Right Dimensions Project in Downtown Kent
One of the reasons I wanted to start a blog was to make sure people had access to as much information as possible on important Kent projects. Given the recent turn of events in the Right Dimension’s “Downtown Village” project, I thought I’d offer the inside of view of where it’s at and where I think it might end up.
The idea for a new downtown Kent retail project began in 2003-04 when a couple of local building contractors saw what they thought was a great opportunity to join together to revitalize the city block bordered by Haymaker Parkway, Depeyster, Water Street and Erie.
The parcels contained within this block were older buildings; most had active businesses in them but the buildings themselves were showing their age and did not really provide the modern amenities that most retailers were looking for in terms of building footprint, space configuration and parking.
The Project Team
The local contractors saw this as an opportunity to fill a retail market need in Kent and they decided to try to join together for the purposes of pursuing a retail development on this site. The early estimates indicated that this would likely be a $15 – $20 million retail project. At that cost they knew they had to find additional equity investors.
Through a family connection the local developers contacted some real estate folks in California who they knew were interested in getting into retail development and after a few meetings and discussions, the Right Dimensions team was born in November 2004. This team brought together the California contingent with the local contractors who then proceeded to hire a Cleveland based design firm (City Architecture) to prepare concept plans that could be presented to the city for their consideration and support.
Memorandum of Understanding
After presentations of their retail concept with city community development staff, the Right Dimensions team was invited to present their concept to City Council. City Council supported the project and entered into a Memorandum of Understanding on March 14, 2005 with Right Dimensions that outlined the basic parameters for the project and defined the contributions expected of each party.
In the MOU, the City agreed to contribute the city owned properties located within the project area, the city agreed to consider the use of Tax Increment Financing (TIF) to support portions of the development costs, and the city agreed to consider using the powers of emminent domain if necessary to gain control of the land within the project area. The developer agreed to obtain ownership of the private properties (unless emminent domain was required), design the project, construct the project and fill the retail space.
The original MOU was good for 9 months with an option to extend for a time not to exceed another 6 months. The MOU outlined a path forward to create a Development Agreement that outlined very specifically the contributions of the city and the developer to the project. The agreement is essentially the contract between the city and the developer that would serve to guide the progress of the project throughout its duration.
The MOU established that the Development Agreement would only be prepared after the developer had acquired all the properties in the project area and had letters of intent for 50% of the retail space. Once the developer reached those milestones the City and developer would then begin to negotiate the final terms of the development agreement. Once the Development Agreement was signed construction would begin.
The Right Dimensions project team created a vision for a “lifestyle center” development that provided specialty retail on the ground floor with mixed residential space on the second floor. The idea was to offer an alternative to the “mall” experience and instead of a drive and shop experience, this projeect would integrate retail with residential in a more urban layout. The concept was consistent with the latest trends using retail to revitalization downtowns and was also particularly attractive to the “creative class” that were considered the target audience for sustained economic growth. (Read two news articles on lifestyle centers: The Mall Goes Undercover and Not a Mall, It’s a Lifestyle Center)
Using the lifestyle concept, the Right Dimensions team created architectural renderings of the lifestyle center in the Kent block. They called their concept plan the Downtown Village and it included an underground parking structure with surface plaza “green space” that was surrounded by the retail residential mix.
Project Team Changes
As the project grew to an estimated $40 million dollars, it became apparent that the project would need additional capital investment. The City hired a third party firm to perform a due diligence financial assessment of the Right Dimension’s Project Team’s financial capabilities and the report noted that the original team did not have the equity necessary to execute a project of this magnitude.
In December 2005, the Right Dimensions team was busy looking for additional investors for the project and they asked City Council to extend the MOU for an additional 6 months to allow them more time to find a large investor and to continue to negotiate property purchases in the project area. City Council granted a 30 day extension for Right Dimensions to find a new equity partner and if they did that then they would have the full 6 month extension which would then expire in January 2006.
The 30 day MOU extension deadline was approaching in late January but the Right Dimensions team had yet to produce an equity partner needed for the project so the city staff was prepared to terminate the MOU. Then, in early February Right Dimensions announced the addition of Catlin/Contrende Properties to their team. A follow up financial assessment performed by the third party firm indicated that Catlin/Contrende was capable of executing a $40 million project so the 6 month extension was granted. This extension would expire June 16, 2006.
By January 2006 the developer had secured ownership of a couple of properties and had obtained purchase options for a few others but a couple of large parcels remained that were proving difficult for the developer to conclude. The developer asked for the city’s help to consider the use of eminent domain on these outstanding properties as agreed to in the MOU. Eventually terms were reached in principle to relocate one of the businesses in a land swap but the other property remained reluctant to sell.
A couple of years ago the city and the Kent Chamber paid for a quick analysis of the prospective downtown retail market. That report indicated a specialty niche that was capable of producing a profit for the right mix of retailers in downtown Kent. The Right Dimensions team hired another firm to further assess the retail trade area to identify growth opportunities from underserved markets. The developer’s report also identified an underserved retail segment.
While the underserved market is clearly indicated from the demographic data, it is not a large margin market; in fact the margins of the retail project are thin. As a result, the market has not developed purely on its own and incremental growth is not likely to happen without some form of stimulus. The key to success in such a thin margin market is volume, both in terms of economies of scale in the development and sales volumes. The strategy in the immature Kent market then is to make the revitalization project large enough to create the economies of scale that will make thin margins viable. This is why the project grew from a $15 million project to $40 million project. It was the best way to make the thin margins work.
The Right Dimensions team hired a retail broker out of Cleveland to market the prospective retail space. The price per square foot on the project remains highly variable as the developer is still scoping out the project and laying out the prospective footprint of the structures and parking garage. Current market rates for 20 – 30 year old space for downtown Kent is in the $10 range and the Right Dimensions team were hoping to be able to secure tenants in brand new, modern structures in the $15 – $20 range, although that range can vary quite a bit depending upon the final layout of the building and the tenant mix.
Although the MOU did not require the city to start negotiating a developer’s agreement until all the parcels were under ownership of the developer and 50% of the properties had signed prospective tenants, the city went ahead and offered to start working out the terms of the agreement to expedite the project which was already a year late. The city hired expert bond counsel to negotiate with the developer’s attorney to lay out financial instruments that would make the project profitable for the developer and beneficial to the city. The city had a series of meetings with the Catlin/Contrende equity partner to work the numbers and find a creative financing solution that ensured a profitable project for the developer and appropriate revenue return for the city. As of June 2006 I would estimate that we had completed 40% of the developer’s agreement.
More Project Team Changes
In May 2006, the Right Dimensions team advised the city that the major equity partner, Catlin/Contrende, had decided to take a pass on the Kent project. Catlin/Contrende had a due diligence period negotiated within the contract with Right Dimensions that allowed them withdraw from the project and in May they exercised that option. Catlin/Contrende advised the city that while they consider the retail project viable, they were withdrawing due to internal issues with the Right Dimensions team.
With the loss of their major equity partner, the Right Dimensions team suffered a setback. The existing MOU expires on June 16th and without the financial capabilities provided by Catlin/Contrende the continuation of the MOU is in jeopardy.
The MOU authorizes the city to obtain the properties within the project area that Right Dimensions had secured title to or had purchased options on. So one of the options may be for the city to pick up where the developer left off and try to get the land under contract and use the land control to solicit a new developer with the financial backing to execute the project.
The Right Dimensions project has been a terrific opportunity for the city to gain experience working with both small and large developers to negotiate a project. We understand the process that needs to happen to take a project from idea to reality. We know how to use all the “tools” in the city’s economic development toolkit, including fairly sophisticated Tax Increment Financing. And we know what developer’s need to make their projects work so we can anticipate and prepare for their needs better than ever before.
It is clear to me that there is an underserved retail market opportunity in downtown Kent but it is also clear that the margins are slim (given low property lease rates) so for any project to succeed it will need to be large enough to leverage the slim margins into profitabile returns over large volume transactions made possible through sufficient size of the project.
Getting that kind of sales volume and size will not happen incrementally by itself, otherwise the market would already be doing it on its own without government assistance. Clearly the market needs a push. Given the number of property owners even in this small block, each with different interests and intentions, it has proven very difficult for any one entity to try to accumulate enough land to make the project viable on its own. Land acquistion of the scale necessary has not happened and was a major reason this project has struggled. In the development world time is money and the enormous time it took to try to negotiate deals with property owners added expenses to a project that frankly didn’t have the luxury of extra expenses.
In the next month the city will take a serious look at where to go from here, and it may well be that Right Dimensions continues in some form, but either way if we really want downtown development to occur we need to be thinking about what we can do as a city to get it over the top and start the momentum needed to move it closer to success. To me, that comes down to the land acquistion issue.