Monday, July 24, 2006

Math doesn't always add up

Bill Christofferson takes a look at two proposals for projects in the Park East development zone in this XOff Files post.

Competing development firms, Ruvin Development, Inc. and Rana Enterprises, each have their own plans for the site. From the Journal Sentinel article Christofferson links to:

Ruvin wants to buy a county-owned parcel, bordered by N. Old World 3rd St.,
N. 4th St., W. Juneau Ave. and W. McKinley Ave., and create a $104 million
mixed-use development. The Ruvin project would feature a 175-room hotel, 70
condos, 55,000 square feet of offices, 31,000 square feet of retail space and a
330-car parking structure.

Rana wants to build a $34 million development on the same parcel. Rana's
plans call for a 202-room hotel, a gas station/convenience store, 14,000 square
feet of offices, 9,000 square feet of additional retail space and a 400-car
parking structure.

XOff takes issue with the fact that members of a County Board committee are leaning toward the Rana plan.

But what it's really all about, it appears, is participation in the project by minority contractors. Plan A includes a goal of 27% minority participation, Plan B 35%. Goal is a key word; there is really no legal way to hold a contractor to that number, except for looking over his shoulder every step of the way and complaining loudly when he isn't meeting the goals. It appears, if
you read the whole story and read between the lines, that committee members doubt Contractor A's commitment.

I have only one comment: People, do the math.

-- 27% of Plan A's $104-million project is $28-million that would go to minority contractors.

-- 35% of Plan B's $34-million project is $11.9 million for minority firms.

If Contractor A somehow got only halfway to its minority participation goal, it would still be $14-million, more than Plan B.

Not to mention the disparity in job creation and taxes generated by the two projects.

I work in this area and live not too far from it. And while doing the math certainly points to the Ruvin plan being the more favorable of the two, I would argue there's a level of practicality the math cannot grasp.

First off, a gas station in the area would fill a void that's been around for far too long. At present, the next nearest station is located at the very inconvenient intersection of Farwell, Ogden and Franklin, and is arguably one of the most expensive gas stations in the city. A little competition wouldn't hurt. If Ruvin were to add one to its proposal, I might give theirs a little more consideration.

But another thing Ruvin would have to do is remove the condos from the proposal. I've long said that residential development in downtown Milwaukee is a great thing. After all, between the lake and river, it always seemed silly that so much unused commercial space was occupying such great real estate. However, too much of a good thing can be bad. Nearly every warehouse and unused piece of land has turned into a condo development in recent years. With starting prices for many of these properties as much as $300,000, infamously high property taxes, the alternative of owning land in rapidly developing neighboring counties and the recent announcement that Milwaukee's population has declined, I'm forced to ask: who's buying these places?

Those 70 condos may seem like they'll provide an enhanced tax base, but that's based on them actually being purchased. The real-estate boom wasn't just fueled by low interest rates, but also buyers borrowing way out of their leagues, using mortgage practices never really intended for residential lending (flipping) and mortgage programs designed not for the first-time homebuyer but rather investors (interest only loans). Resulting from these bad practices are a rise in defaults and lenders reining in some fairly liberal mortgage lending practices. If it won't be as easy to get a mortgage, it'll be just as difficult to get the home.

For the time being, downtown Milwaukee has enough residential development. And while the math may favor Ruvin at this point, sound judgment favors Rana.*

*Please don't take that as saying sound judgment has anything to do with the committee's decision. It may just be luck.

UPDATE: Rick Esenberg agrees with Christofferson. He feels that if the area needed a gas station, the market would have already seen to it being there. I'm as a big a free market guy as anyone, but I think that in this situation the market has failed us. I can't point to what in particular has stopped a gas station from opening, but pretty much anyone working or living in the area will agree that one is needed.

Addiotionally, while Rick's assertion is that he and the Reddes could easily afford a condo in the area, I should note that the target market has been, in some cases, recent college graduates. Properties at $400,000 are not realistic for this group. And even if a bulk of the properties are purchased by suburbanites, you're gonna really love having that extra gas station around.

Trust me.

UPDATE II: Sykes also seems to agree with Bill. He doesn't explain why. It's probably with good reason, but I bet I disagree with it.


At 8:20 AM, July 25, 2006, Blogger Rick Esenberg said...

While I agree that the real estate market is slow, these guys play for the long run and I think there is room, in the long run, for residential growth downtown in the highend. Its not going to be college graduates; its going to be people like me (well, a little older) whose kids are on their own and want downtown amenities and entertainment.

What that means, I think, is a condo is not a condo. What you may have downtown is a glut on the low end of the market and in the "modern look, urban industrial" style (think Commerce Street for the latter).

As for the gas station, you are generally correct (although there are gas stations to the north), but I don't know why the normal principles of supply and demand wouldn't address this. Why does the government have to insist upon it?

At 11:35 AM, July 25, 2006, Blogger Billiam said...

Casper, Sykes did an entire hour on this last week or the week before. If you folks want to be the provincial population you've become, by all means, go with the "local" lower investment plan. That would be typical of Milw. government.

At 8:11 PM, July 25, 2006, Blogger Casper said...

First off, I'm far from convinced that developers, as a rule, plan for the long run. I grew up around Northridge and quite a few stip malls went up that remained unoccupied for years. Jumping into the boom at this late in the game doesn't instill me with the greatest level of confidence in their abilities to judge the market. With most trends pointing downward, I question their speculative abilities.

HOWEVER, I somewhat agree with the point that condos geared more towards the older, more stable crowd have a higher probability of success. The truth, though, is that I've sat through countless sales pitches for many of the condos in the area where they're positioned as properties for the first-time home buyer. A $300,000 property in this market IS NOT for the average first-time homebuyer. So while the property itself may be lucrative, how it's marketed (so far) leaves me thinking the developers are grasping for straws.

Regarding the gas station (and the ones to the north are not downtown) I can't explain why one hasn't opened yet. The market may be too prohibitive or historically unprofitable. But now there's an opportunity to have one, not by gov't dictate but rather gov't acceptance (which any proposal would have to go through), and it's about damned time one opened.d

Believe me, I'm not averse to development, but I don't like development that remains unused. And normally I'm all for a greater investment as opposed to the lesser one, but I believe the investment needs to be wise.

Keep in mind I'm not arguing against something being developed on the property, I'm just for what I think is the more practical of the two proposals. I don't talk about work on this blog because I do have access to very sensitive information, but it so happens that what I do for a living has much to do with monitoring the performance of residential lending I know that I can't offer more info is a total cop-out, but it's what makes me arrive at this conclusion. The inclusion of condos in the Ruvin plan is just too much, too late. It would have been great three years ago and may be great three years from now, but I'm just not crazy about further residential development in the area at this point.

At 8:43 AM, July 27, 2006, Blogger Rick Esenberg said...

So you're thinking that if I make an offer down there, I should low ball?


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