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Balancing Act

The life and culture in Portland, Maine, has always revolved around the sea.

The city's history goes back nearly 400 years, when it was founded as a small fishing hamlet. Through the years, its economy flourished due to the famed lobsters and other seafood pulled from the ocean. Ships radiated from its port, bringing the daily catch down the Eastern Seaboard. And even though the days of Portland living and dying by whether the season produced a good catch or not are over — its economy today is more reliant on its place as a regional financial hub — its residents remain fiercely invested in what plays out on their waterfront.

So it should be no surprise that a proposed plan to redevelop the historic, but dilapidated, Maine State Pier has ground to a halt and been mired in controversy. The saga started in 2001, when city officials convinced the state to transfer the property into their hands. At first, the city wanted to find users for the seven-acre site in its existing maritime industrial form. After several years passed with no takers, Portland decided to redevelop the property, but postponed the project in favor of other planning initiatives.

Finally, in October 2006, realizing that the pier was crumbling and the city lacked funds to redevelop the facility with city money, Portland turned to the private sector. It issued a request for proposals and ended up with two bids — one from Portsmouth, N.H.-based Ocean Properties, Ltd., the other from Portland-based Olympia Companies — to breathe new life into the site. Both firms proposed projects mixing office, hotel and retail uses. Each of the projects promises to generate more than $20 million in new real estate tax revenues for the city, in addition to revitalizing a valuable, but underused, piece of real estate.

You would think Portland's 64,000 residents would be happy.

You would be wrong.

Concerns run the gamut. Residents feel like they've been left out of the process, or worse, that corruption and cronyism are at work. Some have complained about the transfer of public property into private hands. Others have pointed out that the proposals put out by Ocean Properties and Olympia Companies are too similar — and not imaginative enough. The most serious objections, however, concern charges that government officials, including Portland Mayor Nicholas Mavodones, struck a secret deal with Ocean Properties to rig the process. The charges arose after the city allowed the firm to make changes to its development proposal after the Feb. 22 RFP submission deadline.

“This is a key part of our waterfront, it's one of the very few pieces of waterfront left that is publicly owned and a lot of people have high hopes about what could be there,” says Jeff Ingles, managing editor of the Portland-based newspaper the Phoenix. “But the two proposals that have come in are functionally identical.”

In addition, the fact that U.S. Senator George Mitchell, who is a Democrat, made his support for Ocean Properties' bid a matter of public knowledge for Portland's largely Democratic City Council hasn't helped public relations, Ingles adds. “People in Portland are upset because, for one, we should have more of a choice than we do, and if we really have to settle for the non-choice that we have, it shouldn't be a political football,” he says.

As a result, the proposed redevelopment remains at a standstill. In late August, city officials postponed making the decision on which developer should get the bid from Sept. 5 to Sept. 17. But after the Sept. 17 City Council hearing failed to deliver the five votes needed for consensus, it looks as though the city may have to start the whole process over from scratch. In the aftermath of the meeting, the head of Ocean Properties threatened to pull out of the project altogether, while the head of Olympia Companies said he was mulling reworking his firm's bid.

Portland provides a classic example of exactly how not to pursue a public/private partnership and how muffing the process can prove costly for developers and governments alike. For good or for bad, however, public/private partnerships are becoming a necessary way of doing business. Developers who want to get projects built will need to become adept at navigating what can be a very onerous process. The trick, pros say, is getting the balance right. Public/private partnerships — because they involve taxpayer money or other help from government officials — thrust development from the back room to the spotlight. So developers need to become much more sensitive to public perception. And that's no easy task.

According to the Saint Consulting Group, a Hingham, Mass.-based land use political consultancy, 73 percent of Americans oppose new development in their community and 75 percent say the relationship between elected officials and developers makes the city planning process unfair. Landfill projects tend to cause the most discontent, with 87 percent of Americans opposing them, while single-family homes are viewed as relatively benign (only 6 percent oppose them). Shopping centers, however, rank pretty high on the opposition list, with 57 percent saying they don't want a shopping center.

And these people are not likely to suffer in silence, says Patrick Fox, president of the Saint Consulting Group. In the course of his work, he found that those who support a new real estate development won't bother showing up to public meetings and vocalizing their support, while those who oppose new projects will go through every channel to try and prevent the development.

Winning support for a project can be daunting. But there's no getting away from public/private partnerships. There aren't greenfield sites to be found. Instead, finding sites takes work — and help — from public entities, whether through site assembly, expedited entitlements or even financing.

The increased role of cities within retail development is crystal clear when looking at ICSC itself. There are now 4,300 economic development officials in the organization, a 7.5 percent increase from 2000. And they've made themselves visible. There used to be just a handful of city booths at the Spring ICSC Convention. Now there's an entire “Municipal Court” on the floor in Las Vegas, which this year featured 101 exhibitors.

Doing it right

Fortunately, it doesn't always play out like it did in Portland. On the other end of the spectrum is Glenview, Ill., a suburban village of 44,655 that's part of the affluent North Shore suburbs outside Chicago. When the town came into possession of the 1,121-acre Glenview Naval Air Station base in the early 1990s, local officials spent more than two years working out the best uses for the site, eventually deciding to push for a mixed-use project. The town, with the help of San Diego-based developer OliverMcMillan and Chicago-based consultant Mesirow Stein Real Estate, Inc., incorporated both public and private uses into the property to create the $1.1 billion Glen mixed-use development, ending up with 470,000 square feet of retail and commercial space, 1,100 new residences, a 140-acre park and a children's museum. The Glen Town Center opened in October 2004 and the Kohl Children's Museum in October 2005.

The village of Glenview is now reaping the benefits of 2,640 new full-time and 1,359 part-time jobs (the total number of jobs is projected to reach 5,600) and a 35 percent increase in tax revenue, including property, sales and entertainment taxes. The project worked out so well, it received the 2005 Award for Excellence from the Urban Land Institute, with the ULI calling it a “textbook example” of consensus building and effective use of public resources.

Based on its size and the complexity of the undertaking, the Glen should have been more of a challenge than the Maine State Pier. But in public/private partnerships, success is not always based on the tangibles, like the value of the land or the amount of money the city can throw at a project. More often than not, it's about the intangibles — a shared vision between the developer and the city government and a spirit of cooperation.

“In public private/partnerships, it's not location, location, location,” says Scott Kaplan, senior managing director in charge of retail services for the western region with the brokerage firm CB Richard Ellis. “It's location, finance and politics.”

When all three components are present, public/private partnerships bring benefits for both municipalities and real estate developers. American cities are increasingly strapped for cash and while they may own valuable swaths of land, they often don't have the development acumen to turn those plots into income-producing properties, says Richard Norment, executive director of the National Council for Public/Private Partnerships, a Washington, D.C.-based advocacy group that encourages public/private projects. An experienced retail developer can take that piece of land and create a new source of revenue for the city in the form of sales taxes, he says.

And sales taxes are one of the more valuable tools in a city's income-producing arsenal. According to a 2005 Fiscal Conditions study by the National League of Cities, a Washington, D.C.-based group that represents more than 1,600 municipalities around the nation, 68 percent of city finance officers in municipalities that rely on sales tax as the primary source of revenue had an optimistic outlook on their city's future financial performance. Only 36 percent of finance officers in municipalities that rely on income taxes reported being optimistic about the fiscal health of their city.

That's why cities badly in need of new sources of revenue will often give the developer a bit of a financial boost, ranging from tax incremental financing to low-interest loans to payment in lieu of taxes. The latter mechanism allows the developer to postpone the payment of property taxes on a new project if the firm builds a necessary community resource, such as a school or a library, free of charge. In many cases, the added cost of an extra building will be less than the combined amount of property taxes the developer would pay over a 20- to 30-year period.

However, for most developers, the city's financial contribution is not going to make or break a deal, Kaplan says. All that matters is to bridge the gap between what the project will cost and the targeted returns.

Meanwhile, cities that have plenty of income but are experiencing a gap in their retail infrastructure can lure developers in without forking over any cash or giving big tax breaks. The government of Corona, Calif., for example, wanted a lifestyle center to keep its affluent residents shopping within city limits. When Corona, which never suffered from a lack of interest from developers, partnered with Bakersfield, Calif.-based real estate firm Castle & Cooke for the Crossings at Corona, a 1.2-million-square-foot open-air retail and entertainment center, its only contribution to the project was expediting the entitlement process.

“From the time they approached us to the time they were breaking ground, the project took less than 18 months, and that was the worst-case scenario because they didn't have appropriate zoning,” says Darrell Talbert, deputy director of the Corona Community Development Department. In another part of California, the same project would take up to four years, Talbert estimates. The Crossings at Corona opened in the spring of 2005.

The Corona example illustrates an important point. Contrary to popular belief, the main advantage that public/private partnerships offer developers is not public funding, it's speeding along the process and helping developers gain access to desirable urban markets that might not otherwise be open for them, says Norment. The willingness to engage in public/private partnerships can increase the number of projects a firm can undertake by up to 20 percent, he estimates.

The problem, he says, is that in their desire to see underutilized space revitalized, both cities and developers often rush, either not doing enough preliminary studies to determine what kind of use would be best for a given site or embarking on projects that have no chance of succeeding. For example, William H. Hudnut III, chair of public policy with the Urban Land Institute and former mayor of Indianapolis, recalls a project along the East 38 Street corridor that he undertook in the 1980s. The project, called the Meadows, was supposed to revitalize the area's retail infrastructure with high-end shops. Instead, it ended up driving existing mom-and-pop stores out of business. To this day, Hudnut is not sure whether the city got the mix of retailers wrong or whether the area simply did not need additional retail.

To improve a project's chances of success, Norment recommends that cities take their time to research potential uses prior to initiating the request for qualifications process and that they do so with the help of independent development consultants.

Meanwhile, when it comes to deciding whether to make a financial contribution, Hudnut, who went on to complete a successful public/private project with Simon Property Group in the form of Circle Centre, an 800,000-square-foot urban shopping center in Indianapolis, recommends using what he calls a “but for” test. “You have to ask yourself: but for the tax abatement/tax deferment/bond financing would the project be possible? If the answer is no, then it's legitimate and justifiable to have the public sector participate,” he says.

The Circle Centre, which took 17 years to complete, required millions of dollars in tax increment financing, urban development action grants and federal loans, as well as the creation of a special downtown district and the use of eminent domain. When the project was completed, however, in 1995, it served as the centerpiece of the revitalization of downtown Indianapolis. Dozens of new bars and restaurants sprang up around the Centre.

Making it work

Beyond simply crunching the numbers, those who participate in public/private partnerships need to make sure both parties have what it takes to stay the course. These projects take at a minimum twice as much time as a privately run development. They unfold in the public spotlight. And with so many parties at the table, it's hard to balance egos and it means projects never work out exactly as planned, says Jon S. Wheeler, president of Wheeler Interests, a Virginia Beach, Va.-based acquisition and development firm. If a project ends up costing more than originally planned, it could mean a new round of negotiations to get the funding or to alter the design. Plus, there's always the risk of lawsuits from residents opposed to projects.

For example, while Wheeler Interests was working on the Berkley Center, a 51,176-square-foot neighborhood shopping center in Norfolk, Va. that was partially subsidized by the city of Norfolk (the city contributed approximately $1.5 million toward the project to bring a badly needed supermarket to the area), a run-up in the price of construction materials pushed up the cost of development. So after completing a 24-month-long negotiation process, Wheeler had to go back to the city and rework the contract.

“A public/private partnership is a roller coaster of negotiation — you start at point A and end up not where you thought you would end up and you have to solve the problem,” Wheeler says. “It just doesn't move as quickly as a private deal.”

In order to make it through, both the city and the developer have to take the partnership as seriously as they would a marriage, according to Kaplan. In his experience of working with dozens of public/private partnerships around the country, he has yet to see one concept plan that stayed the same from start to finish. “The retail tenants are always changing, condos get hot and then they die. When the airplanes hit on Sept. 11, they destroyed the hotel industry in one day.,” he says. “You have to be flexible.”

From the developer's perspective, the potential success of a partnership can be gauged from the first meeting with the city. If the municipal staff is uncooperative, if they tell you that you will have trouble getting the necessary approvals or if they seem inexperienced, it's better to stop, says Stephen P. Peca, managing director of New York-based Concourse Realty Group. Peca is also an adjunct assistant professor at New York University's Real Estate Institute, where he teaches a course called Public/Private Partnerships in Real Estate Development. He's walked away from potentially lucrative deals because government officials were reluctant to supply him with information on local zoning. “That's my first hint that they will be difficult to work with,” he says.

You can also include clauses in the development contract that call for the resolution of any conflict through nonlegal means, according to Norment. If all the parties involved are committed to the undertaking, there is nothing that cannot be worked out through negotiation, he says, while lawsuits take years.

Public/private partnerships also need strong civic leadership that believes in the project and can make the process move forward. Even the most benign development is bound to run into problems, Norment notes, and it takes a leader to push the partnership's vision through — the higher up on the executive ladder that leader is, the better.

The support of the local government is why Brian Jones, president and CEO of the western commercial group with Cleveland-based Forest City Enterprises, considers Victoria Gardens, a 1.3-million-square-foot open-air lifestyle and entertainment center the company developed in partnership with the city of Rancho Cucamonga, Calif., to be among its most successful projects. In addition to getting permission to use city-owned land for the center, Forest City benefited from unanimous approval of the city council and the city planning commission when it submitted its plans to Rancho Cucamonga in 2002. Less than two years later, the firm held the grand opening for the first phase of the project.

“City officials have to be prepared to look the developer in the eye and say, ‘This is our vision and we will be behind it’ from the policy standpoint,” Jones says.

Forest City estimates that Victoria Gardens generated 3,000 new jobs for Rancho Cucamonga and brought the city a total of $5 million in sales tax, property tax and business license tax revenues. The project also garnered awards from the Urban Land Institute and the California Association of Local Economic Development.

Finally, the local community deserves the chance to get involved in the project, so developers should attend meetings and hold press conferences as often as possible. Doing so helps avoid situations like the one currently taking place in Portland, where the speed with which the city moved on the Maine State Pier project made residents question the extent of the mayor's involvement.

“When people hear that a development got approved and nobody knows why or how it happened, that's one of the biggest problems you can have,” Peca says. “Some of their objections can be rather silly sometimes, but they can't be ignored.”

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