs should be placed on available office sites and moved periodically to different portions of the site. When sites are located in the CBD or on thoroughfares, large numbers of local and out-of-town people can be expected to see the signs. Time and time again during our study of urban renewal programs and projects, we came upon project areas that had appropriately been planned for moderate -income residential reuse but had failed to receive final sub- sidy commitments from HUD prior to the moratorium. In almost all of the cases, it was our judgment that the land was indeed marketable for subsidized housing but was not marketable for housing at market interest rates. Even where a higher use than subsidized housing appeared to be marketable, such use would usually have been less suitable for the project area. We recommend that LPAs either make concerted efforts to -97- obtain the release of subsidized housing funds that were in some measure committed to them under old pro- grams, or quickly gain technical mastery of the manner of obtaining funds under new forms of legislation. We strongly emphasize that the LPA should marshall whatever support is possible to give priority to sub- sidized housing in urban renewal areas. Possible state and local funding sources should also be pur- sued aggressively. Regarding some project areas or portions thereof, there may be a higher suitable use for residential land than had been planned for new low- and moderate -income con- struction. If, after its review of the project area, the LPA concludes that it would be wise to encourage the other use, the plan should be changed as quickly as possible. It is usually advisable to obtain the opinion of a market analyst before making such a change. For those projects in which subsidized housing remains the primary desirable use, the holding of land as described in Tests 15 and 16 in this chapter may pro- vide the only short-term solution. 7. The problem of disposing of scattered single-family sites is widespread among LPAs and is difficult to solve. We have therefore devoted a separate chapter to this problem (Chapter 11, "Scattered Residential Lots"). 8. When cleared parcels for residential redevelopment are located in a project area where older homes scheduled for rehabilitation will be allowed to remain, or when older inner-city areas are adjacent to the project area, the LPA must be certain that the provision of public services that may formerly have been allowed to decline in the neighborhood are once again furnished effectively. In addition to street and utility improvements, the quality and quantity of public services available to a neighborhood are critical in interesting potential residential developers in renewal land. Such services include public transportation, police and fire protec- tion, trash removal, street repair and cleaning, street lighting, and such community facilities as schools, health centers, and day care centers. The more such services and facilities that are available at the time parcels are marketed, the better the prospects for sales . -98- Provision of many public services and creation of public facilities are beyond the direct control of LPAs. However, pressure can often be applied upon other local government agencies to improve services to an area and to coordinate capital improvements ex- penditures with urban renewal planning. It is also possible for the LPA to work with local residents to create self-help programs to improve neighborhood services . 9. A key factor in enhancing the marketability of resi- dential parcels in an urban renewal project is accomplishment qf needed rehabilitation. If neighbor- ing properties have been rehabilitated, the evidence of investment commitment to the area will serve to in- crease the confidence of potential developers. Thus, it is important to stage rehabilitation efforts simul- taneously with construction of public improvements and facilities and with intensive marketing of major dis- position parcels. 10A. Across the nation, numerous LPAs have designated sites in their prime urban renewal projects (usually CBD or waterfront) for luxury or semi-luxury high-rise apart- ments. In recent years, high-rise condominiums have also been proposed. The logic behind introducing this use into a reviving downtown area is irrefutable from a planning point of view. But market realities have not always supported this logic. In a few cities, such apartments have been eminently successful; but in more cases, LPAs have experienced great problems in marketing these sites and often in generating local market support for the facilities if they are constucted. In many cases, the LPA has been the first organization in the city to attempt to market land for high-rise luxury units in the downtown area, but our studies lead us to suggest that it is generally better that the LPA not attempt to pioneer in this manner on downtown urban renewal sites . The risk of "wishful thinking" is especially great in planning an extensive luxury residential area downtown when the market has not pre- viously been tested, even if the buildings will over- look a spectacular public facility or a beautiful river. There are fewer San Franciscos than an LPA might like to think. If urban renewal can revive a portion of the downtown area with new office towers, hotels, and im- proved commercial establishments, it has at least set the stage for high-rise residential living if there is, or will be, a demand in the vicinity. 10B. Despite our general caution in Test 10A above, there are appropriate urban renewal sites for high-rise market -99- rate apartments in many cities. If it is certain that there is a market for downtown apartments, the LPA should engage in aggressive marketing of its own sites. If such marketing has already been underway for two or three years, the LPA should confer with experienced local developers to discover their perceptions of the problems with the LPA's offering. The Agency might consider reducing the required density, the price of land, and/or other development controls. The effects of such changes upon a developer's profit are demon- strated in Test 13 of this chapter. If the LPA's marketing efforts thus far have been rather passive, we suggest the following: Contact should be made with major local developers and with national developers who have successfully engaged in high-rise apartment development in other cities. Even if national developers indicated no interest when they were contacted shortly after project execution began, the LPA should make sub- sequent contacts periodically to describe major developments that have taken place in the renewal area and offer stronger support for market rate residential reuse. Serious efforts should be made to involve real estate brokers who have specialized in land sales for high-rise apartment use to aid in marketing the land . Ordinarily, such efforts will have to go well beyond the "general mail-out" approach and will involve personal contact with brokers at least by telephone. Well-prepared promotional materials can aid the broker, and the ready availability of further descriptive and explanatory material from the LPA will help in encouraging broker involve- ment. The lack of such serious efforts to secure the professional assistance of brokers will almost inevitably result in minimal broker participation in the sales of urban renewal land. Such has been the case in almost every city to date. The LPA should establish a working relationship with local leaders and organizations that promote economic growth for the area . Their experience and contacts at the regional and national level may prove to be of importance in convincing major developers to consider building on urban renewal land in the downtown area. -100- IOC. The LPA might consider promoting the sites for high- rise condominium rather than rental apartment reuse. It may be wise to have a market consultant analyze the significance and advisability of this variation, particularly since the condominium concept is still new in many regions . 11. People living near a residential urban renewal site may be very much opposed to having a medium or high density multi-family development in the neighborhood. Depending upon the character of the proposed develop- ment, there may be justification for their complaints. At any rate, such an attitude on the part of residents may render it all but impossible for the LPA to allow a high enough density of units on the site to make a project feasible for a developer. (We discuss the problems of developers dealing with project controls in Tests IB and 13A of this chapter.) The LPA should attempt to sell relatively small parcels to abutting or nearby owners if such owners are seeking to prevent financially feasible residential development on the parcels . Sometimes complaints against higher densities are really complaints against rental properties as opposed to ownership properties. Thus, the LPA might be able to achieve a higher density if the proposed development will be owned by the tenants rather than rented. This tactic on the part of the LPA may have the dual effect of satisfying neighborhood residents and rendering re- development of multi-family units feasible from the developer's point of view. 12. In relation to the particular type of reuse, the size and other characteristics of the parcels in question, state and local legislation, and other conditions that may be unique to the locality or to the parcels, the LPA should carefully consider the positive and negative features of the six basic methods for offering urban renewal land. These methods are described in Chapter 3. In some cities, the LPA never varies its method of offering parcels. Especially in the case of those par- cels that have proven difficult to dispose of, the LPA should weigh the advantages of the other possible meth- ods to be certain they have chosen the one best suited to the particular case at hand. 13 . Once a potential developer has expressed interest in a parcel or parcels, the process of negotiation begins. If negotiation is successful, the land in question is placed under contract. When circumstances result in delays in development, extensions may have to be granted -101- or the contract terminated. In such cases, negotia- tion can technically be said to continue until the land is officially disposed of or the contract is terminated . 13A. A person conducting negotiations with potential de- velopers of residential land must be aware of the financial and market elements that are of fundamental importance in rendering such development feasible. Is there a sufficient market demand for dwelling units of this type, at this location, from those who will pay enough to justify the developer's investment? The private developer must make a profit or he will not build the housing. Whether or not he can make a profit depends on a number of basic factors, some of which are discussed in Tests 1, 2, 10, and 11 of this chapter. To illustrate the important part that market and finan- cial elements play in guiding the decisions of a profit making enterprise, pro forma investment analysis tech- nique is often used to analyze the sensitivity of a proposed investment to various factors . This tech- nique delineates the land cost, construction cost, and other expenses involved. Mortgage financing alterna- tives are evaluated to determine which type of loan a developer can obtain and the amount of equity or cash on hand that will be required. Then, a cash flow pro- jection is made showing projected income, projected expenses, annual debt charges (payment of the loan), and a resulting cash flow before income taxes and the effects of depreciation and tax shelter. If all the parameters assumed in the pro forma are correct, the analysis yields an accurate profile of what economic gain (profit) can be expected from the total investment in land and construction costs. It should be noted that investors carefully weigh the risk involved before determining an acceptable rate of return on an investment. Thus, a return or profit of 10 percent on a real estate investment probably will not attract an investor if he or she can, for example, obtain 10 percent on a government bond that has no risk In the following table, we use an investment analysis of a 300-unit, multi-family residential development to describe these variables. 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Construction Costs® $27.00/Sq.Ft., including parking, lighting, site preparation, etc.) $ 718,740 3,510,000 Total Investment $4,218,740 B. CASH FLOW BEFORE INCOME TAX Effective Gross Income Gross Potential Income @ $5.25/Sq.Ft. Less: Vacancy and Collection Losses @ 5% Expenses: Management @ 4% Advertising & Promotion $250/Mo. Legal & Accounting Insurance Real Estate Taxes Utilities Maintenance and Repairs Reserve (2.5$/Sq.Ft.) Net Annual Income $682,500 34,130 $ 23,600 3,000 3,000 5,000 107,000 5,000 20,000 3,250 $ 648,370 169,850 Yield on Total Investment ($478,520 f $4,218,740) - 11 .34% Annual Debt Charges ($4,218,740 x 75% = $3,164,060 loan @ 9i% for 25 yrs.; Factor .1049) Cash Flow Before Income Tax RATE OF RETURN BEFORE TAX Equity Investment ($4,218,740 - $3,1 64,060) Rate of Return on Investment ($146,610 f $1 ,054,680) $ 478,520 331 ,910 $ 146,610 $1,054,680 13.9% Assumptions for the Sake of Example: • Eleven acres cleared land @ $1 .50 Per Square Foot • A 130,000 Square Foot Shopping Center @ $27.00 Per Square Foot • A 75% loan @ 9^% for 25 years Note that the above items are subject to variation by both region and time. For example, construction costs, maintenance costs, real estate taxes, etc., can vary monthly and will ordinarily differ by regional location. Even within a region, property taxes vary by municipality. These items can all be affected by policies of the LPA. -133- INVESTMENT ANALYSIS OF PROJECTED SHOPPING CENTER TABLE 1 EFFECT OF CHANGES IN COST PER SQUARE FOOT OF LAND ON TOTAL COST AND RETURN ON EQUITY Cash Flow Table 1 shows the effect of land cost on the equity return Land Cost Total Before Equity or profit. Obviously, marketability ot the land depends in Per Sq.Ft. Cost Income Tax Return part on the appraised reuse value of land. If land disposition is slow, therefore, quite possibly the reuse value of the land $ .50 $3,749,580 $183,520 19.57% ■ ill ItJJ 1 J • . • . should be re-evaluated and reduced as an incentive to $1 .00 $3,989,160 $164,670 16.51% development. *$1 .50 $4,218,740 $146,610 13.9% $2.00 $4,468,320 $126,970 11 .36% $2.50 $4,707,900 $108,130 9.18% TABLE 2 EFFECT OF CHANGES IN CONSTRUCTION COST ON TOTAL COST AND RETURN ON EQUITY Table 2 reflects the effect of changes in construction cost on Construction Cash Flow equity return. Too many stringent design regulations by the Costs Total Cost Before Equity LPA can effectively diminish land marketability because of Per Sq.Ft. Incl. Land Income Tax Return the increased costs required. Thus, design standards must be prepared with a realistic view of their implications on cost $25.00 $3,968,740 $166,280 16.75% and whether they are detrimental to land marketability. $26.00 $4,098,740 $156,050 15.22% Flexibility in negotiations is an objective for the LPA to *$27.00 $4,218,740 $146,610 13.9% enhance the marketability of urban renewal sites. $28.00 $4,358,740 $135,600 12.44% $29.00 $4,488,740 $125,370 11.17% TABLE 3 EFFECT OF CHANGES IN AVERAGE OCCUPANCY ON INCOME AND RETURN ON EQUITY Table 3 describes the effects of varying occupancy rates Average Cash Flow on equity return. Through proper marketabi lity analysis Occupancy Gross Before Equity and the preparation of feasible plans, the LPA can aim for Rate Income Income Tax Return a scale of development which should achieve profitable levels of occupancy. Also, the LPA must realize that 100% $682,500 $180,740 17.13% provision of public improvements and services is instru- * 95% $648,370 $146,610 13.9% mental to desirable occupancy rates, thereby increasing 90% $614,250 $112,490 10.66% the profit incentive for the developer. 85% $580,130 $ 78,370 7.43% 80% $546,000 $ 44,240 4.19% *Based on calculations used in preceding investment analysis. The above three variables have been taken independently. Imagine the negative impact of an overpriced land parcel plus too many stringent design controls. Although these particular variables have been singled out, the LPA must also be aware of the impact of real estate taxes, maintenance costs, insurance and other variables which affect the return on investment. Not noted in the previous analysis, lower overall costs tend to lower the amount of equity or cash on hand required, and less equity required can be a significant factor in stimulating development. It should also be noted that the ability to achieve an expected rental rate where applicable is a high priority in profitable development. The sensitivity of profit to expected rental rates, in addition to occupancy expectancy, is paramount to success. Furthermore, the considerable effects of interest rates on annual debt charges (payment on the loan) and the resultant cash flow before income tax depicts the need for quick execution by the LPA because time costs money to the private developer. Understanding the effects of different costs on a project's profitability, therefore, the LPA can better realize the role its policy plays in stimulating or inhibiting private development. Prepared By: REAL ESTATE RESEARCH CORPORATIOI -134- More buyers can be expected to patronize the downtown area, enhancing the profitability of many of the existing establishments. The public image of a stagnant or decaying down- town may be improved considerably. The task of securing major new retail development ap- propriately involves persons of the most stature , ex- perience, and power within the community. At the very least, the involvement of such persons indicates to the potential developer that the city strongly appreci- ates the significance of his parcel. Furthermore , such key persons can often identify or authorize spe - cial incentives to persuade retailers to locate there . Downtown merchants should be especially eager to en- courage the prospective developer in whatever way they can. Their unified and firm commitment to maintaining viability in downtown retailing can be evidenced by their insisting on high standards of appearance for stores, carrying out intense promotional activity, staying open some evenings of the week, ensuring safety on the streets, and persuading the city to continue to improve downtown parking. Such signs of initiative on the part of downtown merchants may be a constructive influence in the midst of negotiations with a major re- tail developer. It is important that key leaders and LPA staff present a "united front" in negotiating with potential devel- opers. This requires effective communication among the city's various participants prior to meetings with the prospective developer. Ideally, the LPA's contact and coordination with key local leaders should be an ongoing process rather than one isolated instance. 12A. Even when an LPA's marketing program is skillful and aggressive and site and project improvements have been well planned and efficiently implemented, adverse conditions beyond the LPA's control may be impeding disposition. Sometimes these are attributable to national trends, sometimes to singular local conditions or events. Examples of such factors that might delay disposition of retail land are as follows: National Trends Periods of tight monetary conditions. The trend toward new suburban shopping centers. The completion of circumferential expressways and of additional radial expressways. Residential flight to the suburbs. Rising crime rates in inner-city areas. Comparatively high tax rates to support central- city services. Local Conditions or Events Sluggish economy and general lack of investment in the downtown area. Lack of convenient and inexpensive employee parking in the downtown area . Traffic congestion in the downtown area. Relatively poor access to the CBD. A general image of obsolescence in the CBD. Departure of major retail operations from the down- town area. Singularly high perceived crime rate in the central area . Lawsuits regarding condemnation or plan changes. Local opposition to the urban renewal program or to a specific project. Racial disturbance in or near a project area. Intense and/or long-term labor problems in the city. Failure of city, state, or federal agencies to im- plement projects around which the urban renewal plan has been conceived (e.g., federal and state highway projects). 12B. Although many of the above problems and trends cannot be changed by the LPA, even with excellent support on the part of the city and of HUD, some can be expected to correct themselves in time, and others can be miti- gated by local action. We believe it is of the utmost importance to emphasize that although national and local trends that are gener - ally unalterable on a near-term basis may greatly com - plicate disposition, they can often be overcome in re - lation to specific projects if they are identified and -136- dealt with skillfully. Generally speaking, such trends are not an excuse for inactivity regarding the prepara - tion and marketing of land. Nevertheless, in some cases a proposed reuse will have to be changed if the LPA is trying unproduct ively to buck the trend , or the LPA will have to await a change in the trend before resuming full-scale marketing efforts for the orig - inally designated reuse . Among tactics that have helped to offset negative local or national trends are the following: -- Applying pressure on the city by the LPA and down- town interests to substantially improve downtown parking and to maintain excellent police protec- tion and clean-up service. Enlisting the aid of local news media to "accentu- ate the positive" regarding the downtown area and to practice restraint in reporting negative inci- dents . Bringing together local leaders and merchants to obtain a broadbased commitment to reviving the downtown area. When merchants are united and are willing to make contributions to promotion, reha- bilitation of facilities, and other positive ac- tivities, the chances of reviving the downtown commercial area are greatly enhanced. The pedes- trian shopping malls we mentioned previously could not have happened without such cooperation and initiative. Similarly, the principal financial group in the city, if unified and earnestly desir- ous of revitalizing the downtown core, has in many cities been able to turn the tide in favor of the CBD. Using the time while trends are delaying disposi- tion to complete public improvements to set the stage for later marketing. Recognizing when originally planned public improve- ments are not adequate to generate hoped-for com- mercial development. The time may be ripe to plan new, more ambitious public improvements or to re- duce project goals and standards, and focus on the objective of speedy implementation. All of these approaches have proven effective in cities RERC studied, and numerous other examples of tactics to offset disadvantageous conditions are mentioned in other parts of this report. -137- • Hold Land for Future Marketing There are certain conditions under which the decision to hold retail land for future marketing presents itself as a necessary or preferable temporary course of action. Ex- amples of such circumstances are as follows : Necessary Extremely tight monetary conditions have rendered a fast rate of absorption highly improbable; the focus in marketing should temporarily be limited to prelim- inary discussions with potential reusers . City, state, or federal street or highway improvements that are integral to the project area's functioning have been postponed or considerably altered, and the LPA cannot control their timely implementation. Serious crime within or near the area has temporarily stigmatized the project. (This often causes heightened perception of danger, which has the same effect as real danger . ) Major alterations in the urban renewal plan are under- way, and ultimate decisions will affect the parcel (s). Preferable -- A desirable potential user needs several months to finalize future plans and arrive at a decision to lo- cate or expand in the project area (but has given evidence that he is not simply stalling) . -- A major public institution has dire need for temporary use of certain parcels. -- A number of existing and proposed businesses and in- stitutions need surface parking until a developer or the city builds parking garages. -- The desirable future development of certain parcels will have to be determined when the precise nature of development on other parcels has been established. Strong efforts are still being made to attract a single developer for a number of major parcels, and this goal appears to be realistic. -- The city's systematic plan calls for temporarily di- verting a certain type of development to another urban renewal area in order to achieve maximum impact . -138- 13 . When the temporary tactic of holding land for future marketing is necessary or preferable, there are a number of tests that should be applied regarding the use or non-use of the land during the interim period. The eventual disposition of urban renewal land is Fasically an economic activity, and the economic~~re- turn of cleared land while its disposition is unavoid - ably delayed should be a prime consideration . When parcels are clearly doomed to remain vacant for several years' time, an interim use may be advisable. When- ever possible, such a use should yield net income or at least offset maintenance and carrying costs. When an income-producing use is impossible or potentially detrimental to future sale or to the existing environ- ment, the land should be left vacant (but maintained) or should be temporarily devoted to a use that will serve the public interest and enhance the marketability of other disposition parcels in the project area. An interim use is not feasible as far as the LPA is concerned if it involves : Clearly unretrievable monetary expenditures with- out the probability of enhancing marketability in other portions of the project area. -- A strong chance that the interim use will not be able to be terminated when re -marketing is advis- able (for example, if a neighborhood might object publicly to the subsequent sale of an interim playground) . -- The time is ripe, or soon will be, for the sale of the given parcel (s), and the interim use will jeopardize marketing. The following tests should be applied when considering interim use. 13A. If a suitable interim use will produce net income to the LPA, it is ordinarily the most desirable use. The best example of such use is the provision of badly needed surface parking facilities in a downtown area. Potential retail sites will often be strategically lo- cated for this type of interim use. Often a CBD sorely needs an abundance of temporary parking facilities in addition to firm plans for future supportive parking in order to interest prospective commercial and office developers. Such temporary parking lots, with minimal site preparation, will usually produce net income and enhance the redevelopment potential of the downtown area. -139- 13B. When suitable net -income -producing uses cannot be found, it may prove advisable to temporarily allow free or low- cost use of the land to support existing uses. In the case of downtown retail land, for example, one or more firms adjacent to the vacant land might be in need of temporary private parking space, and the gesture of the LPA to allow such use for a nominal fee may result in important benefits for the project area. We have seen several downtown projects in which the ex- terior renovation of existing retail structures moved slowly, though such remodeling was important to the image of the project area. The combination of an LPA's persistent efforts to bring about a willingness to renovate on the part of the retailers, along with such gestures of good will by the LPA as allowing interim use of space for parking, may be a tool to bring about better cooperation. The temporary nature of such uses must be made clear from the outset, however, and the LPA must not be susceptible to threats by the interim user(s) when the time comes to terminate the use. 13C. If certain parcels can be devoted to an interim use that will serve the public interest without jeopardiz- ing their sale when the time is right, such use may be preferable to protracted vacancy. In such a case, minimal -cost leasing or use in exchange for the service of maintenance are in order. Examples that we encoun- tered in the course of this study include the temporary use of cleared land for tot lots or playgrounds, and the provision of parking for university students and employees. Pocket parks within the downtown area, tastefully though inexpensively furnished, can do much to create a feeling of pleasantness within a rather intense urban environment. An excellent example of the manner in which such areas enhance the CBD can be seen along the new pedestrian walkway in the Central City Urban Renewal Area in Evansville, Indiana. Such interim use may help to produce greater regard for the urban renewal program within the community and increase the marketability of nearby sites. 14. The term "land banking" refers to the voluntary setting aside of vacant improved land with plans to market it at a future date. This may be a desirable approach regarding certain parcels or tracts for the following reasons : 14A. A developer or developers may submit an integral plan to redevelop several acres in a desirable fashion, but they may not be ready to enter into a contract to -140- purchase the entire acreage until certain portions have been developed. Although our studies have shown that such comprehensive development schemes often fail to materialize, it is sometimes wise to landbank unsold and uncommitted portions of the planned area while the developer is allowed to proceed with the initial phases of his proposal. Situations of this type require month-to-month vigilance on the part of the LPA to avoid wasting years of potential marketing time regard- ing the landbanked parcels . The greater the probability of eventual realization of the entire development, the more time that can be risked for the land in question. 14B. Careful analysis regarding some parcels may reveal that a waiting period is expedient by reason of the likeli- hood that the marketability for favorable reuse of the site will increase considerably in the foreseeable future. We have used the words "careful analysis" and "likelihood" in order to differentiate such judgments from the mere use of soft market conditions as an ex- cuse to wait passively for a buyer to walk in the door. A good example of carefully calculated land banking was evident in one of the cities RERC studied. Two urban renewal projects were directly competing for the same types of reuse on comparable sites. Rather than allow a haphazard dissipation of potentially catalytic rede- velopment, the city made a clear choice to direct mar- keting efforts and supporting facilities to one of the projects, while holding some land in the other project for intensive redevelopment when the market caught up with the available inventory of land. 14C. A site may be earmarked for a very desirable and highly probable development, which for various reasons cannot occur for a period of some months or years . For ex- ample, we have seen a well -planned civic center area that depended for its completion upon decisions of four different governmental entities to build office struc- tures within the area. There was strong reason to be- lieve that, if the land could be kept open for such use, the necessary decision would eventually be made. The deteriorated condition of many structures within the area mitigated against delaying demolition until the governmental entities were ready to build. 15. The "last resort" in attempting to market urban renewal land is to end up giving it away. This alternative may have to be considered regarding a few parcels. When the parcel in question is relatively insignificant in value, when there is virtually no hope of selling the -141- land in the foreseeable future for any suitable use or at any price, and when a person or organization can be identified who would maintain the land in good condi- tion and use it in an acceptable manner, donating the land may prove the most economical course of action. Cases of such donation were extremely rare in the cities we studied, but occasionally such action may be appropriate. -142- INADEQUATE INTEREST IN OFFICE LAND Statement of the Problem One of the key general problems encountered in urban renewal land disposition is private developer lack of interest in the cleared and improved sites. Once projects are ready for marketing, disposition just has not occurred as rapidly as most LPAs have expected. Developers have been hesitant about undertaking projects on renewal land for many reasons, includ- ing the following: Because the city and metropolitan area are declining and there is little replacement demand for space. Because new construction has traditionally occurred in the suburbs and the urban renewal areas are unfamiliar turf for developers. Because the local market has been temporarily overbuilt. Because builders are unwilling to take the added risks of pioneering in urban renewal areas, especially with the attendant restrictions and red tape. Because the land prices are not low enough to offset development risks. -143- Because only a limited number of developers have the ex- perience and financial capability to undertake some of the planned large projects, and the LPAs have not con- tacted them, or have not approached them persuasively enough . Because the LPA is not adept in dealing with private developers . Because some of the planned projects are out of scale for their local market. In addressing these and other market problems, we have focused on separate land uses in five different chapters. This chap- ter concerns office land. Other chapters deal with residential, industrial, retail and hotel-motel land. Though there is con- siderable repetition among the five chapters concerned with urban renewal reuse market resistance, large sections of each chapter are devoted specifically to one reuse. With the text on this general subject divided into five chapters, readers can concentrate on their problems with one particular reuse without being distracted by questions and answers relating to other uses. Persons who have problems in marketing properties of several types can easily skip over repetitive material in the various chapters they are using. Basic Strategy Alternatives There are two basic alternative ways of trying to deal with the problem of inadequate interest in office land. These may be summarized as follows: • Continue to Market Land Under Present or Modified Reuse -- This involves intensifying and/or redirecting the market- ing program to take full account of local market condi- tions, the potential for the site, the needs and realistic demands of an office developer, and possible tradeoffs or assistance that the LPA could offer a potential developer . • Hold Land for Future Marketing --This alternative involves consideration of interim uses, leasing of sites for tem- porary use, land banking the property in anticipation of improvement in market conditions, and the "last resort" of donating the site to eliminate LPA maintenance costs. Tests to determine which of these two alternatives would offer the most appropriate means of dealing with an individual Agency's problem are set forth in the decision tree on the following page. 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QJ CJ cfl co E QJ QJ R u a QJ u CO r-l m 01 3 qj > cj XI QJ CJ ht) o E OJ 4J X 01 > B Cfl rl O'rl 14 3 U O 4J a-a > 3 B B cfl tvi -H cfl CM CM QJ C^« CO QJ 3 rl QJ 3 rl 4J 3 4J 14-1 B QJ QJ rl r-l cflX a co a qj CO QJ to B OJ cfl u O CO CM ■H OJ 01 X M 4-1 rM QJ 3 X O 4J 3 OJ O CO •§ 3 rl QJ O E O E QJ O E -H O 4J CO -H •o E u OC" u u T3 01 01 *D B 4J O E cfl O CO E 00 E O TJ E QJ •rl r-4 oj x X B cfl 01 4J co x a QJ 4J OJ 4J CJ •rl B CJ CO -H Cfl Cfl ■a 4j e -M E Cfl 3 -H O cfl E u E i-i 00 c rJ 01 4J M QJ •v ax HUH V u o a u o o X CJ u Cfl 01 cfl OJ XI OJ rl CO a QJ -147- that can be answered with a "yes" or a "no." In the right- hand column, we have suggested specific actions to be taken for each of the two possible answers to the test questions. We recommend that a person evaluating the problem of inade- quate interest in office land read through the entire deci- sion tree before deciding upon a specific action to follow. It only takes a few minutes to answer all the questions, and the problem is placed in better perspective when all options are reviewed. Most of the questions are straightforward and self-explanatory and can be answered quickly. However, some of the specific actions are stated in an abbreviated form and may need elaboration before they can be accepted or re- jected. Therefore, the rest of the text in this chapter is devoted to discussion of the issues involved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions discovered in Real Estate Research Corporation's analysis of urban re- newal land disposition across the country. Please turn to the decision tree before reading further in the text. The remaining paragraphs in this chapter simply elaborate upon the test quesions posed in the decision tree. Specific Observations /Suggestions The numbering of the following paragraphs matches the num- bered tests, or questions, in the decision tree table titled "Inadequate Interest in Office Land." Each test is discussed, though the extent of the commentary differs. Some of the questions and suggested actions in the decision tree are ob- vious and require little explanation. Others are not so clear or involve complicated actions that need to be des- cribed in detail. In other cases, the text includes descrip- tions of specific situations or actions discovered during our research that might be helpful to other cities. We have in- cluded as many examples and illustrations as possible of successful tactics and policies adopted by renewal agencies that we visited or have heard about. Again, the text that follows is directly correlated with the numbered tests in the preceding decision tree . The number - ing is consecutive, but the two alternatives are included as subheadings to clarify the context of the discussion of the tests . • Continue to Market Land Under Present or Modified Reuse 1. If land planned for office use is attracting little interest among potential developers, various aspects -148- of the project's planning should be re-examined. When office reuse parcels have remained unsold over several years' time, other portions of the project area, or surrounding land uses, may have undergone considerable change. Sometimes these changes had been foreseen in the original land use plan. But often the actual re- development that has taken place varies significantly from earlier expectations in terms of type or character of the reuse. For example, since execution began, the LPA may have reduced the amount of retail-commercial land in a downtown project area and increased public open space and/or office reuse. Also, the internal or surrounding street system may have changed in a man- ner that had not been envisioned in the original plan. Furthermore, the quality of the redevelopment that has taken place might be less impressive than the LPA's hopes in the initial stages of the project, requiring that the LPA "lower its sights" regarding the reuse potential of remaining land if its marketing efforts are to be realistic. This lowering of sights may involve several actions treated in subsequent parts of this chapter. On the other hand, the failure to note recent and current changes in the project area may in effect blind the LPA to more favorable dispo- sition opportunities that have come about since ex- ecution began. Thus, the unsold inventory of office land should be re-evaluated in terms of completed or firmly com- mitted developments and changes within and surround- ing the office reuse area. Conducting an effective marketing program for unsold sites usually requires a specific concept of the types of users who should be interested in locating there. Actual examples of events occurring during execution that necessitated changing the type of intensity of reuse for various parcels are as follows: The state announces a firm commitment to finance a new convention center, hitherto unexpected, within the project area. Local businessmen, with federal help, generate a pedestrian shopping mall in the downtown area. A proposed highway fails to materialize. A proposed public facility of major significance is constructed elsewhere. -149- A major department store (s) leaves the CBD to lo- cate in the suburbs . A major bank or corporation implements a develop- ment of unique prestige. Re-evaluating unsold parcels in terms of recently es- tablished surrounding uses may reveal the need for basic changes in the urban renewal plan. The pitfalls of an inflexible plan are discussed at length in Chap- ter 13. Prior to the approval of Loan and Grant - Part II, a marketability study and reuse appraisals were com- pleted for each project and submitted to HUD. At that time, the planned reuses had been declared mar- ketable, and an estimated rate of land absorption was normally included. Nevertheless, if sizeable portions of land designated for office reuse have remained un- sold over a period of years, the original market study has probably become outdated. Perhaps it was not real- istic from the beginning. We have found that, for various reasons, many LPAs placed little stock in the conclusions and recommenda- tions of the original market analysis. We believe such market analysis is important, and when the land has remained unsold over several years' time, the LPA should carefully review the original market study to see whether developments and trends that have taken place in the interim may have radically changed the marketability of certain reuses in the project area. a particular site is so basic that promotion, market- ing efforts, and public im] provements can be wasted if the market simply is not t nere and cannot reasonably If, after its review of the earlier market study, the LPA suspects a pronounced absence of current and future marketability for the proposed reuse, we recommend that reliable and up-to-date market information be developed and analyzed by an appropriate professional person or firm. Such a re-evaluation should include recommenda- tions for an alternate, more marketable reuse if the originally designated reuse is found to be unmarket- able. A study of this type should also provide a pro- bable rate of absorption regarding unsold land in light of current and expected developments and trends. -150- This can serve to guide the LPA's expectations for tHe rate of disposition. The Agency must realize"^ However, that the actual rate of absorption will de- pend significantly on the quality of its marketing effort. Even when the market for office land is relatively strong and the price of the land is competitive, determination of the type and intensity of develop- ment that will be financially feasible on a given site requires further technical consideration. Thus, it will often be wise for the LPA to request a feasi- bility component within the market study to indicate the scale and character of development that the LPA can realistically seek and the land price that a typical developer could afford to pay. Especially in the case of speculative development of office space for lease, the market and feasibility study itself may prove useful to the LPA for promotional distribution to potential developers. It is important to note here that the LPA should not apply pressure upon the market analyst to recommend a nigh type of reuse just because such a reuse fits ideally into the project plan and will generate higher revenue ! If the market conclusions are vir- tually dictated by the LPA rather than by the data, method, and objective judgment of the analyst, a decade can easily be lost in attempting to dispose of the land according to a favorable but financially unrealistic redevelopment scheme. The chart on the following page indicates the compon- ents of a typical market study. The feasibility com- ponent is described in Test 8 of this chapter. 2B. The question of land pricing can be critical regard- ing office building sites, especially if the pro- posed structure will be a speculative, multi-tenant facility. The fundamental problem of overpriced land is discussed in detail in Chapter 5, and the advantages to be gained in reappraising the unsold land with a land residual appraisal approach are presented there. The significance of the price of land in rendering office development economically feasible will be illustrated in Test 8 of this chapter . 3. It is the LPA's responsibility to see that the stage is set for showing available parcels to their best -151- ORGANIZATION OF WORK ELEMENTS: MARKET ANALYSIS Analyze physical and locational factors bearing on project I Analyze regional, economic 8 demographic patterns 8 trends Define market areas relevant to project Study existing supply and demand conditions in market area I Estimate market size, characteristics and growth trends Project market area demand - types, prices and quantities 1 + V Prepare a general project development concept Evaluate quality of existing or planned competition Outline general approach to marketing subject project 1 Project project absorption during study period - types, prices, quantities •EITHER- ] [ OR- Begin Financial Feasibility Study (Chart II) Prepare Report Prepared By: REAL ESTATE RESEARCH CORPORATION -152- advantage. If the site or the overall project area has a negative appearance or if the basic functional improvements have not yet been made, potential office developers may be repelled without the LPA ever know- ing that they were interested. In one of the test case cities we studied, several local leaders described the frustration of showing their riverfront renewal area to national developers while the extensive physical improvements were still underway in the project area. With a railroad line to be relocated, a highway under construction, a mas- sive electrical substation being modified, and a flood- wall under construction, the project area presented an enormously negative impression to prospective de- velopers, and for years no outside developer would commit himself to the project. Although this example involves an unavoidable temporary condition, it serves to illustrate the strength of the negative reactions that an unsightly project imparts to potential pur- chasers . A developer of a major office building can be expected to be extremely sensitive to the attributes of a po- tential site and its surroundings. In many cases, he will eventually be leasing Class "A" office space to prosperous tenants at the highest rent the market will bear. He, therefore, needs a Class "A" site. The following activities on the part of the LPA are im- portant to set the stage for marketing by allowing a prospective developer to envision the site's real potential : Regular trash removal. Timely demolition of structures to be removed. Regular surface maintenance. Attention to repairs or addition of sidewalks, curbs, and on-site utilities. For many reasons, the implementation of public impr ove - ments is of fundamental significance in p reparing the way for effective marketing ot land, and this applies to office as well as other types o t parcels. The visu- al and functional qualities ot the site and the sur- rounding area are of major concern to a potential office developer. If basic project improvements (new and improved streets, street lighting, storm and -153- sanitary sewers) have already been completed or at least are well underway, a prospective developer can be certain that his project will not be delayed or inhibited by the failure to implement public improve- ments. Plans and promises are not very effective when an LPA is trying to encourage major investments. Regarding major office, retail, and luxury apartment developments, it is typical for the city to have planned a major public facility that is calculated to enhance the project area and to act as a catalyst for securing high-quality surrounding development. We must emphasize that such facilities should be completed or well underway before the LPA can hope to engage in aggressive marketing of prime sites. Particularly when the LPA is attempting to interest a major national developer, the psychological and visual impact of a city that has accomplished what it set out to do can be the LPA's strongest market- ing tool. Conversely, a city's failure to accomplish promised investments in its urban renewal areas con- stitutes a poor context for marketing office land. In the case of a singularly large project area, pub- lic improvements cannot be installed simultaneously throughout the project. Since marketing efforts are weakened when planned physical improvements have not yet been made in an area, the LPA might consider staging its marketing in accordance with installation of public improvements and facilities. We have found that renewal agencies throughout the nation vary widely in their use of promotional ma- terials and approaches. The importance of good pro- motional materials and use of a variety of marketing techniques and approaches are discussed in Chapter 3. Regarding promotion of available office land, we be- lieve that an attractive and informative brochure to advertise available land will pay for itself in terms of accelerating disposition. Effective promotional material need not be expensive but should be adopted to the character of the planned reuse of the area. In some instances, available urban renewal land may hold strong potential for attracting a national of- fice headquarters into the city; if such is the case, promotional materials should be of high quality and should be widely circulated by mail. If the land is of local interest only, simple but well prepared ma- terials will be sufficient. -154- Besides the brochure, leaflet-type circulars can be used effectively regarding individual parcels planned for office use. An attractive map of the site, illus- trating access and surrounding uses, can be a valuable tool to interest potential office developers and real estate brokers. Portions of such materials can also be used for newspaper or magazine advertisements. A number of persons and organizations outside the LPA should be asked to help promote urban renewal office sites. Political, business, and civic leaders should be aware of the enormous significance that a major new office tower has in signalling the vitality of the CBD area. We have seen a number of cities, for example, that floundered in their downtown renewal efforts until a major local financial institution committed itself to building an office tower. Con- versely, when there is no financial institution in the city that has seen fit to make a sizeable invest- ment in the downtown area, out-of-state investors cannot be expected to show interest in the city. In most cities, there are local or state organiza- tions whose major function is to stimulate economic growth in the area. A Chamber of Commerce is the most typical such agency, but in many cities there are a number of promotional groups with differing emphases and varying levels of promotional activity. In Louisville, Kentucky, for example, we found three civic organizations that engaged effectively in pro- moting the city regionally and/or nationally. It is important for the LPA in any city to be familiar with such organizations and to maintain contact with their officials . For example, where the promotion of of- fice sites and the attraction of new corporations is engaged in by a local organization, available urban renewal sites should be included in advertisements. Often the prime sites for new office buildings in the downtown area are on urban renewal land. An up-to-date market study of the demand for office space, produced at the LPA's request by a reputable consultant, has been used successfully by a few agencies as a major promotional tool. Such a docu- ment is often more meaningful to a potential develop- er of speculative office space than the usual des- criptive promotional materials. "For sale" signs should be placed on available office sites and moved periodically to different portions of the site. When office sites are located in the CBD , -155- large numbers of local and out-of-town people can be expected to see the signs. Besides more generalized promotional activities that attempt to create interest somewhat at random, direct and active marketing of urban renewal land is necessary regarding most parcels if disposition is to proceed - with the kind of efficiency that characterizes pri- vate enterprise sales efforts. The marketing ap- proaches discussed below are basic in attempting to dispose of office sites. The LPA should contact all major local corporations that might be in need of additional office space in order to expand, or that might wish to locate in new space to replace their obsolete facilities. Contacts with such corporations should be made by persons within or outside the LPA who are highly skilled in the field of real estate activity? Oftentimes an initial contact that results in a negative response on the part of the corporation may actually plant the seed for serious consideration by the firm in the future. Furthermore, any developer considering building speculative office space is intensely in- terested in those firms that have stated a near- future desire for new and high-quality office space. In its contacts with major corporations, the LPA may thus become aware of a concrete market for new space that can subsequently help to attract a major developer . In the case of major parcels that have a singularly desirable location for office development, the LPA should directly contact the city's major financial institutions that are not housed in new buildings of their own. Such contact might well be made by local lenders outside the LPA since the positive significance of a new office tower in the CBD can- not be exaggerated. Major financial institutions may include banks, mortgage companies, insurance companies and savings and loan associations. The larger institutions of these types in a city can capital for a new, s in gle-tenant or multi- tenant office structure. Per ~taps more important, such ing their image and prestige within the local community . -156- In city after city during our research for this as- signment, we discovered that the major catalytic developments that brought about a favorable turning 5 ~oint in urban renewal projects were launched by ocal financial institutions or ma j or local corpora- tions that, in addition to simple profit-motivation , were eager to be recognized as having provided a major contribution within their community . Such monumental developments often serve to establish the special identity of an urban renewal area and di- rectly pave the way for additional, though less amb i t ious , deve lopmen t . The first contact with major corporations and finan- cial institutions regarding office sites should not be the last. The desire for unique civic recognition must be allowed to grow within such major organiza- tions, and even after initial rejection, the door should be kept open for further contact by the LPA or local leaders. 6C. Governmental bodies are usually major users of office space within the city. Where office sites" are con- cerned, the first potential user to be considered should be the City itself. Next, the office needs of county, state, and federal agencies should be considered, and they should all be contacted regard- ing their interest and financial capabilities. Even though government buildings are often less impressive than those of the private sector, they may neverthe- less constitute a crucially important use regarding the disposition of office sites. The LPA should be alert to all governmental construc- tion being contemplated in the metropolitan area. Many times, large facilities (especially federal ones) that were planned originally for suburban locations can be attracted to the CBD when the LPA and civic leaders apply pressure for such relocation. 6D. Although newspaper and magazine advertising of urban renewal sites characteristically has been disappoint- ing in its results , we have seen notable instances in which such promotional efforts have helped to secure a major new office structure for the city. If the first marketing efforts on the local scene regarding a prime office site have not been encouraging, we advise the LPA to place a well prepared advertisement in a major national business publication. Such ad- vertising is too expensive to engage in frequently, but the stakes may be high regarding a major parcel -157- or group of parcels, and the chance of interesting a national developer or corporation justifies at least one such advertisement every two years. The proba- bility of favorable results from such advertising is related to the comparative appeal that a particular city has in the eyes of national investors. One LPA director whose record in disposing of land is f avoid- able told us that the LPA placed ads in the local newspaper regarding prime sites once a week -- on the weekday that downtown hotels reported their highest average occupancy. The use of advertising is discussed more thoroughly in Chapter 24. 6E. Related to the previous point and to Test 5 above, we emphasize again the importance of establishing a working relat ionship~with local organizations that promote economic growth for the area . Their experi- ence and contacts at the regional and national levels may prove to be of immense importance in attracting major developers to consider building on urban re- newal land in the downtown area. 6F. Regarding office land for sale, we have emphasized the importance of direct contact with major local financial institutions and corporations by the LPA and/or prestigious local leaders. We have also emphasized the importance of assessing governmental office needs and contacting governmental entities that might be potential users. These are fundamental first steps in marketing office land. If the LPA has chosen not to use real estate brokers from the beginning of execution and if the procedures described above have been followed but office sites remain vacant for more than a year with no apparent interest, serious efforts should be made to involve real estate brokers specializing in office land sales to aid in marketing the land . Ordinarily , such ef- forts will have to go well beyond the "general mail- out" approach and should involve personal contact with brokers at least by telephone. Well-prepared promotional materials can aid the broker, and the ready availability of further descriptive and ex- planatory material from the LPA will provide en- couragement for broker involvement. The lack of such serious efforts to secure the professional assistance of brokers will almost inevitably result in minimal broker participation in the sale of urban renewal land. Such has been the case in almost every -158- city to date. Nevertheless, we encountered some spe- cific cases in which a major downtown office develop- ment was partially a result of a skilled broker's efforts . 6G. In relation to the particular type of reuse, the size and other characteristics of the parcels in question, state and local legislation, and other conditions that may be unique to the locality or to the parcels , the LPA should carefully consider the positive and negative features of the six basic methods for offer- ing urban renewal land. These methods are described in Chapter 3. In some cities, the LPA never varies its method of offering parcels. Especially in the case of those parcels that have proven difficult to dispose of, we believe the LPA should weigh the advantages of the other possible methods to be certain they have chosen the one best suited to the particular case at hand. 7. If office sites have been actively and skillfully marketed, but several years have elapsed with no developer in sight, it may be wise for the LPA to moderate its aspirations regarding the required den- sity of development on the site, especially in the case of a consistently "soft" market for office space. Site coverage requirements, height requirements, and almost certainly the minimum price of the land may have to be reduced in order to market the site with reasonable efficiency. Test 8 below contains a sample feasibility pro forma that may help to drama- tize the sensitivity of office development to size of facility, market for space, cost of materials, interest rates, and competitive rental rates. 8. Once a potential developer has expressed interest in a parcel or parcels, the process of negotiation be- gins. If negotiation is successful, the land in question is placed under contract. When circumstances result in delays in development, extensions may have to be granted or the contract terminated. In such cases, negotiation can technically be said to continue until the land is officially disposed of or the con- tract is terminated. 8A. A person conducting negotiations with potential de- velopers of office land must be aware of the finan- cial and market elements that are of fundamental importance in rendering office development feasible. -159- In some cases, a major corporation or institution will build an office tower more for reasons of image than profit. But the typical developer of multi- tenant space is acutely conscious of the "bottom line," or the cash return on his investment. We have often heard leaders in a city say there is a strong demand for more first-class office space. But the important factor for the developer is, "Will they pay a high enough rental rate to justify the risks of development and return a desirable profit?" As the cost of materials, labor, and construction soar, the rental rate necessary to return a profit may be far higher than that of competitive office space. If the LPA disposition staff is inexperienced regarding the technical and singular aspects of negotiating with office developers, the suggestions contained in Chapter 18 may prove helpful. To illustrate the important part that market and fi- nancial elements play in guiding the decisions of a profit-making enterprise, a pro forma investment analysis technique is often used to analyze the sen- sitivity of a proposed investment to various factors. This technique delineates the land cost, construction cost, and other expenses involved. Mortgage finan- cing alternatives are evaluated to determine which type of loan a developer can obtain and the amount of equity or cash on hand that will be required. Then, a cash flow projection is made showing projected income, projected expenses, annual debt charges (pay- ment of the loan) , and a resulting cash flow before income taxes and the effects of depreciation and tax shelter. If all the parameters assumed in the pro forma are correct, the analysis yields an accurate profile of what economic gain (profit) can be expected from the total investment in land and construction costs . It should be noted that investors carefully weigh the risk involved before determining an acceptable rate of return on an investment. Thus, a return or profit of 10 percent on a real estate investment probably will not attract an investor if he or she can, for example, obtain 10 percent on a government bond that has no risk. In the following table, we have set forth an invest- ment analysis of an office facility to describe these variables. For comparison, a desirable rate of re- turn (profit) before taxes is assumed to be in the -160- range of 12 to 15 percent. Anything above that can normally be considered excellent. In the case of prime sites suited to major office de- velopment, every effort should be made to involve key" public and private leaders in negotiations with poten- tial developers . Ordinarily , the addition of a major new office structure is of great significance in the eyes of local officials and businessmen. It means that: A major investment, hopefully triggering further investment, will reinforce the downtown area and increase the tax base. An established institution or corporation has chosen to remain in the downtown area and invest and expand, or a new corporation has chosen to locate in the city. If the building is to have some multi-tenant space, such space may retain more firms in the downtown area or may help to draw new firms from elsewhere . During construction and after construction, there will probably be a net addition of jobs in the area. The task of securing new office development deserves the attention of persons of the most stature, experi- ence, and power within the community. At the very least, the involvement of such persons indicates to the potential developer that the city appreciates the significance of his proposal. Furthermore, such key persons can often identify or authorize special in- centives to persuade the developer to proceed with his plan . It is important that key leaders and LPA staff present a "united front" in negotiating with potential office developers . This requires effective communication among the city's various participants prior to meet- ings with the prospective developer. From the city's point of view, a major new office building on any suitable site within its boundaries is clearly advan- tageous, but the LPA must emphasize the merits of the site or sites for which it is responsible. The LPA is in a stronger position to insist upon this empha- sis with local leaders if the initial interest arose by means of its own promotion and contact. Ideally, -161- INVESTMENT ANALYSIS OF PROJECTED OFFICE FACILITY (36,000 Net Rentable Sq. Ft.) INVESTMENT Land Value '"a$2.50/sq. ft. Construction Cost: 42,350 gross sq. ft. ^-$25/sq. ft. Site Improvements (including parking and landscaping) Total Investment $ 215,500 1,058,750 42,000 $1,316,250 CASH FLOW BEFORE INCOME TAX Effective Gross Income Gross Potential Income: 36,000 net rentable sq . ft. fe$6.50 per sq. ft. Gross Potential Parking Income: 100 spaces ^$20 per month for each space Less: Vacancy and Rental Loss at 5% Expenses Includes operating expenses, utilities, leasing fee, management, insurance, maintenance, repair, and taxes ^40,5% of effective gross income. Net Annual Income $234,000 20,000 11,700 $ 242,300 97,320 $ 144,980 Yield on Total Investment ($144, 980 ♦ $1,316,250) Annual Debt Charges ($1,316,250 x 75% = $987,190 loan @9£% for 25 years; Factor .1049) Cash Flow Before Income Tax RATE OF RETURN BEFORE TAX 11 .01% 103,560 $ 41,420 Equity Investment ($1 ,316,250-$987, 190) Cash on Cash Return on Investment ($41,420- Assumptions for the Sake of Example: $329,060) 86,200 Sq. Ft. of cleared land (a$2.50/Sq. Ft. A 42,350 Gross SquareFoot OfficeFacility @$2.50/Sq. Ft. 100 surface parking spaces @$20 monthly rental per space A 75% loan @9£% for 25 years. 329,060 12.58% Note that the above items are subject to variation by both region and time. For example, construction costs, maintenance costs, real estate taxes, etc., can vary monthly and will ordinarily differ by regional location. Even within a region, property taxes vary by municipality. These items can all be affected by policies of the LPA. For example, the following tables describe the effects of different values of land cost, costs of site improvements, and occupancy rates on profit. -162- INVESTMENT ANALYSIS OF PROJECTED OFFICE FACILITY TABLE 1 EFFECT OF CHANGES IN COST PER SQUARE FOOT OF LAND ON TOTAL COST AND RETURN ON EQUITY Table 1 shows the effect of land cost on the equity return Cash Flow or profit. Obviously, marketability of the land depends Land Cost Total Before Equity in part on the appraised reuse value of land. If land Per Sq. Ft. Cost Income Tax Return disposition is slow, therefore, quite possibly the reuse value of the land should be re—evaluated and reduced os an $1 .50 $1,230,050 $48,210 14.67% incentive to development. 2.00 $1,273,150 $44,810 14.07% 2.50 $1,316,250 $41,420 12.58% 3.00 $1,359,350 $38,030 11.19% 3.50 $1,402,450 $34,640 9.87% TABLE 2 EFFECT OF CHANGES N COST OF SITE IMPROVEMENTS ON TOTAL COST AND RETURN ON EQUITY Table 2 describes the effects of varying site improvement Cost of Site costs on equity return. Flexibility of desirable standards Improvements for site improvements such as landscaping, screening of Including Surface Cash Flow parking facilities, lighting standards, etc., must be Parking & Total Before Equity achieved during negotiation in order to obtain an attractive Landscaping Cost Income Tax Return yet profitable development. The LPA must realize the ramifications of excessive design controls on profitability, $ 22,000 $1,296,250 $43,000 13.26% and the developer must realize the role of the LPA in $ 42,000 $1,316,250 $41,420 12.58% assuring an attractive development. $ 62,000 $1,336,250 $39,850 11 .92% $ 82,000 $1,356,250 $38,280 11.29% $102,000 $1,376,250 $36,700 10.66% TABLE 3 EFFECT OF CHANGES IN AVERAGE OCCUPANCY ON INCOME AND RETURN ON EQUITY Table 3 describes the effects of varying occupancy rates on Average Cash Flow equity return. Through proper marketability analysis and Occupancy Gross Before Equity the preparation of feasible plans, the LPA can aim for a scale Rote Income Income Tax Return of development which should achieve profitable levels of occupancy. Also, the LPA must realize that provision of 100% $254,000 $53,120 16.14% public improvements and services is instrumental to desirable 95% $242,300 $41,420 12.58% occupancy rates, thereby increasing the profit incentive for the 90% $230,600 $29,720 9.03% development 85% $218,900 $18,020 5.47% 80% $207,200 $ 6,320 1 .92% The above three variables have been taken independently. Imagine the negative impact of an over- priced land parcel plus too many stringent design controls. Although these particular variables have been singled out, the LPA must also be aware of the impact of real estate taxes, maintenance costs, insurance and other variables which affect the return on investment. Not noted in the previous analysis, lower overall costs tend to lower the amount of equity or cash on hand required, and less equity required can be a significant factor in stimulating development. It should also be noted that the ability to achieve an expected rental rate where applicable is a high priority in profitable development. The sensitivity of profit to expected rental rates, in addition to occupancy expectancy, is paramount to success. Furthermore, the considerable effects of interest rates on annual debt charges (payment on the loan) and the resultant cash flow before income tax depicts the need for quick execution by the LPA because time costs money to the private developer. Understanding the effects of different costs on a project's profitability, therefore, the LPA can better realize the role its policy plays in stimulating or inhibiting private development. Prepared By: REAL ESTATE RESEARCH CORPORATION -163- the LPA's contact and coordination with key local leaders should be an ongoing process rather than an isolated instance. When the LPA has found a prospective office developer who is seriously interested in an urban renewal par- cel, it is extremely important that negotiations between the developer and the LPA not be allowed to break down unnecessarily. If the proposed develop- ment is generally desirable from the city's point of view, all possible flexibility should be practiced on the part of the LPA to ensure that the development eventually takes place. Building restrictions included in the urban renewal plan should not unduly penalize the developer in com- parison with restrictions that characterize sites o f comparable value in the city and surrounding area . Excessively stringent lot coverage restrictions and regulations governing building materials and exterior appearance may be enough to turn away desirable de- velopers. This occurred among office developers in a west coast city who clustered their new buildings adjacent to an urban renewal project rather than adopt the low floor area and high open space require- ments called for in the renewal plan. If interested and favorable developers have refused to build in the project area because of stringent regulations, the LPA should compare its development standards with those of competitive office sites in the city and the region, weighing carefully the rela- tive attributes of the locations. If the LPA decides to relax its restrictions, those prospective devel- opers who had previously withdrawn because of the stringent regulations should be contacted again by the LPA and informed of the changes. Typically, an office building developer will be re- quired to furnish some on-site parking for his facility, or will have to create space within a specified radius of the building. In intensively developed portions of the downtown area, where land is especially costly and the amount of office space created is large, the cost of furnishing parking will be extremely high. Although LPA's parking requirements are usually justified, any aid that the LPA or the city can provide with regard to parking facilities may make the difference in the feasibility of a major office structure. -164- 9A. Even when an LPA's marketing program is skillful and aggressive and site and project improvements have been well planned and efficiently implemented, ad- verse conditions beyond the LPA's control may be impeding disposition. Sometimes these are attribut- able to national trends, sometimes to singular local conditions or events. Examples of such factors that might delay disposition of office land are as fol- lows : National Trends Periods of tight monetary conditions. -- The trend toward new suburban office parks. The completion of circumferential expressways and of additional radial expressways. Flight of residential and shopping center devel- opment to the suburbs . Rising crime rates in inner-city areas. Comparatively high tax rates to support central- city services. Local Conditions or Events Sluggish economy and general lack of investment in the downtown area. Lack of convenient and inexpensive employee park- ing in the downtown area. Traffic congestion in the downtown area. Relatively poor access to the CBD. A general image of obsolescence in the CBD. Singularly high perceived crime rate in the project area. Lawsuits regarding condemnation or plan changes. Local opposition to urban renewal program or to a specific project. Racial disturbance in or near a project area. -165- Intense and/or long-term labor problems in the city . Failure of city, state, or federal agencies to implement projects around which the urban renewal plan has been conceived (e.g., federal and state highway projects). . Although many of the above problems and trends cannot be changed by the LPA, even with excellent support on the part of the city and of HUD, we have seen a num- ber of creative and effective solutions developed by various LPAs throughout the nation to offset general problems in regard to specific projects. Before enumerating examples of such creative and ef- fective solutions, we believe it is of the utmost importance to emphasize that although national and local trends that are generally unalterable on~~a near-term basis may greatly complicate disposition, they can often be overcome in relation to specific projects if they are identified and dealt with skill- fully. Generally speaking, such trends are not an~ excuse for inactivity regarding the preparation and marketing of land. Nevertheless, in some cases , a 7ing unproductive] Ly to "buck the trend," or the LPA Wl] .1 h ave to await £ i change in the trend before re- designated reuse . Among tactics that have helped to offset negative local or national trends are the following: Applying pressure on the city by the LPA and downtown interests to substantially improve the parking situation, and to maintain excellent police protection and clean-up service. Enlisting the aid of local news media to "accen- tuate the positive" regarding the downtown area and to practice restraint in reporting negative incidents . Bringing together local leaders and merchants to obtain a broadbased commitment to reviving the downtown area. When merchants are united and are willing to make contributions to promotion, re- habilitation of facilities, and other positive activities, the chances of reviving the downtown commercial area are greatly enhanced. The -166- pedestrian shopping malls we mentioned previously could not have happened without such cooperation and initiative.. Similarly, the central financial group in the city, if unified and earnestly desirous of revitalizing the downtown core, has in many cities been able to turn the tide in favor of the CBD. Using the time while trends are delaying disposi- tion to complete public improvements to set the stage for later marketing. Recognizing when originally planned public im- provements are not adequate to generate hoped-for commercial development. The time may be ripe to plan new, more ambitious public improvements and focus on the objective of speedy implementation. All of these approaches have proven effective in various cities RERC studied, and numerous other ex- amples of effective tactics to offset disadvantageous conditions are mentioned in other parts of this report. Hold Land for Future Marketing There are certain conditions under which the decision to hold office land for future marketing presents itself as a necessary or preferable temporary course of action. Examples of such circumstances are as follows: Necessary There is no logical market for certain office parcels except that of an adjacent corporation or institution that is temporarily unable to commit itself. The overall market for good downtown office land is currently very soft, perhaps because of an oversupply of office land in CBD urban renewal projects. Extremely tight monetary conditions have rendered a fast rate of absorption highly improbable; the focus in marketing must temporarily be limited to one or two prime sites. City, state, or federal street or highway improve- ments that are integral to the project area's func- tioning have been postponed or considerably altered, and the LPA cannot control their timely implementa- tion. -167- Serious crime within or near the area has temporarily stigmatized the project. This often causes heightened perception of danger, which has the same effect as real danger. Major alterations in the urban renewal plan are under- way, and ultimate decisions will affect the parcel (s). Preferable A desirable potential user needs several months to finalize future plans and arrive at a decision to locate or expand in the project area (but has given evidence that he or she is not simply stalling). A major public institution has dire need for tempo- rary use of certain parcels. A number of existing and proposed businesses and in- stitutions need surface parking until a developer or the city builds parking garages. The desirable future development of certain parcels will have to be determined when the precise nature of development on other parcels has been established. Strong efforts are still being made to attract a single developer for a number of major parcels, and this goal appears to be realistic. The city's systematic plan calls for temporarily di- verting a certain type of development to another urban renewal area in order to achieve maximum impact. 10. When the temporary tactic of holding land for future marketing is necessary or preferable, there are a number of tests that should be applied regarding the use or non-use of the land during the interim period. The eventual disposition of urban renewal land is Easically an economic activity, and the economic return of cleared land while its disposition is un- avoidably delayed should be a prime consideration . When parcels are clearly doomed to remain vacant for several years' time, an interim use may be advisable. Whenever possible, such a use should yield net in- come or at least offset maintenance and carrying costs. When an income -producing use is impossible or potentially detrimental to future sales or to the existing environment, the land should be left vacant (but maintained) or should be temporarily devoted to -168- a use that will serve the public interest and enhance the marketability of other disposition parcels in the project area. An interim use is not feasible as far as the LPA is concerned if it involves : Clearly unretrievable monetary expenditures with- out the probability of enhancing marketability in other portions of the project area. A strong chance that the interim use will not be able to be terminated when re-marketing is ad- visable (for example, if a neighborhood might object publicly to the subsequent sale of an interim vest-pocket park). The time is ripe, or soon will be, for the sale of the given parcel(s), and the interim use will jeopardize marketing. The following tests should be applied when consider- ing interim use: 10A. If a suitable interim use will produce net income to the LPA, it is ordinarily the most desirable use. The best example of such use is the provision of badly needed surface parking facilities in a down- town area, and potential office sites will often be strategically located for this type of interim use. Often a CBD area sorely needs an abundance of tempo- rary parking facilities as well as firm plans for future supportive parking in order to even interest prospective commercial and office developers. Such temporary parking lots, with minimal site prepara- tion, will usually produce net income and enhance the redevelopment potential of the CBD area. 10B. When suitable net -income-producing uses cannot be found, it may prove advisable to temporarily allow free or low-cost use of the land to support existing uses. In the case of downtown office land, for ex- ample, one or more firms adjacent to the vacant land might be in need of temporary private parking space, and the gesture of the LPA to allow such use for a nominal fee may result in important benefits for the project area. -169- We have seen several downtown projects in which the exterior renovation and landscaping of existing office and commercial structures moved slowly, though such remodeling was important to the image of the project area. The combination of an LPA's persistent efforts to bring about a willingness to renovate on the part of such owners, along with such gestures of good will by the LPA as allowing interim use of space for park- ing, may be a tool to bring about better cooperation. The temporary nature of such uses must be made clear from the outset, however, and the LPA must not be susceptible to threats by the firm(s) when the time comes to terminate the use. IOC. If certain parcels can be devoted to an interim use that will serve the public interest without jeopardiz- ing their sale when the time is right, such use may be preferable to protracted vacancy. In such a case, minimal-cost leasing or use in exchange for the ser- vice of maintenance are in order. Examples that we encountered in the course of this study include the temporary use of cleared land for tot lots or play- grounds, and the provision of parking for university students and employees. Pocket parks within the downtown area, tastefully though inexpensively fur- nished, can do much to create a feeling of pleasant- ness within a rather intense urban environment. An excellent example of the manner in which such areas enhance the CBD can be seen along the new pedestrian walkway in the Central City Urban Renewal Area in Evansville, Indiana. Such interim use may help to produce greater regard for the urban renewal program within the community and increase the marketability of nearby sites. 11. The term "land banking" refers to the voluntary set- ting aside of vacant improved land with plans to market it at a future date. This may be a desirable approach regarding certain parcels or tracts for the following reasons: 11A. A developer or developers may submit an integral plan to redevelop several acres in a desirable fashion, but they may not be ready to enter into a contract to purchase the entire acreage until certain portions have been developed. Although our studies have shown that such comprehensive development schemes often fail to materialize, it is sometimes wise to landbank unsold and uncommitted portions of the planned area while the developer is allowed to proceed with the initial phases of his proposal. Situations of this -170- type require month-to-month vigilance on the part of the LPA to avoid wasting years of potential marketing time regarding the landbanked parcels. The greater the probability of eventual realization of the entire development, the more time that can be risked for the land in question. IIB. Careful analysis regarding some parcels may reveal that a waiting period is expedient by reason of the likelihood that the marketability for favorable reuse of the site will increase considerably in the fore- seeable future. We have used the words "careful analysis" and "likelihood" in order to differentiate such judgments from the use of soft market conditions as an excuse to wait passively for a buyer to walk in the door. A good example of carefully calculated landbanking was evident in one of the cities RERC studied. Two urban renewal projects were directly competing for the same types of reuse on comparable sites. Rather than allow a haphazard dissipation of potentially catalytic redevelopment, the city made a clear choice to direct marketing efforts and supporting facilities to one of the projects, while holding some land in the other project for intensive redevelopment when the market caught up with the available inventory of land. IIC. A site may be earmarked for a very desirable and highly probable development, which for various reasons cannot occur for a period of some months or years. For ex- ample, we have seen a well-planned civic center area that depended for its completion upon decisions of four different governmental entities to build office structures within the area. There was strong reason to believe that, if the land could be kept open for such use, the necessary decision would eventually be made. The deteriorated condition of many structures within the area mitigated against delaying demolition until the governmental entities were ready to build. 12. The last resort in attempting to market urban renewal land is to end up giving it away. This alternative may have to be considered for a few parcels. When the parcel in question is relatively insignificant in value, when there is virtually no hope of selling the land in the foreseeable future for any suitable use or at any price, and when a person or organization can be identified who would maintain the land in good condition and use it in an acceptable manner, donating -171- the land may prove to be the most economical course of action. Cases of such donation were extremely rare in the cities we studied, but occasionally such action may be appropriate. -172- INADEQUATE INTEREST IN HOTEL-MOTEL LAND Statement of the Problem One of the key general problems encountered in urban renewal land disposition is private developer lack of interest in the cleared and improved sites. Once projects are ready for mar- keting, disposition just has not occurred as rapidly as most LPAs have expected. Developers have been hesitant about under- taking projects on renewal land for many reasons, including the following: Because the city and metropolitan area are declining and there is little replacement demand for space. Because new construction has traditionally occurred in the suburbs and the urban renewal areas are unfamiliar turf for developers. Because the local market has been temporarily overbuilt. Because builders are unwilling to take the added risks of pioneering in urban renewal areas, especially with the attendant restrictions and red tape. Because the land prices are not low enough to offset de- velopment risks. -173- Because only a limited number of developers have the ex- perience and financial capability to undertake some of the planned large projects, and the LPAs have not con- tacted them, or have not approached them persuasively enough. Because the LPA is not adept in dealing with private developers . Because some of the planned projects are out of scale for their local market. In addressing these and other marketing problems, we have focused on separate land uses in five different chapters. This chapter concerns hotel-motel land. Other chapters deal with residential, industrial, retail, and office land. Though there is considerable repetition among the five chap- ters concerned with urban renewal reuse market resistance, large sections of each chapter are devoted specifically to one reuse. With the text on this general subject divided in- to five chapters, readers can concentrate on their problems with one particular reuse without being distracted by ques- tions and answers relating to other uses. Persons who have problems in marketing properties of several types can easily skip over repetitive material in the various chapters they are using. Basic Strategy Alternatives There are two basic alternative ways of trying to deal with the problem of inadequate interest in hotel-motel land. These may be summarized as follows: • Continue to Market Land Under Present or Modified Reuse - This involves intensifying and/or redirecting the mar- keting program to take full account of local market con- ditions, the potential for the site, the needs and real- istic demands of a hotel-motel developer, and possible tradeoffs or assistance that the LPA could offer a poten- tial developer. • Hold Land for Future Marketing -- This alternative in- volves consideration of interim uses, leasing of sites for temporary use, and land banking the property in an- ticipation of improvement in market conditions. Tests to. determine which of these two alternatives would offe the most appropriate means of dealing with an individual Agency's problem are set forth in the decision tree on the following page. Each of the 11 tests is stated as a question that can be answered with a "yes" or a "no." 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CO > <-l CO 0) 11 U-l X CJ •H -r-l CU ^ M U a o 0) E U CO Cfl 1) 4J •— ' B co cfl cu B co E O a •H CU O 4J ,ii r-l 1-1 01 73 E 11 O O 73 CJ 4J U l-l 4J CO U cfl U-l x o I-i o Cfl CO >, e 11 -H > CO OCN 14 11 OJ D.4J r-l B C rQ •r-l *H Cfl Vj 01 O l-l U-l 3 4J D 3 CO U-l 3 11 u U r-l ja 4J Cfl E II II 11 l-l CO Cfl cu a. u Q. O cfl U-l O a u o o I 60 ; e 1 -H I $5.50/Sq.Ft. Construction Costs® $22.00/Sq.Ft. Furnishings & Equipment @ $1,500Alnit for 165 Units Site Improvements® $1 .00/Sq.Ft. $ 479,160 2,200,000 247,500 65,340 Total Investment $2,992,000 CASH FLOW BEFORE INCOME TAX Effective Gross Income Gross Potential Income® $14.37/Sq.Ft. Gross Expenses Administrative & General Advertising & Promotion Heat, Light and Power Repairs & Maintenance Room Department Food & Beverage Telephone Fire & Insurance Real Estate Taxes Personal Property Net Annual Income Less: Amortization for Furnishings & Equipment Net Available for Debt Service $1,437,000 143,500 46,000 49,200 51,300 221,150 454,900 50,000 13,500 36,500 3,000 J 367,950 40,000 $ 327,950 Yield on Total Investment ($367,950 f $2,992,000) - 12.29% Annual Debt Charges ($2,992,000 x 75% - $2,244,000 loan @ 9J,% for 25 yrs.; Factor .1049) Cash Flow Before Income Tax RATE OF RETURN BEFORE TAX Equity Investment ($2,992,000 - $2,244,000) Rate of Return on Investment ($92,550 t $748,000) Assumptions for the Sake of Example: 235,400 $ 92,550 $ 748,000 12.37% • Two acres cleared land @ $5.50 Per Square Foot • A 100,000 Square Foot Facility® $22 Per Square Foot (incl., restaurant, cocktail lounge, coffee shop, etc.) • Site Improvements @ $1 .00 Per Square Foot; assumes building coverage of i acre A 75% loan @ 9^% for 25 years; excludes amortization of furnishings and equipment Note that the above items are subject to variation by both region and time. For example, construction costs, maintenance costs, real estate taxes, etc., can vary monthly and will ordinarily differ by regional location. Even within a region, property taxes vary by municipality. These items can all be affected by policies of the LPA. For example, the following tables describe the effects of different values of land cost, site improvement cost, and construction cost on profit. -195- INVESTMENT ANALYSIS OF PROJECTED MOTEL FACILITY - 165 ROOMS TABLE 1 EFFECT OF CHANGES IN COST PER SQUARE FOOT OF LAND ON TOTAL COST AND RETURN ON EQUITY Cash Flow Table 1 shows the effect of land cost on the equity return Land Cost Total Before Equity or profit. Obviously, marketability of the land depends in Per Sq.Ft. Cost Income Tax Return part on the appraised reuse value of land. If land disposition is slow, therefore, quite possibly the reuse value of the land $3.50 $2,817,760 $106,260 15.08% should be re-evoluated and reduced as an incentive to $4.50 $2,904,880 $ 99,410 13.68% development * $5.50 $2,992,000 $ 92,550 12.37% $6.50 $3,079,120 $ 85,700 11 .13% $7.50 $3,166,240 $ 78,850 9.96% TABLE 2 EFFECT OF CHANGES PER SQUARE FOOT SITE IMPROVEMENTS ON TOTAL COST AND RETURN ON EQUITY Table 2 describes the effects of varying site improvement Site costs on equity return. Flexibility of desirable standards 1 mprovement Cash Flow for site improvements such as landscaping, screening of Cost Per Total Before Equity parking facilities, lighting standards, etc., must be Sq.Ft. Cost Income Tax Return achieved during negotiation in order to obtain on attractive, yet profitable development. The LPA must $ .25 $2,943,000 $ 96,410 13.1% realize the ramifications of excessive design controls * $1 .00 $2,992,000 $ 92,550 12.37% on profitability, and the developer must realize the $1 .75 $3,041 ,010 $ 88,700 11 .66% role of the LPA in assuring an attractive development. $2.50 $3,090,010 $ 84,840 10.98% TABLE 3 EFFECT OF CHANGES IN CONSTRUCTION COST PER SQUARE FOOT ON TOTAL COST AND RETURN ON EQUITY Construction Cash Flow Table 3 reflects the effect of changes in construction cost Cost Total Before Equity on equity return. Too many stringent design regulations by Per Sq.Ft. Cost Income Tax Return the LPA can effectively diminish land marketability because of the increased costs required. Thus, design standards must $20.00 $2,792,000 $108,290 15.51% be prepared with a realistic view of their implications on $21 .00 $2,892,000 $100,420 13.88% cost and whether they are detrimental to land marketability. * $22.00 $2,992,000 $ 92,550 12.37% Flexibility in negotiations is an objective for the LPA to $23.00 $3,092,000 $ 84,690 10.95% enhance the marketability of urban renewal sites. $24.00 $3,192,000 $ 76,820 9.62% *Based on calculations used in preceding investment analysis. The above three variables have been taken independently. Imagine the negative im- pact of an overpriced land parcel plus too many stringent design controls. Although these particular variables have been singled out, the LPA must also be aware of the impact of real estate taxes, maintenance costs, insurance and other variables which affect the return on investment. Not noted in the previous analysis, lower overall costs tend to lower the amount of equity or cash on hand required, and less equity required can be a significant factor in stimulating development. It should also be noted that the ability to achieve an expected rental rate where applicable is a high priority in profitable development. The sensitivity of profit to expected rental rates, in addition to occupancy expectancy, is paramount to success. Furthermore, the considerable effects of interest rates on annual debt charges (payment on the loan) and the resultant cash flow before income tax depicts the need for quick execution by the LPA because time costs money to the private developer. Understanding the effects of different costs on a project's profitability, therefore, the LPA can better realize the role its policy ploys in stimulating or inhibiting private development. Prepared By: REAL ESTATE RESEARCH CORPORATIO -196- is necessary to "get the job done locally" may well arise among leaders as a result of having partici- pated in unsuccessful negotiations with out-of-state developers . Building restrictions included in the urban renewal plan should not unduly penalize the developer in com- parison with restrictions that characterize sites of comparable value in the city and surrounding area ." Excessively stringent lot coverage restrictions and regulations governing building materials and exterior appearance may be enough to turn away desirable devel- opers. In negotiating with potential hotel-motel developers, it is important that the LPA have realis- tic structural and esthetic goals, based on a know- ledge of the elements that enter into rendering a hotel or motel development financially feasible. If interested and favorable developers have refused to build in the project area because of stringent regulations, the LPA should carefully compare its development standards with those of competitive hotel- motel sites in the city and the region, realizing that the amount of money a lodging facility can afford to spend in construction is closely related to the qua- lity of the location and the projected patronage. This is especially important when the site is not in the most desirable portion of the downtown area. If the LPA decides to relax its restrictions, those prospective developers who had previously withdrawn because of the stringent regulations should be con- tacted again by the LPA and informed of the changes. Typically, a hotel or motel developer will be required to furnish adequate on-site parking for his facility. In intensively developed portions of the downtown area, where land is especially costly and the number of rooms will be large, the cost of furnishing adequate on-site parking will be extremely high. Although LPAs ' on- site parking requirements are generally justified, any aid that the LPA or the city can provide with regard to such parking facilities may make the difference in the feasibility of a major hotel or motel. In Louisville, Kentucky, a bond issue was floated to finance a major functional and aesthetic public fa- cility (a plaza overlooking the Ohio River with abun- dant public parking beneath the structure) . The new 25-story Gait House Hotel leases the necessary parking -197- spaces for a very reasonable fee. Without such a favorable arrangement, this impressive hotel might not have been constructed. Hold Land For Future Marketing There are certain conditions under which the decision to hold land for future marketing presents itself as a neces- sary or preferable temporary course of action. Examples of such circumstances are as follows: Necessary The overall market for good CBD hotel-motel land is temporarily very soft. Extremely tight monetary conditions have rendered a fast rate of absorption highly improbable. City, state, or federal street or highway improve- ments that are integral to the project area's func- tioning have been postponed or considerably altered, and the LPA cannot control their timely implementation. Serious crime within or near the area has temporarily stigmatized the project. (This often causes heightened perception of danger, which has the same effect as real danger . ) Major alterations in the urban renewal plan are under- way, and ultimate decisions will affect the parcel(s). Preferable A desirable potential user needs several months to finalize future plans and arrive at a decision to locate in the project area (but has given evidence that he is not simply stalling) . A major public institution has dire need for temporary use of certain parcels. A number of existing and proposed businesses and insti- tutions need surface parking until developers or the city build parking garages. The desirable future development of certain parcels will have to be determined when the precise nature of development on other parcels has been established. -198- Strong efforts are still being made to attract a single developer for a. number of parcels. The city's systematic plan calls for temporarily diverting a certain type of development to another urban area in order to achieve maximum impact. 10. When the temporary tactic of holding land for future marketing is necessary or preferable, there are a number of tests that should be applied regarding the use or non-use of the land during the interim period. The eventual disposition of urban renewal land is Basically an economic activity, and the economic re- turn of cleared land while its disposition is un- avoidably delayed should be a prime consideration. When parcels are clearly doomed to remain vacant for several years' time, an interim use may be advisable. Whenever possible, such a use should yield net income or at least offset maintenance and carrying costs. When an income -producing use is impossible or poten- tially detrimental to future sale or to the existing environment, the land should be left vacant (but main- tained) or should be temporarily devoted to a use that will serve the public interest and enhance the market- ability of other disposition parcels in the project area . An interim use is not feasible as far as the LPA is concerned if it involves: Clearly unretrievable monetary expenditures with- out the probability of enhancing marketability in other portions of the project area. A strong chance that the interim use will not be able to be terminated when re-marketing is ad- visable (for example, if a neighborhood might object publicly to the subsequent sale of an interim vest-pocket park) . The time is ripe, or soon will be, for the sale of the given parcel(s), and the interim use will jeoparidze marketing. The following tests should be applied when considering interim use : 10A. If a suitable interim use will produce net income to the LPA, it is ordinarily the most desirable use. The best example of such use is the provision of badly -199- needed surface parking facilities in a downtown area. Often a CBD area sorely needs an abundance of tempor- ary parking facilities in addition to firm plans for future supportive parking to even interest prospec- tive commercial and office developers. Such temporary parking lots, with modest site preparation, will usually produce net income and enhance the redevelopment poten- tial of the CBD area. 10B. When suitable net-income-producing uses cannot be found, it may prove advisable to temporarily allow free or low-cost use of the land to support existing uses. In the case of hotel-motel land, for example, one or more businesses or office buildings adjacent to the vacant land might be in need of temporary pri- vate parking space, and the gesture of the LPA to allow such use for a nominal fee may result in impor- tant benefits for the project area. We have seen renewal projects in which the exterior renovation and landscaping of existing buildings moved slowly, though such rehabilitation was important to the image of the project area. The combination of an LPA's persistent efforts to bring about a willing- ness to renovate on the part of the owners, along with such gestures of good will by the LPA as allowing in- terim use of space for storage, may be a tool to bring about better cooperation. The temporary nature of such uses must be made clear from the outset, however, and the LPA must not be susceptible to threats by the firm(s) when the time comes to terminate the use. IOC. If certain parcels can be devoted to an interim use that will serve the public interest without jeopar- dizing their sale when the time is right, such use may be preferable to protracted vacancy. In such a case, minimal-cost leasing or use in exchange for the service of maintenance are in order. Examples that we encountered in the course of this study include the temporary use of cleared land for tot lots or playgrounds, and the provision of parking for univer- sity students and employees. Pocket parks within the downtown area, tastefully though inexpensively furnished, can do much to create a feeling of pleasantness within a rather intense urban environ- ment. An excellent example of the manner in which such areas enhance the CBD can be seen along the new pedestrian walkway in the Central City Urban Renewal Area in Evansville, Indiana. Such interim use may help to produce greater regard for the urban renewal program within the community and increase the market- ability of nearby sites. -200- 11. The term "land-banking" refers to the voluntary set- ting aside of vacant improved land with plans to mar- ket it at a future date. This may be a desirable approach regarding certain parcels or tracts for the following reasons: IIA. A developer or developers may submit an integral plan to redevelop several acres in a desirable fashion, but they may not be ready to enter into a contract to purchase the entire acreage until certain portions have been developed. Although our studies have shown that such comprehensive development schemes often fail to materialize, it is sometimes wise to landbank un- sold and uncommitted portions of the planned area while the developer is allowed to proceed with the initial phases of his proposal. Situations of this type require month-to-month vigilance on the part of the LPA to avoid wasting years of potential market- ing time regarding the landbanked parcels. The greater the probability of eventual realization of the entire development, the more time that can be risked for the land in question. IIB. Careful analysis regarding some parcels may reveal that a waiting period is expedient by reason of the likelihood that the marketability for favorable re- use of the site will increase considerably in the foreseeable future. We have used the words "careful analysis" and "likelihood" in order to differentiate such judgments from the mere use of soft market con- ditions as an excuse to wait passively for a buyer to walk in the door . A good example of carefully calculated landbanking was evident in one of the cities RERC studied. The urban renewal projects were directly competing for the same types of reuse on comparable sites. Rather than allow a haphazard dissipation of potentially catalytic re- development, the city made a clear choice to direct marketing efforts and supporting facilities to one of the projects, while holding some land in the other project for intensive redevelopment when the market caught up with the available inventory of land. IIC. A site may be earmarked for a very desirable and highly probable development, which for various rea- sons cannot occur for a period of some months or years. For example, we have seen a well-planned civic center area that depended for its completion upon decisions of four different governmental entities -201- to build office structures within the area. There was strong reason to believe that, if the land could be kept open for such use, the necessary decision would eventually be made. The deteriorated condi- tion of many structures within the area mitigated against delaying demolition until the governmental entities were ready to build. -202- 10 INADEQUATE INTEREST IN INDUSTRIAL LAND A. Statement of the Problem One of the key general problems encountered in urban renewal land disposition is private developer lack of interest in the cleared and improved sites. Once projects are ready for mar- keting, disposition just has not occurred as rapidly as most LPAs have expected. Developers have been hesitant about undertaking projects on renewal land for many reasons, includ- ing the following: Because the city and metropolitan area are declining and there is little replacement demand for space. Because new construction has traditionally occurred in the suburbs and the urban renewal areas are unfamiliar turf for developers. Because the local market has been temporarily overbuilt. Because builders are unwilling to take the added risks of pioneering in urban renewal areas, especially with the attendant restrictions and red tape. Because the land prices are not low enough to offset development risks. -203- Because only a limited number of developers have the ex- perience and financial capability to undertake some of the planned large projects, and the LPAs have not con- tacted them, or have not approached them persuasively enough . Because the LPA is not adept in dealing with private developers . Because some of the planned projects are out of scale for their local market. In addressing these and other marketing problems, we have fo- cused on separate land uses in five different chapters. This chapter concerns industrial land. Other chapters deal with resi- dential, retail, office, and hotel-motel land. Though there is considerable repetition among the five chapters concerned with urban renewal reuse market resistance, large sections of each chapter are devoted specifically to one reuse. With the text on this general subject divided into five chapters, readers can concentrate on their problems with one particular reuse without being distracted by questions and answers re- lating to other uses. Persons who have problems in marketing properties of several types can easily skip over repetitive material in the various chapters they are using. Basic Strategy Alternatives There are two basic alternative ways of trying to deal with the problem of inadequate interest in industrial land. These may be summarized as follows : • Continue to Market Land Under Present or Modified Reuse -- This involves intensifying and/or redirecting the market- ing program to take full account of local market condi- tions, the potential for the site, the needs and realistic demands of an industrial developer, and possible tradeoffs or assistance that the LPA could offer a potential devel- oper . • Hold Land for Future Marketing - -This alternative involves consideration of interim uses, leasing of sites for tem- porary use, land banking the property in anticipation of improvement in market conditions, and the "last resort" of donating the site to eliminate LPA maintenance costs. Tests to determine which of these two alternatives would offer appropriate means of dealing with an individual Agency's pro- blem are set forth in the decision tree on the following page. Each of the 11 tests is stated as a question that can be answered with a "yes" or a "no." 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We recommend that a person evaluating the problem of inade- quate interest in industrial land read through the entire decision tree before deciding upon a specific action to fol- low. It only takes a few minutes to answer all the questions, and the problem is placed in better perspective when all op- tions are reviewed. Most of the questions are straightfor- ward and self-explanatory and can be answered quickly. How- ever, some of the specific actions are stated in an abbreviated form and may need elaboration before they can be accepted or rejected. Therefore, the rest of the text in this chapter is devoted to discussion of the issues involved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions discovered in Real Estate Research Corporation's analysis of urban re- newal land disposition across the country. Pl ease turn to the decision tree before reading further in EKe text. The remaining paragraphs in this chapter simply elaborate upon the test questions posed in the decision tree. Specific Observations /Suggest ions The numbering of the following paragraphs matches the num- bered tests, or questions, in the decision tree table titled "Inadequate Interest in Industrial Land." Each test is dis- cussed, though the extent of the commentary differs. Some of the questions and suggested actions in the decision tree are obvious and require little explanation. Others are not so clear or involve complicated actions that need to be des- cribed in detail. In other cases, the text includes descrip- tions of specific situations or actions discovered during our research that might be helpful to other cities. We have in- cluded as many examples and illustrations as possible of successful tactics and policies adopted by renewal agencies that we visited or have heard about. Again, the text that follows is directly correlated with the numbered tests in the preceding decision tree. The numbering is consecutive, but the two alternatives are included as sub- headings to clarify the context of the discussion of the tests. • Continue to Market Land Under Present or Modified Reuse 1A. If an industrial land use area is experiencing little interest in its offerings, various aspects of the project's planning should be re-examined. When in- dustrial reuse parcels have remained unsold over several years' time, other portions of the project -208- area, or surrounding land uses, may have undergone considerable change. Sometimes these changes have been foreseen in the original land use plan. But often the actual redevelopment that has taken place varies significantly from earlier expectations in terms of type or character of the reuse. Within the industrial reuse area itself, commercial reuses may recently have been established, suggest- ing that the remaining tracts might be more suitable for commercial than light industrial use. Also, the internal or surrounding street system may have changed in a manner that had not been foreseen in the original plan. Furthermore, the quality of the redevelopment that has taken place might be less impressive than the LPA's hopes in the initial stages of the project, re- quiring that the LPA "lower its sights" regarding the reuse potential of remaining land if its marketing efforts are to be realistic. This lowering of sights may involve several actions treated in subsequent parts of this chapter. On the other hand, the failure to note recent and current changes in the project area may in effect blind the LPA to new disposition oppor- tunities that have come about since execution began. Thus, the unsold inventory of industrial land should be re-evaluated in terms of completed or firmly com- mitted developments and changes within and surround- ing the industrial reuse area. Conducting an effective marketing program for unsold sites usually requires a specific concept of the types of users who should be interested in locating there. Re-evaluating unsold parcels in terms of recently es- tablished surrounding uses may reveal the need for basic changes in the urban renewal plan. The pit- falls of an inflexible plan are discussed at length in Chapter 13. Building restrictions included in the urban renewal plan should not unduly penalize the developer in com- parison with restrictions that characterize sites of ~ comparable value in the city and surrounding area. Excessively stringent lot coverage restrictions and regulations governing building materials and exterior appearance may be enough to turn away desirable de- velopers. In devising design and development stan- dards for industrial areas, this danger is particu- larly serious. Both in terms of new development and required rehabilitation of existing industrial building, it is important that the LPA have realistic -209- structural and esthetic goals, based on a knowledge of the profit margin of existing industries and the present and achievable character of the particular industrial area. Although the LPA should not con- done the tendency of certain firms to ignore totally their external appearance, it must be remembered that many small and moderately sized industrial firms are understandably reluctant to place their profits in expensive landscaping and generous amounts of open space. Their need for a fine appearance may be far exceeded by their need to replace machinery or to maximize working and storage space. If interested industrial developers have refused to build in the project area because of stringent regu- lations, the LPA should compare its development stan- dards with those of competitive industrial sites in the city and the region, realizing that the urban renewal project area may not be able to attract the same type of firm as a new and prestigious office- industrial park in the suburbs. Current standards within the project area may be unrealistically high and may thus be seriously limiting the marketability of sites. If the LPA decides to relax its restric- tions, those firms that had previously withdrawn be- cause of the stringent regulations should be con- tacted again by the LPA and informed of the changes. 1C . It is fundamental to the marketability of industrial land that the nature and capacities of constructed and planned utilities be adequate to meet the needs of the proposed reusers. If interested firms have rejected project sites because of the lack of in- sufficient capacity of one or more utilities, the whole question of the utilities needed for the pro- ject area should be re-evaluated and necessary changes should be made as soon as possible. To act otherwise may simply be wishful thinking. As noted above, when the LPA makes favorable changes such as improving the capacity of utilities, industrial firms that previously showed interest in project sites should be contacted once again, informed of the changes, and invited to reconsider locating in the project area. 2A. Prior to the approval of Loan and Grant - Part II, a marketability study and reuse appraisals were completed for each project and submitted to HUD. At that time, the planned reuses had been declared marketable, and an estimated rate of land absorption was normally included „ Nevertheless, if sizable por- tions of land designated for industrial reuse have -210- remained unsold over a period of years, the original market study has probably become outdated. Perhaps it was not realistic from the beginning. We have found that, for various reasons, many LPAs placed little stock in the conclusions and recommen- dations of the original market analysis. We believe such market analysis is important, and when land has remained unsold over severl years time, the LPA should carefully review the original market study to see whether developments and trends that have taken place in the interim may have radically changed the marketability of certain reuses in the project area. The question of the marketability of various uses on a particular site is so basic that promotion, market- ing efforts, and public improvements can be wasted if the market simply is not there and cannot reasonably be expected to appear in the future. If the LPA sus- pects a pronounced absence of current and future mar- ketability for the proposed reuse, we recommend that reliable and up-to-date market information be devel- oped and analyzed by an appropriate professional per- son or firm. Such a re-evaluation should include recommendations for an alternate, more marketable re- use if the originally designated reuse is found to be unmarketable. A study of this type should also pro- vide a probable rate of absorption regarding unsold land in light of current and expected developments and trends. This can serve to guide the LPA's ex- pectations for the rate of disposition. The agency must realize, however, that the actual rate of ab- sorption will depend significantly on the quality of its marketing effort" Even when the market is relatively strong and the price of the land is competitive, determination of the type and intensity of development that will be financially feasible on a given site requires further technical consideration. Thus, it will often be wise for the LPA to request a feasibility component within the market study to indicate the scale and character of development that the LPA can realistically seek and the land price that a typical industrial firm could afford to pay. Especially in the case of speculative development of facilities for lease, the market and feasibility study itself may prove useful to the LPA for promotional distribution to potential users. -211- It is important to note here that the LPA should not apply pressure upon the market analyst to recommend a high type of reuse just because such a reuse fits ideally into the project plan and will generate high- er revenue . If the market conclusions are virtually dictated by the LPA rather than by the data, method, and objective judgment of the analyst, a decade can easily be lost in attempting to dispose of the land according to a favorable but financially unrealistic redevelopment scheme. During the past decade, the proliferation of suburban industrial parks on relatively inexpensive land has produced a radical change in most cities regarding the marketability of inner-city industrial sites. The newer suburban sites often provide, in addition to less costly land, an environment of prestige, con- venient access to radial and circumferential highways, proximity to employees' homes, and freedom from the dreariness, vandalism, and high taxes that often characterize inner-city industrial areas. In our analysis of urban renewal projects throughout the nation, we studied a number of inner-city and CBD-frame projects designated wholly or partly for light industrial reuse. Typically, the disposition of such sites had progressed more slowly than the original market study had suggested. Expansion of stable, existing industries has been the crucial source of disposition. Efforts to obtain substantial exterior rehabilitation of existing industrial build- ings have characteristically met with little success. The most typical result of these projects has been the rejuvenation, stabilization, and expansion of an aging industrial or mixed land use area, with the new environment being more functional and more attractive than the former. But seldom can the process result in the kind of open and orderly atmosphere that new suburban industrial parks so easily create. The chart on the following page indicates the com- ponents of a typical market study. Aspects of the feasibility component are discussed under Test 7 in this chapter. 2B. The question of land pricing is especially critical regarding inner-city industrial sites. Many small industrial operations are operating on a comparatively narrow margin of profit, and their tendency is to give great weight to the price of land in determining their location. Again, the competition of suburban sites -212- ORGANIZATION OF WORK ELEMENTS: MARKET ANALYSIS Analyze physical and locational factors bearing on project Analyze regional, economic 8 demographic patterns 8 trends I Define market areas relevant to project Study existing supply and demand conditions in market area Estimate market size, characteristics and growth trends T Project market area demand - types, prices and quantities £ Prepare a general project development concept Evaluate quality of existing or planned competition 1 Outline general approach to marketing subject project Begin Financial Feasibility Study Project project absorption during study period - types, prices, quantities ■EITHER- I OR- Prepare Report Prepared By: REAL ESTATE RESEARCH CORPORATION -213- and the availability of competitive inner-city sites often compound the difficulties of marketing indus- trial urban renewal land. The fundamental problem of overpriced land is dis- cussed in detail in Chapter 5, and the advantages to be gained from reappraising the unsold land with a land residual appraisal approach are presented there. The significance of the price of land in rendering industrial development economically feasible will be illustrated in Test 7 of this chapter. As noted in Chapter 5, "Overpriced Land", the finan- cial disadvantages connected with reducing the price of a given site may well be outweighed by the re- sulting advantages to the city in quickly returning the land to tax-revenue-producing status. It is the LPA's responsibility to see that the stage is set for showing available parcels to their best advantage. If the site or the overall project area has a negative appearance or if basic functional im- provements have not yet been made, potential indus- trial developers may be repelled without the LPA ever knowing that they were interested. Basic site improvements and demolition of deteriorated struc- tures are important first steps toward marketing industrial land. A favorable appearance of both the individual parcels for sale and of the project area in general sets the stage for effective marketing. When the prospective purchaser's general impression is negative, the future potential of the site he or she is looking at may bear little weight on his decision. Despite the fact that some industrial firms continue to~tnriye in aging, unsightly industrial areas, these are not the circum- stances under which to market industrial land for which the price has been set in anticipation of a re- newed and carefully planned environment? The LPA must keep in mind the competition of new suburban industrial parks and place a high priority on main- taining a positive image within the project area. Specifically : Trash should be removed regularly. Buildings that are to be removed should be demolished . -214- Sidewalks, curbs, and on-site utilities should be in good condition. Sites should be graded and planted with grass, spread with wood chips, or otherwise surfaced in a neat and orderly manner. Regular maintenance should be provided to keep weeds under control. This benefits the entire project area and en- hances the marketability of the specific dispo- sition sites. For many reasons, the implementation of public im- provements is of fundamental significance in pre- paring the way for effective marketing of land, and this applies to industrial as well as other types of land7 We visited one industrial project in which less than 17 percent of the project improve- ments had been accomplished during the five years of execution. This was not entirely the LPA's fault, since the major portion of the improvements involved a proposed new street alignment of crucial signifi- cance to industrial users. None the less, both the physical and psychological impacts of a city's fail- ure to do its part in renewing the project area create a poor context in which to attempt to market land or encourage rehabilitation. Timely implementation of public improvements provides the necessary groundwork for proceeding with aggressive marketing. If aggressive efforts are being made to market spe- cific industrial sites, public improvements should al- ready be completed. This includes installation or replacement of storm and sanitary sewers, street widening and paving, installation of curbs and gut- ters, and provision of street lighting. Evidence of public commitment to the project area increases the confidence of both potential investors and re- maining industrial users. In many cases, new curbs are damaged during subsequent construction on indus- trial parcels, but the increased marketability of sites after improvements are made generally out- weighs the relatively minor cost of repairs after construction. Regarding special utilities that might be needed by a heavy user, it is advisable to wait until a parcel has been sold before installing such utilities. In the case of an extremely large indus- trial project area, public improvements cannot be installed simultaneously throughout the project. -215- Since marketing efforts are weakened when planned physical improvements have not yet been made in an area, the LPA might consider staging its marketing in accordance with installation of public improve- ments and facilities. We have found that renewal agencies throughout the nation vary widely in their use of promotional ma- terials and approaches. The importance of good pro- motional materials and use of a variety of marketing techniques and approaches are discussed in Chapter 3. Regarding promotion of available industrial land, we believe that an attractive and informative brochure to advertise available land will pay for itself in terms of accelerating disposition. Effective pro- motional material need not be expensive but should be adapted to the character of the planned reuse of the area. In some instances, available urban renew- al land may hold strong potential for attracting a national industry into the city; if such is the case, promotional materials should be of high quality and should be widely circulated by mail. If the land is of local interest only, simple but well prepared materials will be sufficient. Besides the brochure, leaflet-type circulars can be used effectively regarding individual parcels within an industrial area. An attractive map of the site, illustrating access and surrounding uses, can be a valuable tool to interest potential developers and real estate brokers. Portions of such materials can also be used for newspaper or magazine advertisements. Promotional activities regarding sites of exceptional size or outstanding location should ordinarily be more intense than for small parcels or for sites for which the most obvious use is expansion of an existing industry. Attracting a prestigious firm to locate in the project area is generally of immense value for securing additional industrial users. In most cities, there are local or state organiza- tions and utility companies whose major function is to stimulate economic growth in the area. A Chamber of Commerce is the most typical such agency, but in many cities there are a number of promotional groups with differing emphases and varying levels of pro- motional activity. In Louisville, Kentucky, for ex- ample, we found three civic organizations that engaged -216- effectively im promoting the city regionally and/or nationally. It is important for the LPA in any city to be familiar with such organizations and to main- tain contact with their officials. For example, where the promotion of industrial sites and the at- traction of new industries are engaged in by a local organization, available urban renewal land should be included in advertisements, even if the sites are smaller in scale than the other advertised properties. In turn, the LPA might well devote a commensurate por- tion of its marketing budget to aiding the publica- tion and circulation of effective industrial pro- motion materials. A number of persons outside the LPA should be asked to help promote urban renewal sites, especially sites primarily of local interest. Perhaps the best source of such promotion regarding industrial areas is the "satisfied client" -- the business that has chosen to locate or to remain in the project area and desires to attract the best possible neighbors. The efficacy of attractive "for sale signs", occasion- ally moved to different portions of a site, should not be underrated. We believe these signs play an especially important part in industrial reuse areas. 6. Besides more generalized promotion activities that attempt to create interest somewhat at random, direct and active marketing of urban renewal land is neces- sary regarding most parcels if disposition is to pro- ceed with the kind of efficiency that characterizes private enterprise sales efforts. The marketing ap- proaches discussed below are basic in a temp ting to dispose of industrial sites. 6A. The LPA should contact all abutting industrial users regarding need for expansion spaceT This should be done long before the land can be made available for sale. Even if a firm expresses lack of interest, the LPA should assess the reason. For example, is the appraised price the obstacle? 6B. The LPA should systematically approach other local industries regarding needs for expansion spaceT 6C . Serious efforts should be made to involve real estate brokers specializing in industrial land sales to aid in marketing the land. Ordinarily, such efforts will have to go beyond the "general mail-out" approach and -217- should involve personal contact at least by telephone. Well-prepared promotional materials can aid the broker, and the ready availability of further descriptive and explanatory material from the LPA will provide encour- agement for broker involvement. The lack of such ser- ious efforts to secure the professional assistance of brokers will almost inevitably result in minimal bro- ker participation in the sales of urban renewal land. Such has been the case in almost every city to date. 6D. In the case of very large parcels or tracts that possess singularly desirable features for industrial development,' the LPA should directly contact single industrial developers and attempt to interest them in purchasing the entire trac ET Such contact might be made by a local industrial development commission, but the point is that major potential developers, both local and national, should be more poignantly aware of the opportunity that this urban renewal " tract affords. For the most likely developer pros- pects , a mail-out brochure is not sufficient to maxi- mize the probability of efficient disposition of the land . 6E. Related to the previous point and to Test 5 above, we emphasize again the importance of establishing a work- ing relationship" with state and local agencies and organizations that promote industrial growth for the area . Their programs of active marketing should in- clude the choice sites of urban renewal land, and their experience and contacts at the regional and national levels may prove to be of immense importance in attracting major developers. 6F. Is the LPA competing with itself (or with the city) by flooding the market with comparable industrial sites? If this seems to be the case, the answer is to carefully phase the marketing of land within and among competing projects , using up-to-date market analysis to guide the phasing. This process will be further discussed in Test 9BT 6G. In cases where a buyer's needs can be well satisfied by a less marketable parcel, does the LPA attempt to divert the buyer's attention from the more desirable site? This basic orientation helps to maintain a highly saleable inventory of land and decreases the number of parcels that will be most difficult to sell. This approach is generally more appropriate with industrial users than with other types of developers. -218- Such an approach in no way signifies an attempt to sell land that fails to meet the buyer's needs, but it does signify astute marketing on the part of the LPA staff. 6H. In relation to the particular type of reuse, the size and other characteristics of the parcels in question, state and local legislation, and other conditions that may be unique to the locality or to the parcels, the LPA should carefully consider the positive and nega- tive features of the six basic methods for offering urban renewal land. These methods are described in Chapter 3. In some cities, the LPA never varies its method of offering parcels. Especially in the case of those parcels that have proven difficult to dispose of, we believe the LPA should weigh the advantages of the other possible methods to be certain they have chosen the one best suited to the particular case at hand. 7. Once a potential developer has expressed interest in a parcel or parcels, the process of negotiation be- gins. If negotiation is successful, the land in question is placed under contract. When circum- stances result in delays in development, extensions may have to be granted or the contract terminated. In such cases, negotiation can technically be said to continue until the land is officially disposed of or the contract is terminated. 7A. A person conducting negotiations with potential developers of industrial land must be aware of the financial and market elements that are of fundamental importance to interested industrial users. For ex- ample, image and visibility are of relatively minor importance to many small firms. Favorable local and/ or regional access for shipping and receiving by truck are often of key importance. The presence of rail service is desirable, though it is unimportant for an increasing number of firms. Although a large percent- age of industrial firms can thrive in aging surround- ings and relative obscurity, few will choose to locate in an area characterized by crime and vandalism. Pro- tection from such losses may be an item of prohibi- tively high cost. -219- In negotiations with a potential industrial user, it is important to understand the priorities of his or her firm and to be aware of the strong points and weak points of the site in relation to the firm's operations. Inflexibility regarding development restrictions can very easily kill negotiations with a firm that cannot afford the luxury of high "image consciousness," but that may be an appropriate user. "Nuts and bolts" is a sound concept to keep in mind when dealing with most industrial developers. If the LPA disposition staff is inexperienced regard- ing the technical and singular aspects of negotiating with industrial firms, the suggestions contained in Chapter 18 may prove helpful. To illustrate the important part that market and financial elements play in guiding the decisions of a profit-making enterprise, a pro forma invest- ment analysis technique is often used to analyze the sensitivity of a proposed investment to various fac- tors. This technique delineates the land cost, con- struction cost, and other expenses involved. Mort- gage financing alternatives are evaluated to deter- mine which type of loan a developer can obtain and the amount of equity or cash on hand that will be required. Then, a cash flow projection is made showing projected income, projected expenses, annual debt charges (payment of the loan), and a resulting cash flow before income taxes and the effects of depreciation and tax shelter. If all the parameters assumed in the pro forma are correct, the analysis yields an accurate profile of what economic gain (profit) can be expected from the total investment in land 'and construction costs. It should be noted that investors carefully weigh the risk involved before determining an acceptable rate of return on an investment. Thus, a return or profit of 10 percent on a real estate investment probably will not attract an investor if he or she can for example, obtain 10 percent on a government bond that has no risk. In the following table, we have set forth an invest- ment analysis of an industrial-warehouse facility to describe these variables. For comparison, a desirable rate of return (profit) before taxes is assumed to be in the range of 12 to 15 percent. Anything above that can normally be considered excellent. -220- INVESTMENT ANALYSIS OF PROJECTED MULTI -LEASE WAREHOUSE/OFFICE FACILITY (80,000 Sq.Ft. Facility) INVESTMENT Land Value @ $1 .00/Sq.Ft. Construction Costs® $7.00/Sq.Ft. (including site improvements and retaining wall) Total Investment $217,800 560,000 $777,800 $114,000 25,400 B. CASH FLOW BEFORE INCOME TAX Effective Gross Income (Average $1 ,50/Sq.Ft. Gross) Gross Potential Income $120,000 Less: Vacancy and Rental Loss at 5% 6,000 Expenses: Leasing Fee and Management Cost @ 5% of Effective Gross Income $ 5^00 Insurance @ 2^/Sq.Ft. 2,000 Maintenance and Repair @ 3^/Sq.Ft. 2,800 Real Estate Taxes (rate $5,615 per $100 of assessed valuation, or $272,300 x .05615) 15,300 Net Annual Income Yield on Total Investment ($88,600 i $777,800) -1 1 .39% Annual Debt Charges $777,800 x 75% = $583,350 loan @ 9±% for 25 yrs.; Factor .1049 Cash Flow Before Income Tax C. RATE OF RETURN BEFORE TAX Equity Investment ($777,800 - $583,350) Rate of Return on Investment ($27,410 7 $1 94,450) Assumptions for the Sake of Example: • Five acres cleared land @ $1 .00 Per Square Foot • An 80,000 Square Foot Facility @ $7.00 Per Square Foot • A 75% loan @ 9*% for 25 years Note that the above items are subject to variation by both region and time. For example, construction costs, maintenance costs, real estate taxes, etc., can vary monthly and will ordinarily differ by regional location. Even within a region, property taxes vary by municipality. These items can all be affected by policies of the LPA. For example, the following tables describe the effects of different values of land cost, construction cost, and vacancy rates on profit. $ 88,600 61,190 $ 27,410 $1 94,450 14.1% -221- INVESTMENT ANALYSIS OF PROJECTED MULTI -LEASE WAREHOUSE/OFFICE FACILITY TABLE 1 EFFECT OF CHANGES IN COST PER SQUARE FOOT OF LAND ON TOTAL COST AND RETURN ON EQUITY Cash Flow Table 1 shows the effect of the land cost on the equity Land Cost Total Before Equity return or profit. Obviously, marketability of the land Per Sq.Ft. Cost Income Tax Return depends in part on the appraised reuse value of land. If land disposition is slow, therefore, quite possibly the $ .50 $668,900 $39,480 19.7% reuse value of the land should be re-evaluated and reduced .75 $723,350 $31 ,690 17.5% as an incentive to development. * 1 .00 $777,800 $27,410 14.1% 1.25 $832,250 $23,120 11 .1% 1 .50 $886,700 $18,840 8.5% TABLE 2 EFFECT OF CHANGES IN CONSTRUCTION COST ON TOTAL COST AND RETURN ON EQUITY Table 2 reflects the effect of changes in construction cost Construction Total Cash Flow on equity return. Too many stringent design regulations Cost Cost Before Equity by the LPA can effectively diminish land marketability Per Sq.Ft. Incl. Land Income Tax Return because of the increased cosr^ required. Thus, design standards must be prepared with a realistic view of their $6.00 $697,800 $33,700 19.3% implications on cost and whether they are detrimental to 6.50 $737,800 $30,550 1 6 . 5% land marketability. Flexibility in negotiations is an * 7.00 $777,800 $27,410 14.1% objective for the LPA to enhance the marketability of 7.50 $817,800 $24,260 11 .9% urban renewal sites. 8.00 $857,800 $21 ,110 9.8% TABLE 3 EFFECT OF CHANGES IN AVERAGE OCCUPANCY ON INCOME AND RETURN ON EQUITY Table 3 describes the effects of varying occupancy rates Average Cash Flow on equity return. Through proper marketability analysis Occupancy Gross Before Equity and the preparation of feasib'o plans, the LPA can aim Rate Income Income Tax Return for a scale of development which should achieve profitable levels of occupancy. Also, the LPA must realize that 100% $120,000 $33,410 17.2% provision of public improvements and services is instru- * 95% $114,000 $27,410 14.1% mental to desirable occupancy rates, thereby increasing 90% $108,000 $21,410 1 1 .0% the profit margin for the developer. 85% $102,000 $15,410 7.9% 80% $ 96,000 $ 9,410 4.8% *Based on calc ulations used in preceding nvestment analysis. The above three variables have been taken independently. Imagine the negative impact of an overpriced land parcel plus too many stringent design controls. Al- though these particular variables have been singled out, the LPA must also be aware of the impact of real estate taxes, maintenance costs, insurance and other variables which affect the return on investment. Not noted in the previous analysis, lower overall costs tend to lower the amount of equity or cash on hand required, and less equity required can be a significant factor in stimulating development. It should also be noted that the ability to achieve an expected rental rate where applicable is a high priority in profitable development. The sensitivity of profit to expected rental rates, in addition to occupancy expectancy, is paramount to success. Furthermore, the considerable effects of interest rates on annual debt charges (payment on the loan) and the resultant cash flow before income tax depicts the need for quick execution by the LPA because time costs money to the private developer. Understanding the effects of different costs on a project's profitability, therefore, the LPA can better realize the role its policy plays in stimulating or inhibiting private development. Prepared By: REAL ESTATE RESEARCH CORPORATION -222- 7B . In the case of prime parcels suited to major in- 3u~s trial users, every effort should be made to in- volve key public and private leaders in negotia- tions with potential purchasers. The LPA must be aware that the location or expansion of a major in- dustry within the city is typically of great impor- tance to the local economy, and the task of securing or retaining such an operation appropriately involves persons of the most stature, experience, and power within the community. At the very least, the in- volvement of such persons indicates to the potential user that the city strongly desires his or her lo- cation there. Furthermore, such key persons can often identify or authorize special incentives to persuade the firm to locate on the site. The "sell- ing power" of the LPA with regard to major industrial parcels may well be doubled or tripled by involving key local leaders in the negotiation process. It is important that key leaders and LPA staff pre- sent a "united front" in negotiating with industries. This requires effective communication among the city's various participants prior to meetings with the prospective purchaser . From the city's point of view, the location of a major industry on any suit- able site within its boundaries is clearly advanta- geous^ but the LPA must emphasize the merits of the site or sites for which it is responsible. The LPA is in a stronger position to insist upon this em- phasis with local leaders if the initial interest arose by means of its own promotion and contact. Ideally, the LPA's contact and coordination with key local leaders should be an ongoing process rather than a "one-shot" affair. 8A. Even when an Agency's marketing program is skillful and aggressive and site and project improvements have been well planned and efficiently implemented, ad- verse conditions beyond the LPA's control may be im- peding disposition. Sometimes these are attributable to national trends, sometimes to singular local con- ditions or events. Examples of such factors that might delay disposition of industrial land are as follows : National Trends Periods of tight monetary conditions. The trend toward new suburban industrial parks. The completion of circumferential expressways and of additional radial expressways. Increased industrial use of air freight. Flight of residential and shopping center development to the suburbs. Rising crime rates in inner-city areas. Comparatively high tax rates to support central- city services. Local Conditions or Events Sluggish economy and lack of investment in the central city. Singularly high perceived crime rate in or near the project area. Lawsuits regarding condemnation or plan changes. Local opposition to urban renewal program or to a specific project. Racial disturbance in or near a project area. Intense and/or long-term labor problems in the city. Failure of city, state, or federal agencies to implement projects around which the urban re- newal plan has been conceived (e.g., federal and state highway projects). Although many of the above problems and trends cannot be changed by the LPA, even with excellent support on the part of the city and of HUD, we have seen a number of creative and effective solutions developed by var- ious LPAs throughout the nation to offset general pro- blems in regard to specific projects. Before enumerating examples of such creative and ef- fective solutions, we believe it is of the utmost im- portance to emphasize that although national and local trends that are generally unalterable on a near-term basis may greatly complicate disposition, they can often be overcome in relation to specific projects if they are identified and dealt with skillfully. Gen- erally speaking, such trends are not an excuse for -224- ina ctivity regarding the preparation and marketing of land. Nevertheless, in some cases, a proposed reuse will have to be changed if the LPA is trying unproductively to "buck the trend," or the LPA will have to await a change in the trend before resuming full-scale marketing efforts for the originally - designated reuse . Among tactics that have helped to offset negative local or national trends are the following: Applying pressure on the city by the LPA and downtown interests to substantially improve parking and circulation and to maintain ex- cellent police and fire protection and clean- up service. Enlisting the aid of local news media to "accent- uate the positive" regarding the central city and to practice restraint in reporting negative inci- dents . Bringing together local leaders and industrialists to obtain a broadbased commitment to reviving the central area. When business persons are united and are willing to make contributions to promo- tion, rehabilitation of facilities, and other positive activities, the chances of reviving the central area are greatly enhanced. Similarly, the central financial group in the city, if unified and earnestly desirous of revitalizing the downtown core, has in many cities been able to stem the tide against the central city. Using the time while trends are delaying disposi- tion to complete public improvements to set the stage for later marketing. Recognizing when originally planned public improve- ments are not adequate to generate the hoped-for industrial development. The time may be ripe to plan new, more ambitious public improvements -- or reduce standards and goals markedly -- and focus on the objective of speedy implementation. All of these approaches have proven effective in vari- ous cities RERC studied, and numerous other examples of effective tactics to offset disadvantageous condi- tions are mentioned in other parts of this report. -225- • Hold Land For Future Marketing There are certain conditions under which the decision to hold land for future marketing presents itself as a neces- sary or preferable temporary course of action. Examples of such circumstances are as follows: Necessary There is no logical market for certain industrial parcels except that of an adjacent but temporarily uninterested industrial user. The overall market for good inner-city industrial land is temporarily very soft. Extremely tight monetary conditions have rendered a fast rate of absorption highly improbable. City, state, or federal street or highway improve- ments that are integral to the project area's functioning have been postponed or considerably altered, and the LPA cannot control their timely implementation . Serious crime within or near the area has tem- porarily stigmatized the project. (This often causes heightened perception of danger, which has the same effect as real danger.) Major alterations in the urban renewal plan are underway, and ultimate decisions will affect the parcel (s) . Preferable A desirable potential user needs several months to finalize future plans and arrive at a decision to locate or expand in the project area (but has given evidence that he or she is not simply stalling) . A major public institution has dire need for tem- porary use of certain parcels. A number of existing and proposed businesses and institutions need surface parking until garages are built. -226- The desirable future development of certain par- cels will have to be determined when the precise nature of development on other parcels has been established . Strong efforts are still being made to attract a single developer for a number of parcels. The city's systematic plan calls for temporarily diverting a certain type of development to another urban renewal area in order to achieve maximum im- pact. When the temporary tactic of holding land for future marketing is necessary or preferable, there are a number of tests that should be applied regarding the use or non-use of the land during the interim period. The eventual disposition of urban renewal land is basically an economic activity, and the economic re- turn of cleared land while its disposition is unavoid- ably delayed should be a prime consideration. When parcels are clearly doomed to remain vacant for sev- eral years' time, an interim use may be advisable. Whenever possible, such a use should yield net income or at least offset maintenance and carrying costs. When an income -producing use is impossible or poten- tially detrimental to future sale or to the existing environment, the land should be left vacant (but maintained) or should be temporarily devoted to a use that will serve the public interest and enhance the marketability of other disposition parcels in the project area. An interim use is not feasible as far as the LPA is concerned if it involves: Clearly unretrievable monetary expenditures with- out the probability of enhancing marketability in other portions of the project area. A strong chance that the interim use will not be able to be terminated when re-marketing is advis- able (for example, if neighboring business objects strongly to the sale of an interim storage area) . The time is ripe, or soon will be, for the sale of the given parcel (s), and the interim use will jeopardize marketing. -227- The following tests should be applied when considering interim use : If a suitable interim use will produce net income to the LPA, it is ordinarily the most desirable use. In industrial areas, possible interim uses include sur- face parking and storage areas for nearby firms. When suitable net-income producing uses cannot be found, it may prove advisable to temporarily allow free or low-cost use of the land to support existing uses. In the case of industrial land, for example, one or more firms adjacent to the vacant land might be in need of temporary, storage space and the ges- ture of the LPA to allow such use may result in im- portant benefits for the project area. We have seen industrial renewal projects in which the exterior renovation and landscaping of existing indus- trial operations have proven nearly impossible to ob- tain, though such rehabilitation was important to the image of the project area. The combination of an LPA's persistent efforts to bring about a willingness to renovate on the part of the owners, along with such gestures of good will by the LPA as allowing interim use of space for storage, may be a tool to bring about better cooperation. The temporary nature of such uses must be made clear fr oro the outset, however, and the LPA must not be susceptible to threats by the firm(s) when the time comes to terminate the use. If certain parcels can be devoted to an interim use that will serve the public interest without jeopardi- zing their sale when the time is right, such use may be preferable to protracted vacancy. In such a case, minimal-cost leasing or use in exchange for the ser- vice of maintenance are in order. Examples that we encountered in the course of this study include the temporary use of cleared land for tot lots or play- grounds, and the provision of parking for university students and employees. Such interim use may produce greater support of the urban renewal program by neighborhood groups, organi- zations, or the city as a whole; increased market- ability of nearby sites; and the basic benefit of serving the public interest in a meaningful way. The term "land banking" refers to the voluntary set- ting aside of vacant improved land with plans to -228- market it at a future date. This may be a desirable approach regarding certain parcels or tracts for the following reasons: 10A. A developer or developers may submit an integral plan to redevelop several acres in a desirable fashion, but they may not be ready to enter into a contract to purchase the entire acreage until certain portions have been developed. Although our studies have shown that such comprehensive development schemes often fail to materialize, it is sometimes wise to landbank unsold and uncommitted portions of the planned area while the developer is allowed to proceed with the initial phases of his proposal. Situations of this type require month-to-month vigilance on the part of the LPA to avoid wasting years of potential marketing time regarding the landbanked parcels . The greater the probability of eventual realization of the entire development, the more time that can be risked for the land in question. 10B. Careful analysis regarding some parcels may reveal that a waiting period is expedient by reason of the likelihood that the marketability for favorable re- use of the site will increase considerably in the foreseeable future. We have used the words "careful analysis" and "likelihood" in order to differentiate such judgments from the use of soft market conditions as an excuse to wait passively for a buyer to walk in the door. A good example of carefully calculated landbanking was evident in one of the cities RERC studied. Two urban renewal projects were directly competing for the same types of reuse on comparable sites. Rather than allow a haphazard dissipation of potentially catalytic redevelopment, the city made a clear choice to direct marketing efforts and supporting facilities to one of the projects, while holding some land in the other project for intensive redevelopment when the market caught up with the available inventory of land. IOC. A site may be earmarked for a very desirable and highly probable development, which for various rea- sons cannot occur for a period of some months or years. For example, we have seen a well-planned civic center area that depended for its completion upon decisions of four different governmental enti- ties to build office structures within the area. -229- There was strong reason to believe that, if the land could be kept open for such use, the necessary deci- sion would eventually be made. The deteriorated con- dition of many structures within the area mitigated against delaying demolition until the governmental entities were ready to build. The last resort in attempting to market urban renewal land is to end up giving it away. This alternative may have to be considered for a few parcels. When the parcel in question is relatively insignificant in value, when there is virtually no hope of selling the land in the foreseeable future for any suitable use or at any price, and when a person or organization can be identified who would maintain the land in good con- dition and use it in an acceptable manner, donating the land may prove to be the most economical course of action. Cases of such donation were extremely rare in the cities we studied, but occasionally such action may be appropriate. -230- 11 SCATTERED RESIDENTIAL LOTS A . Statement of the Problem Many LPAs have sizeable unsold inventories of residential lots at scattered locations throughout urban renewal projects. For the most part, the lots are small and are in the midst of es- tablished residential neighborhoods. This problem is most common in NDP areas where LPAs have performed either spot blight removal or hardship acquisition (buying properties from owners who are unable to pay taxes or to undertake enough maintenance to make units habitable). However, the problem also occurs in portions of conventional residential projects that are desig- nated primarily for rehabilitation. Essentially, the scattered residential lot problem arises more from inadvertant acquisi- tion than from purposeful purchase of isolated sites. In some cases, though, such sites may be the remainders of new subdi- visions that have been disposed of for the most part. We have focused here upon residential lots that are intended for single-family home development and thus are generally too small for multifamily construction. However, the disposition alternatives and actions discussed in this chapter would also apply to scattered sites designated for development with two- to four-unit residential buildings. -231- TYPICAL PATTERN OF SCATTERED RESIDENTIAL LOTS [i 1 i) ji 1 u y = i\ finfi il 1 1 — warn] [i — r B. Basic Strategy Alternatives There are three basic alternative ways of trying to deal with the problem of scattered residential lots. These may be sum- marized as follows: • Try to Sell Lots Without Changing Their Nature -- This in- volves pursuing a more intensive and more thoughtful market ing program than has been carried out thus far. The goal is to try to dispose of the scattered lots without enlarg- ing them or changing their zoning. • Change Characteristics of Lots to Improve Marketability -- Under this alternative, consideration would be given to aggregating small lots (which might involve further acqui- sition), changing parcelization patterns, and adjusting reuse, density, and price requirements. • Do Not Sell Lots -- This alternative of "last resort" in- volves consideration of interim uses, leasing of lots for temporary use, donating the sites to eliminate maintenance costs, and land banking the lots in anticipation of im- provement in market conditions. -232- Tests to determine which of these three alternatives would offer the most appropriate means of dealing with an individual Agency's problem are set forth in the decision tree on the fol- lowing page. Each of the 13 tests is stated as a question that can be answered with a "yes" or a "no." In the right-hand column, we have suggested specific actions to be taken for each of the two possible answers to the test questions. We recommend that a person evaluating the problem of scattered residential lots read through the entire decision tree before deciding upon a specific action to follow. It only takes a few minutes to answer all the questions, and the problem is placed in better perspective when all options are reviewed. Most of the questions are straightforward and self-explanatory and can be answered quickly. However, some of the specific ac- tions are stated in an abbreviated form and may need elabora- tion before they can be accepted or rejected. Therefore, the rest of the text in this chapter is devoted to discussion of the issues involved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions discovered in Real Estate Research Corporation's analysis of urban renewal land disposition across the country. Please turn to the decision tree before reading further in the text. The remaining paragraphs in this chapter simply elaborate upon the test questions posed in the decision tree. Specific Observations /Suggestions The numbering of the following paragraphs matches the numbered tests, or questions, in the decision tree table titled "Scat- tered Residential Lots." Each test is discussed below, though the extent of the commentary differs. Some of the questions and suggested actions in the decision tree are obvious and re- quire little explanation. Others are not so clear or involve complicated actions that need to be described in detail. In other cases, the text includes descriptions of specific situa- tions or actions discovered during our research that might be helpful to other cities. We have included as many examples and illustrations as possible of successful tactics and policies adopted by renewal agencies that we visited or have heard about. Again, the text that follows is directly correlated with the numbered tests in the preceding decision tree . 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It is extremely important that sites being marketed by an urban renewal agency be kept in good condition. Specifically : -- Trash should be removed regularly. -- Buildings that are intended to be removed should be demolished. -- Sidewalks, curbs, and on-site utilities should be in good condition. -- Sites should be graded and planted with grass, spread with wood chips , or otherwise surfaced and kept in neat and orderly condition. -- Regular maintenance should be provided to keep weeds under control. This benefits the surrounding neigh- borhood and also enhances the marketability of the specific disposition sites. 2. If aggressive efforts are being made to market specific residential lots, any planned neighborhood public im- provements should already have been completed. This includes installation or replacement of storm and sani- tary sewers, street widening and paving, installation of curbs and gutters, and provision of street lighting. Evidence of public commitment to a residential area increases the confidence of both potential investors and remaining residents. If new curbs and sidewalks are put in before sites are sold, they may be damaged during subsequent construction on vacant residential lots. Even so, the increase in marketability of sites after improvements are made generally outweighs the relatively minor cost of repairs to curbs, gutters, etc. after construction. In many cities, unsold residential lots are scattered through NDP areas that are so large that all planned public improvements cannot feasibly be made simulta- neously. In such cases, consideration should be given to staging both public improvement construction and intensive marketing of lots. By focusing the LPA's marketing efforts primarily upon the areas where im- provements have been made, concerted attempts can be made to dispose of the parcels with the most amenities and the greatest created value. -236- 3. In addition to street and utility improvements, the quality and quantity of public services available to a neighborhood are critical in generating new residential development. Such services include public transporta- tion, police and fire protection, trash removal, street repair and cleaning, street lighting, and community facilities like schools, health centers, libraries, recreation centers, and day care centers. The more such services and facilities that are available at the time sites are marketed, the better the prospects for sales . Provision of many public services and creation of public facilities are often beyond the direct control of LPAs . However, pressure can often be applied upon other local government agencies to improve services to an area and to coordinate capital improvements expenditures with urban renewal planning. It is also possible for the LPA to work with local residents to create self-help programs to improve neighborhood services. 4A. The ideal method of disposing of scattered residential lots is to sell a package of lots to a single builder for private market construction. In relatively stable, moderate- and middle-income areas, private market con- struction is feasible, especially when sites are cleared and improved and if pricing is competitive with or below that in other residential neighborhoods in the metropolitan area. To encourage this type of development, an LPA can obtain a commitment from a local financial institution to provide mortgages for completed residences and then can use that package" to solicit developers. It is also possible that new units could be used as a relocation resource and the LPA could identify potential homebuyers in advance of construction. This was done, for example, in a pre- dominantly Latino neighborhood of St. Paul. Potential developers of a large number of lots should be evaluated carefully by the LPA before land is deeded. Even when there are not competitive devel- opers interested in the parcels, the Agency should take a hard look at the ability of a designated developer to perform. The factors that should be analyzed (e.g., the developer's financial position, performance record, market understanding, etc.) are discussed in detail in Chapter 20, "Selection Process for Multiple Development Proposals." 4B. Blocks of residential lots can also be sold to single developers for scattered site construction of -237- subsidized units (e.g. , leased public housing or other federal, state, or local subsidy programs). New sub- sidized construction is feasible in neighborhoods with lower overall income levels than are needed for private market housing. In Waco, Texas, the LPA and the Model Cities agency obtained Section 235 reservations in their own names and then transferred the reservations to local builders who were thus able to avoid initial red tape. This type of assistance to potential devel- opers should be considered whenever possible. This marketing approach was severely curtailed by the January 1973 moratorium on federal housing subsidy pro- grams, but many state and local governments are insti- tuting or expanding programs that offer partial housing subsidies as does the new Section 8 of the Housing Act of 1974. All possible avenues should be pursued to encourage subsidized construction on scattered lots. In addition to exploring all conceivable funding sources, LPAs should encourage local governments to modify building standards to decrease construction costs. Also, the LPA should examine its pricing of residential lots to be sure that the prices are low enough to enable developers to build subsidized units. As in Test 4A above, it is possible that new units could be used as a relocation resource within the urban renewal program or for other local construction programs involving residential displacement. Persons eligible for payments under the Uniform Relocation Act could be identified as potential homebuyers in advance of con- struction; commitments could be made to developers; and the buyers could participate in the planning of their new homes. 4C. If there is a market in the urban renewal area for new, lower priced homes, the Agency should consider provid- ing assistance to small local contractors so that they can construct speculative units on scattered lots. The types of assistance that an LPA can provide in- clude: working with the builder to obtain building permit approval, contacting local financial institu- tions to obtain short-term financing, encouraging local lenders to make mortgage commitments for the new homes , urging local government agencies to provide utility hook-ups and to complete building inspections , and lo- cating possible buyers for the units. 4D. The LPA could also prepare "homebuilding kits" to en- courage local residents to construct homes on renewal lots. Such kits could include physical plans for low- cost homes, information on prefabricated components, -238- guidelines for negotiating with subcontractors, re- quirements for local permits and inspections, and in- formation on short- and long-term financing. If this marketing approach is followed, LPA staff members should be prepared to provide local residents with the same kinds of direct assistance cited under Test 4C above . 4E. An obvious market for narrow residential lots is ad- jacent property owners who may want to expand their property with a side yard that could accommodate a garage or even a rental housing unit. All owners of property abutting available residential lots should be contacted to determine their interest in adjacent sites and the prices they would be willing to pay. When evaluating price offers lower than the assigned reuse value, the LPA should take into account the long-term maintenance costs of the sites and the fact that they are off the local tax rolls while being held by the Agency. If market conditions are not promising, it may be worthwhile to dispose of the scattered lots at low prices to adjacent property owners who will then maintain them. 4F. In several cities, small residential lots have suc- cessfully been used as sites for standard housing units that were moved from highway or urban renewal clearance areas. This possible use of scattered lots should be considered. 4G. As mentioned under Test 2 above, many renewal areas -- especially NDPs -- are so large that public improve- ments cannot be installed simultaneously throughout the project. Since marketing efforts are weakened when planned physical improvements have not yet been made in an area, the LPA might consider staging its marketing in accordance with installation of public improvements and facilities. In unimproved areas, for example, general efforts could be made to market sites with the tactics described in Tests 4A, 4B, and 4C. If those tactics have proven unsuccessful in the improved areas of high priority, more concentrated marketing could focus on the tactics described in Tests 4D, 4E, and 4F. 5. Persons attempting to market a number of scattered residential lots can quickly identify overpriced land. It is important to be familiar enough with the economics of home construction to know how land price affects the fHBSH final cost of a new home. In suburban areas, the lot WWm price generally accounts for 20 to 25 percent of the mmbM I -239- final price of a new home. However, this percentage may have to be reduced considerably to attract builders to individual inner-city sites where construction costs are higher, the market is less certain, assembly- line construction methods cannot be used, and property taxes on new units may be higher. (See Chapter 5, which deals with the problem of overpriced land.) Because of their commitment to upgrading residential neighborhoods, LPAs often place high standards on new construction undertaken within an urban renewal project. In areas where the reuse market is not strong, such standards may be unrealis t ically high and may limit the marketability of sites. Thus, periodically during the marketing period, it is a good idea to take a hard look at setback requirements, designated floor area ratios, specifications for materials, etc. In addition to possibly stringent restrictions in the urban renewal plan, there may be local zoning ordinance conditions that are restricting marketing. Many cities have found, for example, that single-family construc- tion is no longer allowed on 25- or 30-foot lots. This means that any construction requires aggregation of lots and that individual parcels can only be marketed to ad- jacent owners or be used for pocket parks. This may be an unrealis tically restrictive zoning requirement that should not be applied in established, built-up areas with standard units that have satisfactorily housed families for many years. In situations like this, the LPA should push for zoning ordinance amend- ments or variances. As with public improvements and facilities (discussed under Tests 2 and 3 above) , a key factor in enhancing the marketability of sites in an urban renewal project is accomplishment of needed rehabilitation. If neigh- boring properties have been rehabilitated, the evidence of investment commitment to the area will serve to in- crease the confidence of potential lot buyers. Thus, it is important to stage rehabilitation efforts simul- taneously with construction of public improvements and facilities and with intensive marketing of dis- position parcels. LPAs should also investigate the possibility of selling adjacent vacant lots to resi- dent homeowners interested in rehabilitation because it is possible that construction costs for outbuildings on the adjacent lots could be financed under the general rehabilitation loan. -240- One problem that many LPAs have encountered in coor- dinating rehabilitation and new construction is that the former is aimed toward low- income households and the latter toward moderate- or middle-income ones. Usually, this sort of income mixing severely limits the market for new construction. It is more expe- ditious, therefore, to focus on one general income group for both rehabilitation and new construction. Two problems arise if the focus is on low- income households: (a) The area will tend to be impacted with concentrations of poor families and therefore will face long-term social and economic difficulties, and (b) subsidies will be needed for both rehabilita- tion and new construction. Where the possibility for attracting moderate- and middle-income households exists, it is generally wiser to aim all marketing efforts toward that group, even if absorption rates are lower and disposition of the land takes longer. Change Characteristics of Lots to Improve Marketability 8. If marketing efforts have been unsuccessful when the original size and shape of the scattered residential lots have been maintained, the LPA should evaluate the possibilities for marketing larger parcels. If the marketing prospects appear to be promising for larger lots, efforts should be made to increase the size of the lots in the unsold inventory. Wherever possible, adjoining vacant lots should be merged to form a larger single parcel. In some cases, it might prove feasible to acquire adjacent parcels to enlarge lots that are presently vacant. This should be seri- ously considered if buildings on an adjacent lot are in need of extensive rehabilitation that is not being undertaken or if the two parcels together could be marketed for a higher- density use. The latter cir- cumstance could lead to a higher price being obtained for the newly created larger parcel. Adjacent parcels should be reviewed to discover any that might be listed for sale on the private market. (The LPA should be on the lookout for private "for sale" signs and should also contact local real estate brokers to check their listings.) When a property ad jacent to a vacant lot is found to be on the market, the LPA could attempt to market its vacant lot in con junction with the private market sale to a buyer who would combine the parcels. This would eliminate the necessity of the LPA acquiring the adjacent property. -241- 9. The LPA should review the access characteristics of the scattered residential lots in the unsold inventory. The types of access problems that may exist are il- lustrated in the diagram below. If access is inade- quate, the cost of improving it should be evaluated. It is possible that the cost of increasing street frontage, changing street patterns, or acquiring ac- cess easements would exceed the recoverable value of the improved parcel. In that case, access should not be changed and Tests 10, 11, and 13 should be applied. TYPICAL ACCESS PROBLEMS OF SCATTERED RESIDENTIAL LOTS -242- Do Not Sell Lots 10. If vacant residential lots are perceived as a blighting influence in the neighborhood or if there is a need for play areas, tot lots, or pocket parks, such interim uses should be considered for unsold scattered residen- tial lots. Three things should be borne in mind, how- ever, about such interim uses. First, the maintenance costs are likely to be considerably higher than for unused vacant lots and those costs will have to be borne by the Agency. (Attempts to encourage maintenance by local residents generally fail over time as interest wanes and original supporters move away.) Second, resi- dents will tend to view the play areas, parks, or garden areas as permanent rather than temporary uses and may raise objections if the lots are subsequently sold for construction of dwelling units. Third, adjacent owners may object to interim uses that draw a lot of children or are not physically attractive. If long-term mar- ket prospects are not particularly promising, it might be better to donate the lots to the city under Test 13 rather than introduce interim uses. 11. It is possible that some scattered residential lots could be used by nonprofit organizations on an interim basis for recreation purposes. In exchange for main- tenance, the lots could be leased to churches, clubs, day care centers, schools, etc. for a token payment of, say, $1.00 per year. Some of the objections to interim uses cited under Test 10 above may also apply to this option . 12. If all marketing approaches have been exhausted without success but there is a likelihood that market conditions will change within five years, consideration should be given to land banking the scattered residential lots for future disposition. A careful cost analysis should be performed to be sure that ultimate disposition pro- ceeds would cover interim administrative, interest, and maintenance costs. If the benefits are likely to exceed the pre-disposition costs, the lots should be landbanked and then be reviewed on a semi-annual or at least annual basis. Even when marketing is in abey- ance, the sites should be well maintained to enhance the viability of the surrounding neighborhood. To cover maintenance and other interim costs, the potentials of Tests 10 and 11 should be re-examined. 13. A final disposition tactic is to donate lots to adjoin- ing owners, the city, or community organizations. This tactic should only be followed if market conditions are not expected to improve within five years or if -243- interim maintenance, administrative , and interest costs will far exceed the expected final disposition price of individual residential lots. -244- SCATTERED NONRESIDENTIAL PARCELS Statement of the Problem Some LPAs have large numbers of scattered nonresidential par- cels in their unsold inventories, particularly in central business district-oriented and industrial projects. (For the problem of scattered res idential lots, see Chapter 11). This problem often evolves from an acquisition policy of spot clearance of blighted buildings, which subsequently results in scattered site disposition. The problem also occurs in projects that were originally planned for total clearance but were later changed to focus on rehabilitation with partial clearance. In many large projects where disposition has been underway for several years, the remaining unsold parcels are small and located throughout the project area; often these are simply the least attractive "leftovers" of a successful mar- keting program. Generally, we have focused in this chapter upon parcels that would only accommodate small-scale commercial or industrial development. Larger parcels are usually marketed individually and do not pose the same problems as small, scattered lots. One marketing tactic that we suggest later in this chapter, however, is packaging" small parcels with larger ones to en- courage developers to take a less attractive site for ancil- lary uses connected with a major project, or to perform secondary development in exchange for the opportunity to de- velop a site. -245- TYPICAL PATTERN OF SCATTERED NONRESIDENTIAL LOTS B. Basic Strategy Alternatives There are three basic alternative ways of trying to deal with the problem of scattered nonresidential parcels. These may be summarized as follows: • Try to Sell Parcels Without Changing Their Nature -- This involves pursuing a more intensive and more thoughtful marketing program than has been carried out thus far. The goal is to try to dispose of the scattered parcels without enlarging them or changing their zoning. • Change Size/Characteristics of Parcels to Improve Market- ability -- Under this alternative, consideration would be given to aggregating small lots (which might involve fur- ther acquisition), changing parcelization patterns, and adjusting reuse, density, and price requirements. • Do Not Sell Parcels -- This alternative of "last resort" involves consideration of interim uses, leasing of lots for temporary use, donating the sites to eliminate main- tenance costs, and land banking the lots in anticipation of improvement in market conditions. Tests to determine which of these three alternatives would of- fer the most appropriate means of dealing with an individual -246- Agency's problem are set forth in the decision tree on the fol- lowing page. Each of the 13 tests is stated as a question that can be answered with a "yes" or a "no." In the right-hand col- umn, we have suggested specific actions to be taken for each of the two possible answers to the test questions. We recommend that a person evaluating the problem of scattered nonresidential parcels read through the entire decision tree before deciding upon a specific action to follow. It only takes a few minutes to answer all the questions, and the prob- lem is placed in better perspective when all options are re- viewed. Most of the questions are straightforward and self- explanatory and can be answered quickly. However, some of the specific actions are stated in an abbreviated form and may need elaboration before they can be accepted or rejected. Therefore, the rest of the text in this chapter is devoted to discussion of the issues involved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions discovered in Real Estate Research Corporation's analysis of urban renewal land disposition across the country. Please turn to the decision tree before reading further in the text . The remaining paragraphs in this chapter simply elabo- rate upon the test questions posed in the decision tree. Specific Observations/Suggestions The numbering of the following paragraphs matches the numbered tests, or questions, in the decision tree table titled "Scat- tered Nonresidential Parcels." Each test is discussed, though the extent of the commentary differs. Some of the questions and suggested actions in the decision tree are obvious and re- quire little explanation. Others are not so clear or involve complicated actions that need to be described in detail. In other cases, the test includes descriptions of specific situa- tions or actions discovered during our research that might be helpful to other cities. We have included as many examples and illustrations as possible of successful tactics and policies adopted by renewal agencies that we visited or have heard about. Again the text that follows is directly correlated with the numbered tests in the preceding decision tree . The numbering is consecutive, but the three alternatives are included as sub- headings to clarify the context of the discussion of the tests. • Try to Sell Parcels Without Changing Their Nature 1. It is extremely important that the sites being marketed do not themselves negatively affect the viability of existing nonresidential uses. 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The accelerated deteriora- tion of the area's image succeeded in blocking retail redevelopment, contributing to the overall decline of the central area. Hence, selection and management of sites to be cleared is of particular importance. Spe- cifically : Trash should be removed regularly. Buildings intended for removal should be demolished. (In some cases, bare adjacent walls may be painted with a graphic design or art theme to enhance the visual appeal of the vacant parcel and minimize the disruptive effects.) Sidewalks, curbs, and on-site utilities should be in good condition. Regular maintenance should be provided. Landscap- ing and grass cutting benefits the adjacent area and enhances the marketability. In some cases, the concept of the temporary park may be used to pro- vide an attractive interim use while attempting to market the parcel . The placement of signs on renewal parcels is required by law and may be one of a number of vehicles used to bring a property to the attention of potential devel- opers. The graphic quality of the signs is important. The signs must be we 11 -maintained for they directly identify the renewal agency. Signs of low graphic quality reflect poorly on the LPA. It is advisable to replace and rearrange signs periodically to give evidence of the proper care and handling of the sites. In one large eastern city, a large number of scattered parcels have stood vacant for years, and many are not currently marketable because of environmental restric- tions. The old, discolored, and warped signs on the lots are a blighting influence on the neighborhood. The signs not only give visible evidence of neglect, but stigmatize other renewal parcels and detract from the quality of the neighborhood. -250- Efforts to market specific nonresidential parcels are enhanced if public improvements are completed. See Chapter 19 (Timing of Project Improvement Construc- tion") for a fuller discussion of this problem. The paving of streets, installation of new street lighting and street furniture, and completion of public improve- ments demonstrate a public commitment to the area that reinforces existing uses and increases the confidence of potential developers. Development of scattered parcels requires a general increase in the economic activity in an area, which is encouraged by improved access, parking availability, and improved levels of security. Failure to build proposed expressways or road systems has been a major cause impeding the dis- position of many sites. Loss of residential popula- tion that frequently accompanies neighborhood decline has undermined the market for commercial reuse. Early completion of public improvements may help to arrest such declines. Provision of many public services and creation of pub- lic facilities are often beyond the direct control of LPAs . However, pressure can often be applied on other government agencies to coordinate their programs and services with the urban renewal plan. It is also pos- sible for the LPA to work closely with local business leaders to improve the quality of neighborhood services. In many cities, nonresidential parcels are scattered throughout project areas so large that public improve- ments cannot feasibly be made simultaneously. In addi- tion, attempting all public improvements simultaneously may bring all modes of transportation to a virtual halt. Staging of public improvements should, to the extent feasible- from an engineering viewpoint, be timed in accordance with the marketing strategy. First, im- provements should be made in the vicinity of the most attractive nodes of activity. By focusing marketing strategies primarily upon the areas where improvements have been made, concerted efforts to dispose of the parcels with the most amenities and the greatest poten- tial value may be fruitful. Persons attempting to market a number of scattered non- residential parcels can quickly identify overpriced land. A fuller discussion of the problem of overpriced land is contained in Chapter 5. One of the most recur- rent problems involves obsolete appraisals. In neigh- borhoods that have experienced population decline, the value of commercial sites has frequently declined but has not been considered in up-to-date appraisals. Other cases have been cited in which the appraisal did not adequately take poor subsoil conditions into account. -251- Test borings made prior to construction may reveal conditions which greatly increase the cost of construc- tion for many project areas are low-lying areas that have poor subsoil conditions or are subject to erosion or flooding. In an eastern city, the attempt to relo- cate a flower market within the project was almost frus- trated by poor subsoil conditions until additional site improvements were made by the renewal agency out of project funds. In other cases, the appraised value of the land is correct , but a desired developer to purchase the land at the appraised value may be impossible to find . 5. Existing provisions of the urban renewal plan or the zoning ordinance may seriously impede the marketing of a particular parcel. If market conditions have changed, there must be flexibility to alter the plan in order to meet existing or potential demand. In a midwestern city, rapid racial change and income decline eliminated the market for retail use. Earlier disposition of the parcels might have been obtained by encouraging non- retail development, but disposition officers have often been confined to an obsolete renewal plan. Altering the plan may require changes in zoning or other regula- tions. In center city areas where the market for re- tail uses has declined, residential development may be considered to increase downtown patronage and better support existing downtown facilities. Smaller sites planned for industrial use may be more readily sold as a combination of industrial-commercial uses. Building and lot restrictions included in the urban re- newal plan should not unduly penalize the developer in comparison with the restrictions that characterize sites of comparable value in the city and surrounding area. Excessively stringent lot -coverage restrictions and regulations on exterior appearance may be enough to discourage potential developers. It is important that the LPA have realistic goals based on an understanding of the profit motive of the types of uses considered desirable for the area. 6A. One way to dispose of scattered nonresidential sites is to sell several lots to a single developer. In particular, a developer may be sold one particularly desirable site at a favorable price only if he agrees to develop another, less desirable site. Where an owner has an existing facility contiguous to several vacant lots, he may be the only likely purchaser, and may be encouraged to put several sites together as part of an expansion. Or, where there is demand for office -252- space, several small office buildings may be constructed by one developer on a speculative basis. Similarly, incubator industrial space or mini -warehouses may be erected on several parcels by one developer. Sometimes, one local developer may, out of a sense of civic pride as well as a desire for profit be encouraged to develop a number of sites. Gaining the support of the local business and political leadership is required in order to develop such a commitment, particularly in a down- town area. In most cities, there are local or state organizations whose major function is to stimulate economic growth in the area. Such groups may play a key role in the negotiations between the developer and the city for special incentives, tax abatements, development of roadways, or parking provisions. In one east coast city, such a commission played a major role in bring- ing two light industrial groups together to share jointly in the development of a parcel. The idea for the most efficient use of the land was developed by the city's economic development officer, working in conjunction with the LPA. 6B. The LPA may sell individual lots to individual firms for small scale construction. In particular, a parcel may be held for construction by a firm to be relocated out of an urban renewal project area. To encourage development, the LPA can obtain a commitment from a local financial institution to provide long term fi- nancing. The LPA can also provide assistance to a small firm by securing permits, gaining plan approval, and providing advice on contracting. Such help may be particularly useful to firms using their relocation payments for constructing a facility in the project area. 6C . In many cases, the only feasible redeveloper is an adjacent property owner, who may use the property either for business expansion or parking facilities. The LPA may wish to encourage the adjacent owner to ex- pand in order to increase employment in the area or to maximize the use of the land. LPAs frequently hold on to land rather than sell it for a nonintensive use, such as a mini -warehouse or parking lot. However, neighboring firms may attempt to obtain indefinite use of the parcel for parking while not committing them- selves to developing it, and adjacent owners may be disinterested in the parcel until someone submits a plan for its use. If market conditions are not prom- ising, it may be worthwhile to dispose of the scattered lots at low prices to adjacent owners who will maintain them. -253- 6D. The LPA may encourage the designated developer or potential buyers to consider an interim use until they are ready to undertake development. In some cases, developers have made limited use of a parcel, provid- ing a parking facility, while contemplating eventual development. Problems can arise if the developer delays new construction because of the profitability of the interim use. An interim use that is profitable may make the site more desirable to a potential devel- oper when his development plans call for construction at a specific time in the future, or his detailed plans and specifications are not completed. Change Size/Characteristics of Parcels to Improve Marketability 7. Many examples were found of marketing efforts that were unsuccessful because the scattered lots were too small and irregular. The LPA must therefore consider the possibility of consolidating lots into larger parcels. If the marketing prospects appear to be promising for larger lots, efforts should be made to increase the size of lots in the unsold inventory. Where possible, adjoining vacant lots should be merged to form a larger single parcel. It may prove feasible to acquire ad- jacent parcels to enlarge lots that are presently va- cant. This should be seriously considered if buildings on adjacent lots are in need of extensive rehabilita- tion that is not being undertaken or if the two parcels together could be marketed for a more intensive use . A higher price per square foot may be obtained for the newly created larger parcel, or a development more in keeping with the objectives of the urban renewal plan may be obtained. In one city, a vacated street was combined with a small adjacent parcel into a large par- cel for development by a local bank. In a southern city, the spot clearance of dilapidated structures planned for redevelopment by small retail developers led to small, unmarketable lots because of the decline of CBD retail activity. 8. The LPA should review the access characteristics of the scattered lots in the unsold inventory. If access is inadequate, the cost of improvements should be eval- uated. It is possible that the cost of increasing street frontage, changing street patterns, or acquiring access easements would exceed the recoverable value of the improved parcel. In that case, access should not be changed and tests 6C, 9, 10, and 12 should be ap- plied. Inadequate access frequently occurs in parcels within rundown commercial areas. Obsolete storage areas in the interior of blocks, formed by demolition of deteriorated structures and accessible by narrow -254- alleys only, restrict potential development. The cleared parcel should be joined to a contiguous parcel or sold to an adjacent owner. Do Not Sell Parcels 9. There are certain conditions that lead to a logical decision not to dispose of a lot at the present time, even when there is a potential developer for that lot. These conditions may be summarized as follows : • If the only interested developer seeks an unde- sirable use, such as a tavern, or polluting indus- try; • If the overall market for land is temporarily very soft, but the prospects for marketing the parcel appear good in the near future ; • If extremely tight monetary conditions have ren- dered a present development untimely; • If planned transportation improvements have been delayed, or the plans for such facilities are cur- rently undergoing change, and disposition must await finalization of transportation decisions; • If major alterations to the renewal plan are under- way, which may greatly affect the marketing of the parcel ; • If planned clearance of adjacent structures allows for a future development of a more unified concept; • If a desirable potential purchaser needs additional time to arrive at a decision to locate in the area, or time to complete plans ; • If there is a great need for a temporary use of a particular parcel by a public institution. For ex- ample, a courthouse may need temporary parking until a garage is constructed; • If strong efforts are still being made to attract a single developer for a number of parcels, even when there is a developer interested in any one parcel ; • If the LPA feels that marketing of parcels in one area will divert development from another renewal area whose development has priority. -255- 10. Parcels that are left vacant and unused may be per- ceived as a blighting influence, whereas interim uses, such as recreational areas, parking, or storage, may add to the overall economic activity or attractiveness of an area. Frequently, the interim use of a parcel may result in considerably higher maintenance and ad- ministrative costs for the LPA. The LPA should explore the possibility of transferring maintenance responsi- bilities to local civic or neighborhood groups. In re- turn, the groups can be allowed to use the land for a worthwhile purpose. Such an interim use may not be feasible if there is a strong chance that this use will not be easily terminated when remarketing is advisable (for example, a neighborhood objects publicly to the sale of an interim pocket park) . 11. In order to reduce maintenance charges, lots could be used by nonprofit organizations on an interim basis. For example, a parcel designated for a neighborhood service center could be used by a school or church for parking until funding of the facility was obtained. In exchange for maintenance, the lots could be leased to the nonprofit organization for a token payment of, say, $1.00 per year. Alternately, consideration should be given to leasing land -- on a short term basis -- to private owners. It may prove advisable to temporarily allow free use of the land to support existing uses. In the case of industrial or commercial land, one or more firms ad- jacent to the vacant parcel might be in need of tem- porary storage space; the gesture of the LPA to allow such use may result in important benefits for the project area or serve to increase overall economic activity, thus making disposition of other parcels more likely. The temporary nature of such use must be made clear from the outset, and the LPA must not be susceptible to threats by the firm(s) when the time comes to terminate the use. 12. The term "land banking" refers to the voluntary set- ting aside of vacant land with plans to market it at a future date. If all marketing approaches have been exhausted without success but studies indicate that future market conditions will be stronger, the scat- tered lots should be land banked and their status reviewed on a yearly basis. Even when marketing is in abeyance, the sites should be well-maintained in order to uphold the viability of the surrounding neighborhood. To cover maintenance and other interim costs, tests 9 and 10 should be reapplied. -256- INNOVATIVE INTERIM USES A good example of this type of carefully calculated landbanking was evident in one of the cities studied. Two urban renewal projects were directly competing for the same reuse market on comparable sites. Rather than allow haphazard disposition, the city made a clear choice to direct marketing efforts and support- ing facilities toward one of the projects, while hold- ing the land in the other project for redevelopment until the market caught up with the available inven- tory of land. A final disposition alternative is to donate parcels to the city, adjoining owners, or community organiza- tions. This alternative should be considered for only the most undesirable parcels. When the parcel in ques- tion is relatively insignificant in value; when there is virtually no hope of selling the land in the fore- seeable future for any suitable use or at any price; and when a person or organization can be identified who would maintain the land in good condition and use it in an acceptable manner, donating the land may prove the most economical course of action. Cases of such donation for nonresidential use are extremely rare in the cities studied, but such action may be appropriate, particularly if interim administrative, interest, and maintenance costs will far exceed the expected final disposition price. -258- OF INFLEXIBILITY PROJECT PLAN Statement of the Problem Urban renewal plans range from general statements of com- munity intent to detailed specifications of redevelopment. Re gardless of the level of specificity of the plan, developers frequently complain that the requirements are too rigid, and in many instances their dissatisfaction is well founded. A parcel with a certain use called for in the plan may not be attracting any developer interest -- even from those developer already working on adjacent parcels with similar, or comple- mentary, uses. For example, most LPAs have experienced dif- ficulties in disposing of parcels designated for neighborhood convenience retail. If the plan had shown the parcel as resi- dential and/or commercial, it may have been disposed of as part of a parcel being developed with housing. Some plans, particularly those for central business districts, add require ments to the redevelopment parcels beyond the normal elements -- such as for underground parking, large amounts of retail space, provision of or accommodation for elevated walkways and extensive plaza and landscape areas -- which may encumber dis- position. Practically all of the elements of an urban renewal plan -- land use (type and amount), street layout, utility easements, structures not acquired, building restrictions (such as set backs, site access and site coverage) -- can contribute to -259- slow disposition. Enforcement of the urban renewal plan's provisions sometimes involves a design review board that advises the LPA on the quality of the site plan and design of the buildings. Such a board, if its reviews are exhaustive and its judgments heavily relied upon by the LPA, may discourage some developers in areas where the market strength or other factors make the project's success marginal. Successful de- velopment in some urban renewal projects may hinge on the pro- vision of needed public facilities. For example, residential neighborhood development may flounder if planned new schools, parks, libraries, etc. are not provided, and if the urban re- newal plan is not adjusted to take this lack of facilities into consideration . The elements called out in urban renewal plans reflect the de- sires and interests of the PACs, City Councils, and LPAs . Many hours have been spent in arriving at supportable plans. Changes in the plans from what was originally worked out, particularly of a fundamental nature, may be controversial and difficult to achieve. If the changes cannot be accomplished, the LPA may be faced with the prospect of undisposable land resulting from a plan that is not flexible enough to respond to developer needs or market forces . Basic Strategy Alternatives Three ways are available to address the problem of an inflexible urban renewal project plan. In summary, they are as follows: • Reduce the Specificity of the Plan - This assesses the possibility of changing the plan to respond to market condi- tions and/or developer needs. It also reviews the extent of the controls set forth by the plan and determines whether broader interpretations can be made. • Retain the Plan and Increase Developer Incentives - Under this alternative, consideration is given to shifting responsibilities assigned to the developer to public agencies and adding public amenities to enhance the attractiveness of the parcel. • Retain the Plan and Reorient Marketing - An examination of the marketing program is called for in this alternative. Tests to determine which of these three alternatives would of- fer the most appropriate means of dealing with an individual Agency's problem are set forth in the decision tree on the fol- lowing page. Each of the 12 tests is stated as a question that can be answered with a "yes" or a "no." In the right-hand column, we have suggested specific actions to be taken for each of the two possible answers to the test questions. -260- u • 4) 4J > m xi to Cfl oo u UJ -i o OC 0. 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CO 1 Xl 4J 4J o cd rJ ■H r-l C 3 4-1 •H •H C4-I •H 1 >^ 60 co- c a 00 -i-l co C 3 u O CO QJ 0) 1-1 l-l a a 4-1 3 o o co a. r-l r-l 0) 01 O X. > > CO 4J QJ QJ l-l •a T3 4J O o 3 0) V-i 01 x: 01 •r-l CO 4J rC O -H 4J l-l C4-I o P.4JO. •r4 CO QJ •o >. c X) QJ U CO o C CO r-l •H QJ C X. QJ 4J l-i CO 4J T3 CO QJ Co- x: D. 4J CM •rH QJ u co E rH QJ 01 C XI u x: >-i qj 0) CO x: 4J QJ 4J 4J 4J 60 a •rl co c a CO QJ s rH -r-l CO M O m QJ O cO- l-i •4-1 OJ o a o C r-4 O QJ •H > 4J OJ CO TJ 4J QJ QJ i-i x: a. 4J u QJ QJ 4J CJ C C •r-( to x; tj c QJ QJ QJ QJ T3 CO tO 3o- O QJ >, l-l rJ 4J XI -r4 Q) r-l CO r-l -H XI XI TJ CO *r4 r-l 4J X 3 &. 0) O 01 r-l 3 o CO £ rJ rJ > QJ QJ H Q -284- the problem is placed in better perspective when all options are reviewed. Most of the questions are straightforward and self-explanatory and can be answered quickly. However, some of the specific actions are stated in an abbreviated form and may need elaboration before they can be accepted or rejected. Therefore, the rest of the text in this chapter is devoted to discussion of the issues involved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions discovered in Real Estate Research Corporation's analysis of urban renewal land disposition across the country. Please turn to the decision tree before reading further in the text . The remaining paragraphs in this chapter simply elabo- rate upon the test questions posed in the decision tree. Specific Observations /Suggestions The numbering of the following paragraphs matches the numbered tests, or questions j in the decision tree table titled "Pre- disposition Nonperformance by Developer." Each test is dis- cussed, though the extent of the commentary differs. .Some of the questions and suggested actions in the decision tree are obvious and require little explanation. Others are not so clear or involve complicated actions that need to be de- scribed in detail. In other cases, the text includes descrip- tions of specific situations or actions discovered during our research that might be helpful to other cities. We have in- cluded as many examples and illustrations as possible of suc- cessful tactics and policies adopted by renewal agencies that we visited or have heard about. Again, the text that follows is directly correlated with the numbered tests in the preceding decision tree . The numbering is consecutive, but the three alternatives are included as subheadings to clarify the context of the discussion of the tests . • Allow Indefinite Continuation 1. If a parcel is competitive with other agency land under development, and there is evidence of pre- disposition nonperformance on the part of a developer, there are probably adequate grounds for contingent continuation. If, for example, a hotel is presently under development, and there has been predisposition nonperformance on the part of a second hotel developer, this may be justifiable and even preferable. Prior to the LPA's final determination as to whether or not predisposition nonperformance should be allowed to continue, a review and update of the market for the -285- use in question should be undertaken. In general, the LPA should avoid competition with itself, in effect, by placing sites for competitive uses on the market at the same time, unless the LPA is assured of the fundamental strength of the market. 2. In some cases, one developer's project is dependent upon completion of another one. For example, a pro- posed small retail center may not be feasible until a large residential development is at least partially occupied. Similarly, a planned hotel or motel may not have sufficient potential patronage until a con- vention center or other traffic generator is com- pleted. In this type of situation, the dependent developer should be awarded a contract extension -- so long as the primary development is moving ahead and so long as the future market demand for the second project still appears to exist. If it is the LPA's responsibility to provide project improvements that are necessary for a proposed de- velopment, they should be installed as expeditiously as possible while the developer is granted an exten- sion on his contract. As stated in the Urban Renewal Handbook, an LPA "must take appropriate measures ... to secure construction of improvements on project land sold or leased to redevelopers" (RHM 7214-1, P. 6). If another party has been designated to provide project improvements, the LPA should decisively use its influence to speed the completion of the improve- ments. It is essential that, whenever possible, the LPA offer its assistance to the developer in what- ever form is most appropriate. If predisposition nonperformance by a developer is clearly due to the failure to make called for improvements, an extension in time should be granted. 3A. Our study has shown that delays in the execution of urban renewal projects are often caused by exogenous factors; that is, those beyond the control of the local Agency. Rises in interest rates constitute such a factor, over which LPA or developers have little control. Many lawsuits also fall into this category. The significance of these factors varies substantially. When the effects of these factors are only temporary, it is in the best interest of an LPA to extend the developer's contract to a later date when a review of his progress will be made. -286- When the effects of such factors produce irreversible circumstances that stymie a developer's efforts, the Agency should consider making any adjustments, within its power, to aid implementation of the development proposal. Changes may indicate, for example, con- sideration of an alternative reuse, an adjustment in the unit mix, or implementation of additional project improvements on the part of the LPA. 3B. FHA or HUD processing may have caused delays in re- sponding to developers' take-down commitments. Prob- lems with the preparation and approval of an Environ- mental Impact Statement may also cause a developer unforeseen delays. As long as such impediments are clearly temporary and correctable* and a developer's intentions appear to be good, an Agency should grant the developer an exten- sion. All efforts to assist him in overcoming these difficulties should be undertaken. For example, the LPA staff could help the developer prepare any sen- sitive" documents or could check with their HUD area office when the time taken to process documents be- comes too lengthy. The LPA should use its influence, its staff capabilities, and its full resources to assist a developer in overcoming temporary obstacles. An example of such action occurred in Seaside, Cali- fornia where the LPA acted as an advocate for a potential developer in getting approval of his plans from the Coastal Commission. On the other hand, in a major midwestern city, the LPA has consistently failed to provide assistance to developers with government regulatory agencies, complicated paper work, and other factors beyond the capabilities of all but the most experienced developers. Allow Contingent Continuation (with specific time limits) 4. Between the time a LUMS (Land Use Marketability Study) is prepared and the land is placed under contract, innumerable forces can change the market demand for a particular parcel. Depending on the amount of time that has elapsed and the quantity and significance of the changes that have taken place in the area, the Agency should consider having another marketability study performed. In any case, an update study should be undertaken. If no market or a lesser market for the planned reuse is determined, the reuse should be changed or broadened. The LPA should provide de- velopers -- or potential developers -- with the most complete and accurate market information possible. -287- This will assist in land disposition and, equally important, it should help to ensure that market acceptance for the use will encourage additional development as well. In the majority of the projects studied by RERC, neighborhood shopping centers that were included in the urban renewal plan have proved to be impossible to develop. Time and again, developers who have contracted land for such a purpose have been unable to secure a prime tenant. The population in some in- stances is too small to support a convenience goods center or the income of residents is too low or the competition is too strong or the project area is con- sidered too risky by grocery store chains. In other words, the market is not there. A detailed inde- pendent market analysis will confirm (or deny) the strength of the market, saving false starts and in- appropriate delays. 5. Land development is by nature a lengthy process. The development process within urban renewal areas may take even longer because of the necessary coordina- tion of several bodies -- developer, city, LPA, HUD -- and the required documentation and approvals necessary at the local and HUD area level. When a proposed project is also a multif aceted, complex one, the LPA should not set too idealistic a time frame for requiring developer performance. Rather, the LPA should remain flexible and work with the developer to establish realistic schedules. This is particularly true of parcels intended for more than one use. Such projects frequently involve complicated and time- consuming negotiations with major tenants, complex financial negotiations over construction and per- manent financing, and major time requirements on the part of architects and engineers . 6. Inability to secure financing for a project has caused delays for countless developers. This is an area in which aggressive participation on the part of the Agency can really pay off. Specifically, the LPA can use its influence to secure aid from local finan- cial institutions or other funding sources, which are often represented on the LPA's Commission. The LPA can be responsible for alerting a developer to fed- eral, state, or local funding mechanisms of which he might not be aware. Furthermore, the LPA can make the initial contact with a bank, savings and loan, or government source of funds. -288- In several cities, such participation on the part of the LPA has been rewarding. In one case RERC studied, the LPA actively promoted financing by working with banks and the Small Business Administration (SBA) to arrange financing for a redeveloper. In another city, the LPA helped a developer to work with three banks to secure a "pooled risk" construction loan for a specu- lative retail mall. In times of high interest rates and limited availability of resources, contingent continuation is probably advisable when good faith efforts have been made to obtain financing but have not met with success. A developer's inability to "package" his proposal may be a result of market changes , the complexity of his project, or difficulty in arranging financing, as has been discussed in relation to previous tests. Prob- lems in development planning, however, may portend future difficulties in project execution. If, after providing any needed assistance, the LPA has indica- tions that a developer's financial or managerial capabilities are in question, termination should be considered. A thorough review of a developer's past performance record, financial stability, and "staying power" should be undertaken prior to termination, however . At times, the capability of a developer can be a very difficult issue to resolve. By all appearances, a developer may meet selection criteria successfully; yet he may have difficulties later. For example, in a midwestern city, a real estate subsidiary of an architectural and engineering firm located outside the city signed a contract to purchase 13 acres of land. The firm's development plan called for a multi- use project, including four apartment towers, two office towers, and a convention hotel. The contract was signed in 1970 and by 1973 the firm was released from their contract for most of the land because, although they had been granted several extensions, they were repeatedly unable to obtain financing for part of the project. The firm can be characterized as a subsidiary of a large corporation that became involved in real estate development despite a lack of prior experience or real knowledge of the field. They had, however, completed successful developments in other cities, and had apparently fully intended to implement the project until mid- 197 3. For many reasons, it was logical for the Agency to have selected this firm; yet in retrospect 2.5 years of -289- potential marketing time was lost because the devel- oper did not have the experience necessary to obtain project financing. In another city, when a locally-constituted develop- ment team was found lacking the financial resources and development expertise necessary to carry out their project, the city and LPA brought in an experienced outside developer as prime contractor to supplement the strengths of the local group. The outside de- veloper managed to arrange for a sufficient number of tenant commitments, financing was then secured, and the development began. In the early days of renewal, several major national developers became heavily involved in the urban re- newal program, particularly in the downtown areas of a number of large cities. In all but a handful of cases, their involvement ended prior to the comple- tion of the projects. This occurred for several reasons, including more profitable opportunities elsewhere, governmental red tape, and a lack of per- sonal commitment to the success of the renewal project. In one major city, a major downtown par- cel was committed to three separate national devel- opers, each of whom withdrew from the project. The parcel was finally developed by a major local de- veloper. In a large midwestern city, a national development firm affiliated with a major industrial corporation effectively tied up the city's key down- town parcel for more than six years, only to with- draw. Once again, the parcel was finally developed -- successfully -- by a local group. This is not to say that national developers have no place in a renewal project. It is meant to suggest, however, that while their resources may be greater, their commitment is generally much weaker than that of local developers. Our findings very strongly in- dicate that, if a national developer has not taken title to a parcel within a maximum of two years from the date of contracting, and if development has not begun by then, the probability of subsequent devel- opment diminishes rapidly. Even though an LPA may have to provide technical assistance to a less experienced or less well capi- talized local developer, the additional expenditure of time and energy by Agency staff may pay off in sizeable reductions in development delays. This can lead to prompt increases in local tax revenues, as -290- well as acceleration in the disposition of renewal land. 9. Rigidly held design standards can cause serious de- lays . It is up to the LPA to determine when it is important to maintain such standards and when it is in the best interest of all concerned to relax the design requirements. As discussed in Chapter 13, flexibility in applying project plans and restrictions can be a critical factor in dealing with redevelopers . In one city, inappropriate design restrictions that were rigorously adhered to by the LPA contributed to very substantial delays in the development of a retail shopping mall. The conflict was reconciled only after the LPA agreed to assume the costs of elaborate garages, underpasses, etc. A similar situation oc- curred in another city RERC studied when the LPA in- sisted that a bank building be constructed on air rights to improve pedestrian flow through a commer- cial area. These are examples of the kind of assist- ance that the LPA/city may need to offer if design restrictions are economically infeasible for the developer to satisfy. As mentioned, a fuller de- scription of the problems relating to design con- siderations is contained in Chapter 13. 10. HUD regulations specify that a Project Area Committee (PAC) composed of local residents and groups be formed to participate in the detailed planning and execution of activities within an urban renewal project area. The PAC must participate in those decisions regarding the timing and location of all activities within the urban renewal area. Depending upon the complexity of the project area, the mix of property owners, the composition and representativeness of the PAC, and the coordination by the LPA, participation by local citizens may facilitate or hamper project develop- ment . If PACs , local political bodies, or other interested groups have caused developer delays, the LPA is in an appropriate position to mediate between the citi- zens and the developer to achieve an understanding and set realistic guidelines. The LPA should counsel and advise the developer as to the goals of the citi- zen groups, as well as work with citizens to keep them well-informed about project activities in an attempt to facilitate project execution and avoid con- flicts. A more complete discussion of citizen par- ticipation is included in Chapter 22. -291- 11. When a selected redeveloper is relatively inexperi- enced, the LPA can provide considerable technical assistance to him in order to speed disposition activity. Such assistance can include contacting local lenders for short- and long-term financing com- mitments; urging local agencies to process permits, complete building inspections, and provide utilities and public improvements; locating tenants; and recom- mending consultants and service agencies to provide management and marketing assistance. Agency assist- ance can be of particular help, for example, in work- ing with an inexperienced nonprofit housing sponsor. In one city, a local nonprofit sponsor has been attempting for six years to develop a residential parcel under a plan calling for construction of 126 dwelling units of single-family low- and moderate- income housing. The Agency, while installing project improvements, encountered unforeseen soil problems. Because of these topographical problems, the number of planned units had to be decreased to 106; con- struction costs increased in order to correct soil problems; and rental rates were necessarily raised. For various reasons beyond the sponsor's control, he has gone through four different development con- sultants and two develope r/ contractors . Problems of every type have faced this sponsor. Unfortunately, many of them seem to have been avoidable, given ade- quate assistance and supervision. This experience is all too typical of citizen-based nonprofit sponsors* who have undertaken major projects without a strong development manager and without assistance and guidance from the LPA. Another area in which LPA assistance can be extremely influential in a project's success is in finding tenants for new commercial facilities from among existing businesses in the city. Agencies, in our study cities, have in several cases been able to persuade local businesses to go into a new retail center, while at the same time encouraging businesses not to move out of the city or renewal area. 12. The LPA, as stated in HUD regulations, is not obli- gated to transfer title to land for private redevel- opment until the developer has furnished the LPA with satisfactory plans for the redevelopment of the land and provided acceptable documentation to show that he has the financing needed to complete the project. The regulations make no specific mention, however, of how long or under what circumstances developers should be granted extensions and how and/or when they should be terminated. -292- 12A. When it is in the best interest of the Agency and will enhance the renewal project to allow contingent continuation of a designated developer, all steps should be taken to provide the flexibility necessary to expedite developer performance. Revising the take- down schedule to achieve more flexibility is one way to accomplish this. The schedule dates could be ex- tended or, as one city found appropriate, the schedule could be based on a specific percentage of land to be taken down by a certain date rather tnan based on com- pletion of development on specific parcels. LPAs are often worried that developers will take advantage of them if take-down schedules are not rigidly struc- tured. Extreme caution can be self-defeating, how- ever, and the most successful disposition officers generally blend prudence with risk-taking in nego- tiating with developers. 12B. Even in a renewal plan that was reasonably well- conceived at the outset, the original demand projec- tions may soon be outdated. One successful means of taking this fact into consideration and enhancing developer flexibility and, thus, aiding development efforts, is to ensure a high degree of flexibility in reuse categories. In Tulsa, eight "development type areas" were created: Each of these categories allowed most of the uses per- mitted in the others. The relative soundness of this approach is illustrated by the fact that few plan modifications have been required in terms of rezoning. This method of categorization has proved to be a sig- nificant accelerating factor in Tulsa and might be in other cities as well. Terminate Developer 13. If it becomes clear that the designated developer is unable to complete his project, if the time period in which he was to "package" his proposal has elapsed, and if another developer has expressed a strong in- terest in the site, termination should be considered. The LPA should attempt to ascertain the strength of developer interest in the site and, if it appears that one or more developers capable of executing a suitable Residential -- High Density Residential -- Low Density Public Office --Low Density Office -- High Density Shopping Center General Commercial Limited Industrial -293- development exist, the first developer should be ter- minated and negotiations carried out with the others. An example of a proposed development of high public interest found in a west coast city concerned the construction of a Mexican-American cultural center. The designated development group proved unable to carry out its proposal yet was not terminated for five years -- even though other developers were avail- able -- because of the political "sensitivity" of the project and the high degree of citizen interest. When such a situation exists, the LPA should consider bringing in another developer to supplement the capa- bilities of the first in a joint venture arrangement. If another developer can be brought in to undertake the same project entirely, consideration should be given to terminating the first and selecting the second. Specific time schedules should be established for those activities to be undertaken by the new de- veloper. It is in the best interests of the LPA to monitor his progress closely to avoid undue delays. In an east coast city, at the insistence of the city council, an entire 80-acre project was under con- tract to a "favored" local developer from 1968 to 1973. When that developer withdrew from the project, not only had five years been lost, but conditions had changed to such a degree that the potential market had greatly eroded, the project had acquired a nega- tive image due to delay, and extensive improvements that were made for the "favored" developer were in- appropriate for other developers. In such circumstances, if it seems likely that the developer will not perform, the LPA should attempt to meet with those individuals or groups whose influence the developer is reliant upon to see whether or not some agreement can be reached that would hasten the redevelopment process. If such intervention fails, serious consideration should be given to terminating the developer, even if a great deal of time and energy have to be expended to cancel the contract. If, after analysis of the above tests and other factors . an LPA has determined to terminate a de- veloper s contract, a formal warning should be issued stating such an intent and the date on which it will be carried out. If a warning has been issued and the developer has not furnished the LPA with any additional information to indicate his progress, the -294- LPA should terminate his cont ract. At that time, the land will revert to the LPA, which should proceed to market it as soon as possible. The plan and the market for the intended reuse should be reviewed at that time. If legal obstacles prevent an LPA from terminating a nonperforming developer, such obstacles should be ex- amined thoroughly with counsel in an attempt to over- come them. -295- TIMING OF PUBLIC FACILITY CONSTRUCTION Statement of the Problem One critical -- and often overlooked problem concerning urban renewal land disposition concerns the timing of public facility construction. The public facilities most widely undertaken as part of urban renewal include: • Elementary, junior high, and senior high schools. • Public junior colleges, colleges, and universities. • Parks . • Parking lots and garages . • Civic centers. • Auditoriums and convention centers. • Neighborhood centers. • Government office buildings - local, state, and federal. • Stadiums. • Hospitals and medical centers. -297- Our research has indicated that, in many instances, the in- tent of the LPA is to use public facility construction as a catalyst to spur private development either in the project area or in areas adjacent to the renewal project. A far smaller number of cities have used public facility construc- tion as the use of last resort when a private reuse market has failed to materialize, or has developed more slowly than anticipated. We have further found that the manipulation of public facility construction (and, to a lesser extent, public improvements construction) has been done as much to secure local non-cash credits as to meet justifiable local needs. This posture has placed some cities in the position of overextending themselves and having made commitments they are subsequently unable or unwilling to meet. A third problem encountered stems from the fact that construc- tion of public facilities invariably takes a great deal longer than is ever anticipated. Lack of funding, interagency dis- putes, and the reliance of LPAs on scheduled construction of facilities by agencies that are beyond city control (school districts, state agencies, or other special districts) create problems that not only delay construction of public facilities, but often hinder overall land disposition. This fact, com- bined with voter reluctance in recent years to pass local bond issues necessary for public facility construction, has placed many LPAs in untenable positions. There are no quick and easy solutions to such a complex series of problems. There are, however, several feasible alterna- tives that may be appropriate in dealing with an LPA's prob- lems concerning the timing of public facility construction. Basic Strategy Alternatives Our research suggests three basic alternative ways to resolve problems concerning the timing of public facility construc- tion, which are as follows: • Accelerate Development of Public Facility -- There are certain times when it is clearly to an LPA's advantage to stimulate the prompt construction of public facilities. • Modify Project or Public Facility Planning to Accommodate Later or Changed Construction --Under this alternative, consideration would be given to when and under what condi- tions either the entire project or the planned public facility should be re-evaluated to accommodate changes that will delay or alter reuse. -298- • Change Reuse Designation -- Under this alternative, con- sideration would be given to changing the reuse designa- tion -- either for the land intended for public facility construction or for the private reuses on adjacent par- cels in the project -- to reflect the present reality of the situation. Tests to determine which of these three alternatives would offer the most appropriate means of dealing with an individ- ual Agency's problem are set forth in the decision tree on the following page. Each of the 16 tests is stated as a question that can be answered with a "yes" or a "no." In the right-hand column, we have suggested specific actions to be taken for each of the two possible answers to the test ques- tions . We recommend that a person evaluating the problem of timing of public facility construction read through the entire de- cision tree before deciding upon a specific action to follow. It only takes a few minutes to answer all the questions, and the problem is placed in better perspective when all options are reviewed. Most of the questions are straightforward and self-explanatory and can be answered quickly. However, some of the specific actions are stated in an abbreviated form and may need elaboration before they can be accepted or re- jected. Therefore, the rest of the text in this chapter is devoted to discussion of the issues involved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions dis- covered in Real Estate Research Corporation's analysis of urban renewal land disposition across the country. Please turn to the decision tree before reading further in the text. The remaining paragraphs in this chapter simply elaborate upon the test questions posed in the decision tree. Specific Observations/Suggestions The numbering of the following paragraphs matches the numbered tests, or questions, in the decision tree table titled "Timing of Public Facility Construction." Each test is discussed, though the extent of the commentary differs. Some of the questions and suggested actions in the decision tree are obvious and require little explanation. Others are not so clear or involve complicated actions that need to be described in detail. 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CO X OJ Sx 4J > 41 CO X C S 4JtI 11 1 "* CO •H C co O CO -H X 4-1 a co E 4J W i-l 4J 1-1 41 -H 1 3 4J O O y -° 3 co TJ X 1 41 41 CO 1-J 1 O O 41 C 41 rM M OS O OC 1 U 04 X -319- Again, the text that follows is directly correlated with the numbered tests in the preceding decision tree . The numbering is consecutive, but the three alternatives are included as subheadings to clarify the context of the discussion of the tests . • Accelerate Rehabilitation Activities 1. Many rehabilitation projects are located in areas in which financial institutions have long been reluctant to make home or business improvement loans. If the area was badly deteriorated, this may have been pru- dent exercise of fiduciary responsibility. However, it may have been the result of redlining, where the financial institutions did not evaluate the risks of individual loan applications but simply chose not to lend in the whole area. Since most of the structural work that is done in rehabilitation neighborhoods is privately financed, it is crucial to the success of a project that funds be available for rehabilitation. An LPA can do a great deal to spur private lending in an urban renewal area. One method is public rela- tions: making detailed presentations to officials of financial institutions and to financial associations to explain the neighborhood preservation efforts that are being made, the project improvements that are being installed, and the renewed commitment of the city in the project area. In Boston's South End, private lending increased in the project area during the planning period -- even before the project went into execution. Many LPAs have influential members of the local financial community on their boards. These members can apply direct pressure on their colleagues to increase lending in the project area; and they can also set an example through their own institutions. Some city governments have used their own bank deposits as a means of leverage in forcing banks and savings institutions to lend throughout the city. If it is found that a bank is "redlining," the city gov- ernment refuses to deposit funds with that institution. LPAs can also work with financial institutions to es- tablish revolving high-risk loan funds for "nonbank- able" home improvement loans in urban renewal project areas . 2. Many homes in urban renewal project areas are occu- pied by families of low and moderate income that cannot afford to make structural improvements on -320- their own and cannot qualify for home improvement loans. Some form of subsidy for rehabilitation must be made available if such families are to continue to live in the area in homes that are brought up to code. If the LPA attempts to increase the pace of rehabili- tation in the area without use of subsidy funds , the project's residents will be forced to find housing elsewhere or housing abandonment will increase. Subsidy funds may be made available from federal, state, local, or foundation sources. Federal funds for re- habilitation have traditionally taken the form of direct grants to low- income families, or direct loans of up to $15,000, with a 3 percent interest rate. Several states have established programs for direct loans for rehabilitation. For example, the State of Maryland amended its constitution to provide enabling legislation to sell bonds for direct loans. However, most of the nonfederal government involvement in re- habilitation financing has been at the municipal level. A 1974 survey conducted by the U.S. Department of Housing and Urban Development identified 83 cities that had developed special rehabilitation financing programs designed to replace or supplement federal programs. Such local programs generally fall into one of five different categories : a. Use of Model Cities funds to subsidize interest rates of rehabilitation loans. b. Sale of local tax exempt bonds to provide funds for rehabilitation loans at below market interest rates. c. Direct borrowing by an LPA or city, with banks able to treat the borrowed money like tax exempt bonds . d. Use of foundation funds, frequently supported by matching local contributions from businesses or industries . e. Participation in the Federal Home Loan Bank pro- ram that provides local communities with up to 150,000 for a rehabilitation fund on a matching share basis. -321- Revenue sharing funds also provide a potential source of funds to establish a loan pool for rehabilitation. The State of Utah made $3 million of revenue sharing funds available to local housing authorities in order to finance grants to elderly homeowners for property improvements. Similarly, Colorado Springs used gen- eral revenue sharing funds to create a direct loan pool to subsidize housing rehabilitation. An LPA should make every effort to gain priority for use of rehabilitation funds within urban project areas. If it appears that no subsidy funds will be available and rehabilitation is beyond the present financing capacity of area residents, a careful re-evaluation of the project (s) must be made. The LPA will probably have to reduce the planned scope of rehabilitation or closeout the project in its present form. In such a case, Tests 14 through 21 should be applied. 3. If the urban renewal project has been in execution for some time and rehabilitation has not been pro- gressing as originally intended, the LPA should re- evaluate the plan. In some rapidly changing areas, plans that were appropriate when a project was con- ceived are out-of-date by the time execution begins. If a substantial number of structures have deteriorated further since the plan was drawn up, rehabilitation may no longer be economically feasible for many of them. If so, the proportion of clearance in the project area may have to be increased substantially. Commercial areas scheduled for rehabilitation or re- development have been particularly vulnerable to changes in market conditions caused by neighborhood income reductions or population declines. Retail reuses that were viable at the outset of a project may no longer be feasible, and especially not at the rent levels required for new or rehabilitated struc- tures. Any attempt to force rehabilitation of retail outlets in a declining market will cause the smaller businesses to close. Thus, project goals should be evaluated in light of current conditions. It may be that the LPA's sights should be lowered. We found that new retail uses can rarely be supported in low- and mode rate -income residential areas, so an LPA should make every effort to retain existing establish- ments in such neighborhoods -- even if the structures are in less-than- ideal condition. 4. If rehabilitation efforts in an urban renewal project have been unsuccessful, the LPA should analyze -322- carefully the causes of investor disinterest to iden- tify the actions that might feasibly be taken to re- store confidence in the area. One tactic that should be considered is clearance of individual buildings that are badly deteriorated or that accommodate mar- ginal operations that have a blighting influence on the neighborhood. If a few such buildings exist at scattered or concentrated locations in the project area, their removal might improve the likelihood of rehabilitation being undertaken. Clearance of a few marginal apartment hotels in the Ghent area of central Norfolk was a major factor in restoring investor confidence in this area of archi- tecturally distinctive houses. After spot clearance, middle- income families already in the area improved their residences, other middle-income households moved in, and housing values rose markedly. Ghent is now the most attractive inner-city residential area in Norfolk, and new housing for the elderly and middle- income high-rises are being constructed. Spot clearance should be planned carefully so that the LPA will not end up with an unmarketable inventory of scattered sites. If many small, interior lots are acquired and cleared, they may subsequently be diffi- cult to sell for development, even if rehabilitation within the project is quite successful. The problem of unsold scattered residential lots and nonresiden- tial parcels are treated in Chapters 11 and 12. In the past few years, more and more very low- income older neighborhoods in large central cities have be- gun to experience "spontaneous" redevelopment by young middle- and upper-income newcomers. These per- sons typically buy an old, relatively rundown two- or four-flat, row house, or other single-family dwelling and invest large sums to remodel and rehabilitate it. When a number of such newcomers to an area buy units clustered relatively close together within a short time span (say, three years), an entire block or larger area can experience a significant upgrading in average quality. Such redevelopment has advanced furthest in the Georgetown and Capitol Hill areas of Washington, D.C. , Back Bay and South End in Boston, and the Lincoln Park area of Chicago. Similar move- ments are underway on a smaller scale in dozens of older neighborhoods in larger cities across the nation. -323- When "spontaneous" redevelopment occurs within an urban renewal area, investor confidence increases rapidly and there is often an enhanced private market demand for vacant residential and nonresidential land. However, the experience of the South End in Boston demonstrates that there can also be serious problems associated with this type of redevelopment for middle- and upper-income households. "Spontaneous" renewal necessarily means that the prior, low- income residents are displaced by the more affluent newcomers . When this occurs within a renewal area, however, the dis- placement becomes a quasi-public action and the LPA becomes accountable. In the northern part of the South End project, "spontaneous" redevelopment was well underway when the project was initiated, and conflicts quickly developed over which socioeconomic groups should be represented on the Project Area Com- mittee and be predominant in setting project area goals. Although the resolution has been to provide new and rehabilitated housing for all income groups within the South End project, conflicts still occur over the disposition of vacant parcels and repre- sentatives of the low-income residents still object to the private redevelopment that is occurring within the area. Although the South End is not a typical case, LPAs should be alert to the types of problems that can develop when upper- income newcomers are attempting to gain the benefits of rapid neighborhood improvement and poorer residents are being displaced to other areas . The more common case is that a small area within a larger project will appeal to "spontaneous" redevelopers , and encouragement of their efforts by the LPA can serve to enhance moderate- and middle- income investor confidence in the remainder of the project area. Timely construction of project improvements and pub- lic facilities is crucial in rehabilitation projects because it demonstrates public commitment to the area and bolsters investor confidence. In areas where residents have the resources to rehabilitate their own units, the key catalyst is often construction of needed project improvements -- sewers, widened or paved streets, curbs and gutters, sidewalks, and street lights. Such public facilities as schools, police and fire stations, parks, etc. serve a similar purpose. Almost more important than their introduc- tion in the project area is their prompt construction if they were announced. Residents of declining -324- neighborhoods tend to be skeptical and pessimistic about the future of their area, and one of the key factors in completing a rehabilitation project suc- cessfully is to engender a positive outlook among residents. Such a change in attitude often spreads to the larger community real estate market. In large renewal projects where all project improve- ments cannot be constructed simultaneously, an LPA is wise to concentrate initial disposition and rehabili- tation efforts on the areas in which project improve- ments have been completed. Then marketing activity can follow improvements to the other sections of the project. More detailed discussions of the timing of public facilities and project improvements appear in Chapters 16 and 19. 7. In rehabilitation, as in most clearance and redevel- opment of renewal land, LPAs should focus first upon the areas adjacent to the highest quality nodes of activity. The most obvious example is a project ad- jacent to a Central Business District, as illustrated in the following diagram. PREFERRED STAGING OF REHABILITATION IN PROJECT ADJACENT TO CBD & DESIRABLE RESIDENTIAL AREA DETERIORATED HOUSING 3RD PRIORITY 2ND PRIORITY 1ST PRIORITY DESIRABLE RESIDENTIAL AREA -325- The preferred staging of rehabilitation, construction of project improvements and public facilities, and disposition of vacant land would be as shown in the diagram. The Agency would concentrate initially in that part of the hypothetical project labeled "1," where market demand would be strongest and there would be the greatest likelihood of attracting private investors. Because of this project's desirable loca- tion near the CBD, it might be possible to draw middle- income residents to Area 1. If the early project improvements were placed in Area 3, the Agency would be starting in isolation and could expect to experi- ence difficulty in generating rehabilitation and mar- keting vacant land. LPAs should avoid focusing initially upon the worst areas that are surrounded by deteriorated and blight- ing structures. New and rehabilitated housing in such areas can be marketed only to low- income families. Such concentration of poverty-level households causes perpetuation of social problems and generally leads to rapid deterioration of new and rehabilitated structures . Private rehabilitation almost always proceeds outward from the most desirable nodes of activity within an area. Rehabilitation in the Capitol Hill area of Washington, D.C., for example, started in the vicinity of the Capitol itself and moved eastward. An LPA strategy is most likely to succeed if it encourages existing trends in the marketplace and does not try to reverse marked decline in an area of concentrated blight. We encouraged one rehabilitation project in the middle of a deteriorating inner-city area. By acting rapidly and creating widespread community sup- port for the project, the LPA was able to generate a great deal of rehabilitation and new construction. However, the project created an island of good quality, lower- income housing in a sea of blight. Even before project closeout, the housing in the rehabilitated area began to show signs of deterioration, and there was no catalytic impact on the surrounding area. The massive expenditure of money in this project could have had more impact if a location on the edge of the blighted area had been selected for treatment first. The illustration below shows a typical neighborhood slated for rehabilitation and identifies a possible strategy for initial treatment. If the LPA were to carry out some rehabilitation itself to serve as a catalyst for private or subsidized redevelopment, the -326- PRIORITY AREAS FOR CATALYTIC REHABILITATION JL I I L MAJOR STREETS PARK NEW OR EXISTING COMM'L DEVEL. COMMUNITY FACILITIES PREFERRED AREAS FOR REHABILITATION FOCUS 1 n :::: V^'^'^X'-y ' IN BE ir ir ir best places to focus would be the high activity cen- ters -- along or adjacent to major streets, adjacent to established commercial facilities, adjacent to we 11 -maintained parks, etc. In such high visibility areas, new residents feel safer and are not as aware of deteriorated structures within the neighborhood. Once an improved nucleus is established and if project improvements are installed, rehabilitation will usually proceed with a sort of "ripple" effect. 8. An LPA may wish to encourage nonprofit housing sponsors to develop or rehabilitate housing for low- income resi- dents for a number of reasons: • To provide a relocation resource for displaced households . • To rehabilitate units in which private developers are not interested. • To develop community participation within the re- habilitation process. • To add to the stock of good quality housing for low- and mo derate -income households. -327- • To provide job training for area residents. • To generate greater resident commitment to re- development of the area. In some areas , the only way that an LPA can meet these objectives is to promote the activities of nonprofit sponsors . There are pitfalls in this approach, however. Tradi- tionally, nonprofit sponsors have been inadequately prepared to manage housing once it has been built. Although there are certainly exceptions to this gen- eralization, we have found that housing rehabilitated by nonprofit sponsors over the last 10 years has fre- quently experienced serious financial difficulties and, in some cases, foreclosure. The nonprofit sponsors often have not had the housing experience or the financial resources to provide for adequate man- agement. The problems have frequently been exacer- bated by the failure of FHA to allow for sufficient rent increases or by local rent control laws. In addition, there may be political complexities among competing community groups for development of par- ticular parcels in projects represented by strong Project Area Committees. Although nonprofit sponsors have had greater diffi- culties in property rehabilitation than for-profit sponsors, the experience is by no means uniform. In some cases, LPA support of nonprofit sponsors has led to successful redevelopment and has served the secondary purpose of gaining the cooperation of area residents in working toward other renewal goals. The terms of the Uniform Relocation Assistance Act provide up to $15,000 to homeowners displaced by governmental action -- clearance for urban renewal, highways, and public facilities construction. An LPA can encourage such displaced households to pur- chase homes in need of rehabilitation and use their location payments to rehabilitate the structures. Or the LPA can perform "turnkey" rehabilitation by completing the structural improvements and then sell- ing the rehabilitated units to relocatees. If the buyer is identified in advance, he or she can par- ticipate in the redesign of the unit and can then buy a customized home. In several small midwestern cities, we found that LPAs aggressively and success- fully combined relocation and rehabilitation efforts -328- within and among urban renewal projects -- in both single -family and multi-family areas. 10. An LPA may wish to perform some rehabilitation itself, borrowing directly from banks or using renewal project or Community Development Block Grant funds in order to rehabilitate structures. By so doing, an LPA can avoid the problems that private redevelopers have in obtain- ing financing, shortcut the red tape, of subsidy pro- grams, perform rehabilitation up to the desired stan- dard, create a catalytic effect for private rehabili- tation within the project, and retain certain features of historical interest that might be jeopardized under private rehabilitation. The risks of direct rehabilitation should be care- fully evaluated by an LPA considering this course of action. We found in many cities that the LPA rehabili- tation staff severely underestimated the costs of ef- fective rehabilitation. An LPA should proceed only if there are experienced local contractors available who have rehabilitated the same types of structures as are being considered and have developed the necessary financing mechanisms to complete the rehabilitation once it has been started. In San Francisco, the LPA purchased and rehabilitated houses in the Western Addition project. Initially, private developers were not interested in the area because the neighborhood had deteriorated. However, the construction of project improvements and the LPA's clear commitment to the area generated enough demand so that the rehabilitated units were sold at a profit. Then private redevelopers entered the area. This pro- cedure works best when the housing market is tight and when there are older, deteriorated homes of historical or architectural value. 11. Another mechanism for bringing about rehabilitation of selected structures in urban renewal project areas is to encourage the local housing authority to rehabili- tate units for public housing. The housing authority can proceed in four ways: it can purchase the struc- tures directly and rehabilitate them; it can sponsor the rehabilitation of a structure through one of the FHA programs and have the rehabilitation supervised by the local HUD office with the financing covered by an Annual Contributions Contract signed with the Housing Assistance Office; it can contract for re- habilitation on a turnkey basis; or it can agree to lease rehabilitated units that are owned by a private developer. The leased housing approach has particularly -329- strong appeal for an LPA because it can result in a limited amount of housing that can be used for dis- placed lower income households; it can provide eco- nomic integration of housing in the area; and it can alleviate community criticism that the LPA is insensi- tive to the needs of poorer residents. The leased housing program has been promoted for use in buildings rehabilitated for middle- and high- income tenants in some big-city renewal areas. 12. An LPA can do a variety of things to help local home- owners who are interested in rehabilitating their units. LPA staff can provide technical assistance in preparing rehabilitation plans, identifying lending sources, filling out forms to obtain financing, lo- cating contractors, explaining the procedure for getting bids, negotiating with contractors, obtaining building permits, and arranging for inspections. It is unlikely that any individual LPA would be adequately staffed to assist many homeowners in all of these ways, but it is important to adopt a posture of willingness to help residents -- and to carry it through with sub- stantive assistance. This type of direct counseling and aid to residents can expedite rehabilitation in a project area and end up being in the best interest of the city and the LPA. 13. In some cases, provisions in the urban renewal plan or in the city zoning and building codes may be re- stricting rehabilitation. The major code restriction that is an impediment usually relates to fire regu- lations. For older structures that were built before the existing code, violations generally are not cited unless substantial rehabilitation is performed. Then the fire department may insist on new standards for doors, fire walls, fire escapes, and stairway widths. Rigid enforcement of such standards may make rehabili- tation economically infeasible, in which case the LPA should make every effort to obtain variances. Most building departments are fairly flexible concern- ing rehabilitation, and some cities have made special provisions in their building codes with respect to wiring and plumbing for structures in rehabilitation areas. Cincinnati, in particular, has altered its building code to facilitate rehabilitation. If the renewal plan itself has established restrictive standards that are limiting rehabilitation, the LPA should consider changing the plan or interpreting it more flexibly. -330- • Reduce Emphasis on Rehabilitation 14. Many of the predominantly rehabilitation projects that we visited have experienced considerable decline since they were initiated. In some cases, delays in funding and planning the project meant that valuable time was lost and neighborhoods moved beyond the point where rehabilitation was feasible. In other cases, exogenous city dynamics were so strong and pervasive that the LPA was not able to turn the neighborhood around and restore investor confidence. Often, structures that were in structurally sound but deteriorating condition when the project was planned have continued to deteriorate or become abandoned and are no longer economically feasible to rehabilitate. In these instances, the population of the area has usually declined sharply, resulting in discontinuation of neighborhood services, which further promotes decline. The people who remain are generally the poorest, which means that social as well as physical problems are concentrated in the area. Given such project dynamics and in the absence of massive subsidized funds for rehabilitation, any attempt to increase or accelerate the pace of re- habilitation activities in a neighborhood will result in increased housing abandonment, hardship to area residents, and failure to achieve the goals of the project. In this type of situation, an LPA has to change its strategy for dealing with an urban renewal area. It can either reduce the standards and quantity of rehabilitation, reduce the size of the project to focus on the best or worst area, or increase the amount of clearance that is planned. The choice among these alternatives will probably depend as much upon the availability of funds as upon the charac- teristics of the project area. 15. In some cases, initial rehabilitation of properties within project boundaries proceeded in satisfactory fashion, but the surrounding areas continued to deteriorate badly, thereby creating later difficulties in the disposition of land within the project. Given such continued deterioration of adjacent areas and reduced demand for properties within the urban renewal project, the LPA should consider changing its strategy for the project. Its original goals and objectives may now be unrealistic and it may simply be forcing the rehabilitation of structures that will subse- quently decline rapidly because of the blight that surrounds the project area. -331- 16. An individual renewal neighborhood may be holding its own with regard to continued deterioration, but the established rehabilitation goals may not be being met because they are too ambitious for the financial capabilities of local residents and businesses and subsidy funds are not available. The LPA may wish to adopt a "wait and see" attitude regarding future fund- ing, or it may want to adopt a more modest standard of rehabilitation and encourage residents to undertake more limited paint up and fix up of their homes. In an area in which most of the homes can be brought up to code with a relatively small investment (under $2,500), an LPA is well advised to promote minor re- pairs and pay less attention to those structures for which rehabilitation will cost in excess of $10,000 per unit. Under this approach, the primary focus would be on preserving the existing stock, rather than devoting limited funds to substantial rehabilitation of badly deteriorated units. Minor paint up and fix up does not solve basic neighborhood or structural problems, however. Although it may serve to arrest further decline, it will not in and of itself restore investor confidence. Rehabilitation standards may have to be changed in commercial and industrial areas, as well as in resi- dential neighborhoods. In one midwestern city we studied, rehabilitation of industrial buildings was stalled initially because the LPA's standards were very high; when the standards were lowered, rehabili- tation proceeded steadily. It is important that LPAs have realistic goals for rehabilitation in nonresi- dential areas because it is easy to place too heavy burdens on business establishments and force them to seek other locations. The development standards im- posed in renewal areas should not exceed those of competitive commercial and industrial areas or desir- able firms will be driven away. Although LPAs should not condone the tendency of some firms to ignore the external appearance of their buildings, many small businesses are reluctant to place their limited profits in landscaping or appearance. 17. If a rehabilitation project has continued to decline under its designated reuse, the LPA should consider and evaluate all other possible reuses for the land if it were cleared. In a Flint, Michigan renewal project, a large area was cleared for multifamily housing but could not successfully be marketed for development. The University of Michigan became in- terested in the site and, with the aid of $1 million -332- donation from a local foundation, the LPA was able to dispose of the land to the university. This served to firm up the market for the remaining land inventory that was dependent upon the general market for housing. Closeout Project 18. If a rehabilitation project has been in execution for more than three years without much activity having taken place, the LPA should carefully re-evaluate the reasons for lack of interest in the goals of the project. Perhaps the project was conceived inappro- priately. Perhaps the plan is no longer viable be- cause of changes in the socioeconomic characteristics of the neighborhood. After its re -evaluation, the LPA may conclude that its limited funds can be more productively spent in other ways. If this is the case, consideration should be given to closing out the project. 19. Court cases and legal actions have abruptly blocked the activities of LPAs in some urban renewal neigh- borhoods . The lawsuits may have been initiated by citizens groups attempting to maintain historical buildings or to promote the development of economically integrated housing. Of they may relate to environ- mental issues or to local moratoria on school or pub- lic housing construction. Whatever the cause, if such legal actions are not likely to be resolved in the foreseeable future, the LPA should consider clos- ing the project. 20. Some citizens groups have actively opposed the re- habilitation process, particularly in cases where rehabilitation of structures will result in eviction of low- income tenants for eventual occupancy by higher income residents. This problem is not common because it only occurs in areas where higher income households are actively competing with lower income residents for housing. In such situations, the problem is two-fold: first, there are insufficient funds to assure that the desired standard of rehabilitation can be attained for a majority of existing residents; and second, the market appeal of the area is causing land values to rise to such an extent that lower income residents can no longer afford to live there. This may create a no-win situation for an LPA. The dynamics of the area are such that private investment is likely to take place regardless of the activities of the LPA, which means that upgrading of the -333- neighborhood will have occurred and one of the major goals of the project will have been achieved. If the LPA accelerates the rehabilitation process, it will only speed up displacement of the lower income resi- dents. If it slows down rehabilitation, it will come under fire for delays. In such a case, an early close out of the project may be a satisfactory solution that will allow future rehabilitation to take its own course . If it is determined that the major reason for an LPA's inability to meet rehabilitation goals is failure to obtain rehabilitation funding, then future prospects for financing should be carefully evaluated. If there are realistic prospects of obtaining funds, then project plans should be reviewed in light of the amount of money that will be available for specific income groups. If all possible funding sources for rehabilitation have been pursued aggressively and un- successfully, the LPA may be well advised to seek early closeout of the project. -334- INSUFFICIENT DISPOSITION STAFF CAPABILITIES Statement of the Problem A key problem that frequently appears to parallel a slowness in the land disposition process is limited expertise of LPA staff members that are involved in the marketing of urban re- newal land. Lack of staff expertise in the knowledge and skills necessary for selling land is a weakness found within many LPAs across the country. This problem is most common in cities with small LPA staffs that must be involved in all facets of execution activities in the renewal process and cannot con- centrate their efforts on land disposition. The capabilities and types of expertise needed include more than just the ability to "sell land." Disposition involves all execution activities from land acquisition to development mon- itoring. The types of expertise needed include but are not limited to : Knowledge of real estate sales and brokerage. Understanding of real estate appraisal techniques and methods . Skills in negotiating the purchase and sale of property. Knowledge of real estate financing. -- Ability to "package" real estate developments. -335- Understanding of the economics of real estate development, and especially the profit motive of developers. Promotional capabilities -- advertising, preparation of brochures, etc. Although it is almost impossible to find one individual with all these characteristics, an LPA can and should rely upon the particular skills of several complementary persons in organ- izing a competent disposition staff and good disposition pro- gram. Basic Strategy Alternatives There are two basic ways of correcting the problem of insuf- ficient disposition staff capabilities, as described below: • Expand LPA Staff Capabilities -- This involves an evalua- tion of the LPA s disposition program to date and consid- eration of the alternative methods available to obtain additional qualified real estate personnel to work on land disposition. These methods include adjusting staff posi- tions in the Agency, hiring new personnel, borrowing ap- propriate person (s) on a full-time but short-term basis from another local agency(s), or obtaining personnel on "loan" from local banks or other local business firms. • Expand LPA's Reliance Upon Outside Assistance -- Under this alternative, consideration would be given to utilizing the needed specialized expertise of outside personnel from a variety of sources: other local governmental agencies; the LPA board; retired business leaders who might work on a fee or honorary basis; leading bankers, brokers, and civic leaders who could be solicited for help on a volun- tary basis; and reputable consultants with whom an on-going relationship could be established. These types of people would be used to guide and assist the LPA in selling land and monitoring development activities. Tests to determine which of these two alternatives would offer the most appropriate means of dealing with an individual Agen- cy's problem are set forth in the decision tree on the follow- ing page. Each of the 12 tests is stated as a question that can be answered with a "yes" or a "no." In the right-hand column, we have suggested specific actions to be taken for each of the two possible answers to the test questions. We recommend that a person evaluating the problem of insuffi- cient disposition staff capabilities read through the entire decision tree before deciding upon a specific action to follow. 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Specific Observations /Suggestions The numbering of the following paragraphs matches the numbered tests, or questions, in the decision tree table titled "Timing of Project Improvement Construc- tion." Each test is discussed, though the extent of the commentary differs. Some of the questions and sug*- gested actions in the decision tree are obvious and require little explanation. Others are not so clear or involve complicated actions that need to be des- cribed in detail. In other cases, the text includes descriptions of specific situations or actions dis- covered during our research that might be helpful to other cities. We have included as many examples and illustrations as possible of successful tactics and policies adopted by renewal agencies that we visited or have heard about . Again, the text that follows is directly correlated with the numbered tests in the preceding decision tree . The numbering is consecutive, but the two al- ternatives are included as subheadings to clarify the context of the discussion of the tests. Undertake Project Improvements Prior to Land Disposition 1. When urban renewal areas are small enough for all proj- ect improvements to be constructed simultaneously, it may be to the LPA's advantage to undertake construc- tion prior to land disposition. Although there are no precise guidelines for determining what the maxi- mum size of a project area should be to fit this test, one example would be a residential project of less than 20 acres that does not require installation of such major public improvements as highways or sewer trunk lines. Frequently, an Agency can judge whether a small project is suitable for simultaneous construction of public improvements on the basis of the improvements that are planned. If the project improvements will be minor (that is , primarily needed to serve individual parcels and not dependent on the construction of major improvements elsewhere in the city), it may be appro- priate to undertake construction as project execution begins. Before proceeding, however, the LPA should ap- ply three other tests, as described below. 1A. The reuse market for the project should be clearly identified, strong, and not likely to be changed. This means that the LPA should be certain that completed public improvements will not lock the project into an inappropriate parcelizat ion that might subsequently limit marketability. Some cities have undertaken -349- project improvements without first determining the de- mand for reuses with sufficient care; upon completion of the improvements, it can be discovered that the re- use plan does not reflect current and probable future conditions. Hence, it is important to be sure that construction of improvements will enhance, rather than constrict, existing and projected market demand. IB. Most types of reuses do not require specialized project improvements to be completed before construction can begin. However, heavy industrial uses, for example, may require larger utility extensions that would have to be available by the time new buildings were com- pleted. Although such improvements could be installed after a single, special site had been deeded, it would be important to have them in place if a large tract of land were to be subdivided and marketed for multiple heavy industrial users. In an area such as this, it would probably be unwise to construct minor improve- ments like curbs and gutters before the sites were con- tracted and deeded. Such improvements are not necessary to enhance marketing and would just have to be repaired after construction on the sites was completed. IC . Postponement of site improvements is also warranted when an LPA anticipates that a large disposition parcel will be subdivided for development. This applies primarily to residential tracts, but it can also be important for industrial or commercial parcels when the planned reuse is an industrial or office park. Construction of site improvements prior to disposition could discourage developers from purchasing large par- cels if the improvements effectively dictated the ways in which the property had to be subdivided. In these cases, it is better to wait until the parcel is deeded and contracted, and then undertake site improvement construction in accordance with the subdivision plans of the developer. For higher density projects in or near central business districts, the question of when to construct project improvements can be more problematic. The major streets and utility trunk lines have to be installed immedi- ately in almost all cases -- because their construc- tion is time-consuming and because roads are often necessary to maintain circulation patterns in the down- town area. The preferable action for secondary streets and for site improvements is not so clear. Many Agencies have historically attempted to market "superblocks" to single developers for integrated multi- use developments. Though the success in marketing and -350- then achieving development of these blocks has been mixed, some of the most exciting urban renewal plan- ning and construction has occurred on superblocks. In a highly urban setting, they represent one of the key advantages of urban renewal -- assemblage of disparate parcels with multiple owners to create sites for large- scale development. Nonetheless, many Agencies have experienced inordinate delays in initial marketing and then in negotiations during the precontract period with potential developers of superblocks. Unless a developer for a superblock has been lined up and an LPA has confidence in his ability to perform promptly and expeditiously, it may be better to sub- divide the project and install all streets and utili- ties (up to the property lines) in advance of disposi- tion. This will reduce long-term costs for project improvement construction and will avoid delays in interagency coordination of construction that could end up hampering the marketing of new buildings in the project. We found cases were utility lines installed for high-rise residential development of a specific large site subsequently limited the planning potential for a mixed-use development. However, the problem there was with on-site improvements. We found few cases where streets had to be realigned after they were put in to accommodate a proposed development . In other words, final developments are more likely to be smaller and not larger than the LPA originally planned. On balance, therefore, we believe that most of the street and utility lines that are likely to be needed should be installed from the outset in CBD-oriented urban renewal projects . 2. Construction of minor public improvements is frequently dependent on prior completion of major improvements. For example, sewer connectors cannot be installed until trunk lines are in place. Also, since many improve- ments follow street alignments, it is necessary to finalize street patterns before undertaking construc- tion of improvements that follow them. When the LPA plans to undertake the construction of both major and minor public improvements, it is often feasible and sometimes essential to complete major improvements before undertaking minor installations. If this is the case, the LPA should consider constructing only major improvements immediately and delaying minor site improvements until parcels have been disposed to developers . 3. One of the most important reasons for undertaking the construction of public improvements before land -351- disposition is their positive effect on land marketing. Visible improvements, in particular, offer tangible evidence of public commitment to an area, and this can help to spur private investment . When one or more of the conditions discussed below exist in a project area, minor improvements such as access roads, curbs, gut- ters, street lighting, and street furniture should be completed prior to land disposition. 3A. If the reuse market is relatively weak, project improve- ments should usually be constructed before marketing begins . Areas that are highly deteriorated tend to be rejected by developers unless market forces indicate unusually strong development potential. Frequently, an LPA will find that "pioneering" developments that introduce a new use to a project area will be espe- cially difficult to get started because of developer conservatism about market acceptance. Furthermore, al- most every city will have renewal parcels for which de- mand is generally depressed and alternative reuses are inappropriate. Such parcels require aggressive market- ing, and every effort has to be made to enhance the desirability of the site. In these cases, minor im- provements that improve accessibility, remove blight- ing influences, and increase the attractiveness of the parcel can help to overcome depressed demand levels. They should therefore be constructed promptly. 3B. If the project is planned for rehabilitation and present improvements are insufficient, new construction should be undertaken as soon as possible. Rehabilitation projects are not likely to require major changes in street alignment or other improvements that can affect parcelizat ion . These projects are especially well suited for immediate completion of minor improvements to encourage private reinvestment and to accelerate disposition of vacant land. In Atchison, Kansas, for example, we found that capital improvements completed prior to disposition significantly improved disposition rates by demonstrating the city's commitment to the project area. This can be an important incentive, particularly to small developers. 3C. If the project is an NDP area and future funding is uncertain, project improvements should be installed simultaneously with initial marketing. Virtually every Agency that has begun a project under the Neighborhood Development Program has experienced difficulties over annual funding. Many have had funding cuts that have made planned construction of public improvements im- possible. Because of continuing uncertainty over availability of funds, we strongly suggest that Agencies -352- not wait to complete minor project improvements until land disposition begins . The best way to ensure that improvements are provided is to undertake construction as soon as funds become available. 4. Most cities require that public improvements be con- structed by or under the supervision of the city engineer or the public works department. This means that the LPA must establish good working relationships with personnel responsible for public improvement con- struction. In several cities RERC studied, LPAs ap- peared to wait until projects were into execution be- fore beginning discussions with other city agencies about necessary public improvements . This sometimes created antagonisms among the agencies and often re- sulted in delays in construction. Furthermore, it also reduced the leverage the LPA could exert when delays occurred. This problem often becomes even more severe when public improvements are to be constructed by non-city agencies. For example, one eastern city has encountered long de- lays in the construction of a flood control conduit because of inadequate leverage over the U.S. Army Corps of Engineers. Many other cities have experienced delays because of inability to pressure state highway departments to expedite construction of new roads. Sometimes these delays are unavoidable because they result from insufficient funding; but in numerous cases, the delays result from the low priority status of the planned public improvement in the scheduling program of the state or regional agency. It is important for an LPA to be realistic about the possible leverage it can exert to expedite construc- tion of public improvements. One way to minimize pos- sible difficulties is to establish lines of communica- tion with appropriate agencies during the planning phase of a project. This can reduce antagonisms and help to anticipate possible delay-causing factors. If political considerations or possible funding cuts indicate that later delays are likely to be difficult to overcome, the LPA should then press for immediate construction of planned improvements. 5. State and federal grants for construction of certain types of public improvements will sometimes require that construction be undertaken within a specified period of time. Funding may terminate if construction is not completed, and a city may have extreme diffi- culty extending a grant or finding alternative sources of funds. In such instances, it is clearly in the -353- LPA's interest to see that funding is appropriately staged to fit the projected construction timetable, and also to be certain that construction begins im- mediately upon the awarding of a grant . 6. The more complex a public improvement, the more lead time that will probably be required for design and con- struction. This means that bridges, state highways, beltways or inner loops, and virtually all rapid transit facilities will necessitate several years of planning before construction can begin. Most major public improvements involve coordination among numer- ous agencies, frequently at several governmental levels, and unraveling bureaucratic red tape can take a great deal of time. Although almost every city visited in our study ex- perienced delays in land disposition because of stalled construction of complex project improvements, a partic- ularly difficult situation occurred in one southern city where a proposed expressway alignment was in plan- ning for almost ten years . State and federal agencies would not make commitments to build the expressway, and the problem was resolved only when the city modi- fied the extent of the alignment and constructed the thoroughfare itself. The long delay between planning and actual construction indicates that cities must be prepared to allow long lead times for design, and to begin construction as early as possible. 7. When an LPA undertakes a total clearance project, street patterns are sometimes planned that are unique to the overall design of the project. Frequently, the LPA anticipates that the project will be disposed to a single developer and in some case the developer is actually involved in the preparation of the reuse plan. In one city RERC studied, an entire project area was under contract to a single developer for five years, during which time all public improvements were com- pleted. At the end of five years, the developer with- drew without starting construction. Subsequently, the LPA had great difficulty marketing the project to other developers because the project's street patterns were highly irregular and not easily adapted to disposi- tion to multiple developers. As the above example indicates, it is often unwise to begin construction of unique public improvements until all parcels are deeded. Although there are certain advantages to the disposition of an unusual project area to a single developer, the LPA should be certain that development will proceed before completing project -354- improvements that create inflexible parcelization. Construct Project Improvements Simultaneously with Develop - ment 8. This test is the corollary to Test 3D. If redevelop- ment can proceed without improvements being completed or constructed, it may be appropriate for the LPA to stage construction simultaneously with development. When it can be used, this approach has several impor- tant advantages. First, it enables the LPA to make certain that project improvements are coordinated with developers' plans. Second, it avoids the additional costs of repairing completed improvements that might be damaged during construction. Third, it gives the Agency some flexibility in changing reuses if initial marketing efforts have not been successful. Even though an LPA may have legitimate reasons for undertaking public improvements construction when de- velopment begins, the possibility of unexpected delays always exists. Sometimes this is not a serious prob- lem, particularly when reuse markets are strong. In Boston, for example, a luxury apartment complex was constructed and substantially occupied long before ac- cess roads, street lighting, and other project im- provements were completed. In most cities, however, delays in construction of public improvements will seriously deter marketability. This is an important factor to consider before deciding to construct public improvements simultaneously with development. 9. One of the important factors to evaluate before decid- ing upon construction of public improvements simultane- ously with development is the amount of time required to complete construction. Developers are certain to request that all project improvements be in place when development is completed; otherwise, the marketability of the development can be threatened. For minor project improvements, it is likely that construction could feasibly proceed simultaneously, but major im- provements may require considerably more time. There- fore, an LPA should not wait to construct improvements simultaneously with development if the time required for their completion will exceed the time required for on-site development. 10. Engineering considerations can place practical limita- tions on the scheduling of project improvements. Gen- erally, underground work must be completed first, fol- lowed by street improvements, curbs, gutters, sidewalks, and structures. If an LPA waits until after disposition -355- to begin construction of project improvements, the public construction activity may interfere with on- site private development. For example, construction of underground improvements can limit accessibility to a site and make movement of equipment difficult or impossible. Aboveground construction can interfere with movement of machinery on a site. The timing of such construction can sometimes be scheduled to mini- mize interference with site development, but, if not, the LPA should be prepared to construct minor improve- ments prior to land disposition. When project improvements are to be constructed by non-city agencies, the probabilities of delay are in- creased enormously. This is because an LPA has much less control over non-city scheduling priorities and funding levels than it does over those of its own city. In addition, the fact that outside agencies are often responsible for major improvements that tend to be larger and more complex than those undertaken by the city itself can contribute to the increased likelihood of delay. As the majority of LPAs already know, high- way projects can be. stalled for indefinite periods by the inaction of state and federal highway departments. Delays in the construction of major public improvements, such as highways, can seriously affect the rate of land disposition in an urban renewal project. When projects are dependent on good accessibility long de- lays in highway construction can have strong negative impacts on marketability; this is especially true for industrial and commercial parcels. Furthermore, in- decision regarding proposed alignments can make reuse planning difficult or impossible. In such cases, it is clearly in the interest of the LPA to exert as much pressure as possible to see that plans are finalized and that construction of improvements by non-city agencies is underway before land disposition begins. -356- SELECTION PROCESS FOR MULTIPLE DEVELOPMENT PROPOSALS Statement of the Problem When an LPA is fortunate enough to own a highly desirable site that has been advertised and has generated considerable developer interest, the Agency is then faced with the prob- lem of effectively selecting one developer from among those submitting proposals. The questions that the LPA must answer, and that are addressed in this chapter are: "How do you de- cide which developer would be best for the project?" and "What factors are helpful in differentiating among the capa- bilities of the developers interested in the project?" These questions have no hard and fast answers. Nonetheless, there are several criteria that should be considered in evaluating proposals and developer capability. To many disposition officers, this problem is an enviable one. Yet, for those fortunate enough to have it, it often poses serious dilemmas. The problem of selecting from among several development proposals occurs most often in central business district projects where prime sites have been cleared and designated for retail, office, and hotel-motel reuses. In residential projects, the LPA is more often able to divert "excess" developers to comparable sites in the same or other projects . -357- Basic Strategy Alternatives In order of complexity and detail of required submissions, there are three general alternatives for LPA actions. These may be summarized as follows: • Make Prompt Selection After Prescreening Under this alternative, developers would submit general qualifica- tions and perhaps appear for an oral discussion/presen- tation. Then the LPA would select one developer and begin contract negotiations. As a general rule, this alternative is not recommended because it provides too little information to the Agency and because it too quickly eliminates the Agency's options. • Make Preliminary Selection and Hold Other Options Open -- In this case, the LPA would enter preliminary negotiations with one developer and extend the negotiation period" long enough to allow time for financing to be arranged, for initial discussions with possible prime tenants, and for working drawings to be prepared by architects. Dur- ing this preliminary period, other developers' proposals would not be rejected. Rather, developers would be told that an initial selection had been made but that further consideration of proposals would occur if the tentatively selected developer was not able to "package" his pro- posal successfully within a specified time. • Require Detailed Proposals and Then Select Developer -- This is the optimum alternative although it is a time- consuming one and might lead to a lower number of sub- missions. It requires all interested developers to prepare covering marketability, financial feasibility, project financing, design planning, and development scheduling. We do not recommend that this procedure involve a design competition. After detailed proposals are submitted and a developer is selected, we recommend the same type of trial period described in the previous alternative . Tests to determine which of these three alternatives would offer the most appropriate means of dealing with an indi- vidual Agency's problem are set forth in the decision tree on the following page. Each of the 14 tests is stated as a question that can be answered with a "yes" or a "no." In the right-hand column, we have suggested specific actions to be taken for each of the two possible answers to the test ques- tions . -358- CO -J < o a O DC a. H Z LU o -J uu > uu Q LU _i Q. 3 cc o LU. (A to LU u o cc Cu H U LU _J LU to s LU -J CO o cc Cl cu cu J_l CO •H CD c ■H o * jj! ri CU 1 t r\ Qi ir Q m *hO HI rft CU r; Cl 4J Q , — I GO CU 4-J ;> rr! 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Hue •O OiH o c ■ * c« >-i O £ U Q) "4-1 C O r-l .H S TD <+J CO CU ^ X U C 4J 1-1 -H 00-H O P *H f— J 3 CT CO CO CU CU 3 < >-i T3 tr CO Cfl CO cu o CU cu o >H z >* z u CO CO ca Cl CU 3 3 a o o a •H 4-1 EC CO tH u cu T3 CO M-l cu jC jC CJ c 00 •H 4J CU 4-1 c CJ CJ T3 H •w CU CU 4-1 -O CO C 01 C ^3 i CJ CO CO CO CO •H l-l T) CO cu 4J -H c cu SI C CO and •H cs- •H 4J CU CU 4-1 U e T5 CU CJ c c a i—< CU CU *H o CU c 3 00 >-H u ■a o CO 4J CU o CU t4 CO > E •rl j- a ^-i a) CU 4J CO CJ CO u ■o ^ CO <4-l o CU I— 1 U O 4J T3 4J 4J c E E co cu CU 1-1 CU 3 a C co c-. a o C CO O o co l-l CU w > > CU J3 CN co cu O 04J O JS T3 Q 4J O tat CO yo/, IrU loan {OJyf7o tor 20 years; Factor . IU4y) 20 Cash Flow Before Income Tax $ 41,420 C. RATE OF RETURN BEFORE TAX Equity Investment ($1 ,316,250-$987, 190) $ 329,060 Cash on Cash Return on Investment ($41 ,420 *. $329,060) 12.58% Assumptions for the Sake of Example: • 86,200 Sq. Ft. of cleared land @$2.50/Sq. Ft. • A 42,350 Gross Square Foot Office Facility @$2.50/Sq. Ft. # 100 surface parking spaces @$20 monthly rental per space • A 75% loan @9£% for 25 years. Note that the above items are subject to variation by both region and ti me. For example, construction costs, maintenance costs, real estate taxes, etc. , can vary monthly and will ordinarily differ by regional location. Even within a region, property taxes vary by municipality. These items can all be affected by policies of the LPA. For example, the following tables describe the effects of different values of land cost, costs of site improvements, and occupancy rates on profit. -371- INVESTMENT ANALYSIS OF PROJECTED OFFICE FACILITY TABLE 1 EFFECT OF CHANGES IN COST PER SQUARE FOOT OF LAND ON TOTAL COST AND RETURN ON EQUITY Table 1 shows the effect of land cost on the equity return Cash Flow or profit. Obviously, marketability of the land depends Land Cost Total Before Equity in part on the appraised reuse value of land. If land Per Sq. Ft. Cost Income Tax Return disposition is slow, therefore, quite possibly the reuse value of the land should be re-evaluated and reduced as an $1.50 $1,230,050 $48,210 14.67% incentive to development. 2.00 $1,273,150 $44,810 14.07% 2.50 $1,316,250 $41,420 12.58% 3.00 $1,359,350 $38,030 11 .19% 3.50 $1,402,450 $34,640 9.87% TABLE 2 EFFECT OF CHANGES IN COST OF SITE IMPROVEMENTS ON TOTAL COST AND RETURN ON EQUITY Table 2 describes the effects of varying site improvement Cost of Site costs on equity return. Flexibility of desirable standards Improvements for site improvements such as landscaping, screening of Including Surface Cash Flow parking facilities, lighting standards, etc., must be Parking & Total Before Equity achieved during negotiation in order to obtain an attractive Landscaping Cost Income Tax Return yet profitable development. The LPA must realize the ramifications of excessive design controls on profitability, $ 22,000 $1,296,250 $43,000 13.26% and the developer must realize the role of the LPA in S 42,000 $1,316,250 $41,420 12.58% assuring an attractive development. $ 62,000 $1,336,250 $39,850 11 .92% $ 82,000 $1,356,250 $38,280 11.29% $102,000 $1,376,250 $36,700 10.66% TABLE 3 EFFECT OF CHANGES IN AVERAGE OCCUPANCY ON INCOME AND RETURN ON EQUITY Table 3 describes the effects of varying occupancy rotes on Average Cash Flow equity return. Through proper marketability analysis and Occupancy Gross Before Equity the preparation of feasible plans, the LPA can aim for a scale Rate Income Income Tax Return of development which should achieve profitable levels of occupancy. Also, the LPA must realize that provision of 100% $254,000 $53,120 16.14% public improvements and services is instrumental to desirable 95% $242,300 $41,420 12.58% occupancy rates, thereby increasing the profit incentive for the 90% $230,600 $29,720 9.03% development 85% $218,900 $18,020 5.47% 80% $207,200 $ 6,320 1 .92% The above three variables have been taken independently. Imagine the negative impact of an over- priced land parcel plus too many stringent design controls. Although these particular variables have been singled out, the LPA must also be aware of the impact of real estate taxes, maintenance costs, insurance and other variables which affect the return on investment. Not noted in the previous analysis, lower overall costs tend to lower the amount of equity or cash on hand required, and less equity required can be a significant factor in stimulating development. It should also be noted that the ability to achieve an expected rental rate where applicable is a high priority in profitable development. The sensitivity of profit to expected rental rates, in addition to occupancy expectancy, is paramount to success. Furthermore, the considerable effects of interest rates on annual debt charges (payment on the loan) and the resultant cash flow before income tax depicts the need for quick execution by the LPA because time costs money to the private developer. Understanding the effects of different costs on a project's profitability, therefore, the LPA can better realize the role its policy plays in stimulating or inhibiting private development. Prepared By: REAL ESTATE RESEARCH CORPORATION -372- 13. A lack of local citizen involvement in the selection of developers can be a serious deterrent to expedi- tious land disposition, especially in residential projects. Citizens have often felt that the federal government and an outside developer should provide all the money and take all the risks. Thus, the de- mands upon a developer can become unrealistic and can lead to termination of a disposition agreement. In Portland, Maine, in contrast, such rivalry existed among city agencies over developer selection that co- ordination and resolution by the adept city manager were required. When groups outside the LPA are par- ticularly interested in developer selection, the LPA should arrange to meet with them to jointly review proposals by rating them against specific selection criteria. 14 <, The question raised in this test was discussed earlier in Test 5. After reviewing that discussion and the results of Tests 8 through 13, we suggest that a de- veloper be tentatively selected and be allowed a two- to three-month period in which to secure financing, tenant commitments, etc. Until a final disposition agreement is signed, other developer options should be kept open. -373- INTERIM PROPERTY MANAGEMENT Statement of the Problem The importance of adequate property management is often under- estimated in a community redevelopment program. Yet the man- ner in which property management functions are handled from the time of initial acquisition can have a substantial impact upon the rate of land disposition. Moreover, because of their highly visible nature, the adequacy of property management activities can influence community acceptance of the entire renewal program. Cities across the country face an increasingly serious prob- lem with rising costs and responsibilities for the management of diverse, and often increasing, inventories of real estate. Many cities will have to take a more comprehensive approach to property management by developing a positive communitywide strategy and the tools for its implementation. The experi- ence of the Local Public Agency will provide valuable input to the development of such a program, and the LPA could play a vital role in its implementation. The growing need for a comprehensive property management program has arisen for some of the following reasons, which are detailed further below: • A residual of least desirable properties. • An inventory of occupied residential structures but inadequate relocation resources. -375- • The need for high maintenance standards to keep proper- ties marketable. • Blighting influences continuing to retard marketability. • The need to optimize opportunities for interim property use . • The increased emphasis on structural preservation because of resistance to clearance. All of these problems are common ones that RERC encountered in visiting LPAs . Because they are so closely tied to many disposition difficulties, each is discussed in subsequent paragraphs . 1. Residual of Least Desirable Properties Examination of timelines of the rates of land disposi- tion in urban renewal projects shows a "flattening out during the last years before closeout. This pattern was confirmed in our examination of over 70 projects in 22 cities, which revealed that this is in part due to a residual of parcels that are the least appropriate for development. Such parcels are often of inappropriate size or shape, lack proper access, are overpriced, or are designated for a reuse that is inappropriate or not viable in the near term (see other chapters for dis- cussions of these particular problems) . An acute prob- lem of this type exists in many communities that under- took Neighborhood Development Program projects in low- density residential areas. Because sites were acquired through hardship or voluntary acquisition, many LPAs now have inventories of scattered single-family lots (see Chapter 11) that are particularly difficult to market and costly to maintain. Land banking may be the only viable recourse for treat- ment of these residual parcels. Land banking is not a "do nothing" strategy, however. It implies that suitable maintenance will take place and that all efforts will be made to procure interim, preferably revenue -producing, uses . 2. Inventory of Occupied Residential Structures but Inadequate Relocation Resources Some LPAs and other local agencies have inventories of residential structures scheduled for demolition or re- habilitation. Occupants are to be relocated into standard housing as soon as suitable units or relocation funds -376- become available. Unfortunately, due to limited supplies of standard housing or inadequate financial resources, these residents are sometimes forced to remain in sub- standard conditions. This situation creates an especially sensitive property management problem as the community is in the position of being a "slumlord" and is faced with the unhappy choice of continuing to manage properties that are generally unfit for habitation or of spending con- siderable sums on maintenance and interim improvements to correct deficiencies to at least minimum standards. Ob- viously, the treatment selected in this situation can influence the community attitude toward the entire urban renewal program. 3. Need for High Maintenance Standards to Keep Properties Marketable Our findings indicate that many LPAs have insufficient appreciation of the importance of adequate property man- agement to "keep a marketable product." This applies equally to an inventory of occupied structures, vacant structures, or vacant land -- though the implications on costs and responsibilities vary widely by type of property, as indicated on the accompanying chart. As consumers, most people would avoid a store in which the aisles were piled high with trash, where merchandise was soiled or torn, or where the products had obviously been on the shelves for some time. Yet it is not atypical for LPAs to let their property inventory grow up with weeds and pile up with trash, to allow sign boards to fade, or to leave vandalized structures unrepaired. Such actions very much reduce the appeal of the properties the LPAs are trying to market. Maintenance responsibilities and costs must be assumed. There may be opportunities for LPAs to recover these costs from revenues generated from interim use of the property, or to pass the maintenance responsibility on to others. The importance of appropriate maintenance for keeping urban renewal sites marketable cannot be over- emphasized. 4. Blighting Influences Continuing to Retard Marketability As communities move toward closing out existing urban re- newal projects, LPAs will be increasingly responsible for removing constraints to marketability. One such con- straint is the continued presence of blighted structures that are creating a poor environment for new development on adjacent vacant sites. These structures are often in -377- CO 0) •rl 4J •rl C P 4-> o a a o • • CO CD CU CJ 1 CO rH C »rl a s-i ■rl CO 4J o - c 4-» «H CO a £ co Si 60 CO CrQ ■u a 60 C co CO P D cj ps u H O CO c •H • i cj co CU 4J C U CU 60 •H ,12 * CO CO 60 CO C = U «H CU 4-> 4-> rH 4-> CO u p CO O CO 4-> Tj CU -0 co C £ CO (U 4J « n O g ?>vH CU CO 4J g 4J -H CU -H U CO CO -H Pm co S CO a <: h > CO P CO 4J O cj co U (U 2 u x> P »H 4J CO > CO O C U 4-1 u p CO O 60 CO 44 CU co: U U 60 C CU «H T3 •» cO •H i— I 4-1 > co C O >-H U O CO Pw gS cu co 60 CO U CO TJ H CU co cu 4-4 rH X o u 4-> CO 4-> C g O CO CO CJ X CL cO CO g > cu •H £ 4-1 CU O 4-1 N O •H 4J g C P O g 60S CO CU 60 CO g H << > rJ c o •H 4J CO U O & o u J3 CJ r4 CO CU CO PS CU 4-> CO 4J co W CO CU PS r^ rQ 8 CO a cu P-l -378- LPA ownership and are scheduled for eventual demolition or rehabilitation. In other cases, which are more dif- ficult to deal with, these structures are not owned by the LPA. Perhaps they were initially scheduled for re- habilitation under an owner-participation agreement or other circumstance, but are no longer viable for this purpose. Typically, Agencies would not have funds for additional acquisition. Our findings indicate that, under the conventional urban renewal program, most LPAs undertook the execution activities of acquisition, relocation, and demolition before any serious attempts were made to market land. In nonresidential, CBD-oriented projects, such action was often necessary to "create a marketable product" and to overcome developer/ investor resistance to the area. This was particularly significant for the initial or "pioneer" developers. Thus, to the extent that communities have open projects with remaining blighting influences or are proposing new projects, greater attention to this aspect of property management will have a direct and positive bearing upon the rate of land disposition. Need to Optimize Opportunities for Interim Property Use As communities move toward a posture of positive land banking as a recourse for acquired property that is not marketable in the near term, increasing need will develop to optimize interim uses. Under community development block grants, there will be intense competition for use of local funds . Property management and maintenance are likely to receive low priority. Thus, communities will be motivated to derive all possible revenues from idle properties they own. In cases where revenue -producing possibilities do not exist but there are opportunities for use of the land in the public interest, political pressures will be exerted to inaugurate such use. In most communities, only limited innovation has occurred to date with respect to interim property use. As the long-term nature of some of the property management re- sponsibilities becomes clear, greater realization of interim use opportunities will likely occur. Finding all potential appropriate interim uses for publicly -owned property should be a key component of a positive land banking strategy . -379- 6. Increased Emphasis Upon Structural Preservation Because of Resistance to Clearance Even without all the previously mentioned reasons, the increasing public resistance to clearance and the emphasis upon structural preservation will place new responsibility upon LPAs to manage their properties appropriately. The preservation emphasis has its genesis in a number of trends, including reaction against flagrant community dis- ruption for some renewal projects; the practical considera- tion of rapidly rising costs for new construction (ma- terials, labor, interest); renewed interest in historic preservation; and the environmental movement with its strong "conservation" bent. These trends require reexami- nation of inventories of structures held by LPAs as poten- tial resources for housing, commercial, or industrial space -- perhaps under less restrictive rehabilitation standards than have been established heretofore. In many renewal areas, partly because of the "blight removal" emphasis of the urban renewal program, structures have already been demolished and only vacant sites remain. For the above major reasons, the problem of a longer-term re- sponsibility and rising costs for managing an often increasing inventory of property in public ownership will represent a substantial challenge to many LPAs in the future. This will require a change in attitude and recognition of the importance of creative "packaging" of property management activities into a comprehensive program that is properly coordinated and ade- quately funded. The job could be retained by the LPAs, which have had considerable direct real estate experience, or it could be assumed by another city agency if unsold renewal parcels are transferred to city ownership. Basic Strategy Alternatives Because of the reasons outlined above, we believe it will be- come increasingly essential for cities to integrate and co- ordinate their diverse property management activities into a comprehensive, formal program . Since property management is not generally conceived in program terms, it will be neces- sary to establish management goals and objectives and then standards and procedures differentiated by class of property within a policy context. The principal steps for establish- ing such a program are shown on the accompanying diagram and are highlighted briefly below: 1. Establish Management Goals --As property management has not generally been viewed as a program with communitywide application, it will be essential as a first step to establish overall goals. Among these goals should be -380- z LU Q- o _l LU > LU o LU X I — Z CO I— z LU £ LU _l LU > LU o o Q£ Q_ r— Z LU LU o < z < >- I— an LU a. o 1/1 z Q_ o I I O tin C (- eo > ■= 2 5?C5 5 z* LU t- (/> lis 533 z g ill uj — S S l_ Q Q 5 5 w Z q_ LU .> _i < u LU 7 LU sis < u z >/> < S £ 3 uj £. _i a. lu > 9 s Z { fl II 11 _J = 3 32- w 5 ^ in 2w LU Z LU !T LU SIS loie oo^ • 0" _ . X i Z >- y-> —i z UJ Z o LU U 5 LU £ u a S: u o T L?l z o I- < cc o a. cc O o I o cc < LU CO < I- co < LU cc >- CO to Q. a> -381- changes in attitudes relating to the following concepts: (a) recognition of property management as a positive action strategy; (b) heightened perception of the land inventory as a community asset; and (c) understanding of the importance of maintaining a marketable product. 2. Develop Management Objectives/Differential Standards -- Communities may have multiple objectives in their property management program. These may include a desire to (a) protect the public safety, health, and welfare, (b) assume social responsibility, (c) optimize fiscal integrity, and (d) enhance the public image of the ad- ministrative agency. The relative emphasis that is placed upon each of these elements should derive from a formal policy planning process . The policies and pro- cedures providing the framework for implementation may to a large extent derive from the nature of the public property inventory . Differential standards may be desir- able for management /maintenance of occupied structures, vacant structures, and vacant lots. 3. Identify Key Management /Maintenance Functions -- An es- sential part of a comprehensive program would be identi- fication of the key management/maintenance functions that . are or should be performed, that should be coordinated, and for which policies, procedures, and standards should be developed. 4. Survey Existing Institutional Capabilities -- A survey of the LPA and other agencies performing management / main- tenance functions is important to identify where the focus of present " act ivities is and to evaluate the capa- bility of existing human resources for integration into a comprehensive program. 5. Identify Alternative Financing Sources -- The key to a viable property management program is of course a reliable source of revenue for continued operations. Potential sources include: (a) LPA operating budget supplements, (b) urban renewal budget amendatories , (c) interagency "pooled budgets," (d) community development block grants, (e) general revenue sharing funds, and (f) revenues from owned properties. 6. Formulate Coordinated Management System -- With the in- puts of goals, objectives, and standards developed in a policy context, and evaluation of human and financial resources, communities can formulate a coordinated property management system for implementation. This system should be revised periodically in response to changes in the property inventory or in other local conditions . -382- The discussion in this chapter is devoted primarily to pro- viding guidelines for evaluating alternatives for property management treatment of properties in the public inventory located in urban renewal projects . However, the guidelines will also be useful to cities for evaluating the type of treatment that would be appropriate for future redevelopment activities. As the tests involve public health, safety, and welfare, and social and fiscal considerations, they may also provide assistance to communities for the broader task of formulating an overall property management program. The basic alternative strategies for evaluating properties to be integrated into the property management system may be sum- marized as follows: • Retain Structures for Future Rehabilitation -- This in- volves consideration of physical, economic , and social factors relevant to the potential offered for retention of a structure as a permanent housing or other space resource worthy of future rehabilitation. • Retain Structures as Interim Use until Disposition is Appropriate -- This alternative assumes the structures are not suited for rehabilitation and there is not a ready market for the cleared land, but there may be interim uses for the structures that would provide revenue, mitigate maintenance costs, or provide other public benefits. • Demolish Structures and Maintain Vacant Sites in Good Condition -- This alternative of "last resort" assumes that no permanent or interim reuse potential exists for the structures or that it is otherwise in the best in- terest of the community to demolish the structures and manage the properties as vacant sites. Tests to determine which of these alternatives would offer the most appropriate means for dealing with an individual Agency's problem are set forth in the decision tree on the following page. Each of the tests is stated as a question that can be answered with a "yes" or "no." In the right-hand column, we have suggested specific actions to be taken for each of the two possible answers to the test questions. We recommend that a person evaluating the problem of interim property management read through the entire decision tree before deciding upon a specific action to follow. It only takes a few minutes to answer all the questions, and the problem is placed in better perspective when all options are reviewed. Most of the questions are straightforward and self-explanatory and can be answered quickly. 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The remaining paragraphs in this chapter simply elaborate upon the test questions posed in the decision tree. Specific Observations/Suggestions The numbering of the following paragraphs matches the numbered tests, or questions, in the decision tree table titled "Interim Property Management." Each test is discussed, though the ex- tent of the commentary differs. Some of the questions and suggested actions in the decision tree are obvious and require little explanation. Others are not so clear or involve com- plicated actions that need to be described in detail. In other cases, the text includes descriptions of specific situa- tions or actions discovered during our research that might be helpful to other cities. We have included as many examples and illustrations as possible of successful tactics and poli- cies adopted by renewal agencies that we visited or have heard about . Again, the text that follows is directly correlated with the numbered tests in the preceding decision tree. The numbering is consecutive, but the three alternatives are included as subheadings to clarify the context of the discussion of the tests . • Retain Structures for Future Rehabilitation 1. In older, predominantly clearance urban renewal projects where considerable disposition and new con- struction have taken place, the retention of older structures might not be compatible with the overall urban renewal plan. Indeed, the structures remain- ing in the area may serve as a deterrent to market- ability of the abutting cleared land (see Test 4 below). On the other hand, in projects that already have a significant number of rehabilitated structures, especially in residential neighborhoods, it may be appropriate to reconsider structures originally in- tended for demolition and new construction as a po- tential resource if rehabilitated. This is especially necessary now, given limited housing subsidies for -386- new construction, and the increasing need to derive interim uses to produce revenue or mitigate main- tenance costs. In summary , retention and rehabilitation might be compatible with the project plan, except where there would be: Architectural incompatibility with predominantly new construction. Perpetuation of an unsuitable use. Creation of inappropriate parcelization for abutting parcels. Creation of awkward ingress or egress to abutting land. Limited realization of full economic benefits to redevelopment . 2. Obviously, a decision to retain structures involves consideration of their structural adequacy for feasi- ble rehabilitation. These criteria relate primarily to health and safety requirements for occupancy under present housing and building codes. Many modern codes are unduly restrictive and enforcement often precipitates demolition. Given present conditions, reconsideration of rehabilitation potential utilizing less stringent standards might be appropriate. For example, in one city RERC visited, very high stand- ards were placed on eligibility of structures for rehabilitation. As a consequence, a number of struc- tures that might otherwise have provided a potential housing resource were destroyed. A reevaluation of these standards might have recognized that more build- ings were structurally adequate for rehabilitation. 3. Conditions in a community may change so that struc- tures initially designated for clearance in an urban renewal project are incorporated in an historic preservation area. This occurred in Seattle after a conventional urban renewal project had been in plan- ning for about eight years. In 1971, a voter refer- endum placed all the structures in the Pike Place historic marketplace in an historic preservation dis- trict. A new urban renewal plan was prepared that designated each structure in the area as a candidate for either mandatory or optional preservation. An area of Sacramento, California's Capitol Mall -387- Riverfront project was designated from the outset as an historic area, but clearance for a freeway de- molished many structures that otherwise would have been preserved. 4. The presence of older structures in a predominantly clearance-type urban renewal project may constitute a continuing blighting influence that retards the marketability of abutting cleared land. There is ample evidence from our test case projects that clearance of an adequate area of blighting influences was important to marketability, particularly for non- residential uses. In one city, delayed demolition of blighted structures on a principal CBD "superblock" postponed disposition activity for several years. Developers often remarked, "Let me know when you're ready to sell the land." Although demolition has been completed in most older nonresidential clearance projects, there are isolated examples of structures remaining that are blight- inducing. In Sacramento, for example, an old hotel in the prime commercial area had initially been pro- posed for rehabilitation under an owner-participation agreement. Subsequently, the firm went out of busi- ness, leaving a vacant structure. This building is a blighting influence, but it is not in LPA ownership and no funds exist for acquisition and/or rehabilita- tion. The most pronounced example of continued blight as a retardant to marketability was noted in one of our test case cities in the southeastern United States. In that instance, Demolition activities lagged far behind acquisition and relocation. By the end of the fourth year, only 40 percent of the acquired struc- tures had been demolished, compared to nearly 100 percent in most other cities examined. Only 70 per- cent had been demolished after eight years in execu- tion; and disposition at that time was only about one-fourth complete. Furthermore, little effort had been made to make innovative interim use of the acquired but undemolished structures. This has clearly been a factor contributing to the slow dis- position rate. 5A. Successful rehabilitation for the private market re- quires that the rehabilitated structures will generate sufficient revenue to the owner to justify the invest- ment costs in nonresidential and multifamily residen- tial structures. Considerable interest has been -388- generated in this type of redevelopment in recent years. In "Old Sacramento," part of the city's CBD urban renewal project, the LPA has acquired rehabili- tatable structures and is selling them to private developers for reuse for retail stores, restaurants, and office space in keeping with an early "Frontier theme. This is also occurring with the historic mar- ket structures in the Waterfront project in Boston. There are numerous examples of private market re- habilitation of nonresidential structures, including Ghirardelli Square and The Cannery in San Francisco, the proposed Victorian Row" in Oakland, and Seattle's Pioneer Square. Private market financing of rehabilitation of single- family dwellings is often difficult in urban renewal project areas because the areas are often stigmatized and the creditworthiness of potential borrowers fre- quently does not meet the standards of lenders. Con- sequently, successful rehabilitation in these areas has often required a companion program of loans and grants for more marginal or ineligible borrowers. The moratorium on the federal rehabilitation programs effectively stymied action in rehabilitation of neighborhoods in all the test case cities we examined, but many communities are now formulating local pro- grams of this type. The favorable acquisition costs and relocation payments (as a result of the 1970 Uni- form Relocation Act) have made it more advantageous for households in many neighborhoods to seek to be displaced than to use more limited rehabilitation loans or grants . Where private market rehabilitation is not feasible, it may still be desirable for the Agency to sponsor rehabilitation. The costs of rehabilitation for some structures in Old Sacramento, for example, make it impossible for private investors to obtain an adequate return on their investments. The LPA there has al- ready made use of some "historic easements" money as a subsidy to investors. In other cases, it will probably be necessary for the LPA to use public funds to rehabilitate the structures with the intent of selling the renewal nonresidential structures to in- vestors on a "turnkey" basis. In all likelihood, some form of public subsidy will be required for the capital investment costs for rehabilitation of the Pike Place market structures in Seattle as well. Among the options being explored are opportunities to make a "profit" on the sale or operation of income -producing ventures on some sites to offs^' losses on the historic structures. -389- In other cases, Agencies can acquire and rehabilitate structures as a catalyst to spur the private sector to undertake similar activity. San Francisco has a successful program of this type. Many of its multi- use Victorian structures have been purchased for a low price, rehabilitated with public funds, and re- sold at a profit to private investors, thus yielding funds to buy other rundown structures. 5C. One important rationale for retaining structures for future rehabilitation is if it is needed as a reloca- tion resource. In most cities, pressures on the housing market were reduced during the period from 1968 to 1972 because of the very high production of both subsidized and nonsubsidized new residential units. However, in some cities, demolition of presently occupied, substandard structures would create a severe relocation problem as adequate re- sources are not available. Thus, these structures are needed both as an interim source of housing and, to the extent they are rehabilitatable , as a permanent housing resource. To achieve rehabilitation, one midwestern city visited by RERC made innovative use of the Uniform Relocation Act. The LPA identifies a household to be relocated through urban renewal or another clearance program and records the space requirements and income capa- bilities of the household. Then a unit in need of rehabilitation is located that meets the space needs of the subject household. The purchase price, plus rehabilitation costs (estimated by a rehabilitation contractor) , are approved as a relocation unit under the Uniform Relocation Act. When the rehabilitation work is completed (often to the specifications of the new owner) , the unit is purchased and the household is relocated. 6. Too often, LPAs overlook the opportunity for making interim use of acquired structures that have not yet been demolished and for which there is no near-term use for the cleared site. The actual decision on what type of interim reuse is appropriate depends on tradeoffs among fiscal, social, and public safety, health, and welfare objectives, as described previ- ously. (See Test 9 below.) -390- Retain Structures as Interim Use until Disposition is Appropriate 7. If standing structures are interfering with the com- pletion of planned project improvements, they should probably be demolished immediately. The only ex- tenuating circumstance would be if the structures have significant private market rehabilitation poten- tial that would justify either moving them or modi- fying the project improvements plan to accommodate them. 8. In most instances where acquired structures are so badly dilapidated that they significantly violate the building/housing codes, the buildings should be scheduled for either immediate rehabilitation or immediate demolition. This is in keeping with the LPA's responsibility to protect the public health, safety, and welfare and to avoid the image of being a "slumlord." There are examples, however, where the relocation resources are so limited that the LPA must retain such substandard structures for occupancy. In those situations, the LPA's police power obliga- tions might require expenditures of funds on interim improvements that would not otherwise be justified. 9. Ideally, the LPA should seek to optimize revenues from acquired structures when there is not a present market for the cleared site. The accompanying chart shows a number of interim uses that offer revenue potential. One of the most pervasive findings in our study of urban renewal land disposition was the great difficulty of marketing or sustaining the viable operation of neighborhood shopping centers. In most cases, small business was relocated early in the execution stage; then, when sites were cleared and ready for disposition, LPAs and developers discovered there was no market for retail reuse. The replace- ment market had vanished by that time, and businesses that had served a vital role in lower- income neigh- borhoods (like the corner druggist) were gone. In many cases, retention of these businesses as tenants in LPA-owned structures would have been appropriate until a reuse for the site was available. In addi- tion to deriving revenue from existing occupants, it may be possible to procure new occupants at an economic rent, if utilization of the site is not scheduled for three to five years or more. -391- POTENTIAL INTERIM USES FOR ACQUIRED PROPERTIES Potential for Revenue Production STRUCTURES Conventional Primary Commercial/Office "Embryonic" Businesses Secondary Commercial Commercial Parking Commercial Recreation/Vending Machines Warehouse/Goods Storage Temporary Relocation Housing Temporary Use by Public Utilities Billboards Storefront Churches, Lodges, Unions, Fraternal Organizations Community Involvement Center/Meeting Space Vocational Schools Housing and Home Management Center Manpower Training Center, Employment Counseling Health or Welfare Service Centers Community Recreation/Cultural Center Legal Aid Centers Art Center/Exhibit Space Theater Groups Associations, Institutions and Nonprofit Groups Temporary Library Facilities Youth Recreation Center Senior Citizens Center VACANT SITES Commercial Surface Parking Open Storage Contractors Yards /Equipment Storage Overflow Parking for Abutting Commercial Uses Overflow Parking for Community Facilities Temporary Relocation Housing (Mobile Homes) Portable Classrooms Portable Library Facilities Corporation Yard Carnival, Commercial Recreation (Temporary) Christmas Tree Lots (Seasonal) Flea Markets Use by Abutting Residential Owners for Garden or Other Purposes Pocket Parks Open Space Gardens Playgrounds X X X X X X Potential for Mitigation of Maintenance X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Potential for Other Public Benefits X X X X X X X X X X X X X Prepared by Real Estate Research Corporation. -392- Good opportunities for interim use of nonresidential structures are often available in CBD-oriented projects. In San Jose, California's San Antonio Project, the LPA has pursued an aggressive policy of renting up acquired structures under its "timely demolition program." The LPA endeavors to maintain the existing tenancy in acquired structures, though businesses often are unable to sustain the uncertainty of interim occupancy and a month-to-month lease. The LPA has found that about 75 percent of the acquired store space has been re-rented to different, but simi- lar, types of users; Often these are "embryonic" firms, to whom the below market rental rates (con- sistent with the short notice of eviction) are very appealing. This may be good social policy, as well as being economically sound, because many of these newer businesses may subsequently be viable enough to occupy the new commercial space when it is built. In the five years of its operation, the LPA has collected $930,000 in revenues from rentals of commercial space and has incurred about $300,000 in out-of-pocket ex- penses. However, it should be noted that a "paper deficit" appears as the LPA makes in lieu property tax payments to the city, which are credited as non- cash grants-in-aid. Even residential projects can show a "profit" from well-planned property management. In San Jose's May- fair Project, low-density, single-family existing uses in an area that had originally been proposed for Section 235 housing generate a slight profit. Revenues are in excess of maintenance costs, plus in lieu taxes, and the occupants are offered below mar- ket rents consistent with the uncertain tenure. The San Francisco LPA has had good experience in leasing space in acquired structures to nonprofit organizations of various types. An Old Victorian building in the Western Addition Project serves as a Youth Law Center. The Western Addition Project Area Committee also occupies an old pharmacy storefront in that project area. The advantage to the LPA is that these groups often fix up and maintain the interior space and occasionally even paint the outside -- thus retaining the vitality of the project area. A number of other cities we examined, including Hart- ford, have derived revenue from interim use of ac- quired structures for residential and commercial -393- office uses. Generally, however, the potential for interim use of urban renewal land and buildings is not examined as thoroughly as it might be. 10. It is not always necessary that an interim use derive economic rent. Simply shifting the responsibility for maintenance (or a portion of it) from the LPA to the tenant can be beneficial. The preceding chart includes a number of examples of potential occupancy (primarily to nonprofit corporations; civic, social, or community organizations; or other governmental agencies) that might provide some opportunity for limited revenue but, more importantly, could shift maintenance responsibilities and costs. A number of cities, including Boston, have adopted the practice of acquiring properties and leasing them for use to such groups until a market is available for the cleared structure. San Jose has a policy of renting space to nonprofit organizations for only $25 per month, while shifting some of the maintenance re- sponsibility to the tenant. 11. Even if there are not opportunities for deriving revenue or of shifting maintenance responsibilities to others, it may be in the public interest to make available space in structures acquired but not yet demolished. In addition to those quasipublic and public uses shown on the preceding chart, it may be desirable to permit continued occupancy for housing use where relocation resources are limited. Demolish Structures and Maintain Sites in Good Condition 12. Once the structures are demolished, the LPA must be prepared to assume the costs and responsibilities of maintaining vacant sites. This is essential to keep the land marketable. Often the cost of maintaining vacant sites is less than maintaining structures, particularly occupied structures with a number of de- ficiencies that require extraordinary maintenance. Nevertheless, LPAs should recognize the importance of good site maintenance. Specifically: Trash should be removed regularly. Sites should be graded and planted with grass, spread with wood chips, or otherwise surfaced in a neat and orderly manner. Regular maintenance should be provided to keep weeds under control. -394- EXAMPLES OF APPROPRIATE AND INAPPROPRIATE SITE MAINTENANCE Weed- and debris-filled lots -395- Sites, curbs, and on-site utilities should be in good condition. Poor site maintenance was observed in a number of the projects we examined. Some cities, however, do an exceptionally good job: St. Paul, for example, seeds and sods all its vacant sites as a matter of policy. San Francisco has also made it a practice to seed and plant most of its areas, including throwing poppy seeds on sites in Diamond Heights. Sacramento has an automatic provision for weed control, as the LPA properties fall under the city weed abatement ordi- nance. The city performs the cutting and bills the LPA. In San Francisco, labor unions have a weed abatement contract. 13. Opportunities exist to derive revenue from vacant sites as well as structures, and these should be optimized. Examples of potential uses for vacant sites are also shown on the preceding chart. One of the more frequently used revenue producers is com- mercial surface parking. A number of cities we ex- amined, including Hartford, Tulsa, and Sacramento, derived revenue from this type of interim use. Sacramento has been very successful with parking lots in their downtown project. The lots provide enough revenue to cover all the costs of maintenance for the CBD property management program and still yield a "profit." The LPA made a capital investment in surfacing and landscaping, but some savings were achieved on the latter by using students through a local work-study program. Oakland is using commer- cial parking on an interim basis in its Center City (subsidized rates are available for city staff). San Jose, in its San Antonio project, leases a vacant site near San Jose State University for student parking. The ground lease to the operator was at a below market rate, allowing him to pass on the savings to encour- age student support of the retail and other activities in the revitalized Central Business District. San Francisco has leased a parking site in the Golden Gateway project for 11 cents per square foot. The operator has assumed the cost of the surfacing, striping, and fencing required for operation. 14. As with structures, it may be desirable to allow in- terim use of vacant sites where maintenance responsi- bilities can be shifted to others. For example, a vacant parcel abutting a commercial establishment might yield revenue for parking purposes; yet a similar lot next to a church might not, but the -396- church might maintain the lot for parking and relieve the pressure on city streets. Sometimes vacant lots can be utilized for pocket parks, playgrounds, gardens, or open space and the maintenance responsibility can often be shifted to others. For example, San Francisco's LPA donated a site adjacent to an elderly housing project in Yerba Buena to a senior citizens garden club for interim use. The club has planted the site and maintains it regularly . Whether or not revenue can be obtained or maintenance responsibilities shifted, it is often desirable for the LPA to develop recreation space for community use on an interim basis. Many communities have done this, including St. Paul and San Francisco. The latter city has developed several pocket parks in the Western Addition Project and paid for such improvements as benches, footbridges, planters, and landscaping from project funds; they are maintained regularly. The labor for installing the improvements was provided by joint participation with manpower training programs. In Oakland's Acorn Project, interim recreation space - a putting green was provided on a vacant site until the block was disposed of for a neighborhood shopping center. -397- CITIZEN PARTICIPATION Statement of the Problem Effective citizen participation in the urban renewal planning and decision-making process may contribute to the successful implementation of a project. Ineffective citizen participa- tion can result in a breakdown in communications that may degenerate into open hostility and lawsuits that can delay urban renewal projects for long periods of time. In the early years of the renewal program, very few LPAs es- tablished effective communication channels in the communities with which they were involved, especially those most impacted by relocation from project areas. This resulted, especially in those areas in which "slum clearance" was proposed to make way for higher nonresidential or middle-income or luxury resi- dential uses, in rather severe dislocations and significant social consequences. These impacts were even more acute be- fore passage of the 1970 Uniform Relocation Assistance Act. As a consequence of the political impact of some of the "heavy handed" renewal approaches and other factors , the law and administrative procedures were changed to require LPAs to establish Project Area Committees. As stated in the Urban Renewal Handbook, the objectives of citizen participation in urban renewal are : "Citizens should have clear and direct access to decision- making in all stages of the urban renewal process in order to achieve: -399- a. More accurate determination of needs projects should meet and the development of policies and programs responsive and relevant to those needs. b. Involvement by citizens in the development and ex- ecution of policies and programs in order to further their own growth and development. c. Firmer commitment of citizens to projects." Thus, since about 1969, LPAs have been required to establish Project Area Committees (PACs) and report to HUD on "the activities of the PAC during planning, . . . types of issues dealt with; technical assistance rendered to it . . . . and the expected role of the PAC during project execution." LPAs were to establish PACs that are "representative of a fair cross section of the residents of the urban renewal area." Technical assistance provided by the LPA to PACs is an eligi- ble project cost. In project areas that overlapped Model Cities areas, the PAC requirement was superseded by the Model Cities citizen participation structure. The requirement for PACs applied to most older conventional projects and to newer NDP projects established after the Housing Act of 1968. Despite these requirements, an Urban Renewal Demonstration Project by the National Urban League* found that "the great majority of PACs are weak, moribund or no longer exist. This overriding fact testifies to the failure of urban renewal agencies and HUD to take citizen participation seriously -- either to encourage its development or to use it effectively." Many communities have encountered citizen resistance that is delaying completion of ongoing projects and may create an un- favorable political climate that may seriously limit the ability to undertake effective redevelopment in the future. * Toward Effective Citizen Participation in Urban Renewal , A Re- port of the National Urban League Urban Renewal Demons trat ion Project. This report is "an account of the experience, find- ings and recommendations of an Urban Renewal Demonstration Project conducted by the National Urban League, June 1971- June 1973. The project provided technical assistance to Project Area Committees in five demonstration cities, helping the citi- zens' groups participate more effectively in urban renewal through decision-making experience in land use planning and relocation practices." -400- B. Basic Strategy Alternatives The basic alternative strategies for dealing with the problem of ineffective citizen participation that is preventing the expeditious execution of ongoing urban renewal projects are as follows : • Increase Citizen Participation -- Sometimes greater com- munity support for an urban renewal project can be en- couraged by improved communication and involvement of citizen groups. This alternative involves "breathing new life into moribund PACs and other interested com- munity groups. • Restructure Citizen Participation -- Often because of the extensive time period involved from initial planning through execution, particularly in a complex nonresi- dential project, the initial objectives of the plan change over time. Different participants, often repre- senting conflicting or contradictory points of view, become spokespersons for the PAC at different times. To take into account these changes, or for other reasons, restructuring of citizen participation may represent a viable alternative in some cases. • Change Predominant Reuse or Abandon Project -- Although conflicts can arise over many aspects of the urban re- newal process, controversy is often generated over the relative balance between clearance and rehabilitation and the ability to provide adequate relocation housing, par- ticularly within the project boundaries. This alternative of "last resort" applies where there is a complete break- down in citizen participation and lawsuits are delaying the project. In these instances, it may be necessary to make substantial changes in the proposed reuses or even to abandon the project. Tests to determine which of these three alternatives would of- fer the most appropriate means of dealing with an individual Agency's problem are set forth in the decision tree on the following page. Each of the 13 tests is stated as a question that can be answered with a "yes" or a "no." In the right- hand column, we have suggested specific actions to be taken for each of the two possible answers to the test questions. We recommend that a person evaluating the problem of ineffec- tive citizen participation read through the entire decision tree before deciding upon a specific action to follow. It only takes a few minutes to answer all the questions, and the problem is placed in better perspective when all options are reviewed. Most of the questions are straightforward and -401- z o < Q. U f- cc < 0. 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However, some of the specific actions are stated in an abbreviated form and may need elaboration before they can be accepted or rejected. Therefore, the rest of the text in this chapter is devoted to discussion of the issues involved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions discovered in Real Estate Research Corporation's analysis of urban renewal land disposition across the country. Please turn to the decision tree before reading further in the text. The remaining paragraphs in this chapter simply elaborate upon the test questions posed in the decision tree. Specific Observations/Suggestions The numbering of the following paragraphs matches the numbered tests, or questions, in the decision tree table titled "Citizen Participation." Each test is discussed, though the extent of the commentary differs. Some of the questions and suggested actions in the decision tree are obvious and require little explanation. Others are not so clear or involve complicated actions that need to be described in detail. In other cases, the text includes descriptions of specific situations or actions discovered during our research that might be helpful to other cities. We have included as many examples and illustrations as possible of successful tactics and policies adopted by renewal agencies that we visited or have heard about . Again, the text that follows is directly correlated with the numbered tests in the preceding decision tree . The numbering is consecutive, but the three alternatives are included as subheadings to clarify the context of the discussion of the tests . • Increase Citizen Participation 1. The National Urban League's Demonstration Project found that effective PACs "have been in existence for a relatively long time . . . /_and_7 almost all arose out of longstanding neighborhood organizations that had been involved in community planning, social services, recreation or other neighborhood civic con- cerns." Thus, projects located in such neighborhoods are more likely to have active citizen participation, regardless of any positive action taken by the LPA. On the other hand, the LPA can be expected to have only limited success in creating artificial citizen participation where a community of interest is lack- ing, and then only after a longer time period. -404- Because of the long time periods involved, few con- ventional projects were found to have consistently active citizen participation from the initial plan- ning stage through execution, except perhaps non- residential CBD-oriented projects where property owners and business leaders have a vested economic interest in successful renewal. Conflicts arose with citizens groups in the execu- tion stages of one major east coast city's projects because of their inadequate participation in initial planning. On the other hand, Tulsa s Downtown North- west project was initiated by some of the city's more prominent business leaders and financial institutions, which still remain influential today in the later stages of disposition. Neighborhood Development Pro- gram (NDP) projects are more likely to have active citizen participation in both planning and execution. This is a result of the new HUD requirements for citizen participation and the simultaneousness of planning and execution activities characteristic in this program. Also, to the extent that NDP project areas overlapped Model Cities neighborhoods, active, well-financed citizen participation organizations were already in place. Support for the renewal plan by civic leaders within the project area is usually directly related to their degree of involvement from the initial planning stage. The North Tulsa community had been planned by staff planners in the mid-1960' s for medium-density devel- opment, including new multifamily structures, with the objective of providing population support for the Central Business District. Subsequently, when the project was converted to NDP and an active citi- zen participation mechanism was established, the com- munity sought and ultimately secured a revision of the plan to maintain the present densities and basic single-family lot pattern. Although there have been many changes in community leadership and considerable apathy, the revised plan now has basic community sup- port. On the other hand, one city's downtown project exem- plifies the way in which ineffective citizen partici- pation in the initial planning can lead to controversy and delay in the execution stage. Civic leaders resi- dent in the area (and immediately adjacent to it) were not adequately accounted for initially. This has re- sulted in lawsuits, which may cause revisions in the land use plan. -405- 2B. Lack of support is often caused by real or perceived inability of the LPA to keep civic leaders adequately informed about renewal activities. One of the pre- cipitating acts by one city's LPA that led to demon- strations by a civic association was the demolition of 35 buildings . Communication failure was also at the root of controversy in a midwestern project, where it was alleged that the LPA had its own "secret plan" for the area and had not talked with the Model Cities residents. One western LPA took a classic step in relieving the burdens of communication between the LPA and a neigh- borhood group by hiring one of the more activist civic leaders and making him project coordinator for one of its residential projects. In this role, he has been able to keep the community fully informed about all planning and execution activities in the neighborhood and has helped to keep the plan realistic by identi- fying the actions that are politically acceptable. PAC leaders are often very helpful to the LPA when kept adequately informed. In Tulsa's North Tulsa NDP and in St. Paul's Summit-University NDP, they were helpful in working with the LPA to identify hardship and "opportunity" acquisition sites, to communicate with residents about rehabilitation and relocation benefits, and to identify the types of public facilities and new housing that would achieve community acceptance. Assistance in identifying community-acceptable housing was provided to the LPA by the Smedley project PAC in Chester, Pennsylvania. The PACs in Tampa's NDP Area #1 have provided in- direct assistance to the LPA in land disposition of residential sites. In some cities, including St. Paul, proposals for redevelopment sites are discussed with the PAC. If agreement is reached in St. Paul, a joint LPA-PAC report is submitted to the governing board. If not, separate reports are filed with supporting documen- tation. 2C. We found wide variation in the degree of involvement of local business leaders in the process of identi- fying and negotiating with redevelopers for disposi- tion sites. In a few cities, there was almost no communication or involvement between the LPA and the business community or establishment. (These cities had all experienced very slow land disposition.) In Tulsa's Downtown Northwest (CBD) project, members of -406- the LPA board were representatives of the financial and property -owner interests and they actively pur- sued developers. Indeed, one of the financial in- stitutions ultimately became a partner in the devel- opment that has a major nine-block area under contract for commercial redevelopment. In St. Paul's Capital Centre (CBD) project, the LPA strongly encouraged participation of the business community, and the project enjoyed full, if often behind-the-scenes, support . 2D. Civic leaders may be especially influential in at- tracting nonrenewal funds to the project area, which will enhance the overall environment and improve the catalytic impact of renewal. In Tulsa's CBD, a group of civic leaders agreed to pledge $7 million in private subscriptions if the city would provide matching pub- lic funds for a new Civic Theater. The city rallied to the challenge and a bond issue was passed for this use, which absorbed an important disposition parcel in the downtown project. In one NDP project we studied, civic leaders -- prin- cipally a city councilman representing the area have been responsible for channeling nonrenewal funds to the area for community facilities, and (as one of four target neighborhoods) a city subsidy for an as- sessment district for neighborhood physical project improvements. These efforts are an attempt to demon- strate the city's commitment to neighborhood preser- vation and to compensate for limited and declining federal funds. A good example of a local effort to optimize urban renewal funds with nonrenewal funds is in St. Paul's Thomas -Dale NDP project. Here, at the suggestion of the LPA, the PAC solicited a local foundation that had administrative offices and a child guidance center adjacent to a proposed housing site in the project area. The foundation was persuaded to become the developer of a housing project and, as part of their proposal, they offered a neighborhood center and a full-time housing director to be paid for by the foundation. 3. As pointed out in the National Urban League Demonstra- tion Project, most PACs are weak and ineffective, but they can still make important contributions to the urban renewal planning and execution process and they have done so in many communities. PACs often influ- ence decisions on land use, degree of structural and -407- layout change, amount of displacement of residents and businesses, future housing resources, community facilities and amenities, and economic opportunities that may be created by renewal. They may monitor relocation, equal opportunity /af f irmative action, interim property management, rehabilitation, new construction, and LPA compliance with laws and regu- lations. More experienced and well-funded PACs could actually carry out certain portions of the urban re- newal work under agreement with the LPA -- such things as conducting surveys, preparing all or part of the renewal plan, developing a relocation plan, counsel- ling relocatees, etc. Spinoff activities handled by separate entities may complement and supplement activities of the PAC, including such economic func- tions as housing corporations, minority banks, co- operatives and business enterprises, and such social functions as day care centers. These activities may contribute indirectly to land disposition, although the chief concern of PACs is seldom, if ever, dis- position alone. In St. Paul's Summit-University NDP project, the PAC was influential in the selection of a local black con- tractor and church organization to build, own, and manage a subsidized housing project. In the same project, the Community Housing Corporation provides advice to homeowners desiring funds or technical assistance in rehabilitation and participates as a purchaser and seller once rehabilitation is completed. In terms of citizen involvement in urban renewal, Boston ranks as one of the cities with the oldest and most active groups in the nation. Aggressive citizen groups were instrumental in the late 1950 's in the designation of the Washington Park urban renewal project in the Roxbury section, one of the largest clearance residential projects ever undertaken. Citizen groups and the LPA sought out church groups and other organizations that would be eligible as nonprofit sponsors for subsidy housing projects in the area. Similarly, active citizen groups in the South End project have often competed for development sites for housing and other uses, and the PAC has been extensively involved with the LPA in developer selection. The most direct participation of Project Area Commit- tees in the renewal projects encountered in our study was in Hartford. There, in the South Arsenal neigh- borhood, the PAC is the tentative developer of the -408- entire project area. The original neighborhood or- ganization, which became the first neighborhood de- velopment corporation in the state of Connecticut, achieved a cohesiveness that enabled it to participate directly in the renewal program. South Arsenal Neigh- borhood Development Corporation provided inputs to the project planning from the early days of its existence and developed both political and business community support for its activities. Nevertheless, Hartford's experience with a strong PAC also illustrates the difficulties involved in trying to combine community participation with real estate development. Although the inputs of the PAC are extremely helpful in defin- ing local concerns and redevelopment objectives, their unfamiliarity with actual development frequently de- lays the redevelopment process. This has necessitated the participation of the business community -supported Greater Hartford Development Corporation (DevCo) as a joint venture partner that supplies development man- agement expertise. Restructure Citizen Participation 4. One of the inherent characteristics of neighborhood organizations is constant turnover in participation and leadership. This plays havoc with continuity in goals, objectives, and tactics for implementation of complex projects such as urban renewal. In Cincin- nati's Avondale-Coryville project, for example, the citizen's group changed membership often during the life of the project, which required reorientation and resulted in occasional philosophical changes that de- layed the project considerably. As pointed out in the National Urban League report, "successful PACs have been careful to gain community - wide interest, acceptance, and support for their activities .... PACs that have maintained close contact and credibility with the renewal community have constantly involved residents in planning and decision-making through subcommittees and mass meet- ings. . . . Community support is often crucial during disagreements between the PAC and the LPA. A favorite LPA ploy is to question the ' representativeness ' of the PAC: to try to give the impression that the PAC really does not represent the community ( which unfor- tunately is sometimes the pase ) . " There is no single way for an LPA to establish a "representative PAC, or to ensure that it remains -409- representative over time. The National Urban League study identified at least four major ways in which these groups can be established: • Designate an existing community organization. • Create a Committee from representatives of a number of community organizations. • Hold a general (at-large) election among residents of the project area. • Elect representatives based on geographical sub- divisions of the area (Model Cities model). "From observations in the field," the Urban League points out, "the PAC functions better if it is created from an existing, credible neighborhood organization. " In our test case studies, we noted a number of exam- ples of lack of representativeness. In one project where the Model Cities organization was the PAC, its boundaries were smaller than the urban renewal project boundaries. The PAC therefore excluded white business- men along a commercial street; their interests, if exercised, would have diluted the power of the con- trolling group. The supercomplexity of representati vene s s among citi- zen participants is illustrated by one east coast residential project. The diversity of groups having an interest in the urban renewal plan there is indi- cated by the following list: • The lodging house tenants (about 15,000 persons in 1965) , the major proportion of whom are poor and elderly, both black and white. This group played a small role in the politics of the urban renewal program. • The lodging house owners (about 1,000), of whom half were resident -owners . They were concerned with difficulties of bringing their structures up to a desired standard while maintaining the lodging houses . • The "urban villagers," consisting of a number of blue collar ethnic enclaves: Italian, Syrian, Negro, Chinese. -410- • The rural newcomers, poor arrivals from the rural south or Puerto Rico, who were too alienated to become involved in the planning stage, but who would suffer most during the execution stage, in- sofar as they were concentrated in the demolition areas . • The urbanites middle class professionals -- who were rehabilitating row houses for single- family use or investment with high-income tenants. This group was to conflict in every stage of the project with those who were promoting the interests of lower income residents. • The "problem people" -- prostitutes and skid row inhabitants -- whose presence affected the project area but who were not directly involved in the plan. In part, this city created its own problem with this project by encompassing an enormous area that extended beyond the perceived boundary of the neighborhood. An alternative approach is that of Hartford, which has created numerous smaller projects that more pre- cisely follow traditional neighborhood boundaries -- or portions of them. 5A. Over the years, criticisms of the urban renewal pro- gram by PACs have in many instances been valid. Ex- cessive zeal for blight removal in some communities did in fact cause severe residential and business dis- location, which was only compensated for adequately with the Uniform Relocation Act of 1970. Excessive reliance upon noncash credits and other financing and administrative factors often resulted in projects of inappropriate size or with inappropriate modes of blight treatment. Operation of the national program varies widely with the local community context: its history, institutional structure, economic base, power structure, and political traditions. To oper- ate a successful program, LPAs must be able to re- spond to local needs and desires. Where criticism of local administration of the program is valid, the director and his or her policy board must be re- sponsive and make constructive changes. 5B. Too often citizen criticisms are a result of an LPA's lack of effective communication of changes that have been made to overcome an earlier point of contention. Criticism with respect to "heavyhanded" treatment may no longer be valid, for example, since ample compensation -411- is now available. Similarly, arguments based on pre- vious excesses in acquisition and clearance may no longer be relevant with the HUD restrictions on ac- quisition and the rapidly declining federal financial support for the program. Any such out-of-date criticisms should be laid to rest through public relations efforts of the Agency. 5C. In almost all instances, more effective communication can and should be developed between the LPA and PACs to reduce criticism and, more importantly, to con- structively contribute to the expeditious completion of beneficial projects. As pointed out by the National Urban League study: "A PAC's relationship with the LPA is perhaps the most crucial of all variables. Many PACs persist despite LPA discourage- ment, harassment and indifference. But when PACs and LPAs work together despite differences , a better , more sensitive, more responsive urban renewal plan usually results. "~ 6. The degree to which PACs influence the decision- making process with respect to developer selection varies widely. One of the strongest power positions of a citizens group encountered in RERC's test case cities was in an eastern city. Renewal in the project was destined to experience considerable de- lay because the multiuse project was huge and complex and was located in a diverse community in a compli- cated, large city. The extension to the PAC of veto powers over disposition decisions was the re- sult of a compromise initiated by the Mayor's office to overcome a serious breakdown in communication between the renewal agency and the community. An essential element of the compromise was that the PAC be formally constituted and representative, with delegates elected from the community. The PAC election was contested and wrangling continues. This arrangement has caused delays in a number of disposition decisions, not only among competing groups for housing sites, but for nonresidential uses that the PAC generally opposes. This LPA/PAC decision- making model is not one to be emulated. 7. Conflicting objectives between the LPA and the PAC have delayed land disposition in a number of cities. In addition to the controversy discussed above, conflicts have also erupted in another project in the same city. This project had its genesis through the business community, principally the Chamber of Com- merce. Through a nonprofit corporate' subsidiary of -412- the Chamber of Commerce, the plan that was prepared called for a substantial increase in residential uses in an area that was formerly predominantly nonresi- dential. In 1970, because of the new citizen par- ticipation requirement, the LPA held an election in the project area and the citizens voted to recognize one group as the PAC and endowed with veto power. The LPA refused to comply with the election results. The PAC staged a demonstration in 1972 and subse- quently filed suit. The suit was resolved in 1973 by establishing a restudy committee of local residents and the LPA to revise the plan. The probable out- come will be to increase further the amount of resi- dential reuse, open space, and community facilities to serve the neighborhood. This replanning will further delay land disposition. This city represents an extreme case in the breakdown of LPA/PAC cooperation, but conflicts in objectives and tactics are common in most cities and they can seriously retard land disposition. For example, in one NDP project RERC studied, the PAC's goal was to acquire as many substandard structures as possible from owners that wanted to sell. This "hardship" acquisition per- mitted the owners to benefit from favorable relocation payments. However, it also resulted in a disposition inventory of scattered residential lots that are ex- pensive to maintain and difficult to market. Conflict often arises between the LPA and PAC over one of the most fundamental issues of urban renewal — replacement of deteriorated housing with higher and better commercial uses. As pointed out in the National Urban League study, the proposed reuse for the Kansas Street project in Memphis results in a net decline of 75 acres of housing use and replaces it with industrial use. Although major housing reuse is proposed by the LPA, the Urban League felt that too little attention was given to the opportunity for re- habilitation. In this instance, however, the PAC is weak and ineffective and the LPA-initiated plan re- mains substantially unchanged. Conflicting interests among citizens groups within the redevelopment area may also stalemate urban renewal project land disposition. Residents of St. Paul's Summit -University area often challenged Model Cities' representativeness as PAC for this large, hetero- geneous neighborhood of homes and businesses. For -413- about two years, the LPA capitulated to Model Cities, which used the time to prepare their own plan. Con- siderable disagreement arose over that plan, and the result was a compromise plan worked out between LPA and Model Cities planners. Although there are many examples of conflict among citi- zen groups, the city discussed above may well be the classic case. In terms of the politics of community participation, the major conflict developed between the urbanites (middle-class professionals) and repre- sentatives of the poorer residents. The latter would clearly be displaced by implementation of a plan founded on development of a higher income, in-town neighborhood. Consequently, there has been a con- stant battle from 1963 to the present time. The battle has resulted in a stream of compromises that satisfied neither side. The LPA has acted in the role of arbitrator between the competing groups. Although there were two major camps on this issue, there were a number of factions vying for control within each camp. Dividing the area and creating two or more PACs might have been an appropriate action initially; however, it is doubtful that this could be successfully accomplished now. As pointed out by the National Urban League study, "Arbitrary project boundaries sometimes coincide with those of organized neighborhoods. When they do not, successful PAC or- ganizations are less likely." The National Urban League found that successful PACs, in addition to having diverse membership and leader- ship and wide community acceptance, are funded either by the LPA or other sources. Many LPAs look nega- tively upon the funding of PACs because effective citizen organizations can create considerable prob- lems for an Agency. On the other hand, with adequate technical assistance, an effective education process can be achieved that can ultimately result in stronger support and execution of a project plan -- especially in residential neighborhoods. Among the better funded PACs is San Francisco's Western Addition A-II, which has an annual budget of $180,000. The National Urban League describes it as "vibrantly alive, viewing itself as in direct confrontation with, and a natural adversary of, the renewal agency." Despite its "maturity and sophistication, the PAC was primarily occupied with monitoring relocation and affirmative action plans and with housekeeping. The PAC has not yet assumed a more aggressive role by -414- actually participating in such spinoff effects of the program as housing management. Still, the effective- ness of the PAC in establishing lines of communication between the LPA and the community is probably con- tributing to the overall success of this project, par- ticularly the rehabilitation efforts, which in turn improve the overall appearance of the neighborhood and thereby enhance marketability of cleared sites. In contrast, the Beale Street II and Kansas Street PACs in Memphis, which were in the National Urban League demonstration, were unfunded and ineffective. Although there is no evidence in Memphis of the PAC "rocking the LPA's boat," there is also no evidence that they contributed in any meaningful way to the positive execution of a beneficial project. Thus, though community situations vary widely, financial assistance to help create or sustain viable PACs may have long-run payoffs in terms of support for the urban renewal project, which may translate into im- proved attitudes toward the area, removal of stigma and improvement in the rate of land disposition. Often the LPA can use the skills of existing estab- lished agencies or institutions to provide technical services or to mediate with citizens groups. In St. Paul's Thomas-Dale project, the LPA contracted with the Community Health and Welfare Planning Coun- cil, a citywide organization composed of representa- tives of many social agencies, to plan and carry out the citizens participation portion of the NDP plan. The Council created a temporary Steering Committee composed of Thomas -Dale residents. The Steering Com- mittee decided to hold an election to select members of the Thomas -Dale Development Council, which became the PAC. The area was divided into three sections and two representatives were elected from each. Each year of the NDP, major planning proposals are submitted to residents in a communitywide referendum. Technical services to PACs may also be available from such other organizations as social service agencies, legal aid programs, labor organizations, churches, or other voluntary organizations. Lawyers from Neighborhood Legal Services offices played vital roles in PACs examined by the National Urban League in Yonkers , New York; Oklahoma City, Oklahoma; Memphis, Tennessee; and Atlanta, Georgia. In Sacramento's Alkali Flat Project, the City Planning Department provided planning services necessary for -415- preparation of the NDP application, and helped the LPA in structuring the PAC. In Hartford, a State Department of Community Affairs is empowered to pro- vide financial assistance to nonprofit community housing development corporations to provide low- and moderate- income housing. This assistance takes the form of loans and grants to develop plans for housing and to administer social service programs in behalf of the occupants. Developers of the South Arsenal, Van Block, and Barbour-Charlotte projects all re- ceived such state assistance. One of the most direct forms of technical assistance to PACs is also illustrated by the Hartford experi- ence. The South Arsenal project, which is being developed by the PAC, has been assisted by DevCo as a joint venture partner in the redevelopment. DevCo is the Greater Hartford Development Corporation which, together with the Greater Hartford Process, Inc. (with the full backing of that city's huge insurance indus- try) , has been participating in a total program of community development in the Hartford Region. An LPA can frequently make use of technical and pro- fessional services available from residents or busi- nesses in the project area to assist in project im- plementation. In nonresidential, CBD-oriented projects in particular, local businessmen and repre- sentatives of financial institutions often contribute their professional and technical services to initiate new development. Financial institutions may provide technical services, for example, in directing de- velopers to loan sources or otherwise "packaging" their proposals. PACs in low- income residential areas seldom have ex- tensive professional experience to draw upon within the resident population, but they may also overlook opportunities that are present. An owner-architect in Oakland's "Victorian Row" was instrumental, for example, in stimulating planning for a major historic preservation project abutting that city's Center City urban renewal project. According to the National Urban League report, many PACs that have been organized and funded for some time and have developed sophistication could logically carry out technical functions under contract to the LPA; however, few have actually done so. PACs may be able to provide an especially useful role in identi- fying "real" relocation needs and problems and in -416- articulating viable solutions. They may also be able to provide the type of followup on relocation disper- sion that is essential for appropriate future com- munity redevelopment planning. Change Predominant Reuse or Abandon Project 12A. In the early days of the urban renewal program, the constitutionality of the urban renewal program and process was challenged a number of times. Such liti- gation slowed the start of execution in such projects as Tacoma's Fawcett, Tulsa's Downtown Northwest, and Evansville, Indiana's Riverfront projects. Except for condemnation cases concerning particular acqui- sition parcels, there have been few cases of major lawsuits effectively challenging urban renewal projects once acquisition and demolition have begun. Those that do arise typically relate to disagreement over the type of treatment and reuse (as in Boston's Water- front conflict) or the adequacy of the relocation plan (as in San Francisco's Yerba Buena project). 12B. Some particularly controversial projects may be ex- pected to encounter extensive delays due to legal actions. No sooner had the suit been resolved with respect to Yerba Buena 's relocation plan than another was filed requiring an Environmental Impact Statement. This report has been prepared and found adequate, so the project is proceeding. However, negative senti- ment is so strong that it is possible that there will be future challenges at each remaining stage of ex- ecution. Environmental legislation may provide a means for those opposed to urban renewal generally, or to specific reuse plans, to challenge projects in ex- ecution. For example, the Environmental Protection Agency's stringent standards on air pollution control may require significant revision of plans for massive parking structures or other uses involving large con- centrations of parked cars. This situation is im- minent in several cities we examined. Another area of potential legal conflict relates to historic preservation and the demolition of protected struc- tures. In California, the Coastal Commission review body has jurisdiction over all lands, including urban renewal projects, within a certain distance of the shoreline. Reviews by this agency have already de- layed projects in Seaside and Monterey, and they pro- vide an opportunity for legal action by dissatisfied citizens or other agencies. Depending upon their -417- execution status, projects anticipating long legal delays should probably be abandoned or be scheduled for early closeout. 13A. To compensate for some of the abuses in the early years of the urban renewal program, legislation passed in 1968 requires one-for-one relocation hous- ing replacement. Yet the adequacy of the relocation plan to achieve this goal may be challenged, as it was in one major west coast city. 13B. Because the initial relocation plan for one major city was deficient, the city's LPA revised it to in- corporate relocation housing within the project for the single nonelderly men who represented the group most significantly impacted by the redevelopment plan. The balance of the displacees were relocated to other sections of the city (thereby creating housing pressure and accelerating blighting condi- tions there) . 13C. Agreements in the settlement of a west coast city's suit involved a plan for the appropriate staging of relocation and demolition activities to accommodate the needs of the relocatees. The experience in this project and in other similar situations has resulted in more sensitivity by many agencies to the problems of relocation brought on by urban renewal. The San Jose LPA, for example, now operates on a "timely demolition" program, whereby acquired structures are maintained and rented until they are required to be demolished for marketing of a cleared site. This not only permits more appropriately staged relocation of residents and businesses, but provides continued revenue from interim property management as well. Eugene, Oregon has done an especially effective job of staged demolition/appropriate interim property management in its CBD project. -418- WHETHER TO OFFER PARCELS TO SINGLE OR MULTIPLE DEVELOPERS Statement of the Problem One very real problem faced by many renewal agencies is the selection of developers. Should an LPA seek to locate one single developer who will assume responsibility either for a very large parcel, or conceivably an entire renewal project? Conversely, should an LPA seek to involve a number of devel- opers in the same sized piece of land or project? In short, should an Agency put all of its eggs in one basket by select- ing one developer, or should the same area be parceled dif- ferently and sold to a number of different developers? The answer to this question depends on many factors. By selecting a single developer to undertake a very large parcel -- or perhaps even an entire urban renewal project -- an LPA increases the risk of failure should problems occur with the selected developer. By selecting several devel- opers to undertake the redevelopment of the same sized area, an LPA spreads the risk, ensuring that the failure of one developer to perform in a suitable and timely fashion will not jeopardize the successful completion of the entire project. On the other hand, selection of a single developer particularly one whose overall capabilities, resources, and experience are superior -- may ensure that a project will move towards completion in a more timely and expeditious fashion than would be the case with several less capable developers. This is particularly relevant in large, complex, central business district projects where timing is of the utmost importance to successful land disposition. -419- Another major consideration that must be assessed realistically concerns the experience and capability of the LPA in overall development management. An Agency with considerable strengths in this area may rightly consider that its own project manage- ment capabilities are at least equal, if not superior, to those of any developer. An Agency that does not possess these management capabilities may consider it preferable to deal with one developer, who in turn may involve other devel- opers and essentially coordinate management of much of the project . Basic Strategy Alternatives Our research has indicated three basic options or alternatives available to an LPA in dealing with this problem. These may be summarized as follows: • Offer Individual Parcels to Various Developers -- This is generally the most common and widely accepted manner of land disposition, except in certain central business dis- trict projects. • Coordinate Project Development and Offer Parcels Indi- vTdually -- This implies very strong financial, manage- ment, and design capabilities on the part of the LPA, together with a very clear and sharply focused set of ultimate objectives for the project. • Offer Large Tracts or Groups of Parcels to Single Developers -- This practice, which has not been used extensively in the past, is one that may imply a more limited management role for the LPA than has been traditional . Tests to determine which of these three alternatives would offer the most appropriate means of dealing with an indi- vidual Agency's problem are set forth in the decision tree on the following page. Each of the 15 tests is stated as a question that can be answered with a "yes" or a "no." In the right-hand column, we have suggested specific actions to be taken for each of the two possible answers to the test questions . We recommend that a person evaluating the problem of whether to offer parcels to single or multiple developers read through the entire decision tree before deciding upon a specific action to follow. It only takes a few minutes to answer all the questions, and the problem is placed in better perspective when all options are reviewed. Most of the questions are straightforward and self-explanatory and can be answered quickly. 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LU > LU Q LU _l Q. -I D O LU -I O z (7j o H (A _J LU o DC < OL sc LU U. u. O O I- £C LU z H LU X 2 LU -I 00 o CC Ol o a (0 w c Q) U Q) > *U •H 4-1 CD U co a. o C om !-< .-i U) i—l -i O 4-1 D. •H CO 4J D c •Hi — I O CO HJ t-4 O > 4-1 Q. O U ui aj ■H TJ i — I ■a c 4 Z c 3 o u 00 T3 c CO CO C-* 4J CD 4-1 aj aj oo^: 1J 1-1 CO CO E 0) 4J > CO CO 0J 32 4-1 u o a iJ o o CO CD a 4) OS CO ai •a cl> H cfl a Si -422- an abbreviated form and may need elaboration before they can be accepted or rejected. Therefore, the rest of the text in this chapter is devoted to discuss ior of the issues involved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions discovered in Real Estate Research Corporation's analysis of urban renewal land disposition across the country. Please turn to the decision tree before reading further in the text. The remaining paragraphs in this chapter simply elaborate upon the test questions posed in the decision tree. Specific Observations /Suggestions The numbering of the following paragraphs matches the numbered tests, or questions, in the decision tree table titled "Whether to Offer Parcels to Single or Multiple Developers." Each test is discussed, though the extent of the commentary differs. Some of the questions and suggested actions in the decision tree are obvious and require little explanation. Others are not so clear or involve complicated actions that need to be described in detail. In other cases, the text in- cludes descriptions of specific situations or actions dis- covered during our research that might be helpful to other cities. We have included as many examples and illustrations as possible of successful tactics and policies adopted by renewal agencies that we visited or have heard about. Again, the text that follows is directly correlated with the numbered tests in the preceding decision tree . The numbering is consecutive, but the three alternatives are included as subheadings to clarify the context of the discussion of the tests. • Offer Individual Parcels to Various Developers 1. The quantity of land available and the complexity of staging for new construction must be considered in determining whether one developer should play a major role in the development of several parcels. If the available land can be developed in one phase without overburdening the market, one developer would be appropriate. There have been cases in which a national developer conceived a monumental plan that so caught the fancy of local officials that the weak market for the proposed development was ignored or inadequately evaluated. In the case of one riverfront project, a large, multiuse project was to be developed by a single developer who kept the city immobilized for a number of years before withdrawing from the project. Where the current market does not justify a large-scale, -423- one-time development, it is usually preferable to sell individual parcels in the project to separate devel- opers so as no*- to lose development opportunities while waiting for a single large developer to perform. Where the market requires careful phasing of develop- ment to coincide with growth of market demand, it is generally better to dispose of land phase by phase, rather than to tie up the land at the outset with one developer. Though it may seem that there would be more risk in marketing many parcels to a number of developers than in committing a great deal of land to one long-term developer, experience has demonstrated that this is usually not the case. 2. We found in the projects studied that development of large tracts or several parcels by one developer has been less successful for multiuse than for single-use developments unless the market conditions are un- usually strong. In one CBD superblock planned for multiple uses, development probably would have pro- ceeded more rapidly if the land area had been split up among different developers. Near the CBD in the same city, however, a nine-block area was committed to a master developer for a mixed use project. For the area, use of a master developer was judged to be the best' policy because there was lack of developer interest but there was a strong market for the final smaller users of completed buildings. This example is atypical -- though many LPAs have delayed dis- position in the hopes that a master developer could be attracted to construct an integrated, multiuse project on a superblock. Such developers are rare, especially in inner-city areas. Generally, disposi- tion proceeds more rapidly and effectively when in- dividual developers are concerned with only one reuse. 3. The land being offered may be so configured that there is a strong market for one section of it, but the re- mainder would be one or more small, poorly configured, or inaccessible remnants that could not be disposed of easily. In such cases it is desirable to dispose of the full offering to a single developer, even though construction could begin immediately if the desirable portion of the land were disposed of separately. If current parcelizat ion is inappro- priate, the LPA may wish to consider additional acquisition to create two or more marketable parcels instead of one parcel that is not fully usable. 4. The shape, size, or location of a piece of land may be such as to make the most feasible reuser the -424- abutting owner. This may be particularly true in an industrial area where a parcel can be used as an in- centive for industrial expansion. Some parcels have such limited alternative potential that abutting owners are the only ones who could economically use the land effectively. In such cases, barring major changes in street alignments or reparcelization, attempts should be made to dispose of land to abut- ting owners. 5. Land offered to a single developer does not necessarily have to be contiguous. In some cases, a single devel- oper may be designated for a highly desirable parcel only if he undertakes development of a less market- able parcel. If the market is weak, however, devel- opment of the less desirable parcel may cause delays that are not dissimilar to those that would have occurred if there had been a separate offering. Non- contiguous land has no functional characteristics that make it particularly suitable for a single developer. The experience of the test case projects indicates that development of noncontiguous land proceeds more smoothly if there are separate offerings, particularly if the plan calls for different land uses. A major exception has been in the development of be low-market -interest rate housing for low- and moderate- income households. Noncontiguous properties may be offered to a single developer in order to speed up the processing of paperwork and make use of a federal or state commitment. A single developer that has been designated by the LPA and has had ex- perience in constructing lower cost housing can often proceed with greater speed than a number of separate developers. This also applies to developers of scat- tered site public housing. Rely on Agency to Coordinate Project Development and Offer Parcels Individually 6. The degree to which an LPA may wish to rely on a single major developer and assume the risks that are involved in placing all its eggs in one basket will depend in large part on the financial and technical resources of the Agency. In particular, cities of over 50,000 people that have assumed planning and administrative costs in return for 75 percent federal funding of project expenses may not have the finan- cial resources to coordinate a complex development process and may be better advised to select a single highly skilled developer who can manage the intricacies -425- of development coordination. If the Agency is highly conscious of its limited administrative budget, the staff could devote its efforts to obtaining various government and citizen approvals and allow the single developer to do most of the planning, coordination, and administration of the development. For non- residential projects, such a procedure requires a particularly strong involvement of the business com- munity in the renewal process, as seen particularly in Hartford. The reliance on major developers to conceive and administer major elements of renewal plans takes some of the initiative away from the LPA for establishing a comprehensive strategy, but it can also enable more rapid development at less cost to the city. In addition to the funding of staff, the LPA should evaluate the technical capability of its staff to coordinate development. If Agency personnel have had little or no experience in development or in the sale and transfer of land, the LPA should consider turning over some development responsibilities to a highly experienced developer who could perhaps coordinate the developments of other individuals within the project area. Staff capabilities of large and small LPAs change over time, often requiring reassessment of the relationship between the Agency and developers. Staff turnover can bring a renewal program to a virtual halt if experienced staff are replaced by persons without development experience. In such cases, one option available to LPAs is to retain outside specialists to serve the same functions, and another is to hand over the responsibilities to developers. In one city, the efforts of a new mayor to take control of the LPA pro- gram led to a further incapacity of the LPA staff to deal convincingly with developers. In sum, the LPA director must make an honest evaluation of the ex- perience, capacity, and effectiveness of the staff before undertaking coordination of complex develop- ments . If an LPA is to coordinate project development with a number of different developers working on individual parcels, it must be able to stick to a fairly tight schedule in order to maintain the support of indi- vidual developers and to avoid getting mired down in delays. Crucial to its effectiveness is the support that it gets from the political and financial insti- tutions of the city. The LPA must take the lead in coordinating public actions with those of private developers. Public actions may involve planning and -426- timing the construction of project improvements, ob- taining approvals from the planning department, de- termining the need for variances from local ordinances, and providing special concessions that may be made to developers in the form of tax abatements, provision of parking, access, or assessment considerations. Gen- erating the confidence of developers in the ability of the LPA to deliver on its commitments is of crucial importance in the ongoing disposition of land. De- velopers are highly sensitive to an atmosphere of uncertainty, which is created if there is not strong support of LPA initiatives by the city government. 9. Closely related to the political effectiveness of the LPA is its reputation in the business community. If the LPA is considering assuming coordinates of the development process, it should be aware that extensive delays will occur if it does not enjoy the support and confidence of the business community. In Waco, Texas, for example, the exceptionally persuasive power of the LPA with the business community enabled it to more rapidly execute disposition of parcels in the Brazos project using a number of individual developers. City staff changes can undermine an LPA's power in dealing with the business community because there is frequently a relationship between the business com- munity's confidence in the political leadership and its confidence in the LPA leadership. Changes in local political administrations that result in the naming of new LPA directors have often led to reduc- tions in the power of LPAs because established rela- tionships are disrupted. If an LPA does not have solid, direct relationships with the business com- munity, it should consider giving a greater role to a single major developer in the coordination of the development process. 10. If the LPA has carefully worked out a detailed plan that specifies the scheduling and phasing of inte- grated development of large sections of remaining land, it may feel more confident about accomplishing the desired concept if it retains control of the development of each individual parcel and does not delegate responsibility to a master developer. In Sacramento, California, the LPA maintained control of the development process in Old Sacramento through disposition of land to many individual developers instead of one master developer, which in our esti- mation resulted in a more carefully coordinated and integrated project. Such LPA control was necessary -427- because the Agency had to undertake the rehabilita- tion of some structures that could not feasibly be improved with private financing. The LPA's coordina- tion worked well because there was an excellent inte- grated plan designed to preserve the historical significance of the project area. In another city that had a carefully integrated plan for a large part of a project, a single master developer was selected; however, the LPA thought in hindsight that it would have preferred to deal directly with the individual developers because there was poor performance on a number of parcels . 11. If the LPA has a history of successful coordination of projects, it may more readily consider further such coordination. However, in cities that have lost experienced staff, past experience of the Agency may be a poor predictor of future successful performance. The LPA should evaluate whether or not the conditions still exist that enabled it to operate successfully in the past. Does it still have the confidence of the political leadership and the business community? Does it still have the staff members who gained ex- perience on earlier projects? If any of these condi- tions have changed or if the Agency has not had past successful experience in coordination of the devel- opment process, it should carefully evaluate the difficulties of such an undertaking in light of the considerations discussed under Tests 6 through 10. Offer Large Tracts and Groups of Parcels to Single Developers 12. If the LPA has previously dealt successfully with a large-scale developer and if a large tract or group of parcels is appropriate for unified development, then the LPA should encourage a proposal from such a developer. An LPA can use many different approaches in encouraging a developer to assume responsibility for a group of parcels. In a southern city, a sin- gle developer was offered a "bulk-quantity, single- purchaser" discount price for assuming the risk of multiuse development on an entire tract. The total price was less than the sum of the seven blocks as individually appraised. In other cases, developers have been given the flexibility of s»taged takedown -- for example, 10 percent of the land annually un- specified as to parcel. -428- Frequently, the change from a parcel-by-parcel dispo- sition strategy to a superblock concept will involve major plan changes that cause delays. To avoid such delays, it is often best to work with the large-scale developer during the conception of the plan. In some cities, a developer has proposed the concept and plan, and the renewal agency has provided the level of sup- port consistent with its skill and resources. Agencies that have sufficient skills to manage the development process themselves may feel reluctant to turn control over to a single developer. A strategy of choosing to deal with one developer creates a de- pendency upon him that weakens the Agency's ability to enforce contract compliance. It also increases the LPA's risks concerning nonperformance by the de- veloper since much more acreage is tied to a single disposition contract. For more discussion of pre- disposition nonperformance by developers, see Chapter 15. 13. If previous disposition offerings indicate a relatively weak reuse market, the likelihood of a single developer being able to complete development of a large tract is greatly reduced. This is particularly true in small or medium-sized cities where new construction must be carefully staged to avoid flooding the market. A de- veloper may want to keep his reservation for a large site until market conditions improve, but this type of delay increases the LPA's risk and raises the probability of ultimate failure of the development to materialize. If the market for the proposed reuse is weak, the LPA should consider changing the reuse, landbanking the property until the market improves, or carefully staging the development of individual parcels so as to improve the desirability of the area and meet demand over time. 14. There have been many instances in which developers have agreed to undertake major developments out of a commitment to enhance the downtown, the image of the city, or their corporate image, even when the projects had limited economic feasibility. A major local in- stitution like a bank or insurance company is more likely to see a project through than a developer who comes in from outside the area and has no noneconomic incentives. If a developer is not able to complete a project, all or a portion of the land will revert to the Agency, which will have to begin marketing all over again -- often with partial improvements made on -429- the property that may limit its reuse potential. A major conclusion from our study is that, in the selec- tion of a large-scale developer, it is preferable to choose one who is locally based and has a strong com- mitment to the area. A local developer will often stick with a difficult project that might be aban- doned by an out-of-town developer. If the Agency has already offered large tracts or groups of parcels without attracting interest from qualified developers, the LPA should consider other disposition alternatives that are more suitable con- sidering the market potential. If offerings have generated strong response, the Agency should attempt to dispose of a superblock. One large development is likely to be more coherent and will have greater impact than the sum of the parts that might otherwise be created by a group of smaller developers . The LPA's coordination with the developer will be easier than with a number of companies , and a large developer bringing wide experience to the project will assume much of the management responsibility. If the land available lends itself to a unified concept, the LPA should consider making such an offering. -430- APPROPRIATE METHOD OF ADVERTISING DISPOSITION PARCELS A. Statement of the Problem Current HUD regulations require only that an LPA erect signs on land available for disposition to encourage public interest in acquisition of the property. Prior to the execution of a disposition agreement, the LPA is also required to give public notice of the intention, generally by placing what is normally called a "tombstone" or legal notice in at least one general circulation newspaper in the locality. Neither of these re- quirements constitutes an effective advertising program. An LPA must answer three important questions with respect to the advertising of land available for disposition: 1. Is advertising an appropriate sales promotion vehicle? 2. If so, what medium is most appropriate and effective? 3. What agency resources should be allocated to advertis- ing? Our analysis of renewal activities in 22 cities of varying size indicates a wide range of approaches to advertising strategy, suggesting that no one approach is the ideal one. Some cities have devoted considerable time, effort and resources to -431- advertising, while others have minimized advertising, prefer- ring to deal with potential developers on a face-to-face basis. Because there has been such a wide range of adver- tising practices that have met with success, we have generally confined our analysis to what we view as the most crucial and difficult choice; namely, what types of advertising are most effective and most appropriate. Basic Strategy Alternatives There are three basic alternatives for determining the most appropriate methods of advertising disposition parcels. These may be summarized as follows : • Undertake a National Advertising Program -- involving the use of national newspapers and trade publications, and im- plying a substantial budgetary commitment. • Undertake a Regional Advertising Program -- using regional trade publications and newspapers and implying a less sub- stantial budget for direct advertising. • Undertake a Local Advertising Program -- using metropolitan newspapers and metropolitan publications. This implies a still less substantial budget for direct advertising. Tests to determine which of these three alternatives would offer the most appropriate means of dealing with an individual Agency's problem are set forth in the decision tree on the fol- lowing page. Each of the nine tests is stated as a question that can be answered with a "yes" or a "no". In the right-hand column, we have suggested specific actions to be taken for each of the two possible answers to the test questions. We recommend that a person evaluating the problem of determin- ing appropriate methods of advertising disposition parcels read through the entire decision tree before deciding upon a speci- fic action to follow. It only takes a few minutes to answer all the questions, and the problem is placed in better perspec- tive when all options are reviewed. Most of the questions are straightforward and self-explanatory and can be answered quickly. However, some of the specific actions are stated in an abbreviated form and may need elaboration before they can be accepted or rejected. Therefore, the rest of the text in this chapter is devoted to discussion of the issues involved in the tests, the actions that could be considered to correct deficiencies and problem situations, and examples of such actions discovered in Real Estate Research Corporation's analysis of urban renewal land disposition across the country. Please turn to the decision tree before reading further in the text. The remaining paragraphs in this chapter simply elabo- rate upon the test questions posed in the decision tree. -432- CO -I LU CO o Q- CO o z CO oc 111 > Q O Q O z I- UJ OC CL O oc Q. 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