Lofty words 

Significantly increasing the residential population in Downtown will be fundamental to success.

– The Greater Downtown Partnership’s Reinvestment Strategy for Lower Woodward

In 1996, the Greater Downtown Partnership – a private, nonprofit planning agency created by Mayor Dennis Archer – launched its reinvestment strategy for the blighted lower Woodward corridor at the heart of Detroit’s downtown. The Partnership’s vision for a revitalized central city focused heavily on creation of a mixed-use commercial development in the Campus Martius area, where the Hudson’s, Kern and Crowley’s department stores once stood.

Less hyped but, many would argue, more critical were plans to bring residential lofts to the newly christened "Necklace District" – a collection of historic buildings in the area bordered roughly by Grand River, Broadway, Washington Boulevard, and Grand Circus Park.

Conversion of old industrial and commercial buildings to residential lofts has lured young, middle-class professionals to once-decaying areas of many other cities. Drawing this population and its disposable incomes to the vacant and underutilized buildings of lower Woodward would generate the critical mass – and expanded tax base – Detroit’s leaders have sought for their city center for more than two decades.

But to date the Partnership’s strategy has been little more than talk and building shuffling. Many say that, unless the Partnership and the city get serious soon about loft development, the Necklace District will never be more than just another colorful planners’ sketch.

"I don’t think it’s moving fast enough or deep enough to make it happen in the way it needs to happen," says Ray Parker about the Partnership’s residential strategy. Parker is president of RFP Associates, a downtown real estate brokerage firm, and owner of a building in the district.

Words, not deeds

A look at the Partnership’s loft development activities to date supports Parker’s contention.

The Partnership’s main role is to aggressively market buildings to capable developers, says Mark Yagerlener, director of real estate for the Partnership. Since 1996, the Partnership has acquired four buildings for the quasi-public Downtown Development Authority with the intention of selling them to developers. The buildings were identified as ripe for loft conversion but particularly difficult to move on the open market, says Yagerlener.

The Partnership also recently succeeded in having the lower Woodward corridor named to the National Register of Historic Places, making rehabilitation projects eligible for a 20 percent federal tax credit and a 5 percent state tax credit, as long as certain guidelines are followed.

But to date, not a single building acquired by the Partnership has been sold for loft conversion. A deal is in the works for the three-building Ferguson complex, which formerly housed Winkleman’s and Marianne’s clothing stores; if the deal goes through, Yagerlener says it will include about 75 residential lofts with an anticipated completion date of spring, 2000.

The Partnership is also marketing four city-owned buildings, but has not yet issued requests for proposals on three of them due to repair work and title complications. The Partnership announced plans for a 52-unit project in the fourth, the Farwell Building on Griswold, more than a year ago, but the developer has not yet secured financing. Yagerlener says if the project does not move forward soon, a new development team will be sought.

But even if the Ferguson building deal does finally get inked and its 75 lofts built next year, at that rate, it would take more than 50 years to create 1,000 new housing units downtown.

Big demand

If they build lofts, will anyone move in?

A recent survey by planning consultants Zachary and Associates identified demand between 1997 and 2005 for up to 15,000 units of new housing in the greater downtown area, which extends as far north as the New Center area and encompasses a large swath of the riverfront. Demand in the core downtown area is a key part of that, says Ernie Zachary, the group’s president. "We have every indication that there is a large desire to live downtown. It’s just that there isn’t a product out there right now," he says.

Parker, like many others, has specific ideas about what it will take to meet this demand. And it’s significantly more than what the Partnership and the city are currently doing. He has stacks of articles on his desk showing how cities such as Cleveland, Denver, Dallas and Chicago have made loft districts work.

"Most other cities offer incentives," Parker observes. "Detroit needs to offer some immediate incentives to current building owners and those who are interested in developing buildings downtown, with probably a bonus available if a new resident moves into your unit." Incentives should include gap financing (to make up the difference between a developer’s costs and returns on that investment), tax abatements, loans for facade improvements and city-funded streetscaping, he says.

Yagerlener says the Partnership, too, has looked to other cities, particularly Cleveland and Denver, as models. He says assistance for loft projects in those places was minimal, however. "They started it with a couple demonstration projects and then the market came right in and took off," he says.

But a closer look at Cleveland shows otherwise. Including city-directed federal funds, tax abatements, loans from the city and additional sources, since 1985 Cleveland has invested $17 million in 10 housing projects in its loft district, known as the Historic Warehouse District. In addition, the city has funded streetscaping and a storefront renovation program. Cleveland Tomorrow, a corporate-backed funding entity similar to Detroit Renaissance, has kicked in $7 million in low-interest loans for residential projects.

Rehabilitation investment tax credits – for which many buildings in Detroit’s Necklace District are also eligible – have been key too, says Pat Beard, executive director of the nonprofit Historic Warehouse District Development Corporation. This idea also has strong support from the city’s mayor.

More than 1,800 new units have been developed in the nine-block Warehouse District since 1985, Beard says. Those units are 97 percent occupied and loft development has extended to other areas of the city.

Stephen Strnisha, deputy director of Cleveland Tomorrow, is frank about how the projects would have fared without large-scale city assistance. "They would not have happened," he insists.

Even with the success of the Warehouse District over the past 14 years, the city continues to offer assistance, although funding has been scaled back, says Clare Doyle, manager of downtown housing for the city’s Community Development Department.

"I don’t think the market is totally there yet," she says.

By comparison, Detroit Renaissance is in the process of creating a fund that would provide short-term loans to potential Necklace District developers for pre-development costs. The fund will be capped at $250,000.

Who gets the money?

In the past, the DDA has provided substantial gap financing for residential development downtown. Projects such as Trolley Plaza, the Millender Center and lofts in Harmonie Park all received DDA dollars and federal funds to successfully bring new life to blighted areas. Under the Archer administration, however, DDA money has been used for big-ticket projects such as demolition of the Hudson’s building, estimated to be $15 million, and financing new stadiums for the Tiger and Lions to the tune of $85 million.

Consequently, those who come knocking these days at the DDA’s door asking for money to invest in residential projects are all being told the same thing: No.

Sean Harrington, president of Harrington Properties, went straight to DDA Director C. Beth DunCombe to inquire about gap financing for 18 lofts he is developing in the Iodent Building, just outside the Necklace District.

"She told me there was absolutely no DDA financing for this project," Harrington says. Mike Higgins, owner of the 33-story Broderick Tower at the head of the Necklace District, reports the same response.

"The DDA, which used to have funding, is pretty much giving everything to the stadiums," Higgins says.

Yagerlener says the Partnership offers favorable financing on the purchase price of the DDA-owned buildings, but that his agency is also working with both the DDA and Detroit Renaissance to make real dollars available.

"It would certainly help," he says. Currently, the only option available to developers in the Necklace District is a small business loan that caps out at $200,000 per project, he says.

The Partnership also is working with the city to implement a streetscaping plan and provide parking for new residents, Yagerlener says. City funds have not yet been dedicated to these projects, however.

Gap financing is perhaps more critical for the loft district than for other residential projects in the city. While commercial lenders are more receptive than they have been in years past, they still view loans for downtown loft conversions as risky, say brokers and developers in the area. In addition, they point out, initial market rents will not cover costs, especially since the purchase prices of many buildings in the area have skyrocketed in response to the nearby stadium developments.

"Most building owners, once they’ve gone through the numbers to figure the economics of doing a loft conversion, realize that you can’t do it. The rent is not high enough yet in downtown to justify the construction costs of doing it, so that’s where that gap financing comes in to fill that gap to make the numbers work," says Parker.

In lieu of hard dollars, the city and the DDA could offer a form of soft financing by reducing the price of their buildings, suggests architect George Petkoski. Petkoski owns the Wright-Kay Building, which houses residential and commercial lofts, and is part of a development team seeking to acquire additional buildings in the Necklace District.

"Actually, the city is in a position to eliminate the gap financing need right now just by turning over their properties to qualified developers to get the project going. At that point the gap financing becomes a nonissue," he says.

Cutting the price

But the City of Detroit has a long tradition of seeking market value for tax-reverted property, and the DDA appears to be following suit. Yagerlener says the price of the DDA-owned buildings reflects what the DDA paid for them, plus costs. A revamped sales approach would catalyze the district, argues Petkoski.

"Even as a first wave of development, there’s enough buildings that are owned by the city – as long as the city decides to get out of the real estate business and turn over these properties to developers for no fee or even a very nominal fee, rather than sell them for what they consider a marketplace – then the development can actually get going," he predicts.

A proposed deal on the Lafer building, which Petoski’s team bid on but was turned down by the Partnership, is an example. "They basically came back to us and said we think it’s too tough of a project to develop and it’s too marginal. We hate to see anybody fail," Petkoski recounts. "So they decided to not sell it and the building still sits."

Yagerlener says, "We’re looking for a development team who’s got a well-thought-out development program, who’s got strong development experience and who’s got a fair amount of capital that they can put on the table." None of the parties who submitted proposals for the Lafer Building met those criteria, he says.

But the project could have worked had the price of the building been reduced, argues Petkoski. "Had the city not asked for four-hundred-some thousand dollars for it, it wouldn’t have been such a skinny deal," he says.

There not only needs to be a change in policy, but a change in priorities, he adds.

"There doesn’t seem to be this sense of urgency that this needs to happen now, not later, this year versus next year," he says. "You have economic prosperity right now, but is it going to last for the next 10 years? Probably not. If we can’t make this happen during good economic times, we certainly can’t make it happen when everybody’s laid off and nobody’s buying jeeps and vans. It’s not going to happen."

And loft development must be a priority across the board, observes Parker.

"If the mayor announces a new policy, then the other departments will have to fall in line to make it happen," he observes. "But from the bottom up, it’s difficult. It has to be a strong, affirmative policy that housing is the most important," he says.

Until that time, Parker, like many of his neighbors, will keep his building limited to commercial use. Higgins will continue to seek funding to develop a nightclub and lofts in a towering structure at the gateway to lower Woodward.

And small building owners will proceed in the same manner people like Sophie Tatarian always have – slowly.

"As funds became available I’ve worked on it," she says of the eight-story Rose Jewelry building, which she owns. "I go in by floor and develop by floor."

Tatarian recently purchased a second building in the area and plans to rehabilitate it in the same manner. That, of course, is a fine way to build a project. But it is no way to build a district.

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