Up Against the Wall

Death by a Thousand Cuts
by Terrence Wall

This past year, Urban Solutions and Silverstone Partners put the dilapidated 26-acre Royster Clark fertilizer plant on Cottage Grove Road under contract for purchase — with the heroic thought of razing it and developing a mixed-use project with residential units as the anchor.

This project is a good illustration of how dozens of little issues can gang up on a developer to quickly make a project infeasible.

First, there was the uncertainty of being able to tear the building down. In order to secure a demolition permit, city of Madison ordinances require the property owner to first invest in a full-scale master plan and commit to specific uses. The holding costs during that time would have been enormous with no certainty of securing the permit.

Without the demolition permit and clearance of the buildings, the property owner can't get under the buildings to further investigate the environmental risks. (Clearing the old Rayovac buildings on East Washington was critical to determining the contamination there).

Then there was the uncertainty of environmental contamination. Does anyone doubt that there are numerous environmental issues attached to this property?

Then there was the uncertainty of what zoning and what combination of uses would be allowed.

The developer wants to mitigate his risk by not closing without the rezoning approved, but the seller was unwilling to extend the contract due to continued liability of the existing structures and the uncertainty of what the seller would end up with at the end of a three- to four-year-long entitlement process.

The uncertainty of the zoning also was complicated by Madison's anti-big box retail ordinance. Given the project's extraordinary costs, a large commercial anchor tenant would be needed to make it work, but the ordinance makes it financially impossible for a typical neighborhood grocery store (such as those recently built or approved in Monona, Middleton, McFarland and Sun Prairie) to be able to locate at the site.

Then there was the uncertainty of city funding, such as TIF. The Rayovac site was awarded about $4 million in TIF, but it took more than a year to secure the TIF.

During that time, the delay would have added 8% to 12% inflation to the construction costs, which would be more than the value of the TIF grant. The TIF also would have extended the rezoning process Ð further increasing the risk. (In this case, TIF would have been used to install railroad crossing gates so that the trains wouldnÕt blow their horns at night next to the new residential area.)

By comparison, the project would also have to compete against a newly approved residential project in city of Monona where Monona gave the land to the developer for $1 and provided over $1 million of additional funding for infrastructure.

The process would also have been delayed because the city of Madison commissioned a market study to determine what uses should be built on the site instead of letting the experts (the developer) figure that out.

Once the market study was to be completed, the developer would have been held to the findings of a study that would be obsolete prior to the start of construction. (Look at how, during the delays at the Rayovac site, the market changed from strong condo sales to a crash in sales and values.)
The development would be further delayed as the developers were told they had to wait for the city to draw up and approve a neighborhood plan before any zoning (or TIF) could be considered, which has historically taken over a year.

Due to the ever-changing market conditions (especially in the current housing market) the developer just couldn't take the risk of buying the property.

As you can see, the project suffered the death of a thousand cuts; no one person was responsible.

But that's my point. By the time all the ordinances, the seller, the neighbors, the city, etc. get their licks in, there is no longer a feasible project left standing.

By comparison, our Costco development in Mesa, Ariz., took less than six months to entitle — and afterwards the Mayor of Mesa sent me a card asking me if there was anything else he could do for us!

Business Tip of the Month: Cash is king. Prioritize your expenditures and postpone those that are not absolutely necessary during a slow down.
On the other hand, don't let that stand in the way of making an investment given lower pricing.

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