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Northeast Nightmare

When Vornado Realty Trust decided to bring the first Wal-Mart in New York to Rego Park II, a proposed 10-acre mixed-use project in Queens, in 2004, the developer was hoping to get the approvals in place before the identity of its anchor tenant became public, according to the New York Times. Somehow, the news reached New Yorkers earlier than expected and Vornado ended up with a political storm on its hands. Union-backed demonstrations and opposition from City Council members left the developer with a choice — lose the Wal-Mart or perhaps lose the chance to build altogether.

The Wal-Mart was scrapped. Two years later, Vornado still hasn't put a shovel to the ground and it's unclear whether the project will ever get the green light.

Welcome to building in the Northeast.

Vornado's ordeal represents just one of many potential headaches developers can expect in trying to build a large-scale project here. High labor and land costs and arduous approval processes are the norm. And forget about finding the ideal site. Expect to have to buy out residents (or resort to eminent domain), in addition to dealing with historic preservation issues and clean-up concerns. All this amounts to projects that are much costlier and more time-consuming than in the rest of the country — if they ever get built at all.

“A lot of people don't realize that it takes millions of dollars and about two to three years just to get through the entitlement process,” says John R. Clifford, principal with GreenbergFarrow, an architectural and engineering firm that offers development services. “The Northeast is the most restrictive environment in the country.”

The average time it takes to complete a development here is three to five years, according to Patrick Breslin, chairman of the retail group with brokerage firm GVA Worldwide. By contrast, in many parts of the United States, the development process takes only two years.

The payoff? The Northeast's demographics are hard to match. It has the highest population density in the country and the highest household incomes. There are on average 79.6 people and 32.8 housing units per square mile in the United States, according to the Census Bureau. New Jersey and Massachusetts have 1,134.4 and 809.8 people per square mile, respectively. Five of the wealthiest states in the country are Northeast states, including Connecticut, with the median household income of $56,409 a year, New Jersey with $56,356 and Massachusetts with $52,713. The figure for the United States is $43,318 a year.

Northeast properties are attractive for investment, but they don't come up for sale very often, leaving developers with only one option — to build

“There is tremendous appetite for retail investment and not a lot of product to buy,” says Rick Latella, senior managing director of the retail industry group with brokerage firm Cushman & Wakefield.

As a result, builders will even take slightly lower initial yields on developments in the Northeast in exchange for higher long-term returns. Latella estimates that the added cost of development means initial yields are below nine percent, while the targeted yields for the rest of the country are closer to 11 percent.

That's because the region's advantages can be a double-edged sword. “With so many people in such a small area, the likelihood of litigation is always out there,” says Henry Kent-Smith, a partner in the real estate practice of Saul Ewing LLP.

The cost of doing business is also high in the Northeast — New York is the second most expensive market in the country after Hawaii, according to the Milken Institute, a publicly supported economic think tank. Massachusetts (number 3), Connecticut (number 5) and New Jersey (number 7) follow close behind. New York, New Jersey and Massachusetts are also the three highest-ranking states on the wage index.

Land is expensive, as well — in Atlanta, Ga., the average price for an open parcel is $9.50 per square foot. In Bakersfield, Calif., it's $11.50 per square foot. In Hartford, Conn., however, a similar parcel costs $60 per square foot, according to Colliers International.

Negotiating all the red tape is another challenge. Zoning laws vary, but in many parts of the region there are agencies at the state, city and county levels to deal with. A project that in another part of the United States would require two or three permits before construction can commence will need up to 60 permits in the Northeast. To build on a retail-zoned site in Atlanta, Ga., for example, a developer would need a building permit and a highway access permit and will be able to start site work within a few weeks.In the Northeast, the same project would require a zoning approval, an environmental review and an architectural review before a building permit could even be considered.

If the process goes smoothly, getting all that paperwork through might take a year. But if someone files a lawsuit, the wait can stretch to more than seven years.

And local zoning laws are very flexible. It's often up to the town boards to make up the rules as they go along. If a retail center is set to include a big box, town officials will change the zoning even as the developer is sealing the deal, says Ted Zangari, a real estate lawyer with New Jersey — based Sills Cummis Epstein & Gross P.C.

In Somerville, Mass., land use disagreements have plagued redevelopment efforts for years. When Taurus New England Investments Corp. and Gravestar, Inc. wanted to bring in Home Depot to replace the town's run-down Assembly Square Mall in 1998, local activists used traffic concerns to stop them.

After six years and a trip to court, Taurus and Gravestar sold the mall and a nearby land parcel to Maryland-based REIT Federal Realty Investment Trust last year for $64 million. Federal plans to develop a mixed-use project on the property, but even this proposal is on shaky ground — some locals would like to see more office use at the site and Somerville Mayor Joseph A. Curtatone threatened to take back the land if Federal delays construction.

Federal Realty declined to comment.

Even for an open parcel, securing environmental permits takes effort. When the Mills Corp. won the bid for its 4.8-million-square-foot Meadowlands Xanadu project in Bergen County, N.J., in 2003, the company agreed to donate a 587-acre land site, called the Empire Tract, to the state in exchange for permission to build on wetlands (Mills originally wanted to build a mall on the Empire Tract, but was blocked by community opposition). Mills also promised to include a 45-acre park and 1,250 acres of open space in the development. The project is currently in limbo as Mills waits to finalize the financing for Xanadu.

Similarly, Michigan-based REIT Taubman Centers, Inc. hasn't been able to reach a land use agreement on its 860,000-square-foot Mall at Oyster Bay in Syosset, Long Island, since 2000. In October, Taubman requested a ruling from the Supreme Court of the State of New York. The company believes that it will prevail over the town board, but it has already spent $122.5 million on a development that might not happen. Taubman did not return calls for comment.

Plus, there are cases when rival owners go all out to stop a new shopping center. Simon Property Group is reportedly sponsoring the opposition to the Mall at Oyster Bay to protect its Roosevelt Field property in Garden City, N.Y.

That's not the only example of this in the region either.

When Secaucus, N.J. — based developer Hartz Mountain Industries lost the bid for the Meadowlands site to Mills, it filed a lawsuit against Mills, its partner Mack-Cali Realty Corp. and the New Jersey Sports and Exposition Authority, the agency in charge of the site, claiming Mills didn't follow request for proposal specifications. The developer was concerned the new Mills property would jeopardize its dominance in the area, where it owns at least four malls.

And in the late 1990s, Massachusetts-based New England Development and the City of New Haven, Conn., had to go to court with Westfield America over the latter's interference in their plan to build the 1.3-million-square-foot Galleria at Long Wharf. The lawsuit charged that Westfield lobbied local officials, filed 15 lawsuits disputing land use approvals and counseled New England's tenants to drop out of the project to protect its Connecticut Post mall in nearby Milford.

New England Development scrapped the Galleria in 2000, after five years of planning. The company did not return calls seeking comment on the story.

How to protect yourself

First and foremost, reach out to the community and local politicians years before a bid is submitted. Zangari recommends breaking outreach efforts into incremental steps. At the outset, the developer should meet important community figures — heads of religious organizations, parent teacher associations and senior citizen leaders. Then should come discussions with public officials. As time goes by, the meetings should include more and more people.

“Early and often is our mantra when we advise our clients,” says Zangari. “The worst possible scenario is when the residents first learn of a proposed project by reading a tiny notice in the newspaper or by getting a required notice in the mail. Come up with a vision of what the project will contribute architecturally, business-wise and in community benefits and then take that vision in full color to the local community center.”

That has been the modus operandi for Bruce Ratner, president of development firm Forest City Ratner, in his efforts to create a 22-acre sports/entertainment complex in downtown Brooklyn, N.Y.

As part of the project, Forest City promised to deliver seven acres of public space and 2,250 affordable and middle-income housing units for local residents. The company publicized the fact that the Atlantic Yards redevelopment would create thousands of new jobs and billions of dollars in revenues for city and state. Ratner also forged a Community Benefits Agreement with several Brooklyn groups, promising educational initiatives, jobs for minority and women contractors and support for local businesses.

In addition, in June of 2005, Forest City revived Walt Whitman's Brooklyn Standard — a publication that provided borough news while also unabashedly supporting construction of the Atlantic Yards project.

Ratner, who spent years working for New York City government, also has something his opponents lack — support from public officials. Both Brooklyn Borough President Marty Markowitz and New York Mayor Michael Bloomberg have publicly expressed their desire to see the Atlantic Yards project come to life. If you don't have a close relationship with local public officials, their support can often be secured through campaign contributions says GVA's Breslin.

Avoiding the use of eminent domain is trickier — threaten to take away someone's home and you are bound to have a fight on your hands. Offer to help the residents find new housing or provide them with an apartment at the new development for the same price as they currently pay.

Sometimes a lawsuit is unavoidable, but to protect your public image it's better to take an understanding stance toward the claimants. “Most developers have to go through an education process to make people realize that their project is not going to be the end of the world,” says Clifford, of GreenbergFarrow. “And a lot of solutions come from really listening to what their concerns are.”

Taubman Centers, for example, has suggested that it would scale back the Mall at Oyster Bay in exchange for land use approval. And Forest City Ratner has been careful to preach sympathy toward opponents of the Atlantic Yards development. In October, local residents filed a lawsuit against Forest City and New York public officials, claiming illegal use of eminent domain. In response, Forest City expressed regret that its efforts to reach a “fair and beneficial” compromise did not yield desired results.

That's the right approach, says Zangari. “Too often, developers parachute in with a vision that does not match the needs of the public,” he notes. “But that's not to suggest that a developer ought to agree to every last wish a community might have. If the mayor wants to build the Taj Mahal and the numbers will never pencil out, have a meeting and explain that it won't work.”

Look before you leap

Developers that have had success building in the region say that by doing homework and being prepared to set aside extra time and money in case something goes wrong, you can navigate the potential pitfalls and get the project built.

“There is always a voice questioning what you are doing,” says John Johnson, executive managing director with Centuria Corp./The Whiteweld Foundation, a development firm that is currently working on a $1 billion mixed-use project in Fort Lee, N.J.

“But we have always prepared answers to those questions and we've never lost a project,” he says.

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