Carling, 11 East Bleeding Money: developer asks city for more help

[thelakelander]

Two of downtown's premier apartment buildings - renovated with tens of millions of dollars in city loans and grants - have hit a financial snag that has the developer asking for relief.

The Carling and 11 East Forsyth combined have racked up a $1.5 million operating deficit over the past six years, according to documents Vestcor Cos. submitted to the Jacksonville Economic Development Commission.

The negative cash flow doesn't necessarily mean taxpayers' investment in the historic buildings will go sour or that taxpayers will be fronting additional money, but the struggle to attract residential and commercial tenants raises questions about the viability of Jacksonville's urban center.

Vestcor Chairman John Rood said the losses are unsustainable. If the city can't help, he said he'll need to seek another investor for assistance, but stopped short of saying he'd close or sell the buildings.

The 11 East renovations were completed in 2003. The Carling opened in 2005. Vestcor reported two years of balanced budgets before the buildings it manages began losing money.

A $373,734 operating deficit was first reported in 2006, followed by bigger losses the next two years. Through Sept. 30 this year, the company said the buildings were $278,009 in the red.

"We didn't come running to the city in the first hour of negative cash flow. ... We continued to put money into it," Rood said. "I don't do this lightly. I hate the thought of going before City Council and saying I'm not doing what I said I could do."

The city was the primary lender for the renovations, but Vestcor's balance sheet shows the development group put up an additional $3.6 million to help ends meet and cover cost overruns.

Vestcor Chief Financial Officer Clarence S. Moore said millions of dollars in private equity also came into play.

Rood said a tough real estate market is largely to blame, but the city's help is still needed. His staff submitted a two-part recovery plan to the JEDC this month.

The Jacksonville-based company is asking for interest-only payments, temporarily setting aside principle debt, for the next three years on roughly $34 million in city-financed, 20-year loans on the buildings.

Vestcor also wants the city to provide incentives aimed at filling empty ground-floor commercial space: low-interest loans for stores, restaurants and other tenants.

Between the two buildings, there are 227 residential units and 16,199 square-feet of commercial space. Vestcor officials say about 80 percent of the apartments and 17 percent of the commercial space are occupied.

The buildings' residential occupancy rate is in line with most downtown housing projects, but a study by international real estate company CB Richard Ellis shows the Jacksonville percentage is below average.

Nationally, the study says apartment buildings are 93 percent occupied, noting that it's a low percentage compared with previous years.

JEDC Executive Director Ron Barton said he first reviewed Vestcor's request Tuesday. He expects to have a recommendation on how to move forward by next week, but it likely won't be voted on until his board's formal meeting in February.

He said Vestcor's plight does not seem far off from that of other downtown developers as the housing market continues to recover, but Vestcor was the one asking for help. He said the company seems to have a sound business model suffering from a lack of customers, but the market should eventually change that.

Because it's a city-backed plan to renovate historic buildings, he said, it behooves the city to help.

"The pressure here is we're the primary lender. We're like any other major lender that has a commercial portfolio. You have to look at it," Barton said.

Barton said Vestcor has been making all its loan payments. Debt service between the two buildings costs about $1.1 million annually. Even so, he said the second part of the company's request - commercial development loans - may be difficult to grant.

Although city incentives were common for downtown development projects in the first part of this decade, a recent Times-Union analysis of the health of the core found the incentives dried up just as residential plans were picking up steam. Many of those projects subsequently failed to materialize.

Barton said the JEDC isn't opposed to investing more in the Vestcor buildings, but is unsure how to free up money amid a city budget crunch.

"We have to look at it as a business decision," he said.

At 11 East, which once housed a Starbucks, there are no tenants in the street-level commercial spaces. The Carling has vacancies as well but is home to several street-level businesses, including a barber shop and an art gallery.

Mayor John Peyton has been saying the city should invest more in downtown real estate because of its concentration of cultural attractions and readily available city services. It's a stance that's developed in recent months, long after the city shut down the JEDC's downtown development arm to streamline costs in 2006 and after Peyton mainly had been prioritizing the development of Jacksonville's deepwater ports and the Cecil Commerce Center.

Peyton spokeswoman Misty Skipper said the mayor did not want to discuss the Vestcor issue until all sides meet to talk over the specifics of the request.

Vestcor bought the downtown buildings for $4.75 million.

The company received $17.8 million in city financing with a 1.5 percent interest rate to renovate the Lynch Building, a 17-story tower built in 1926 that was once home to American Heritage Life insurance. It became 11 East.

The city gave Vestcor a $16.5 million loan at 1.4 percent interest, along with a $5 million grant, to renovate the former Roosevelt Hotel on East Adams Street into The Carling.

There are about 2,600 residents in downtown Jacksonville. City planners say 10,000 is the number needed to attract the offices, stores, restaurants and nightspots that will build a vibrant core.

Downtown Vision Executive Director Terry Lorince said she was unaware of the cash-flow problems with the Vestcor buildings but wasn't surprised, considering the overall housing economy.

"We all want to see more residential down here. We want it to succeed," Lorince said. "What we need to figure out is how to get past this and get back on track."

http://jacksonville.com/news/metro/2009-12-30/story/downtown_jacksonville_housing_developer_asks_city_for_more_help

[BridgeTroll]

The Jacksonville-based company is asking for interest-only payments, temporarily setting aside principle debt, for the next three years on roughly $34 million in city-financed, 20-year loans on the buildings.

Vestcor also wants the city to provide incentives aimed at filling empty ground-floor commercial space: low-interest loans for stores, restaurants and other tenants.

I would think these are doable.  The city should have been offering incentives for the commercial space all along...

[undergroundgourmet]

My partners and I have been interested in the retail space (11 east) since June. No one can give us straight answers. The staff have no clue so they transfer me to the listing agent and I never can get anyone to return my calls. We were ready to go $$$ but now lost interest due to the lapse in customer service with the agent(s).

[vicupstate]

This is bad news.  I guess this explains why Rood has no interest in the Barnett building.

I have a hard time understanding why this property isn't making money.  A suburban property would not have grants and mega-low interest rates.  It also would have a pool to maintain, which isn't exactly cheap.  I realize the renovation costs were high, but so is new construction, as would be required in the burbs.

Questions:

How are other Vestcor properties doing locally?  The same or higher occupancy? 

How do DT rents compare with Vestcor's suburban properties?

Would a rent reduction result in higher occupancy and better total revenue?

What rents are being sought on the commercial space?  Is it reasonable for the DT market?

[tpot]

I used to live in 11 East when it first opened. The building back then was top notch, the tenants were young hip professionals and the building was full.  By the time I left, the building was plain old dirty.  The hallways smelled, the carpets stained and the quality of tenants went WAY DOWN. You would see vandalism in the elevators and hallways.

People with a descent job are not going to stand for this lack of quality.  They will move across the river to The Strand.  The Strand is immacualte and has a pool.................

[tufsu1]

What rents are being sought on the commercial space?  Is it reasonable for the DT market?

the rents are quite reasonable...in fact, Starbucks had a really sweet deal...Stephendare can tell you more about it.

[Overstreet]

It sounds like the suburban apartment company is having problems becoming a city apartment company. They don't figure enough maintenance. They can't get occupancy up. They don't do well at commercial real estate management of the first floor retail.

[CS Foltz]

Well they have already received $21 Million Dollars, courtesy of the City Council, and they need more? Did it ever occur to anyone that this is a tax dodge and/or write off for Vescor? Why should they put money into something when they already have money from the taxpayers again? I agree stephendare, meter bufoons go overboard to substanciate their existance.....but hay! Free money for the City coffers right?

[downtownjag]

I don't think it's a tax dodge, vestcor has said all along they could make more money on a suburban project, which they are constantly putting up.  They recently completed a brand new student housing complex on kernan called The Flats; in my opinion, a much more calculated and promising return on investment.  They originally, or at least claimed, to be doing the projects as a way to help spark revitalization.  I can't vouch for 11 East, but I live in the Carling and it is always in immaculate condition.  The Party hall is always being rented out.  From what I gather, it's at 90% occupancy as well.  11 E evidently is the problem.  I can agree that there can be a good amount of confusion trying to talk to the commercial leasing agents though.  Finally, both communities are very comparable with the residential rental rates.  It shouldn't be any suprise that with the current real estate markets the first places to take a hit will be "trailblazer" spots like downtown.

[downtownjag]

My partners and I have been interested in the retail space (11 east) since June. No one can give us straight answers. The staff have no clue so they transfer me to the listing agent and I never can get anyone to return my calls. We were ready to go $$$ but now lost interest due to the lapse in customer service with the agent(s).

What kind of space do you need? I gather some sort of bakery?

[mtraininjax]

It sounds like the suburban apartment company is having problems becoming a city apartment company. They don't figure enough maintenance. They can't get occupancy up. They don't do well at commercial real estate management of the first floor retail.

That is what it sounds like to me too. Vestcor should have done more homework on their investment. Hood sits there and says they are sound financially, but they still want a better deal. OK, City should extend the loan for longer out with higher rates at the end, to make up for givinga break now to them. The City needs to make this deal stand on its own, as they should with every deal. No interest now, for higher rates, and a pre-payment penalty, we as citizens, need to get a return on the money.

[Dapperdan]

The management of the retail spaces is pretty terrible in fact.   No one is able to talk to anyone who can give a straight answer on terms or rates.  That is the common complaint.

But a real problem is the difficulty in getting basics anywhere near. 

Everyone ive met that lived in the spaces ended up moving out because they were constantly going to the suburbs to eat and get entertainment.

It was one thing when Starbucks was still there, at least you could get coffee and a pastry on saturday and sunday afternoon (on sunday especially, Starbucks was literally the only gig in town), but when they left it became problematic.  It was just as easy to go to San Marco and get lunch and do some shopping.

And of course, there is the problem with people being hassled by parking enforcement when they visited.

The Parking enforcement goons as a matter of course identify the few places that have much traffic and would circle the block waiting for 30 seconds overtime violations in order to meet their quota.

Nothing quite like living in a building that your friends and associates will get penalized for visiting.

Again, its an unfair penalty that only affects downtown residents and no other part of the city.

If the city would simply invest in a few small business loans, and fire Bob Carles city destroying bungholes, there would be a remarkable turnaround in downtown.

Do the Carling and 11E not offer validation for guests that have to pay to park?

[stjr]

I respect Mr. Rood and Vestcor and am a big supporter of Downtown.

But, nonetheless, I have a real concern about more dollars from the City.  First, if this project had been a home run money maker, would he have called the City and offered to share the "unexpected" returns?  Well, why should the City share in the "unexpected" losses?

Second, Mr. Rood is a very successful and astute businessman and developer.  He cut his best deal with the City originally and found the risks acceptable.  And, as a died-in-the-wool Republican, he should stick to his conservative "principles" and refuse to ask for corporate welfare in this situation.  The City should not give his company assistance when we can not fund basic needs of the population, schools, and non-profits helping the community or be able to balance the City budget.  I don't see the support for this.

Where is it written that when you do business involving the taxpayers, you should be assured of no losses?  If that is what the City must do to get projects done, then maybe we don't need the project that bad.

I have already suggested, as have others, that the best way to revive Downtown isn't through incentives of dollars, but rather in infrastructure and amenities just like those provided for suburban areas:  good schools, parks, transit, security, street friendliness, etc.  Do this and no developer will need more assistance along the lines Vestcor is requesting.

[CS Foltz]

$21 Million to this date, courtesy of the Jacksonville taxpayer! I agree with stjr's take on the situation.......more infrastructure downtown would be nice instead of taxpayer dollars! stephendare's take is right on the nose........silly City Hall, level the blanking playingfield! BRT will transform downtown right.........along with the proposed dedicated bus lanes and that will cost us how many millions? Once again......no plan, no vision  and definitely no sense/cents.....take your pick!

[vicupstate]

Where is it written that when you do business involving the taxpayers, you should be assured of no losses?  If that is what the City must do to get projects done, then maybe we don't need the project that bad.

The parking garage deal for the courthouse and sports district are in fact not only guaranteed NOT to lose money, but to get an 8% ROI.   


I too am leary of putting still more money in this, but my mind is still open to learning more.  I think the culprit is the Strand is taking a lot of their tenants and new jobs are not being created in the area either.