[Music] Okay. [Music] We will call the work session to order. and Ken Bowers and Ralph Rechie are presenting. Good morning, Mayor and Council. Ken Baris of Planning and Development and I'm here to present an update on the redevelopment of city-owned property east and south of Mor Square and throw out for your discussion, advice and potential recommended next steps. So, just to orient everyone once again because I know since the last time we were at the podium on this topic, there are some new members. The stuff in green on this map is land that the city made available for disposition um about three years ago through an RFP process. It was uh some land that we'd owned for a long time around City Market, the parking lot, the old Esso Station, the Norwood House, and some parcels on Plake Street. And then there was also um some land that had been acquired more recently on the east side of More Square. It all totaled under four acres about 2.6 six east of Moore Square and about 1.2 South. And the RFP vision was to leverage this property to create quality mixeduse development and a significant amount of affordable housing and to leverage what is probably the most transit-rich location because all the BRT services as well as existing bus services converge at the Morsquare Transit Center. A single RFP was issued in March 20, 2022. Um, we allowed folks to bid on one or both of the sites. All teams but one bid on both of them. Um, the loaden team had slightly different teams for the east site and the south site. um and they were selected uh through a staff through a process that included a multi- um departmental diverse review team that was accepted by council in November. Um we've ordered appraisals for both of the sites and the RFP stated that the uh sale price for the land that was going to be conveyed fe simple will be based on those appraisals. Um the one thing that has happened is that uh the affordable component is moving forward. It's currently in development review. We'll talk a little bit more about the footprint for that property, but um council authorized a ground lease about one year ago that gave um Harmony Housing the nonprofit affordable developer site control and they are currently in the process of both obtaining the tax credit financing as well as um navigating the city's development review process which they are been in for several months. and we have otherwise on the rebalance of the property been on on negoti ongoing negotiations. So let's give an update. So the original proposal that won the day for the south site was a hotel. Um it was the only loaden was the only team to propose a hospitality use for this site. Um most of the other proposers had proposed uh affordable housing on this site. Um Loen had proposed the affordable housing on the east site uh which sort of stood apart. The team thought that a hotel would be uniquely suited to help energize and activate um City Market. City Market has a lot of food and beverage as well as specialty retail, just the types of things that out of town visitors are most likely to patron patronize. Um they had proposed at the time doing something uh with the Norwood House and a key part of this was also renovating the the old ESO station um that's on the corner uh to integrate it into the overall development. This is the the total of the city property. It was there was the two parking lot parcels and the eso station that were originally part of the RFP. A later council action allowed staff to integrate the Norwood House and the two Blake Street parcels onto that um assemblage. And these are the parcels that are specifically designated for the hotel about8 acres the zone for 12 stories of development. Now, um there is a physical constraint here, which is that uh most parking decks are ramps that are double loaded on either side, and you need 120 ft of width to fit a ramp garage on a piece of property. This piece of property is 105t wide. So, if you're going to put a parking multi-level parking structure on it, you have to use a different approach than is typical for almost every development. And if you don't believe me, fire up IMAPs or Google Maps and look at areerials of all these apartments that have been built. they all have 120 ft of parking deck width. So, it's incumbent on the city to recover market value um for the property. The normal way that one would determine market value is put something on the market and see who bids the highest. because we used a RFP process that um uh the selection was based not just on willingness to pay but on the quality of the development outcome and the use that was being proposed. Um we made a choice uh based on the idea that a hotel would be the most beneficial for the city market in the Morsquare district. Before the city put it out on the market, we upzoned the property. It had threetory zoning on it. We we had some um discussion at the council table at the time. Uh should we go for five, seven or 12? Um 12 was sort of the maximum that that the historic development commission thought would be appropriate and to provide maximum value and flexibility the the city council chose 12. Um I will say no proposal that was came into us came in at greater than seven stories. Uh so apparently the that one market test was no one thought a 12-story building was viable. That said, um uh we have an appraised value on the property for the hotel pad of 6.6 million which is based on the comparable sales for other 12tory zone sites downtown. Um the the loaden's initial offer was $4.5 million. Where did that come from? came from multiplying 150 rooms by a land value of $30,000 per room or key as they say in the industry. Um so we had a significant gap between what they felt the project as proposed could support in terms of land value and what the appraised value came in at. So how are we trying to bridge this gap to the best of our ability? what we've been able to negotiate with Loen at this point our initial is an initial payment lump sum at the con start of construction of the hotel of $4.5 million and then there's that will not purchase the property but it'll initiate a ground lease. The ground lease will include some lease payments that are on an annual basis that do not acrude to the purchase price. There will also be a payment in lie of taxes to make up for the fact that as long as as well as as long as the city owns owns the land, the land is not taxable. Only the improvements are taxable. So we would look at how the county assesses the land and calculate a payment in le of taxes based on the tax rate for that. The the ground lease in has an ongoing option to purchase. When the purchase occurs, it would be to fill that gap between what the appraised value was and what the initial payment was. The other part of this is to solve the parking problem. They're essentially proposing to build a hotel that has only a very modest amount of ground flooror parking and most of the parking for guests would be through leases of city facilities. And while the details of that are still to be determined, the city commitment is at this point based on our um analysis of where the capacity is is that within a certain radius, probably mostly in the more square or city center deck, we would make a certain number of spaces available. probably around 100 is what this would require. Um somewhere between 100 and 120. Some of those would be self-p partarked and some of those would be valet part. What about the other parcels? So um uh they they would like control of the Norwood House if we can work an arrangement. We have conferred with um director of our parks, recreation and cultural resources department that if there's space available fronting the park for lease, say in city market, there's some recently renovated buildings right next door. Um and it was no cost to us that we would be we would happily move our park operations into those buildings to allow the Norwood House to be used for some other use. the ESO station and Blake Street building. These are two structures that sit within the um Morsquare historic local historic district. So they are protected. Um they are both well the the Blake Street building is essentially a shell. It has no real plumbing, no bathrooms, no HVAC. It's a four walls and a roof and a concrete floor and that's it. Um and the ESO building has been sitting kind of in a vacant state for a while and is is has some significant deterioration and would need a lot of work to turn into a viable commercial space. So the idea is that the appraised value of these buildings is kind of almost is completely offset by the cost it would take to renovate them. So while the terms of this are still a little bit subject to some negotiation, we would we would essentially be conveying these properties and the benefit in return would be renovation and preservation of the historic structures. And then the last little parcel is this open parking lot. Um it's got an appraised value of $450,000 and Loen is willing to pay that price for that parking lot. Um it would probably be used for to consolidate waste handling between the hotel and city market. Right now, there are four dumpsters sitting on the city's parking lot that serve City Market. One of which is a permanent installation as a trash compactor. The other three are just kind of resting there. Um, it's not entirely clear how the compactor came to be there. What we haven't been able to unearth whatever agreement happened. It probably happened a very long time ago, but some sort of accommodation for the waste handling of city market is certainly a physical problem that needs solving. So the options and we'll get to the recommendations at the very end of this presentation, but the options on the table are if council finds these terms something that you feel the city can accept, we would fill in all those gaps and uh firm up the terms uh within 60 days of today and then uh work on draft agreements to bring back for um authorization for the manager to execute. If you don't like the terms, we can reject the offer. And if we reject the offer, there are three options. One is to put the property out for the highest bidder. That's the negotiated offer and upset bid process. You could issue a fresh RFP and see what comes in based on that. We would probably change and clarify the terms to make sure that everyone understood how the land would be priced before putting in a proposal. And then uh you if the last option is the status quo with that I'll turn to the east site proposal. And the east site proposal was a a pretty robust mix of uses. There was going to be um an affordable housing component of 160 units. That's the one thing that is moving forward. I want to stress that is an advanced state of the process. So you know barring any unforeseen circumstances that component of this is happening. They were also going to work with Raleigh Rescue Mission to build them a new building. Um, we'll get a little bit to that status as I go through a series of maps. There's going to be market rate housing, at least some of which would be in a high-rise configuration. Um, and then there'll be additional mix of uses. And some of the things that were included in the proposal was a second hotel as well as um a food retailer. Now, um, one of the reasons why we are where we are is that the the RFP came out. The RFP had two things. One of which is we were asking for ambitious proposals and and kind of judging people on how ambitious their proposal was. And also we had just had a huge market runup where we had a combination of rapidly growing rents and due to the pandemic impacts and the influx of people moving from other areas and extremely low interest rates. also due to the pandemic because interest rates were dropped close to the zero lower bound to make up for the economic shock that the pandemic produced. So, as you can see, when the RFP was reduced, we were at the top of the market for asking rents within the city market and interest rates were still quite low. Fast forward um to where we are now, we've been in a long period of declining asking rents within the Raleigh market. They peaked in 2022 and we've seen interest rates uh rise from that being near zero to 5 and a half%. And of course high interest rates impact any development project in two ways. They uh raise the cost of capital. So real estate is mostly financed by borrowing and so that impacts the bottom line and it also lowers the value of the project because now cap rates are higher because I'm not going to invest in a risky real estate project at 5% if I could buy treasury bonds at 5%. I'm going to require a higher return and so that's going to lower the value the amount that you'll pay for a given income stream on a project. So high interest rates squeeze a project from both directions. More costly to finance, less value when it's done. So, let me review kind of where this we are with the site plan and what has happened here. So, this is the shape of the original property that the city owned and put out in the RFP. 2.59 acres included um a minor included less than half of the frontage directly on the park. Was sort of oddly shaped included all the Bloodworth Street frontage. So, we actually had more land kind of on the Bloodworth Street side. And although we're not showing the zoning line, essentially the west half of the block, front of the park is zoned for 20 and the back half is zoned for 12. This is the footprint of the affordable housing unit development. It's a very dense development, 160 units on 1.2 acres. So this is this is close to 140 units per acre and it's a podium building which means there's a ground floor level of parking with a concrete two levels of concrete and then stick construction on top of that. It's seven stories. Um, now the result of putting it here is that the site that's labeled two is now physically disconnected from the balance of the city property. Um, and site one is kind of a squeeze to fit a parking deck on. It could probably be done, but it definitely limits some of the developable opportunity. Now, the good news is is that Loen has negotiated an opport an option to purchase a privately owned property that really fills in um a missing gap in what the city owned, which was the Hadley property. And they spent well over a year, maybe around a year and a half in negotiations with the family that owns this property to get to this option agreement. And the option is assignable to the city. So, if this if we do not move forward with Loaden, the city can take over that option. Um the implications of taking over the option are there are annual performance payments um that are made to to keep the option uh alive and then it has to be exercised that is the p property has to be purchased by March 13 of 2027. So a little less than two years from today. The other component of this was the move of the Raleigh Rescue Mission. So the Raleigh Rescue Mission building is um is an older building. Uh Raleigh Rescue Mission just went through a very successful capital campaign to build a new building for the women's services. It's on a site in Nightdale. That campaign is concluded. And so the idea is with that move, they can consolidate men's services here and and build themselves a new structure that would be funded through a new capital campaign. Um, and one way to facilitate that is if Raleigh Rescue Mission moves to the east on this corner property that's currently owned by the city, you could build the new building alongside the existing building and then seamlessly move into it and then when the old building is torn down, that becomes part of the development. So, Loen was working with the board of the Raleigh Rescue Mission to attempt to get uh an anou a memorandum of understanding together about this particular move. If for any reason the city is not moving forward with Loaden, it seems advisable to the city continue that conversation on behalf of ourselves as a land owner and see if Raleigh Rescue Mission is still committed to a plan like that. Why would we want to do that? because if you could do that um it would be beneficial both to the Raleigh Rescue Mission and sort of unlocking the more valuable piece of their current property um and creating a really nicely sized uh redevelopment block that's shown in red on this map. Um we would not advise that the city try to acquire these missing pieces on the corner. You could certainly build with or without them, but if we were to sell the property in red in partnership or joint venture, if you will, with the Raleigh Rescue Mission, um obviously a future owner could try to close the deal on those three remaining parcels on the block. So, the big the big uh decision point facing us right now relates to that affordable project. So, the affordable project, as I said, has a density that rivals or exceeds many market rate um uh properties in our uh market. It's more expensive to build that densely in the podium building. And as a result, with the higher hard cost of construction, there's a significant gap, financing gap for all the affordable units. And there's a lot of affordable units. There's 160 of them. So, this the combination of the large perunit gap and the large number of units creates this large thing. Now, if we were able to come to terms on the southside and sell both the hotel pad and the Blake Street parcel, get that initial payment of 400 4.5 million and plus the 450, now you're around $4.9 million that would that potentially might flow into the project in time to fill some of that gap, but you still have $1 million or so in round numbers unaccounted for. Without funds from land sales on the east site, we'll have to find a different source to fill that gap to keep the affordable project moving forward. And the obvious source is our existing affordable housing fund. But the implication of tapping that fund is that 250 to 300 affordable units and other projects could elsewhere in the city could not be funded. So it would have a major impact on our overall affordable housing program to commit those dollars whether they came from the existing fund or a future housing bond. It's money that's going here can't be used somewhere else. I think the other thing that the city has to think about is the selection was predicated on the desire at the time that was clearly expressed by many council members that we wanted to see a a high-rise on the park fronting of the park, a high high-end highv value development that was going to capitalize on the park front location. Because of the higher interest rates and the deterioration in rents, uh many market observers believe that that we are nowhere near at the rent levels necessary to um underwrite high-rise construction and may not be at that level in downtown for a number of years. I know there are some highrises that have recently delivered. All of them were financed before these economic trends became apparent and I think many of them are probably not meeting their performant rent targets at this time. So, how long are we willing to wait for that? Or do we want to see something happen in the in the near term? Loen of course agrees that they don't believe that this development is financable and it may be many years before a high-rise development is financable. And the question is how do we test this? The only way to test this is probably to either, you know, you can do a market study and that'll tell you some. The other way to test it is to put it out on the market and see if someone can bring a viable project forward. But I do think it's I think there is something that on a policy level we need to think about which is even if we believe that a residential high-rise is the highest and best use over the long term. If getting there means suffering through having an empty blighted condition on one of our premier downtown parks for five to seven years. Is that a price worth paying to get there? or is are we better off sparking some revitalization on the east side of More Square even if it's not as ambitious as what was originally proposed? That's not a question the staff can answer, but I think it's a question that the council has to ponder and thinking about the direction moving forward. So that gets us to the options for the east side which are very similar um to the options for the southside except we have no offer in hand. There's no timeline. There's no price. There's no nothing at this point and there is no path that we see right now to getting to those things working through the current process negotiating process. So we can continue working um with Lowen team to see if we can put some sort of framework that would include some sort of timeline and some sort of performance payments on the table. um uh and would probably include working with them on the Raleigh Rescue Mission conversation or we can suspend the negotiations um and we can put we can put the property back out on the market either through a negotiated and offer and upset bid process which again sells to the highest bidder fee simple no special restrictions on the end use of that. we can issue a new RFP. Again, the property configuration has changed significantly since the original RFP went out. So, we would redefine the parameters and goals. The affordable component is already taken care of. So, we don't need to make that part of the performance standards anymore. What we're really interested in, I think, is plugging that gap to reserve funds for affordable housing elsewhere in the city. Or we could stop negotiations and just keep the status quo. With that, I will now present you with the recommendations. So, our recommendations is um to continue negotiations on the south site. Uh the selling price has been a sticking point. We have been working um internally and very closely with the team to try to fill that gap to the extent that we can. Um, we believe that the hotel site, there's a strong argument that that the hotel probably in today's market is the highest and best use because it can be parked on site because it makes good use of the narrow property. You would really need to do a high-rise residential using the full 12story um allocation to get a higher and better use um than the hotel on the site notwithstanding what the appraisal has concluded. Um, so continue working on on firming up that agreement to bring back to you for a future date. That's our recommendation there. On the east site, stressing again, I believe that Loen has attempted to negotiate in good faith with us on this, but we're just not at a point where we can come back with anything meaningful. I don't believe in a reasonable time frame in terms of a timeline and commitments to move forward with a project here. So that leaves the option of putting the property out on the market. I think we need to know what's in and what's out. So, we have to make a decision to assume that Hadley option. Staff believes that's critical. Um as or more critical than talking to the Raleigh Rescue Mission. Um we do believe we should talk to the Raleigh Rescue Mission to get firsthand input as to what their goals are and whether the city could be a partner to meet those goals as well as creating a better development opportunity on the east side of War Square. We would like to do a market study um and present the results of that market study to the council that would try to answer the question of what is the right height for development construction type that we think is feasible and a reasonable time frame to move forward. Um, and then based on those findings, we would uh request your authorization to either do the negotiated offer and upset bid or issue a fresh RFP with maybe some tightened parameters as to what the city is asking for so that um we can try to more rapidly and successfully conclude a process and with a goal which we would strive to meet, cannot promise of generating funding from the the value of that land in time to um meet the schedule of when the funds would be necessary for the affordable housing project. So that concludes my presentation and I would be happy to answer any questions that you may have. Okay, councelor Harrison. Yeah, thanks so much for all the details here. Um so for the east site recommendations, are you still saying that we're moving forward on the affordable housing regardless? That's right. We've we've we've committed we've um we have given Harmony Housing an option on the land. Uh they'll exercise that option when the project is funded and ready to go forward into construction and that is moving forward on its own pace independently of all these other moving parts. Thank you. I don't really have questions. I have some comments. Um, you know, I think our two greatest sort of needs, and they're not commenurate, but the two top two for me in this area were the affordable housing and then the hotel rooms. We know we need the hotel rooms walkable to the convention center. We've got a deficit there. Um, so using that surface parking for the hotel, trying to support the small businesses and city market. I think that makes perfect sense. I'm all for upholding the staff recommendation on the um south site. I'd also love to see the ESO station sort of activated. you know, it's a historic parcel that I think could be a real uh additive to whatever development happens on that parking lot. So, I think all of that the whole um you know, part for the southside, I'm good with the east site. Um knowing that the affordable housing is going forward, I think that was our greatest need. The rest of it, um you know, we want quality development downtown. We keep talking about more foot traffic, more people living in our business core, particularly on the Fateville Street corridor. We've got the more square right there. So, I do think we need to find a way to activate the highest and best use for the east site. It sounds like Loen has tried um over a multitude of years and so I would be fine with the staff recommendation of seeing what other type of market conditions exist there because what I don't want to see happen is is it just remains in its current condition which is not really a good use for it. I mean, obviously, we have that old sort of a burned out looking service station with trees growing through the roof and then sort of like an empty little office building there. And so, if we could get something on the site in the near future, that would be great. So, I'm I'm good with uh the staff recommendations because regardless, we're going to get the affordable housing and it sounds like the hotel. Yeah. again. Um, yeah, I'd echo um everyone in saying I'm glad that the affordable housing is moving forward. I'm just going to keep saying that to all the viewers watching at home. Affordable housing is moving forward. Um, couple questions I had um to inform this discussion. You mentioned that part of the hotel package deal would be to lease city-owned parking spaces elsewhere in the city. Yes. I also know that like in a separate plane of existence there's discussions about the future of city-owned decks and there's some interest in disposing of some of them. How do those connect? Have we have So my understanding as to where we are and Paul if you want to add any color if you feel is that the deck that's that has been talked about in the past of potentially selling is Wilmington Street. So currently we have not offered up any spaces in Wilming Street as part of this. Now Loen has said if Wilmington Street is up for sale they might put a bid in on it. Um but they may not win so it's hard to say. Uh the more square lower level seems to have some capacity and then the city center deck seems to have some capacity. And so we're still trying to work out looking at all the commitments that have been made to Red Hat and other users in center city as well as um in more square what the right allocation is but there's seems to be enough total spaces to meet this allocation and you know frankly the parking program has the parking enterprise it's an enterprise fund has has not been running in the in the black and so some additional leases to take up some of the excess capacity which is still hangover from the pandemic is probably not a bad thing from the standpoint of the fiscal health of the enterprise. Are you good? Yeah, I'm good. Okay. Okay. Great. Thanks. All right. Um and then do what is the cost per unit for the affordable housing? So all in development cost is and this is this is hard cost and development and hard and soft not land is $385,000 a unit. Okay.$385,000 385,000 and the and the the gap to be filled from all sources is around 20 something 30 something of which the city is responsible for around 95 to 100 per unit which is obviously a larger number than the typical tax credit project. The thing to remember is that the the 4% tax credits only fill around 30%. of the of the capital stack of a affordable project. So the bigger that hard cost gets, the tax credits get bigger, but they're still only 30%. And so the what's left over is what what's left over between that and then the the permanent debt is always the same because the rent is always the same because it's benchmarked to that 60% AMI income. So, it's the rest of it that grows um as the c as the hard costs go up. And this is this is the issue with any attempt to put affordable housing on expensive land where you have to build densely. But because of the value of this land, it's still cheaper to build densely than it would be to to try to use land that costs as much as this does and build a typical two to three story garden apartment complex. then you'd be running into $1500 to $200,000 of land value per unit, none of which is offset by tax credits. And so I think I caught you saying you said that the city's subsid the city's portion of the subsidy is roughly $100,000 per unit. Yeah. Yeah. In round numbers. Okay, got it. And then my last question, um, is there like a very loose approximation of if we were to opt for this upset bid or fresh RFP, is with the new configuration of the block, is there a very loose understanding of the value or how much that might generate if we put it out for I mean, I know upset bid can be anything, but where we'd start? I would say it's very loose at this time. Um I when we got the entirety of the site appraised I'm looking at Ralph. Do you do you Ralph? Do you remember the Ralph Richie or Richie is our real estate manager. Do you remember those numbers off the top of your head? I I don't really sorry. Uh I think it was was it 16 million? Yeah, I think it was that was the number that stuck in my head. I we would want to check the calculations, but there was enough value on the more square frontage under the 20s story zoning that at the time we believed it could fill that gap. Got it. There there may be there may be a little bit of a bump for assemblage because the future proposed configuration is more valuable than the scattered one that we started with. and the uh the Raleigh Rescue Mission would be moving into the 12story area and we would be exchanging for 20story zoning. So there's a little bit of a differential there that might involve another bump. Okay. Got it. Yeah. Although although to be clear, it's not our intent to capture the real estate value that Raleigh Rescue Mission rightfully owns. That that swap would be an would be negotiated to be an equitable arrangement. Yeah. Yeah. I think with with all that information, I also am aligned with the staff recommendations. I'm I'm glad that we're getting downtown affordable units. I also hate to think that we would drain the entire bucket of affordable housing on one project and not be able to build anywhere else in the city. And so, if this is the move that allows us to sort of refill the bucket in a timely manner so we can continue projects elsewhere in the city, then I think that's then that's the appropriate move. Yeah. I mean, I just a couple of comments. First of all, thank you for the work on this. This has not been easy um in this climate that we're in. Um and with these recommendations because we're still having affordable housing. Um we're still looking at the hotel piece and we're have we will have an opportunity to decide at a later date either upset bid or RFP based upon the market say the way I'm reading this at the appropriate time. I would just move um to approve staff recommendations. Yep. I would and I would just echo thank you not easy all parties how much work has gone into this and uh how important this site is and this has been I think uh Mayor Mer wanted the kilo pest control was one of the uh thorns in his sides like 20 years ago and here we are. So, I appreciate that you have a plan to move us forward and address, right, some of the biggest needs, but this site is obviously part of the original city plan, such a part of the the just soul of the city that um wanting to see progress and appreciate the plans you have put forth which I will support. Okay. So, I think I move for approval of staff recommendations. Second. Okay. Any further conversation or comment? All in favor of the motion? I I All opposed. Okay. And realize we don't own the pest control site. The sign is off though. No more signage. Madame Mayor, is Councelor Mitchell? Yes. Thank you for uh Councelor Mitchell Silver is traveling today and will not be at the work session or city council. So that is an excused absence. Okay. And that is all the business to come before us and we are adjourned. [Music] Oh heat. [Music]