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Public money must play big role in HSBC tower conversion, panel says
by chocieniRedeveloping
the HSBC tower in downtown Buffalo will take significant public sector investment
before it can be converted into a mixed-use building and an anchor for
waterfront redevelopment.
Those
were the findings of a high-powered panel of national real estate experts from
the Urban Land Institute, who were brought into Buffalo over the last three
days to review the prospects for the city's tallest building and to create a
path for its reuse.
The panel
agreed with the overall proposal by the building's owners for converting the
tower into a "stacked" layout of office space, apartments or condominiums, and
a hotel, perhaps with a restaurant and observation deck on the top two floors
and retail at the base.
But it
questioned the financial viability of those options without big public dollars
to support the conversion, based on what could be justified by local market
demand, rates and costs. The financing gap, between the cost of the conversion
and the initial revenues, could total tens of millions of dollars.
"You're
not going to see this happen without public assistance," said panel member
Michael Reynolds, principal of the Concord Group, a real estate planning and
analysis firm in California. "It's going to have to be mixed-use, and it's
going to have to have public support."
The
recommendations may face strong opposition from taxpayers, many of whom are
tired of spending tax money to support the private sector, and from rival
developers, who are often angry at any special use of government money to prop
up other buildings.
Even
Mayor Byron W. Brown, who was at Thursday's news conference after getting
briefed earlier, would not commit.
But the
six panelists stressed they are not suggesting a government bailout for One
HSBC Center or a financial subsidy that would make other downtown buildings
noncompetitive.
"We're
not talking about making a gift of public funds. We're not talking about
putting money down a rat hole," said panel chairman Charles Long, an Oakland,
Calif., developer.
Rather
the panel said the government has to be a partner in redeveloping an asset that
is critical not only for downtown Buffalo but for the entire region.
Given the
owners' need for cash flow, a public-sector fund infusion may be necessary in
the short term, along with tax abatements, followed by other tax credits, condo
incentives and a second loan or state money for the long term, said Steve
Spillman of Pacifica Cos. of California.
The
partnership could even involve the city or other government entity taking an
ownership stake in the property, sharing the risks and the rewards with the New
York City investment group that currently owns it.
That way,
taxpayers would benefit from the investment, either through sharing the rental
income or splitting the proceeds when the building is eventually sold. The
private owners would still demand an acceptable market return, while the
government would likely have certain expectations, such as additional
construction or permanent jobs.
"It is
not a gift. It is not a bailout. It's a partnership," said Ron Gerber, economic
development manager for Walnut Creek, Calif. "It's not unusual. It gets
complicated, but it can be like an annuity for the city. You're getting a
return from the project."
Without
such a plan, the 38-story building, which faces a $75 million one-time
"balloon" payment on its mortgage in January 2015, would likely wind up in
foreclosure or bankruptcy, with a new owner possibly unwilling to make the
investments and only interested in slashing rents to lure tenants. That, in
turn, would empty other buildings downtown and leave the overall market worse
off.
"The do-nothing
alternative is that the building gets sold at auction, and there is a
considerable likelihood that the new owner will cannibalize the market," Long
said. "The do-nothing alternative is worse."
Citing
the "importance of this building," Brown praised the panel's "tremendous work."
But he cautioned against depending only on the public sector. "We are certainly
going to do our part to support this process on the community's side, but this
is going to involve some reciprocity on the owners' part," he said.
The Urban
Land Institute panel, which involved architectural, development, land-use and
asset management experts from California, Texas and Indiana, was convened to
provide outside insight and advice into what Long called a "knotty problem"
facing Seneca One Realty, the owners of One HSBC Center. The
850,000-square-foot tower is now more than 90 percent occupied but will be 95
percent vacant by the end of the year after HSBC Bank USA and law firm Phillips
Lytle LLP move out. The No. 3 tenant, the Canadian Consulate, closed last year.
The panel
urged Seneca One to bring a developer into the mix, learn more about real
estate finance, polish the plans, test and validate them, and create a
partnership with the city.
But with
the 10-year loan due, the loss of rent means the owners need a new source of
cash flow by year-end or they can't afford payments and can't refinance. So the
panel said the first priority is to deal with the balloon payment, by
negotiating with the "special servicer."
"If you
don't solve that, you won't know who you're going to deal with, because that
special servicer may put the property up at auction," Long said.