Part One of a two-part series examining the downtown residential rental market.
Coming Tuesday: Is downtown Cincinnati being overbuilt?
CINCINNATI - Residential developers think they’ve hit a gusher in downtown Cincinnati.
Rents are rising. Vacant apartments are scarce. Developers are racing to build nearly 1,600 new apartment units in and near downtown. They are confident that a steady stream of empty nesters and young professionals will pay a premium to live in the urban core.
So, why are taxpayers still priming the pump?
A WCPO analysis shows taxpayers are covering at least 41 percent of the current downtown apartment boom, with the city of Cincinnati handing out tax abatements, capital grants, free land and forgivable debt to get the job done.
Today’s subsidies are as rich as the financing assistance that city officials awarded in the 1990s, when downtown living was mocked by many and ignored by lenders.
“All of the residential (construction) brings more activity after regular business hours to restaurants, retailers, bars and so on to make it more of a 24-hour neighborhood, or maybe a 16-hour neighborhood, which is good for everybody,” said Jeff McElravy, interim director of the city’s department of trade and development. “It is a hot market, but it is not one where the rents are sufficient to bear the costs.
“I look forward to the day we get there,’’ he added, “but we’re not there yet.”
Critic: 'Government Is Picking Winners And Losers'
Developers say subsidies are needed because downtown, high-rise construction adds cost. Indianapolis developer Flaherty & Collins Vice President Jim Crossin said the company’s planned 300-unit apartment tower at Fourth and Race streets will cost roughly twice as much per unit than The Boulevard at Oakley Station, a 302-unit apartment where tenants began moving in four months ago.
The analysis shows Fourth and Race, a $77.8 million project, will receive more than $45 million in subsidies, including $18.5 million from a 30-year property tax exemption. In addition to 300 apartments, the project will include a 1,000-car garage and a long-coveted downtown grocery store.
“These projects will generate other development,” Crossin said. “Currently, downtown areas are seeing real opportunities with these residential and mixed-use developments. They bring so much to a downtown. They bring population. They bring high-income earners who spend money on entertainment. The cities that are taking advantage of these opportunities will strengthen the ongoing resurgence of their downtown.”
Critics say subsidies awarded to downtown developers indirectly raise the tax burden on others.
“What it gets down to is the government is picking winners and losers,” said Hamilton County Auditor Dusty Rhodes. “The winner is somebody living downtown because the government has decided that’s a noble purpose. Why is it in our best interest that a lot more people live downtown? Why is that a consummation devoutly to be wished?”
Others fear focusing so heavily on downtown residential development will lead to the demise of Cincinnati neighborhoods.
“When are we going to see some of that spending in Price Hill, Mt. Washington, Mt. Lookout?” said Pete Witte, a Price Hill business owner and longtime neighborhood activist. “Of course downtown is important but you also have to protect your middle class, family neighborhoods. We’re going to be a city of haves and have-nots, where you’re either young and hip and living downtown or poor. All the middle class working people will just move to the suburbs.”
When Should Subsidies Be Sliced?
Subsidies have been fixture of downtown construction for decades, financing everything from office buildings to hotels, retail and residential developments.
Private projects are often enabled by the city’s purchase of land, which is then leased to developers for nominal rent. Tax abatements on new construction is common. Grants and low-interest loans are a bit more rare, but all are part of the tool kit developers seek in what they consider a high-cost environment.
“You’re talking about parking decks and podiums (concrete slabs) and prevailing wage and high-rise construction. All of those represent premiums. At some point, you’ve got to get a return on investment,” said Towne Properties LLC principal Arn Bortz, who is negotiating for city subsidies for a 186-unit apartment tower above the downtown Macy’s store.
Bortz led the first wave of downtown’s housing recovery with apartment buildings near Garfield Park in the 1990s.
The WCPO analysis of those deals shows taxpayers covered 57 percent of the Garfield projects, or $98,000 per unit, while five residential projects approved by city council this year received $95,000 per unit, or 43 percent of the total project costs.
Some elements of the Garfield deals are similar to those struck by the city in 2013.
Tax abatements were in place for 20 to 30 years at Garfield; 12 to 30 years at deals signed in 2013. City grants covered between seven percent of total construction costs at one Garfield project, Greenwich on the Park, 120 Garfield Place; 20 percent at the Lofts of Shillito Place, 151 W. 7th St. In 2013, the city and county pledged $3 million dollars for a parking garage at the Banks, covering five percent of total construction costs. A $3.5 million grant at Seventh and Broadway covers 15 percent of total costs.
In some ways, the structure of the Garfield deals were less favorable to Towne Properties than contract terms received by developers in 2013. For example, loans for the Garfield projects came with interest rates of three to nine percent. They were below-market rates, but they weren’t as friendly as the five-year forgivable loan offered to Fourth and Race developer Flaherty & Collins.
Rent is another example. At two of its Garfield buildings, Towne Properties was required to pay $10 a year plus 15 percent net cash flow, which is gross revenue minus operating costs. At 4th and Race, Flaherty & Collins pays $1 a year for 75 years to control a site worth $8 million. Rent is not mentioned in deals for the Banks second-phase residential project or at 7th and Broadway.
“They were structured so there is an opportunity for return in a way that’s not there in the present, arguably,” said Steven Massie, a commercial real estate consultant who ran the Cincinnati Equity Fund from 1996 to 2004. That’s a corporate-backed loan pool that made low-interest loans in downtown and Over-the-Rhine projects.
The fund is now managed by Cincinnati Center City Development Corp., or 3CDC.
After reviewing WCPO’s subsidy analysis, Massie questioned whether the city is “making some unwise decisions” by continuing to subsidize projects as aggressively as it did in the 1990s.
“If the market is so strong that developers are proposing 1,600 units, shouldn’t we be able to cut back our subsidies?” he said. “If you can’t cut back now, when can you?”
Interactive Map: A closer look at the projects and the subsidies, which are detailed by clicking on the link at the end of each project.
Map by Libby Duebber, WCPO multimedia producer. Photos by Emily Maxwell, WCPO photojournalist. Analysis by Dan Monk, WCPO business reporter.
How The Deals Get Done
The city of Cincinnati has no standard or formula for determining the size of subsidies it offers developers. Instead, it looks for what is necessary to get worthy projects off the ground, McElravy said.
At Fourth and Race, for example, the city was not only trying to bring new residents to downtown, but establish a grocery store and replace parking spaces from the soon-to-be demolished Pogue’s garage.
“This is really three projects on one site,” said McElravy, who took over the city’s development department when Development Director Odis Jones left for a new job in Detroit. “In order to bring that kind of project to market, it’s what it took to get the deal done.”
All major cities use subsidies to encourage residential development, but “best practice” standards call for a portion of the units to be affordable housing, said John McIlwain, senior resident fellow for the Urban Land Institute, a Washington, D.C. –based nonprofit that promotes responsible real estate development.
“Should they subsidize it? Yes, because for the long run its important for the city to grow population and to have people living and working close in,” McIlwain said. “But you would want to have people who make incomes from 60 to 100 percent of median income to be able to live in the city.”
Based on Cincinnati’s median income of $34,100, affordable monthly rents would run from $570 to $950. But downtown’s average rent is $1,205, according to figures compiled for WCPO in August by CBRE Vice President Dave Lockard. Most of the new downtown projects are targeting price points well above average rents.
McIlwain said policymakers could reduce cost by favoring smaller buildings with fewer parking spaces. He said urban areas tend to be more walkable with better transit options. So, public funding of garages may not be a good idea.
“Most cities’ requirements for parking is greater than the market demand,” he said. “That’s one area where you can save.”
An Example Across The River
The city of Newport has shown that residential development is possible without heavy subsidies. City-issued revenue bonds were used to build Monmouth Row, a Towne Properties project with 102 units, and Vue 180, at 300 Riverboat Row, a 93-unit building next to the Southshore condominium tower. City Manager Tom Fromme said developers saved about $6,000 per $1 million in project cost, or 0.6 percent. But these are projects that cost a combined $22 million, or about $118,000 per unit, compared to more than $200,000 per unit at the Banks and Fourth and Race.
On the Banks riverfront development project, the goal has been to secure private investments of two to four times the public investment in the Cincinnati riverfront, said Tom Gabelman, Hamilton County special counsel for riverfront development matters.
The Banks second phase includes a $67 million apartment building with 305 rental units and 21,000 square feet of new retail space. It will increase total private investment at the Banks to $165 million. That means private investment now exceeds the $158 million in taxpayer funds spent on garages, roads and utilities to date.
Gabelman, a partner in the Frost Brown Todd law firm, expects that private investment number to rise over time as a planned hotel and office building are constructed on development pads reserved for those uses.
“You have to set parameters, not just provide economic development grants without limitation,” he said. “In phase one of the Banks, we know the return was dollar for dollar. For every dollar we put into the garage, we received a dollar of private investment in return. When we do the office and hotel, that’ll far exceed the public investment.”
But that’s not a very compelling argument to those who question the wisdom of public investments in private enterprise.
“When they say these things can’t be built without subsidy, they’re basically saying the market isn’t right for it,” said Greg Lawson, policy analyst for the Buckeye Institute, a conservative think tank that promotes limited government.
“You’re asking taxpayers to foot the bill for something that can’t stand on its own two feet.”
WCPO counted four kinds of subsidies for residential projects downtown: Low-cost land, parking perks, cheap financing (including low-interest loans and grants) and tax breaks, including various kinds of tax abatements and tax credits earned by investors in downtown projects.
Real estate consultant Steven Massie and Jeff McElravy, interim director of Cincinnati's department of trade and development, reviewed the analysis for feedback. Based on their input, the analysis was modified.
WCPO used subsidy amounts from multiple city documents. Multiple interviews with city officials and developers also informed the examination, but this analysis also includes estimates that require some assumptions.
For example, the value of tax abatements for deals before 2001 are assumed to have been worth a similar percentage to deals struck since 2012. So, WCPO assumed the 30-year abatement at Shillito Lofts was worth 24 percent of total project costs, same as the 30-year TIF arrangement that allows developer Flaherty & Collins to avoid property taxes on the new real estate value it creates at Fourth and Race. In addition, WCPO estimated that the city's $12 million forgivable loan at Fourth and Race is worth not only the principal amount, but the interest payments that the developer would avoid by having the debt forgiven. Finally, WCPO was unable to calculate a value for air rights on projects being built atop publicly-owned garages, so we used a portion of the land value beneath the garages and the apartments constructed above them.