SALT LAKE CITY ECONOMIC REVIEW PANEL
Minutes of the Meeting Held at 451 South State Street, Room 326
Present from the Economic Review Panel were Rob Fetzer, Valda Tarbet, and Nathan Anderson. Present from the Planning Staff were Alex Ikefuna, Planning Director; Cheri Coffey, Deputy Planning Director; and Elizabeth Giraud, Senior Planner. Dave Oka, Director of the Redevelopment Agency and Matt Dahl, Project Coordinator for the Redevelopment Agency were also in attendance.
A roll is being kept with the minutes of all who attended the Economic Review Panel meeting. Tapes of the meeting are available and will be retained in the Salt Lake City Planning Office for one year.
Ms. Valda Tarbet, the applicant, represented the Redevelopment Agency throughout the economic hardship process. Mr. Rob Fetzer was chosen by the Historic Landmarks Commission as their representative on the panel. The two representatives chose the third member of the panel, Mr. Nathan Anderson.
Mr. Alex Ikefuna, Planning Director introduced the staff members that were present and each panel member then introduced themselves. He thanked the panel members for agreeing to take part in this process. He stressed the importance of being there for this meeting and the need to be objective. They are to deliberate on the request to declare an Economic Hardship regarding the preservation of a duplex at 748-50 North 300 West. Mr. Ikefuna discussed the letter from Vicki Mickelsen, Chair of the Historic Landmark Commission which was sent to each panel member outlining the reason and responsibility of being on the Economic Review Panel. He indicated that a chair and a vice-chair will need to be elected. He said that a decision will need to be made by December 16, 2005 and if that is not possible a request to him for an extension of time will need to be made. He hoped that their decision will be made based on the informed facts and findings on the issues presented today. He further indicated that if additional information was needed, the Planning Staff will provide it.
Mr. Fetzer nominated Nathan Anderson as chair and Ms. Tarbet seconded. Motion carried and passed. Mr. Anderson nominated Mr. Fetzer as Vice-Chair. Ms. Tarbet seconded. Motion carried and passed.
Mr. Anderson talked about an e-mail of October 13, 2005, he received from Mr. Fetzer which listed a number of questions. He wanted to discuss the issues that were in that e-mail. The first question he wanted to discuss is:
#11. Matt Dalh stated in the application letter dated July 13, 2005, that in the application of Economic Hardship that preventing the agency from demolishing the building deprives the agency of reasonable economic use and the community of a direct economic return.
Has the agency explored the economic options of redevelopment for the remaining property if the duplex is kept? If so, please provide a proforma projection of the said redevelopment.
Mr. Dahl stated that before he answered the question, he wanted to clarify that Mr. Fetzer had sent the e-mail in hopes to get as much information as possible. The agency felt that there were certain questions that were obviously pertinent to the application and the RDA would address those. However, the RDA believed that some questions were outside of the purview of what the application was asking. He indicated that he went through the list of questions Mr. Fetzer raised and has answers for those that had no contention. Question Number 11 falls into the category that the RDA doesn’t necessarily believe falls within the purview of the application. He wanted to know if there is a consensus with the panel that the question is valid.
Mr. Anderson didn’t know if there was a definite decision within all the material whether it was agreed to or not.
Mr. Fetzer felt it should fall to Ms. Tarbet to determine whether there is a consensus and whether the applicant should address the question. As he went back and reviewed the Ordinance 21A.34.020.2d.iii, which states: “The infeasibility of alternative uses that can render a reasonable economic return for the property as considered in relation to the following Market value of the property in current condition,”
He would consider the redevelopment of the property in a current condition an economic use of the property.
Mr. Dahl said that question had more to do with the parcels that are not being discussed as part of this Economic Hardship process. He felt that they are not discussing the other two parcels; only this one.
Ms. Tarbet indicated that they should have Mr. Dahl hand out the information that the RDA has put together. It is difficult as a Redevelopment Agency to deal with this because if the only property they owned was 748-750 North 300 West, the question wouldn’t be asked but because they happen to have the two adjacent parcels they are being asked the question. She stated she is more willing to give more information than less and will just proceed on that basis.
Mr. Dahl didn’t have all the information needed on the other parcels but was willing to read what he had. On question number 11 – The termination of Economic Hardship pertains to the subject property only. He stated that discussion on the other parcels is immaterial to the process. He stated that furthermore the process for developing agency owned property, as discussed in question number 3, does not provide for an accurate proforma on the development of the remaining parcels at this time. Mr. Dahl then referred to the third question from Mr. Fetzer’s e-mail. “In your application cover letter you requested that they look at the economic impact loss for potential redevelopment of the site. Accordingly please submit RDA financial Proformas of projections for anticipated development project, five years would be helpful.” The answer is:
Mr. Dalh stated that the development of an agency property is the product of collaboration between the agency and the developer. Given that the agency has not marketed the subject property, selected a developer, or received specific plans for the development of the property agency staff is unable to provide an accurate proforma at this time.
He stated that this all ties together in saying the answer to number 11 is that the RDA markets the property together and then waits for the developer to say what they think should be built on the property. They do intend to market the parcels in the future but as far as what they intend to develop, the only plan they have now is a general plan to stay within the requirements of the Mixed-Use Zoning District.
Mr. Fetzer asked whether it should fall to the developer to prove an economic hardship on the property. If the developer is the one taking the financial risk, the agency should market the property as is and allow the developer to take that risk.
Mr. Dahl indicated it would be arguable to say that by the agency purchasing the property, currently has a high financial risk and that is what the panel is discussing at this time.
Mr. Fetzer also felt it was arguable that the agency created their financial risk.
Mr. Dahl indicated that whether that is true or not is debatable and does not fall within the application requirements. The application simply asks whether or not an economic hardship exists.
Mr. Anderson asked if the RDA bought the duplex because there were activities going on in the duplex that were not becoming to the neighborhood.
Mr. Dahl stated there have been police calls on the property on a previous tenant indicating someone thought he was selling drugs out of the house. He also stated there were several reasons it was purchased, they are:
1. The purchase of the parcel had to do with the other two parcels and issues relating to undesirable activities;
2. This property has an easement attached to it that affects the other two parcels and in order to get the corner parcel, the property has to be purchased; and
3. It was beneficial for them to also get the duplex if they planned to develop it.
Mr. Anderson asked whether they ever looked at relocating the structure or marketing the building to be relocated to another site.
Mr. Dahl indicated they had gone to the Historic Landmark Commission with a proposal to move the duplex. When they looked at the cost and some of the other issues associated with moving a building of un-reinforced masonry, they were directed by the RDA Board (the City Council) that they should look at demolishing it. They have marketed other properties for relocation and no one has actually followed through with it especially if the building has un-reinforced masonry.
Ms. Giraud asked whether the structure to the east is where they are planning to build a single family home.
Mr. Dahl indicated that it is. Mr. Dahl stated that the reuse plan is for landscaping should the economic hardship be approved demolition of the structure.
Mr. Anderson asked Mr. Dahl if they could rezone the duplex and corner parcel.
Mr. Dahl indicated they had no intentions of doing that.
Mr. Anderson asked for Mr. Dahl to walk through the expenses of 2004 to the present.
Mr. Fetzer indicated that information is on the last page of the AGC Architect letter.
Mr. Dahl said that Mr. Fetzer’s questions pointed out some realistic things that should be removed from the expense sheet i.e., depreciation. He has adjusted the numbers but was not going to provide a five year proforma if they were going to renovate it. The application only asks for historical and current information.
The projected renovation costs is $76,000.00
Mr. Anderson asked what the expense vs. the income would be if the property were renovated.
Mr. Dahl indicated that they are currently asking $525.00 a month rent for each unit, in its current condition and they have not been able to get any renters. They determined that if they renovated the units and asked for $650.00 a month for rent, they would be faced with a negative return. The $650.00 rent estimate is based on what rents are in the area based on a three-year-old appraisal.
Mr. Anderson asked what the difference in rents is from this location and one block to the east.
Mr. Dahl felt that it is very possible that they were renting the subject properties at $450.00. He was not sure if they could get $650.00 for the properties.
Mr. Anderson said that the appraisals list each individual unit at those prices.
Ms. Tarbet asked Mr. Dahl how much rent it would take on a monthly basis to just break even.
Mr. Dahl indicated he did not have that calculation.
Ms. Tarbet asked whether he felt it was more than $650.00 a month.
Mr. Dahl said it would be.
Mr. Anderson asked if the renovation costs would be undertaken in order to make improvements to the structure to obtain higher rents or for structural or safety reasons.
Mr. Dahl indicated it was both. He said that this building is not blighted but it is not a choice property. In order to make it a marketable property he would need to do a lot of renovation just to raise the rent. They would have to do extensive work on the exterior as well as interior so the purpose of renovation is both reasons.
Mr. Dahl stated the renovation cost of $76,000.00 as identified in the submitted documents.
Mr. Fetzer indicated that the renovation cost is like rebuilding the building. The appraisal indicates the cost to rebuild at $52.00 a square foot. They are proposing $42.00 a square foot to renovate. He stated he thought the renovation cost of $42.00 a square foot was too high and could be done for much less and still be marketable and meet the HLC requirements.
Mr. Anderson indicated the engineer’s appraisal indicates a lot of the cost could be to repair the structure rather than making it look good inside and out. This property sits in what Salt Lake County describes as the Geological Overlay Zone.
Mr. Fetzer quoted Paul Reaveley Engineers Structural Report of the building. In the section of the report titled General Observations they state, “The building is in reasonably good condition with respect to gravity loads. There are no substantial cracks in the exterior foundation walls, the blaster on the interior walls shows no cracks that would indicate poor performance and the walls are for framing. Generally the building is in reasonable shape for the gravity loads. It has been in service for almost 100 years with no visible signs of failure or problems. It is reasonable to assume that the building will continue to perform in this manner. There are a few minor issues that should be addressed but are not critical. Some renovation does need to be done to the building but not high level”.
Mr. Anderson talked about his concerns with the ability of the structure to withstand an earthquake. Mr. Fetzer felt the panel should rely on the information the applicant’s engineer had submitted which was $8,000.00 for structural improvements. He stated the applicant’s engineer is not calling for extensive structural renovation.
Mr. Fetzer stated that they needed to determine if after renovation, they could get a reasonable return on the property.
Mr. Fetzer thought that a large corporation would be the type to buy this property and finance it, at 85% of value. If the debt is at 6.5% on a loan of that size, and they could rent each unit for $500.00 a month, they would earn $1,000.00 a month or $12,000.00 a year in rent. If they put $40,000.00 into renovation, after netting out expenses, water, sewer, taxes and a maintenance reserve, they would net on top of paying debt service of 3.5% an overall return of 10%. He stated that on the open market this is feasible.
Ms. Tarbet asked if the numbers include the purchase price or just the renovation.
Mr. Fetzer indicated that this was the return on equity in the project. If they put in 20% of $110,000.00 plus $40,000.00 in renovation costs, the return would have a net cash flow of $1,100.00. This renovation figure is half of the RDA figure and was taken from his estimators at Ellsworth Paulson Construction. They did not look at the property just the report of the engineer and the engineer’s estimates.
Mr. Anderson disagreed with Mr. Fetzer as he felt this type of building would be purchased by a young couple who would finance it at 100%. They would be in one unit and rent the other unit to supplement their mortgage. He would not cut the renovation in half because $76,000.00 would not go very far in the renovation of both units. He stated if you had $188,000.00 and you factor it at 6.5% you have a principle interest of $1,399.00 or $16,553.00 for a year. If you had $700.00 rents not $550.00 you would break even. Not including the taxes and other costs.
Mr. Anderson asked what the inside of the property looks like and whether it needs major improvements.
Ms. Tarbet asked Mr. Dahl when the last time was that the bathrooms were renovated. and whether there were working toilets and tubs.
Mr. Dahl said the bathrooms are not in good condition.
Ms. Tarbet asked Mr. Dahl about the condition of various other rooms in the structure.
Mr. Dahl said the cabinets in the kitchen have been renovated but not done well. The windows are single pane. The basement is partially completed, there is some concrete.
Mr. Anderson asked about the mechanical equipment and age of the home.
Mr. Fetzer said according to the appraisal, all of those items should have been factored into the purchase price. The appraisal is three years old so probably there is some wear and tear since it was completed. It states that both units have been updated and the north unit has recently had a new furnace installed. There are new 30-year architectural shingles on the roof, and both units have new windows and new carpet. Both units have window mounted evaporated coolers. The quality of construction is typical for the area and the structure is in overall good condition. The report says the improvements are in average condition. He felt that the obsolescence of the interior of the building should have been accounted for in the appraisal resulting in a reduced purchase price. If since 2002, when the property was purchased, there has been above normal wear and tear of the property, then he would have to say that the applicant is creating their own economic hardship.
Mr. Dahl said that one unit’s furnace and plumbing needs to be replaced and some of the electrical does as well.
Mr. Anderson gave a lot of comparisons with prices of property per square foot ranging from in the hundreds of dollars to as low as sixty-six. He again discussed his concern with the seismic stability of the structure and thought that other engineers should analyze the structure.
Mr. Fetzer asked Ms. Tarbet what ideas the RDA has for this property.
Ms. Tarbet wasn’t exactly sure The RDA board felt leaving the duplex in place would not be the best thing for the community. They look more at the economic return when they do redevelopment types of activities. It leaves them in a position asking if this type of renovation is economically feasible or not. It doesn’t take into consideration those social or development issues of West Capitol Hill at large. They probably would try to recover as many losses as they could.
Mr. Fetzer asked Mr. Dahl if the duplex has been rented since its purchase in 2003.
Mr. Dahl indicated that there were two renters living there. Over the course of 2004 they, through some difficulty, had to stop leasing to one tenant. In the beginning of this year (2005), they were advertising that they would rent the space again. The other space recently became vacant. Currently, neither one is occupied. There was never any regular rent received from either tenant.
Mr. Fetzer asked what the value of the property is today.
Mr. Dahl did not have an answer.
Mr. Fetzer indicated that they needed that information to determine if there will be an economic return for an investor.
Mr. Dahl indicated currently the county is taxing the property at an $85,800.00 value Typically, the assessed value is 80% of the projected market value.
Mr. Fetzer wanted to know what the rents were when it was rented.
Mr. Dahl said it was $425.00 per month. They marketed the property at $525.00 for about 6 or 7 months but nobody would rent the units for that price.
Mr. Fetzer asked how the property was marketed.
Mr. Dahl indicated they put an advertisement in “City Weekly” newspaper. They did not post the property because they felt it would draw attention to the fact that the property was vacant.
Mr. Fetzer indicated that he didn’t know if they could determine if an economic hardship exists for a buyer without knowing what the property would sell for. He wondered if a new appraisal would be needed. The property has increased in value since the purchase based on the fact that property values in Salt Lake in general have increased. Based on the County Appraiser estimate, the property would have a market rate of $107,000.00, which is less than the purchase price four years ago. If you assume the value is unchanged and put $80,000.00 in renovation cost, the purchase price would be at $190,000.00. With this scenario and assuming the RDA gets no economic return on their investment and they lose the cost of the utilities and legal expenses they have paid over the last three years, Mr. Fetzer did not believe there would be reasonable return.
Mr. Dahl indicated that the deficit on the unit that was rented was $1,036.42 in 2004 and through August 2005, there was a negative income of $5,753.00. If you project that out through the end of this year there is a negative income of $8,629.73 or roughly $10,000.00 in total.
Mr. Fetzer asked if there was a way to offset the renovation costs through historical tax credits, or historical incentives and whether the RDA has explored any of those alternatives.
Mr. Dahl has not looked at every option but there would not be any benefit from them for the RDA.
Ms. Tarbet talked about state tax credits and said that 20% of the total renovation cost can be carried forward on state income taxes for six years if you invest at least $10,000.00. The Federal tax credits have an adjusted gross basis added to it.
Ms. Giraud explained that if you are in a National Register Historic District you get these credits. You have to meet the Secretary of Interiors standards for rehabilitation.
It can be applied to everything except site work, accessory buildings or landscaping. That means that mechanical, roofs, seismic, diaphragms, new windows, etc. can qualify.
Mr. Fetzer asked Ms. Giraud if the applicant’s cost break down meets those costs.
Ms. Giraud indicated that she felt a great deal would. The tax credits are administrated by the State Historic Preservation Office.
Mr. Fetzer further asked her how much of the estimated $76,000.00 renovation cost could qualify.
Ms. Giraud said 20%, if everything in the proposed renovation qualified under the tax credit regulations. If the property is an income property, then the investor can apply for Federal Income Tax credits for a potential 40% credit.
A lengthy discussion followed on scenarios, on the tax credits and uses allowed under the MU (Mixed Use) zone.
Mr. Fetzer asked Ms. Giraud whether the Mixed Used Zone requires both residential and commercial uses.
Ms. Giraud said no, she didn’t think so but one reason it was established for this area is with the idea that a business could locate within a residential structure.
Ms. Coffey said that the property zoned Mixed Use in the area includes a lot of single family homes and commercial uses. The zone provides for both to co-exist. The panel had a brief discussion about whether they believed a commercial use on the property was very likely given the lack of parking, the size of the parcel and the ability for a business owner to find a more desirable location for a small business.
Mr. Fetzer felt that no investor would be willing to purchase the property un-renovated but thinks they can renovate it at a lower price than estimated in the submitted documentation.
Mr. Anderson indicated that the feasibility for a young couple to purchase and renovate this type of property is not there because there is not a good track record for stable rents on the property.
Mr. Fetzer said the only way anyone can get an economic return is for one investor to purchase the property at $120,000.00, renovate it themselves and take advantage of the tax credit.
Mr. Anderson wanted to know if the RDA could keep the duplex and maintain it for residential use only.
Ms. Tarbet said they have been known to put restrictions on things and they would talk with the Planning Division to get their input.
Ms. Coffey said that the Planning Division would recommend it to be used for whatever is allowed under the current zoning.
Mr. Fetzer indicated that there isn’t any economic return that is acceptable on the open market for an investor to purchase it as an income property after renovation. With an owner occupied unit, the owner couldn’t take full advantage of the tax credits unless they are a mature couple with mature income. As far as the RDA maintaining it as a rental income it doesn’t seem that is reasonable. The sole option that may allow for a reasonable economic return is if the property is an income producing property and someone comes in and renovates it themselves. He questioned the likelihood of that happening. The longer it is marketed, the more it’s going to cost and the more money it will take the RDA to recover that cost.
Ms. Tarbet said that if the RDA were to sell the property as it is and the wall was considered a liability they would fix it before they sell it. They would get advice from their attorney to determine if it is a liability.
Mr. Fetzer indicated that the intent of the RDA is take the building down and market the whole parcel, including all three pieces for redevelopment. In the mind of the RDA, the current owner, and the applicant is the property worth more to them without the structure on it or as it is with the structure?
Ms. Tarbet said the RDA is looking for development that will benefit the West Capitol Hill redevelopment project area. Prior to the time they put the property on the market, they will have it appraised and set the value. It hasn’t been appraised with or without improvements on it at this time.
Mr. Fetzer asked if the RDA would be able to recoup the $127,000.00 they have invested.
Ms. Tarbet wasn’t sure, but she hoped they would. She asked to focus on the discussion on whether there is a reasonable return with the structure on the property.
Mr. Fetzer asked what the size of the parcel is.
Ms. Giraud replied 93’73” x 49’87 “or 4675 square feet.
Mr. Fetzer asked if you can get $28.00 a square foot for the land.
Mr. Anderson said that because the location of the property is on 300 West the land would be lower than $28.00 per square foot. He stated the property by the Gateway, which includes large developable parcels, is selling in the mid-twenty dollar to mid-thirty dollar price range.
Mr. Anderson made the following motion:
There is evidence that an economic hardship would occur based on the following findings:
• The property could not meet sufficient rents in order to provide an economic return that would be acceptable to an investor given the fact that the RDA would need to recapture their costs, assuming no appreciation in the property and given the cost of renovation, which at the very least would be $50,000.
• The owner / rent scenario where the owner would live in one unit and rent the other unit would not provide adequate rents to provide a reasonable economic return because the owner would not likely be able to take advantage of or qualify for the historic tax credits to offset the renovation costs.
• The “flipper” option (the person who would come in and perform the work themselves and then sell the property) would not provide a reasonable economic return because that type of investor is looking for a higher return on the investment because it is a higher risk.
Given these scenarios the property does not have an economic return that is sufficient for the market today.
Mr. Fetzer seconded. Mr. Anderson called for the vote. Mr. Fetzer and Ms. Tarbet voted “Aye” and the motion passed.
Meeting adjourned at 10:47 a.m.