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Urban Rehab Opportunities and Challenges: A Developer’s Perspective  

12-09-2015 17:35

My personal commitment to historic preservation represents more than just an individual’s passion for the past. It is, in fact, a meaningful component of our company’s long-term vision and strategy. We believe that historic preservation is good for our business and for the business of American cities in general. First, I would like to offer some background on who we are and what we do.

Forest City Enterprises, Inc., was founded by an immigrant family in 1921 here in Cleveland. The company has been publicly traded since 1960 and is currently listed on the New York Stock Exchange. Today Forest City has grown into a $5 billion real estate company. We’re diversified in product and geography. We have primarily commercial product (office and large retail), and residential product (multifamily apartments). We’re currently in 19 states and the District of Columbia, but we’ve increasingly had an urban focus -- Boston, Washington, Denver, northern and southern California, and, of course, Cleveland, our hometown.

Forest City has an experienced management team, a wonderful group of people who have led us into all of these developments. But we are a hybrid of a publicly traded, financially sound company and an entrepreneurial business directed by the third generation of family leadership and committed to creating value in real estate. I grew up in the real estate industry and love it like a relative.

Forest City has adopted a core strategy of investing in cities. We believe that urban development and the revitalization and growth of urban centers represents an exceptional economic opportunity. Originally Forest City started with greenfield development primarily in suburban locations in the ’60s and ’70s. Starting with Cleveland our interest in cities grew and our understanding of cities grew. We realize that urban centers are, in fact, long-term market opportunities. There are complex issues in urban environments which require complex solutions. We’ve had to match those opportunities with a broad base of real estate development skills, and we’ve had to develop a long-term vision and a long-term commitment. Urban real estate requires investment, not speculation.

But it’s more than just a private opportunity. Sound public policy supports urban development. Urban development is, in and of itself, smart growth -- economic expansion without sprawl. Urban development -- and all urban development, I would argue -- is sustainable development. It brings jobs, homes, services, and fosters the diversity that America cherishes. People in America are looking for a sense of place, a rootage, a feeling of belonging, for connections to each other in our collective past.

But why do we do historic rehab? Our experience has taught us that urban development and redevelopment requires an understanding of the historic fabric and historic buildings that make up our cities. A dynamic city requires significant new construction, but we must maintain a commitment to the historic components that define and preserve a city’s character.

Issues in Urban Development

There are four themes that are either challenges or issues that I see as lessons learned from our experience. First, we must address broad issues of place and context. Individual buildings, however skillfully we do each building, must be part of a vibrant context if they’re to maintain value and provide a return on financial and civic investment. A project is not just a single building but must be seen as part of a neighborhood, a district, a city, even a region. We must understand the historic patterns of place and form, but we must permit them to be modified by the dynamics of current economic and other needs.

Second, success in historic rehab relies on a whole series of public and private partnerships in the management of complex projects, through teams of professionals on both the public and the private side. Public and private partnerships, however, must extend beyond the conventional process that we all know -- economic assistance, regulatory and code cooperation, and even some of the innovative public marketing and planning agendas in American cities. If a building, as stated above, can only succeed as part of a vibrant urban fabric, then owners have to rely on the civic and public entities to establish a broad vision, a broad agenda, and to carry that out.

An example of this can be found in a property, which happened to be new construction, that we did many years ago in Detroit. The building originally was very successful and, in fact, was successful for almost its first decade. However, the city really didn’t do all the other things that had been promised on Washington Boulevard. That portion of Detroit declined severely. And after initial success, the building eventually became a failure. No individual project can exist without the city and the neighborhood. And that means that we as individual developers of projects have to rely in a broader sense on that publicprivate partnership.

Third, the economic reality of a historic rehab is that bringing old buildings into compliance with new codes, with new needs, and with new demands is complex and very expensive. While the 20 percent historic rehabilitation tax credit brings some economic relief, in most cases it barely offsets the premium cost of doing a historic rehab. Every project still requires careful attention to the real estate fundamentals -- marketing, product, cost, value, finance. To overcome some of those challenges we have to be very creative. And I break down creativity -- with regard to historic rehab -- into two categories: financial creativity and physical or technical creativity.

Fourth, the future. I think we need to really reassess the historic rehabilitation tax credit. We need to rethink what we’ve done. In the decade that we’ve been using the historic rehabilitation tax credit to promote the reuse of historic buildings for commercial purposes, we’ve learned a lot as developers, as public officials, and as citizens. While there are many areas of concern that have been raised in various forums across the country, there are two areas that I feel are critical, based on our experience.

First, the standards and guidelines originally developed by the Secretary of the Interior for other program purposes have been used as the criteria to determine whether an adaptive use meets the requirements of a historic rehabilitation and qualifies for tax credits. I don’t believe that these standards, or the process that is in place to review and approve projects, allow for creative balancing for the historic needs and economic realities. The whole concept of adaptive use doesn’t really find a place in the standards.

Second, the historic rehabilitation tax credit underserves the small project. As I said before, it’s the urban fabric that matters in American cities; it’s not just individual buildings. That urban fabric is contributed to by multiple small buildings. If those small buildings aren’t preserved, if they’re not rehabbed, we lose the character of that neighborhood, of that region, of that district. And, in fact, it is very, very difficult for the owner of a small building to take advantage of the historic rehabilitation tax credit. Transaction costs are large. There are multiple and easier things that we could do to change that and make it possible for small business to take advantage of the credit.

Tower City Center

I’d now like to present an overview of our efforts at historic rehab and urban development, with Tower City Center, our core asset here in Cleveland. Tower City Center is the project that both launched Forest City into historic rehab and into a realization of what a city could be. The Tower itself was built in the ’20s and opened in 1930. It was then, and is still, one of the largest mixed-use projects in America. At the time it provided not only a major city railroad station but a hotel, department store, and, of course, the Terminal Tower Office Building.

The Tower became both a physical and financial heart of Cleveland and over the years became the emotional heart of the city. However, by the 1980s the Tower had fallen into disrepair, and many parts of it had been virtually abandoned. The railroads had pulled out many years before. The Tower seemed not to have any future. At that point my cousin, Albert Ratner, and his sister, the late Dr. Ruth Miller, conceived a vision of what the Tower and Cleveland could become. Not only did their efforts recreate the Tower but they revitalized the city, and in some senses, the region.

This project took tremendous devotion to historic preservation. An example of that is the ceiling of the center portico coming off Public Square. We had a young man who spent most of two years flat on his back trying to rival Michelangelo for how long he could lie on a scaffold in order to repaint that ceiling. We got assistance from the Sherwin- Williams Company, which mixed the paint colors from the original sample chips. We were able to restore the WPA murals that are high in the wall and the niches.

To give you an idea of the complexity of this project let me describe Public Square. We were able to create 300,000 feet of retail that extends at grade from Public Square, under Prospect Avenue, under Huron Avenue, and back to a view of the river, and then opens the project and the city back to the river. We built two new projects on foundations put in place in the ’30s -- a hotel and an office building. And, of course, all of this is linked to the historic preservation and restoration of the old Post Office at the M.K. Ferguson Plaza and for the Renaissance Hotel and the Higbees Building, which we have since purchased.

This project is, in and of itself, a successful story. But it’s more than that. It’s not just a single project, even at its scale. It’s part of the revitalization of the city of Cleveland and serves tremendous purposes. There’s the Tower, Public Square, the hotel, and the office building.

Now I need to come to a more difficult part of the story. Tower City Center did not receive historic rehabilitation tax credits. We walked away from about a $40 million tax credit because we couldn’t come to an agreement with the National Park Service and its requirements. For the moment, I’m going to stipulate that the National Park Service’s determination was correct within the standards and the guidelines. And I think it was a somewhat academic decision, but nonetheless, you could argue, I think coherently, that it was a correct decision. The National Park Service was concerned that the cumulative changes meant that we had lost the sense of the train station. And although compromise in this case would have meant that we would have lost about a third of the retail space and lost the integrity of the retail development, the National Park Service legitimately said that that part of the economic reality of the project wasn’t within their standards. If that was a correct decision under the standards and guidelines, then we need to rethink the rules.

Keys to Success

So what are the keys to success? They’re very straight forward. There’s passion. There’s urban vision. There’s creativity. There are relationships. Underlying it, there are economic realities. And in the end, for our company and for the country, there’s a notion that location equals value.

I don’t often quote Einstein. In fact, I don’t even try to understand Einstein. But these words seemed particularly appropriate: “Out of clutter, find simplicity. From discord, find harmony. In the middle of difficulty, wise opportunity.”

My overall message is that we must work together, and we can. As a developer, I am sometimes asked if we ever sacrifice profitability to achieve excellence in historic preservation. My answer is that that is a false choice. The fact is, we can have it all, but only if we work together. The projects we want to be involved in, the best ones, offer opportunities in all areas, including economic return. Private investment is the only way to achieve some of these things. Without it, and without the commitment and leadership of the public sector, it just won’t happen.

Publication Date: Winter 2003


Author(s):Ronald A. Ratner

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