Eugene Weekly : 06.22.06
The Word From Woolley
The frustrations of trying to make a buck in Eugene.
STORY & PHOTO BY TED TAYLOR
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Back in our May 19, 2005 issue, EW broke the story on the ambitious plans by local developers Tom Conner and Don Woolley to renovate several blocks on Broadway for a $165 million mix of national retail shops, restaurants, apartments, a movie theater and parking — the kind of high-profile project C&W have done successfully all over the West Coast and Hawaii. We've been dogging this important story ever since, including the inability of the group to purchase more than a dozen key properties needed for the "Broadway District" project, a partnership with the national Opus Group. Meanwhile, many of the aging properties C&W have acquired over the years remain vacant and vandalized, leading to public criticism of C&W for contributing to downtown's blight. The group recently hired public relations practitioner Jenny Ulum, who helped arrange an interview with the normally media-shy Don Woolley. The interview took place June 6 at Ulum's office and she asked to sit in, not to guide the interview, she said, but rather because of her interest in keeping up with downtown development issues.
What's going on since the announcement this spring that C&W & Opus have abandoned the Broadway District development?
Nothing's really happened. We had closed on the Book Mark, one property that we did acquire. We haven't really tried to market it for lease or sale. It touches the back of the Kaufman building at a 90-degree angle, but it really doesn't add anything. I read in the paper [R-G] that Jo Dee Moine [owner of Luckey's Bar] had an interest in something to do with it, but to my knowledge she's never actually contacted us and expressed that, so that's kind of gone.
On the Symantec-Kaufman buildings, we're working on a partnership with two different tenants. One would take the entire Kaufman building, approximately 45,000 sq. ft. They are still not close; they are in what I would call "preliminary discussions."
The upper floor of the Symantec building is leased and has been for several months now to the International Society for Technology Education — 15,000 sq. ft. on the third floor, 5,000 sq. ft. in the basement. Other than that, property manager Sue Pritchard is continuing to lease out the one-story buildings where ShawMed is and DIVA. She's continued to market those for lease. We did put a little tiny tenant in there on a month-to-month basis, the Blue Luna [now called Cabana Blue]. That's all that's changed in the past few months.
What about the city-owned Sears site on the back side of the same block?
The Sears building RFP has gone out. I guess they [city planners] are just testing the waters to see if somebody has something great. Our position was that we weren't going to bid on it, but a funny thing happened on the way to the forum. Just last night [June 5] we had some internal discussions and we may actually take a look at it. But we don't know what for. We don't have a plan in place, but I've been spending a little more time up in Portland the last three weeks and have a wild idea I presented in the last couple of days, internally. We don't know if that would be something that's doable.
How is doing redevelopment in Eugene different than in Portland or Hawaii?
The main thing that's different in Eugene over most other areas is the people who are active in the marketplace elsewhere are actually knowledgeable, and there are formulas that everybody acknowledges which determine the value of everything. In California the land price relative to the finished price of the house is whatever, 25 percent. So if you can sell a house for $1 million, the lot is worth $250,000 to $300,000. Everybody knows what everything is worth. You can argue about what that house can sell for, but once you determine that argument, you know what your land is worth. You don't argue. It's done. But Eugene doesn't operate like that. There's a disconnect. That's why it's hard to do business here. Nothing makes sense.
But isn't it hard to find comparables for downtown properties? How do you evaluate Lazar's building, for example? There's nothing else quite like it.
It has nothing to do with comparables. You don't need comparables. What can Lazar rent his building for? That's all you need to know. If it's 25 cents [per square foot], then there's the value in the current market and cap rates on whatever quality. That property might have a cap rate of 9.5 percent and it comes out that the value is known. But Eugene doesn't operate like that. It's a really uneducated population.
After the interview, we asked Woolley to elaborate on how commercial properties are valued. See his written response in sidebar story.
So have you been educating people?
A lot of them are uneducable. It's just not doable. I lived in Colorado for two years and moved back here in 1984. Lenders didn't want to do business in Eugene then and to some degree still don't, especially lenders who are outside Eugene. Wells Fargo, now, they will maybe do loans in Eugene; but to get a lender, say a life insurance company that isn't headquartered here, doesn't have a branch here, to make a loan here? Eugene's not even on their radar. In the middle 1980s not only was Eugene not on the radar, it was banned. There was no money available. It's just a market that doesn't command any consideration. Eugene has just never been on the horizon for investment capital, real estate-wise. Probably won't be.
Until there's some critical mass?
I don't think it's a critical mass issue — unless it's the critical mass that Eugene will grow to far beyond my lifetime, if I live to be 90. It will never hit that mass, especially at the rate it's going.
Is it that there have not been a lot of transactions and deals done here?
You could say that, and maybe that's true, but most people in Eugene are not from Eugene. So it's not like the lack of sophistication isn't organic. It came here and stayed. I'm not from Eugene, you're not from Eugene, it's just a function of the way it is. It's really sad. Reading the letters to the editor in your paper — I don't know where these people come from because they are so off-base. They have no basis of knowledge from where they are writing, and it perpetuates the stereotype.
But having said that, Eugene's not a bad place, because of the city government. You go down to other city governments, say Tempe, Ariz., and they tell you exactly what you're going to build, where you're going to build it, what it's going to look like — far more intrusive than Eugene is. The Eugene city government actually takes a big black eye it doesn't deserve. It does do some things that are quirky, but that's more on the political side and not on the nuts and bolts side of developing Eugene.
So nothing's really changed downtown. We don't have any information today that we didn't have a couple of weeks ago. There's no national retail market. It isn't any different than it was a few months ago. None of the properties we tried to acquire have announced any plans for what they might want to do.
Would you still be interested in buying them individually to eventually tie up the whole two-block area on Broadway?
No. We told them at the time that we would do a "best and final" offer, and we were countered by all the people who expressed an interest. We were countered. They weren't listening. [If some sold to us], we'd still have the same roadblocks we had before. You can't have one in the middle and that hasn't changed. People who don't want to sell are still the ones in the middle. So there's nothing to talk about. It's not even worth having the discussion.
You do have the south side of Broadway that's all in your ownership. Is it not big enough to do something?
Our access that we were relying on in that project — the access to the large retailers — was coming through Opus. It's not that we couldn't contact the retailers ourselves, but Opus was already working with them, doing deals with them, and were familiar with the people who were making the real estate decisions for retail companies.
And it needed to be a certain scale?
That was one of the issues, but what a couple of the retail companies had told Opus was that even if we did develop on the south side of Broadway, they wouldn't come because of what's on the north side. Even if there were no street people, vagrants — whatever you want to call them — on the south side, you'd look across the street. To get the customers to come in they have to feel comfortable. Whether the citizens of Eugene like that concept or not, it's reality. People are only going to go where they are comfortable. We still have the south side — we could redevelop it, but we wouldn't get any tenants because people wouldn't come.
So what do you do with all those properties on Broadway? Rent them out and hope for best, or sell them?
In the short run, yes, rent them out and maybe wait a period of time or until some divine intervention happens [laughs]. We are going to evaluate what we want to sell, but we haven't done that. We are trying to get tenants through the Lane Metro Partnership. It's just in a holding pattern. Some people [developers] may do something, but they may just do it to trade dollars. Invest a million dollars and you still have a property worth just a million dollars. That's not what we do. That's not our business plan. For a lot less work you can go out and buy double tax-free municipal bonds and not have all the headaches and risk and all that. There are some people who would potentially do that, but I don't know who those people are.
So why not keep lowering the rents until someone takes the properties on a short-term lease?
The rents are low, and you can't go below free. We have a tenant down there who hasn't paid for 10 or 12 months. And on the west end of Broadway there are vacancies, and Bené's Pizza went out of business.
What was frustrating for us, setting aside the economics of the project and the inability to acquire the other properties, was all the chatter that had nothing to do with the project. Such as, "there's only going to be rich people down there on Broadway." But in Eugene, rich people might be anybody who earns more than $20,000. Eugene isn't exactly on the high end of income scale, or income per capita. All this chatter came up, which was ridiculous. Somebody else had a concern that it would be all monolithic, but we had actually looked at hiring different architectural firms for each block. Those are the details, and we hadn't gotten that far yet.
Whole Foods is a great example [of the chatter]. Whole Foods became a whipping boy for the city building a parking garage which had nothing to do with Whole Foods. They [citizens] got lost in the forest again. They couldn't focus. The city decided to build a parking garage that just happened to be built at the same time by the same developer, and next to Whole Foods. But the parking was not for Whole Foods. There's all this public outcry about subsidizing Whole Foods, and the city's not even providing parking for Whole Foods.
I thought Whole Foods required the parking garage to be built next door?
They had their requirements for all the parking spaces they needed, and they were all on their own property. Not one parking space in the garage is for Whole Foods.
Jenny Ulum interjected here that the Whole Foods parking garage was "built into the lease only because that was what the agreement was with the city. So they just acknowledged that. It looked like a requirement but only because that was what they were going to do. They would have signed a lease without that requirement, if that was how it was proposed to them."
So what's the solution for Broadway? Would it make sense in your business plan to take one of your buildings and do something nice with it to raise the value of the other buildings?
Yes. Going back to the Sears site, if we don't get the Sears site and somebody else does something there, I think it's an advantage to everybody. Potentially they would have a plan that was bigger than just the Sears site and they may want our site. We'd sell it to them. That's one scenario. The other scenario is after we know what's going to happen to that site, maybe based upon that, we'd be willing to do something. I did hear a rumor that one of the parties looking at it was interested in building office spaces, not mixed use. Off the cuff, that sounds like not the best use. I don't think the vacancy for office space is down below 5 percent now. It's relatively high.
The Sears site is a full quarter-block, so the city owns the entire frontage across from the library, but they only own half of the southwest block. Diamond Parking owns a quarter block out of the middle and then we own a quarter plus an eighth.
What was your reason for hiring a PR firm?
Well, obviously we weren't doing very well ourselves [laughs], and Jenny's a nice lady. We don't work with public relations firms in other cities; we don't need to. We do what we say we are going to do and we do what it takes to get the job done. We hired Jenny and her firm because of all this chatter that has nothing to do with our project. We live here in this community, and it was a way to address the chatter and provide a stream of information.
The bottom line is everybody wants Eugene to be a nice city, and there are some nuances to what different people think that means. There was a small minority that thought it was great a few years ago when all the anarchists were downtown, but I can't believe very many people thought that was a good idea. And so for something to happen, I think people have got to give a little bit of slack and let something at least develop enough to know what it really is going to be before everybody weighs in on what they think it's going to be.
Friends of Eugene had a forum and decided things they wanted. You want open space, you want parks? Great. Would it hurt my feelings if the city bought all four of those blocks and tore them down and made a park? No. But who's going to pay for that and how? Are you going to cut public maintenance of streets to have a park downtown? Are you going to cut buying additional parklands to protect the ridgeline from development in order to have a park downtown? There are financial choices to be made, and I'm not the one to make those choices.
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| 1 SPRING PROPERTIES INC 2 LIBRA BOOKS INC 3 LOUIE JACK H & ILLINE M L 4 MAKYADATH LAZAR V & ROSA L 5 DAN DAVIS FAMILY LLC 6 LAZAR ROSA TE 7 KEIM JOSHUA 8 BRUNN JENS C 9 SPRING PROPERTIES INC 10 WILLIAMSON ROBERT J TE 11 BRUUN JENS C 12 SNOWDEN BETTY 13 SANJACRON LLC 14 EVERGREEN ASSOCIATES 15 EVERGREEN ASSOCIATES 16 EVERGREEN ASSOCIATES 17 PRADO PARTNERS 18 DIAMOND PARKING INC 19 BLUE RIDGE INC 20 MOINE JO DEE 21 WILSON ROBERT B 22 BLUE RIDGE INC 23 CITY OF EUGENE |
PLACING VALUE ON DOWNTOWN PROPERTIES
As explained by Don Woolley
Comparables (other similar properties in the market) are only one way of determining commercial property values. The other two are: 1) replacement cost of the land and the building, and 2) income method. A typical MAI appraisal does all three calculations; then has a discussion about why one or more is more reliable regarding the appraisal at hand.
Typically, replacement cost is the least reliable. A typical building in downtown Eugene has functional depreciation: defects in design (low ceiling heights, deep bay depths from street, little insulation), poor quality of mechanical systems (old, poorly maintained, out-dated), poor accessibility (multi-levels without ramps), etc. To replace an existing building today would cost a certain amount per square foot (building only). Land cost per square foot would be determined by transactions; then total the values for the land and building. However, replacing that building, as is, would not be the highest and best use of the property; so the replacement cost is not reliable.
The income method looks at that same typical building and asks, "What income generating ability does the property have?" On West Broadway, a building commands a certain range of rent per square foot per month on a triple net basis (meaning net to the investor). Therefore, the number of square feet, times rent per square foot per month, times 12 months, equals annual net rent to the investor. This amount is then divided by the cap rate (the rate of capitalization, i.e. the market required percentage return). The cap rate for a Fred Meyer store may be 6.5 percent because the credit of Fred Meyer is very good. The tenant impacts the cap rate. What kind of credit does the typical renter currently have on West Broadway? In our discussion, I threw out 9.5 percent for the cap rate for discussion purposes. That would make the value of the typical building, including land, to be annual net rent to the investor divided by 9.5 percent.
The real estate market relies on these equations, plus a lot more. Just because you don't have comparables doesn't mean you can't value the property. In Eugene, many property owners do not view their property in the same way the real estate investment market views their property.
If the property owner is also the tenant/occupant of the building, yes, there would be additional considerations for that owner, but it does not change the value of the property in the market. And in assembling multiple properties there is usually a premium paid.
