Incentives await new development
$2 million available for Downtown revitalization
Memphis Business Journal - by Andy Ashby
ALAN HOWELL | LEE SWETS | MBJ
The Center City Development Corp., a division of the Center City Commission, has awarded $473,208 through retail and office tenant incentives since beginning the programs in late 2008. It currently has $2 million still available for these programs, which many believe are necessary to spark Downtown commercial revitalization efforts. So far there have been six new retail forgivable loans worth $212,460, eight existing retail forgivable loans worth $188,305, four office occupancy grants for $37,500 and three facade improvement grants for $34,943. Art Under A Hot Tin Roof at 117 S. Main was awarded the first incentives, a $35,000 retail forgivable loan and $5,800 facade grant, in February 2009.
A forgivable loan is a 0% interest loan that a business pays back in monthly installments. At the end of each year, the money is refunded back to the business. “It is to help influence someone to open up their business Downtown instead of out East,” says Lisa Brumleve, manager of business recruitment and retention for the Center City Commission. “Downtown is more challenging to open a business in and the retail forgivable loan is set up to make it easier.”
The CCDC is a non-profit entity with nine-member volunteer board that promotes development Downtown. It draw funds for these incentives from the Center City Revenue Finance Corp., which is funded primarily from fees related to payment-in-lieu-of-taxes abatements. When the organization gives tax abatements, the beneficiary pays a fee, which is 1% of the project cost. A tenant must have a five-year lease to be eligible for incentives and the loan total is capped at $40,000. “At the end of five years, it basically turns into a grant because you’re done paying in and we’ve given it all back to you,” Brumleve says. Jim Street, the Center City Commission’s chief financial officer, says business owners give a personal guarantee for these loans in case the business fails. “If they default on the loan, we’ll call the loan and get a judgment against them for the unpaid balance,” Street says.
The personal guarantee allows the organization to get money not just from the business, but from the business owner or any guarantor who vouched for them to get the loan. The CCDC hasn’t had a company fail on these loans yet. Although CCDC doesn’t dictate what the loan is used for, the business owner has to let the organization know how the money will be used. The loan application does require a detailed business plan, as well as a five-year pro forma financial plan. “People can’t just come in with a two-page business plan which says what their dream business is,” Brumleve says. “We have to see how they plan to maintain their business. It needs to be a very well thought-out dream.”
The CCDC started the forgivable loan program for existing businesses because of the economy’s downturn. It was also meant to offset the tightening credit markets. An existing business owner is required to show how the funds will improve the health of their business. Also, Memphis-based business consulting firm alt.Consulting monitors their business for six months. The existing retail loan program covers the whole Central Business Improvement District. Initially, the new retail forgivable loan program was solely focused on Main Street. In March, the program was expanded to include Front Street, Second and Madison up to the Edge District.
Adam Slovis, managing broker with Slovis & Associates, is representing Thompson & Co. while it considers a new office space at 85 Union. The marketing and advertising firm was awarded a $15,000 office occupancy grant on April 21. Its potential lease was helped along when the building’s owner, Union Main Holdings LLC, was awarded a $200,000 development loan by the CCDC board the same morning. These incentives aren’t just important — they’re critical and necessary when working with redeveloping older spaces, according to Slovis. “The construction and redevelopment costs are out of line with the rental rates tenants will pay and for what the banks will loan,” he says. “Downtown has mostly older buildings and they cost more to redevelop.” Rental rates Downtown have dropped over the years, which impacts redevelopment.
The average office lease rate was $14.93 per square foot at year-end 2009, down from $15.27 per square foot at year-end 2008, according to CoStar Group Inc. reports. Similarly, the average retail lease rate was $10.83 per square foot at year-end 2009, down from $11.79 at year-end 2008. “When a tenant can’t pay a market rate compared to what it costs to redevelop a property, these incentive programs are essential in filling the gap and getting these deals done,” Slovis says.
Midge McCauley is president of Downtown Works, a Washington, D.C., consulting firm that focuses on Downtown retail recruitment across the country. She says Memphis has more and better incentive programs for its Downtown than most cities in the U.S. “We often use Memphis as a model,” McCauley says. “They’re becoming more common because cities are realizing they have to take a more active role in their retail scene.” McCauley says new retailers are influenced by sales and other retailers operating in the same area. “If you don’t have co-tenancy and sales, then for someone to take the risk to come there often requires incentives,” she says. Incentives aren’t needed forever, McCauley says, but are used to get the redevelopment process started. She points to St. Louis, which had two rounds of forgivable loans for its downtown area and then stopped the program. However, that city is considering another round of incentives due to the recession, according to McCauley.
Although McCauley says Downtown Memphis is ahead of the national curve on retail incentives, there is one issue she thinks could help even more: opening Main Street to traffic. She says only a few cities, like Santa Monica, Calif., and Burlington, Vt., have been successful closing main retail streets to vehicles, but Memphis isn’t one of them. “The incentive program is going to be helpful, but what would be more helpful would be to re-open Main Street to vehicular traffic,” she says. “They’re going to hobble the growth of retail as long as they keep it closed.”