Commercial real estate has its own version of the three Rs – remodel, repurpose or replace – that were the subject of an “Infill 101” seminar last month put on by NAIOP, the commercial real-estate development association.
The first takeaway from the seminar is there could be more interest in the three Rs in Albuquerque, particularly in the Central Avenue corridor from Old Town to Nob Hill, if developers can make the numbers work profitably.
A second takeaway is that multifamily housing, in many cases federally subsidized apartments, appear to be a critical component to infill projects because they provide the density of land use needed for a positive cash flow.
A third takeaway is that redevelopment is not for the risk averse.
“You start off losing money, then you make some. Then you lose more money, then you make some,” John Mahoney of Evergreen Development said during a panel discussion on historic El Vado Motel’s redevelopment at the NAIOP seminar.
All told, panel discussions addressed four potential redevelopment scenarios at Infill 101, a seminar theme that NAIOP first explored in 2003. There also was a discussion of two actual redevelopment projects: the completed University Village extended-stay hotel on University SE near Gibson and the yet-to-be-built Imperial Building in Downtown.
“It was revisiting what had been a very popular topic, and we thought that there was now more energy in the marketplace for these kinds of projects than there has been for a long time,” NAIOP President Lynne Andersen told the Journal about the seminar theme.
A dramatic increase in construction costs locally was mentioned as an issue during a couple of panel discussions. The rising costs likely result not from material prices – the producer price index for construction materials has been fairly flat – but from labor costs.
The upshot is that rents or sale prices needed to cover project costs such as construction can get pushed so high that the risk of a correspondingly high vacancy rate becomes a concern.
That’s why federally subsidized apartments will play a role in some future redevelopment projects.
The subsidy comes in the form of low-income housing tax credits, a federal incentive encouraging so-called “affordable” or income-restricted housing. The most popular form of housing tax credit is awarded once a year by the New Mexico Mortgage Finance Authority on a competitive basis.
The credits are typically sold by the developer and the proceeds used as equity in the project. Tax credits impose limits on construction profits and overhead but include a provision for a developer’s fee that ranges from 10 to 15 percent of the project cost, depending on size.
“That’s what you’re doing it for,” Mike Pattengale of Titan Development said about the fee during a panel discussion.
The fee is an important incentive for developers to take on affordable housing projects, said Felipe Rael, director of housing development at the MFA. The fee serves as a reserve fund for cost overruns, which puts the fee at risk if the project budget goes awry.
As discussed at the NAIOP seminar, the redevelopment concept for El Vado Motel, a Pueblo Revival-style property built in 1937 at 2500 Central SW, included income-restricted housing as well as a market-rate component.
The income-restricted housing would come from the conversion of the existing hotel buildings into 30 one-bedroom apartments, while 17 three-story, for-sale condos would be built on an adjacent lot along Central. The motel office would be converted to retail space.
The condos, labeled Casa Grande, would be the profit point, Mahoney said. The condos would cost about $2.72 million to build and generate about $4.08 million in sales proceeds, he said.
“The risk is whether the units would sell,” he said. “We could make a million dollars. We could lose a million dollars.”
The redevelopment concept for El Vado discussed at the seminar was not submitted to the city of Albuquerque when it solicited proposals to redevelop the now city-owned and fenced-off property.
Several proposals were submitted and are currently under review by an ad hoc committee, said Rebecca Velarde, the city’s metropolitan redevelopment manager. The Albuquerque Development Commission is scheduled to pick one Sept. 18.
Velarde and city Planning Director Suzanne Lubar addressed the NAIOP seminar about the various government incentives available for certain types of infill projects that can help to bridge financial gaps even when the projects are on land donated by the city.
“In areas identified as distressed, developers will not get the rents they need, the density they need to finance high-quality development,” Velarde said.
Other government officials, including the MFA’s Rael and Michelle Hunter of the state Environment Department, also spoke. For some in attendance, their participation illustrated a break from the tensions between the development community and government regulators in the 2000s.
“It shows they’re invested,” David Silverman of Geltmore LLC told the Journal . “They’re willing to do what they can to see these projects happen.”
Geltmore and YES Housing Inc. are partners in a joint venture in another metropolitan redevelopment project, the four-story, 121,000-square-foot Imperial Building on roughly half a city block at 205 Silver SW. The building’s Victorian-sounding name was inspired by a laundry once located on the site.
As reviewed by Silverman, the redevelopment concept for the Imperial Building morphed over time from a pretty straightforward grocery store on city-owned land to a much larger mixed-use project with 74 apartments and commercial space. Housing tax credits already have been awarded to it.
“Form follows finance,” Silverman said. “The building and its composition will be a byproduct of what justifies financing it.”