SALT LAKE CITY HISTORIC LANDMARK COMMISSION Minutes of the Meeting
Held at 451 South State Street, Room 126
No field trip was scheduled.
Present from the Historic Landmark Commission were Dina Blaes, Billie Ann Devine, Wayne Gordon, Magda Jakovcev-Ulrich, Maren Jeppsen, William Littig, Sarah Miller, Elizabeth Mitchell, Orlan Owen, Oktai Parvaz, Amy Rowland, and Robert Young. Susan Deal, Rob McFarland, and Robert Payne were excused.
Present from the Planning Staff were William T. Wright, Planning Director, Joel Paterson, Preservation Planning Supervisor, Elizabeth Giraud, and Nelson Knight, Preservation Planners.
The meeting was called to order at 4:00 P.M. by Chairperson, Dina Blaes. Ms. Blaes announced that each item would be reviewed in the same order as listed on the agenda So that there would be no disruption during the meeting, Ms. Blaes asked members of the audience to turn their cellular telephones off.
A roll is being kept with the minutes of all who attended the Historic Landmark Commission meeting. The minutes are presented in agenda order, not necessarily as items were presented at the Historic Landmark Commission meeting. Tapes of the meeting will be retained in the commission office for a period of one year, after which they will be erased.
WORK SESSION
The basics of real estate development and the implications on historic preservation.
Ms. Giraud introduced Ms. Alice Steiner, Director of the Redevelopment Agency of Salt Lake City (RDA). She said that Ms. Steiner had worked at Wallace and Associates, plus she also lives in an historic district.
Ms. Steiner distributed copies of the "Real Estate Development Process", which was filed with the minutes of this meeting. She discussed the real estate development process, highlighting each section of the document.
1. Concept: There were many different kinds of concepts, anywhere from a new house to a new aquarium in Salt Lake City. A person would have to decide on what would be developed.
a. Identify site and obtain control. Once a development concept has been decided then a site has to be identified. At this stage, most people do not want to just buy real estate, they want to control real estate.
b. Identify property issues (title, environmental and building constraints). Once the property has been identified, controlled, and purchased, when needed, then the title has to be searched. Most title companies do not search beyond the previous forty years. Title insurance is issued to cover anything in that forty-year period that was not searched. There are many environmental soil issues that need to be investigated, such as toxic waste on the site.
c. Design concept. After the property has been researched, it is time to "pencil out" some design concepts. The zoning, setbacks, and parking requirements would have to be known, and how all these would affect the layout of the building(s).
d. Cost/feasibility concept (often use rules of thumb). A person now has to calculate to find out if the development would work. The person would total what the estimated costs would be, by a "rule of thumb" method, what the rate of return would be, then decide if the project would be worth pursuing. Experienced developers can easily tell by looking at the property and the design concept and analyze quickly if the project would be worth developing. If a persons finds that the construction costs start to eat up the profit margin, then the land costs would have to be pushed down a little.
2. Pre-development planning: If the person now decides to go ahead with the project, the architect, contractor, and/or consultant will have to be contacted. The developer will want to find the right people to help make the right choices.
a. Obtain development approvals (everything except building permit): At this point, a person would submit an application to the City. The development approval process would be explained.
b. Define and create ownership/equity entity. A person would start to define who the ownership entity would be and where financing would be obtained. Most developers would not choose to bring in other investors. They would choose to do it on their own with a bank taking the bulk of the risk. Most banks are not willing to do that. Most experienced developers have people who have cash, who they talk to on a regular basis, and who invest in property deals.
c. Line up major tenants/users. On a commercial project, the financial institution could dictate whether or not a developer has to have pre-leasing and/or pre sales commitments. Individuals, who are risking their own money, have to feel comfortable with the tenants, or buyers, and the neighborhood. A certain quality of tenant would be needed to go into the space.
d. Line up contractor/builder. At this point a person would start to interview contractors. Many developers have in-house contractors or people they deal with on a regular basis. The contractors must know what the cost factor would be. The contract needs to be secured.
e. Obtain financing commitments. A person should already be working with a financial institution or individual who finances real estate. They will truly dictate what gets built. A valid appraisal of the property will be necessary.
1) Finalize design. This where the control of costs with the contractor and subcontractors is vital. The architects are secured. The developer has to control the cost of too many change orders.
2) Finalize costs. At this point, time is money. Any delay in getting a building permit approval, costs money. Before a lender will close, they usually want to have building permits in place. At this point, probably the only permit in place will be the excavation permit. The lender wants to make sure that the project can be built before they will come up with the money.
f. Marketing planning. The quality of tenants ultimately translates down to someone who has been in business before. A person has to have marketing strategy and skills.
3. Development (Construction Risk period): Control of costs and control of the contractor and subcontractors is vital
a. Close on construction financing interest begins to accrue. In order to close, a developer will have to have all things in place, such as the financial institution, the architect, the contractor, and design and development approvals. At this point, the developer will be ready to proceed and the interest starts to accrue.
b. Close on property purchase. if not done sooner. The papers are signed and the financing takes place.
c. Obtain building permits. The permits are obtained after going through the regulatory process.
d. Construct improvements (control of costs is critical to success). Controlling costs is vital. Most investors have contingency clauses for unforeseen costs. It is very difficult to get the equity investors to come up with more money.
4. Absorption (Absorption Risk period). While the project is under construction, the developer will be working on absorption. Absorption is whatever it is that is
being built. The major risks in the absorption period will be that the risk taker did not project out all the income from the property and the costs involved with building the project.
a. Marketing underway. The lenders will scrutinize the marketing plans that will be underway. They will have an interest in qualified tenants.
b. Operating management in place. Once the project is constructed, then the developer moves into the operation phase.
c. Leases/sales. Qualified tenants and/or buyers are found and the leases and/or sales are secured.
5. Operation (Operating Risk): One of the risks involved is if the tenant number is not met. If that happens the construction loan goes on and on and the interest accrues, and ultimately the monthly payment will be higher than the generated revenue.
a. Permanent financing closes if all pre-conditions are met. The institutional lenders will come up with money. At this point, real estate is safe. The experienced developer controls the risk factor and how well the project does.
b. Respond to market adjustments. Essentially all risks are gone, except for the supply and demand in the market place.
c. Maintenance. There will always be maintenance problems.
A question and answer session followed the presentation, which led to a discussion regarding real estate options, and the affect real estate has on historic properties.
Ms. Steiner said that many buyers will look at historic buildings as if they were vacant ground, depending on the location and the nature of the project. She said that developers have to be educated to the fact that the historic buildings are not vacant properties. Ms. Steiner pointed out that the price of the property will be adjusted appropriately. She said that if the historic buildings are not desirable to the property buyer, the property will sell as raw land and the developer will do everything possible to tear the building(s) down. She added that the real value is the land value.
Ms. Steiner said that in cities where low-density buildings were constructed in the 1920's and 1930's there is much pressure to construct buildings of greater densities. She said that the highest and best use of real estate has to be done through development regulations.
Ms. Steiner stated that there were two methods to determine land value: 1) look for similar properties and find out about the selling price; and 2) subtract the costs from the rental income and what is left over is the amount a person could pay for the property. Ms. Steiner gave a few examples of property values and the buy and sell market.
Mr. Robert Young, a member of the Commission, is also a professor at the University of Utah in the Graduate School of Architecture. He made a presentation regarding the real estate economic cycle and the risk factors affecting feasibility. Mr. Young talked about comparing investments and why people get into real estate. He passed out copies of two documents: "Risk Factors Affecting Feasibility" and "Real Estate Economic Cycle" to the members of the Commission. Mr. Young said that real estate offers one of the largest opportunities for financial gain, depending on the type or market. He said that there could be returns on investments up to 20 percent. Mr. Young referred to the "Real Estate Economic Cycle" document and summarized it with the following commentary:
REAL ESTATE ECONOMIC CYCLE
A. Things are good:
1) Demand and supply. Not all real estate moves in the same cycle. When the demand is greater than the supply, it is a "seller's market.
2) Rates are attractive. Low interest rates attract buyers.
3) Liquidity is good. When the cost of buying money is lower, the opportunity to acquire money is more favorable. There is a rapid exchange of money so money can be put into other investments.
4) Underwriting less stringent. The people who write the loans have criteria that must be met. When the real estate cycle is good, they begin to relax the criteria and fewer standards apply.
5) Equity is available. Money is available. In these conditions, there is a lot of demand for property. People want to invest because the opportunity exists for a good rate of return.
6) Inflation is low. Inflation, currently, is about 3 to 3% percent. If an investor can find an investment that will return money greater than what the rate of inflation is, then the investor will be money ahead. If it is lower than inflation, the investor would lose money.
7) Overreaction leads to overbuilding. When the real estate economic cycle is good, too many investors want to get into the market and there will be an overbuilding of projects. When this happens, it is important how the development community reacts.
B. Growth Plateau:
1) Building continues but no new. Based on the natural occurring growth in an area, buildings will be finished but very few new projects will be undertaken.
2) Demand and supply. Demand and supply are equal so the market becomes neutral.
3) Lenders become cautious. Lenders pay more attention to traditional values. The debt ratio in the projection of a pro forma would tell the lenders that the debt could be covered.
C. Downfall phase:
1) Supply and demand. Finished buildings come on the market and there is no one to occupy them so the buildings sit empty.
2) Building slows. No new construction takes place. Buildings are sold for "cut-rate" prices or losses are taken on them. Banks take over the buildings. Banks do not hold them for a long period of time because they do not like to be in the real estate business.
3) Deals appear/buyers’ market. Buildings are finished to the point where tenants could start moving in. The tenant and/or buyer has more leverage. Empty real estate will not attract other people.
4) Underwriters more stringent. The criteria of the underwriters is tightened and the numbers and information has to be specific and well documented.
D. Downside:
1) Supply greatly exceeds demand. The downside could last any period of time from six months to six years, depending on the economy of the region and/or the country.
2) Vacancies/no construction. Many vacancies exist and there is no new construction.
E. Recovery: People will follow trends. There will be a series of changes take place. As investors start to look at development possibilities, they will consider their return on investments, the up valuing of property, and consider the highest and best use for property. They see the activity of other areas and look at the associated risks.
Mr. Young referred to the "Risk Factors Affecting Feasibility" document and presented the following summary:
RISK FACTORS AFFECTING FEASIBILITY
1. Economic Cycle: National trends: federal, state and local monetary and fiscal policy; regional economy: local economy; and paths of growth. Investors look at the paths of growth, nationwide, that have not caught on locally yet, such as franchises, strip malls, and outlet malls. People become familiar with the tax credits for preservation rehabilitation and/or low-income housing, Redevelopment Agency funds that become available, and other kinds of incentives.
2. Financial: Debt/equity: debt service constant: debt coverage ratio: mortgage costs; subsidies (government utilities); and capitalization rate. This is more concerning the banking institutions.
3. Environmental: Toxic waste. lead asbestos. radon. UFFI; wetlands; "green architecture": significant features: and impact statements. There has to be an understanding about the local environment, whether it involves wetlands, toxic waste, or other environmental issues. Having to file impact statements in sensitive areas take time. The legislative regulatory and review process extends the projects out even further. Also there are people who are starting to take a stand on both sides of environmental issues of a community's "growth" or "no growth" policies. There has to be a balance in the growth issue.
4. Management: Vacancy; gross effective income; operating expenses; NO/ (net operating income); and incentives. There are people who just buy or sell properties. They do not want to be in the management business. The developers would develop a project, then hire managers. The trend of the type of managers have changed through the years. An equation process takes effect before a developer decides to invest.
5. Development Feasibility: BTCF (before tax cash flow); ATCF (after tax cash flow); ROI (return on investment); up value: and highest and best use. Ms. Steiner covered these issues.
6. Leasing/Sales: Rental rates/sales prices: absorption rates; Pro Forma NO/ (return on investment); net profits: and incentives. Ms. Steiner covered these issues.
7. Political: Zoning; site-plan approval: neighbors: tax rates: tax abatements: impact fees: exactions: building codes: and growth/no-growth. Zoning and building codes have to be determined. Taxes are a big issue. A community tries to bring in business that would generate jobs. Incentives are offered, such as tax abatements, to bring jobs into a community because it is believed that those jobs will feed the local economy.
Exactions come into play. A property owner in one section of the city has to pay for water, sewer, ·fire and police protection for a development that might be across town. Many communities expect the developers to take accountability for those services. Those services would be reflected in the rents or purchase price of the property. Residential and retail/commercial mixed use is a good utilization of urban property.
8. Market Research: Historical absorption; development pipeline: comparable: product differentiation: pre-lease/pre-sell: capitalization rate: undeveloped niche: reposition strategy: and lease profiles. Some realtors do not identify properties as being in an historic district and the new owners are surprised when they find out about the regulatory process.
9. Architecture/Construction: Site planning; density: setbacks; efficiency: quality; fast track/conventional: on time/on budget: rehabilitation vs. new: and sustainability. It has to be understood what construction and architectural design communities are seeking.
Mr. Young said that by addressing each of these areas causes people to decide to develop or not develop.
Mr. Young said that an outreach program needed to be developed for the community to educate people about the value of preservation. He said that if the public was more familiar with the big picture, it might discourage a economic hardship review process for demolition. He said that it should be made clear that demolition is not an option. Mr. Young pointed out that not all realtors want to have knowledge of the zoning or the historic district status of a piece of property. Ms. Giraud talked about a brochure that is offered to real estate offices regarding the historical status of properties. Ms. Blaes
said that it has been quite an accomplishment that it now shows up on a title search if a property is in an historic district or is on a register. Ms. Giraud said that she deals with many people who claim they did not know their property was in an historic district.
Ms. Blaes thanked the participants and said that the exercise was helpful in understanding the larger development picture and the affect development has on urban properties.
OTHER BUSINESS
Refining the economic hardship review process.
Ms. Blaes said that a subcommittee was formed to review options to make the economic hardship review process tighter. She encouraged the Commission members to provide support to the staff in making these policy decisions.
Ms. Giraud said that she, Mr. Wright, and Mr. Knight plan to have a telephone conference with the liaisons with the National Trust. She indicated that the National Trust is trying to tap into other sources to try to find out why Salt Lake City has the "weak link" in the economic hardship ordinance. Ms. Blaes suggested that staff also discuss the "takings" issue with the National Trust people.
A lengthy discussion took place regarding past cases that had gone through the economic hardship process. Many of the Commission members expressed his or her opinions regarding the analysis of the information submitted for the review of these cases and other related matters.
A lengthy discussion took place regarding past cases that had gone through the economic hardship process. Many of the Commission members expressed his or her opinions regarding the analysis of the information submitted for the review of these cases and other related matters.
Subcommittee for the Salt Lake Arts Council.
Ms. Giraud said that Nancy Boskoff from the Salt Lake Arts Council has asked that a couple of Historic Landmark Commission members attend some of their design committee meetings in March of 1999, to form a joint subcommittee to review some proposed public artwork that would be displayed on Exchange Place. Ms. Giraud said that this discussion could be continued at the next meeting.
Frank E. Moss Courthouse.
Mr. Wright said that he had a meeting with the people from General Services Administration (GSA) regarding the Frank E. Moss Courthouse. He said that GSA has a new project manager team in place; however, the architect is the same. Mr. Wright said that GSA spent too much money on the design options and have a $30 Million gap in the budget. He added that the judges rejected all the options.
Adjournment of the meeting.
As there was no other business, Ms. Blaes asked for a motion to adjourn.
Mr. Young so moved to adjourn the meeting. It was a unanimous vote of approval by the Commission members and the meeting adjourned at 6:00P.M.