TO:                  Town of Chapel Hill (the “Town”), University of North Carolina at Chapel Hill (the “University”), University of North Carolina Health Care System (the “Hospital”)

FROM:            UniDev, LLC

DATE:             April 25, 2001

RE:                   Revised Project Plan – Downtown Chapel Hill Mixed-Use Development Project

 

 

The following sets forth (1) what we have learned from undertaking the additional survey, the focus groups, and further discussions with local brokers and business owners, (2) a suggested approach for development based on the foregoing information, and (3) the next steps to be undertaken in order to continue moving toward implementation of the suggested development program.

 

 

PART ONE – WHAT WE’VE LEARNED

 

A.            Housing  (see attached Exhibit A – Survey Results and Exhibit B – Topline Summary of Focus Group Findings for further details)

 

            à            There is significant demand for housing.  The current survey of employees indicates that ~ 20% of employees of each of the three institutions would consider purchasing a moderately sized and priced new housing unit, within the next 5 years, in downtown Chapel Hill.  Twenty percent of all employees of these institutions equates to approximately 3,200 people.  Although many focus group participants said they will likely never be interested in purchasing a house downtown (because they already own a home, they want more land and/or a larger house, they do not want an urban environment, etc.), all agreed that building housing for employees in downtown would be a great idea.

 

            à            Employees want to live in a community.  The focus groups revealed that employees are concerned about living in a location with close access to services that support residents, not just students (i.e., a grocery store, drycleaner, drug store, laundromat, hardware store, clothing stores, etc.).  (As one focus group participant pointed out, “The downtown business district caters primarily to the students and the visitors.”  Another said: “Downtown Chapel Hill has evolved into an area that caters to tourists, students and people who work in the area.  The things you want available to you where you live are not there.”)  They want their community to be secure and quiet, to be pet friendly, and to have common green space.  It was generally thought that such a development would be most appealing to singles, couples, seniors and other households without children.  It was also generally suggested that a variety of housing products, at various price points, be included so as to encourage a mix of incomes, ages and households to comprise the community. 

 

à            The units should feel like a home, not an apartment unit.  The majority of focus group panelists have a preference for town homes, although many people desire single level dwellings.  Units of 1,200 square feet are considered the minimum size for a typical 3 bedroom unit.  Smaller 2 bedroom units are thought to be appropriate for some potential occupants -- singles, young couples, and seniors.  Most people want a direct, private entry to their unit, and most want at least a balcony or patio to ensure private, outdoor space.  Sufficient parking (most thought this was 2 or more reserved spaces per unit plus adequate visitor parking) appears to be a significant issue.  (“Before they address the housing issue, they need to address the parking issue.  They go hand in hand.”)  Building units above retail or parking is acceptable to most people; above other residential units would be less desirable but still plausible; above restaurants is not generally found to be acceptable. 

 

à            Affordability is a major concern.  Many employees believe that living downtown is not an option because prices are just too high.  (“I am resolved that I may have to leave Chapel Hill because I can’t afford to be in Chapel Hill.  I don’t expect Chapel Hill to build me a house, or build a community for people who make less than $30,000.  There has to be a way for people with regular jobs to have a home.”  “It is hurtful to know that you have to move 5-10 miles outside the town you want to live in because you can’t afford to live in the town.”)  Also, most focus group participants would like to buy, rather than rent, a house.  Employees generally indicate that they are more concerned about finding a place they can live in comfortably for the long term rather than making a superior financial investment that they can sell soon for a profit.[1]  Both down payment and monthly payment requirements are of major concern to most employees.  Providing a mechanism that would reduce either or both of these costs in exchange for some of the unit appreciation is an acceptable tool for making the housing more affordable.  Requiring employees to sell a unit if employment is terminated would be a major disincentive to purchasing.  Employees are concerned about their employer becoming involved in their personal financial affairs, although a separate non-profit housing sponsor does not appear to pose similar issues. 

 

            In summary, there is sufficient demand for downtown residences, provided they are part of a larger community with supportive services nearby, they incorporate the necessary amenities into their design, and they are affordable.

 

B.         Office

 

            à            The downtown office market is perceived to be healthy.  Interviews with local commercial brokers and business leaders reveal that the downtown office market is healthy, although not robust.  While vacancy rates are low (approximately 5 - 6 % overall), absorption is perceived to be slower than in the past and tenants are shopping for better deals.  In addition, there is an expectation that the University will build additional office space on its campus or on the Horace Williams Tract, thereby freeing up downtown office space currently rented by the University over the next 5 to 10 years.  On the other hand, we have been advised that existing business are growing and expanding and that new companies are showing interest in the area.  Further, fiber optic cable already runs down Rosemary Street, making this a prime location for new office space.

 

            à            The University is the largest tenant in downtown Chapel Hill.  The total office space available in downtown Chapel Hill is ~ 570,000 square feet.  The University leases, in the aggregate, ~ 123,000 square feet of office space in downtown, or ~22% of the total space available.  The University also owns and occupies 440 West Franklin Street (comprised of ~ 57,500 square feet of space), which houses high-tech and other administrative University employees.  The University has indicated the need for renovation of this space, the importance of these employees to the University, and its concern for inconveniencing them during construction.  It is also generally anticipated, by knowledgeable people in the market, that the University will build additional office space on its main campus in future years, which will reduce the dependence on downtown office space.

 

à            There are a few other significant space users in downtown, but tenants are generally small.  The downtown market appeals primarily to tenants who want smaller spaces (many occupy under 2,000 square feet) and who want to be in downtown, because of their corporate culture or because of its proximity to the University.  Relatively large downtown tenants, in addition to the University, include: FGI, which occupies ~ 25,000 square feet in 206 West Franklin Street and 6,800 square feet in 200 Franklin Street; KBM, which occupies 22,000 square feet in 208 West Franklin Street and has leased 8,000 square feet in The Fountain; Bank of America, which occupies ~ 20,000 square feet in the building located at 137 East Franklin Street; and Extensability, which occupies 13,000 square feet in 200 West Franklin Street. 

 

à            There appears to be some demand for new space from existing downtown firms and new businesses.  Although inquiries to major employers in the Research Triangle revealed no interest in downtown Chapel Hill office space, discussions with current downtown firms and brokers has revealed that new Class A office space is likely to attract current downtown space users that want to consolidate or move into better space, newly formed businesses, and businesses that are new to the area.  FGI has indicated that it would like to consolidate its space and may want to expand; however, its principals believe that KBM may reduce its occupancy in 208 West Franklin Street and, as the majority owner of that building, FGI would give serious consideration to taking over that space.  The Carolina Environmental Program now occupies less than 5,000 square feet on the University campus.  It has plans to lease up to 10,000 square feet of space in downtown while awaiting construction of a new building on campus.  Further, Scott Maitland (owner of Top of the Hill Restaurant & Microbrewery) believes there is sufficient demand from new users for a biotech incubator in downtown.  Mr. Maitland is interested in constructing a 20,000 – 40,000 square foot building, but his research (which includes long term discussions with University representatives) indicates that demand would support significantly more space.[2]  A key issue for any potential tenant will be whether it is willing and able to pay the rents necessary to support the construction of a Class A office building.

 

            à            Office development would require the significant support of the University.  We engaged Bolan Smart Associates, an experienced market analysis firm, to undertake a more detailed review of the demand for Class A office space in downtown, particularly from private tenants.  Based on their site research, including interviews with local brokers, developers, and private tenants in the marketplace, it was determined that the private office market is fairly thin and untested and, therefore, it would be risky to proceed with an office building based primarily on private tenants.  Further, the rental rate required to support the cost to construct the project would be significantly higher than the private market would bear.  Specifically, Class A office rents generally range from $20 to $22 per square foot in Chapel Hill, whereas a new, privately developed, Class A office development in downtown would require a rental rate of approximately $30.30 per square foot to support it.  (See attached Exhibit C – Table 1 for further details regarding development costs and required annual rents to support new, privately developed, downtown, Class A office construction.)

 

                        On the other hand, if the University were willing to sponsor the development of office space – by leasing all or a significant portion of the building, so as to ensure long-term occupancy by a credit tenant and to facilitate tax-exempt financing by the Town – then such a project could be very successful and positive for the downtown.  Specifically, the rental rate that appears to be required to support such a development equals approximately $19.60 per rentable square foot without parking or approximately $19.00 per rentable square foot with parking but without tenant fit-out.  If the Town accepts a payment-in-lieu for its portion of the taxes collected on the project and abates the County taxes (since the project would be publicly developed and, therefore, not subject to taxation), then the rental rates would drop to approximately $18.15 and $17.65 per rentable square foot, respectively.  Both of these rates are close to the amount that the University is currently approved to spend on leased space ($17.50 per square foot) and well within a reasonable increase of such amount which is anticipated to increase in the near future).  (See attached Exhibit C – Tables 2 through 4 for further details regarding development costs and required annual rents to support new, publicly developed, downtown, Class A office construction.) [3]

 

            In summary, the downtown office market is relatively healthy; however, it is overly dependent on one tenant -- the University -- that, although not going away, could strongly impact the market by changing its occupancy status (e.g., vacating downtown space for new on-campus facilities).  Private office demand may be increasing, but it is principally from relatively small space users who prefer downtown to other locations.  And, it is unlikely that these tenants would pay the premium rents required to sustain a Class A office building built for the private market.  However, a publicly developed and primarily publicly occupied building could be extremely successful, particularly if the County’s share of property taxes is abated so as to bring required rents down to the University’s rental rate limits.

 

C.        Retail

 

            à            Support retail facilities are needed to attract residents to downtown.  Employees attending the focus groups expressed the need for a grocery store to be located downtown, within walking distance, in order to make this location an attractive housing option.  Other establishments considered highly desirable, which would make employees feel that the downtown caters to more than just the student population, include: drycleaner, laundromat, hardware store, drug store, and clothing stores (not a t-shirt shop).  The general feeling was that, to the extent these facilities are currently available downtown, they are geared toward students and, therefore, insufficient in scope and/or too expensive (“more like a boutique”).

 

à            The downtown retail market is fairly healthy.  Chapel Hill’s downtown retail district has been (and will likely continue to be) affected by the growth of shopping centers and enclosed malls in the suburbs, but has fared better than most small city downtown areas (primarily because of the captive University market).  A number of factors cause downtown Chapel Hill to be an attractive market to retailers: the large number of students, University employees and University visitors represent a fairly captive market; the area is compact, walkable and primarily comprised of smaller scale buildings, making it an attractive and easy to use place; and there is an active entertainment component that provides significant spillover sales and draws students, workers, visitors and residents from neighboring towns. 

à            Local establishments and regional chains could be enticed to locate facilities in downtown Chapel Hill.  Harris Teeter Express has expressed an interest in opening a store in downtown Chapel Hill.  It would require approximately 12,000 square feet of space and 36 parking spaces.  It is anticipated that other local stores catering to residents could be enticed to relocate into downtown, particularly if the Town, the University and the Hospital support the expansion of the downtown residential base by sponsoring employee housing development.

 

            In summary, retail facilities (particularly a grocery store) that cater to residents, not just students, must be expanded in order to attract residents to downtown.  And, the more residents that move into downtown, the easier it will be to attract new retailers to the area.

 

 

PART TWO – WHAT WE SUGGEST

 

            We believe that a vibrant downtown Chapel Hill can only be achieved through the creation of a true community – one which provides a mix of residential units, office and retail spaces, and facilities for residents, students, employees and visitors.  It is anticipated that the University’s new arts complex will go a long way toward making the downtown a more vibrant and desirable place to live.  However, the focus groups confirmed that potential residents will not be eager to move to downtown unless they feel that the necessary support services (particularly a grocery store) are within walking distance, that there is sufficient parking, and that other significant amenities exist there.  Achieving the goal of creating a supportive, lively community in downtown Chapel Hill will require more than a single employer assisted housing program.  In short, we believe that the Town, the University, and the Hospital must enthusiastically undertake a mini-master plan that commits all three of these institutions to the support of downtown office buildings, retail facilities, and housing.  Such an effort will achieve national recognition as well as support from entities such as FannieMae.

 

A.        Begin Implementation of Downtown Small Area Concept Plan

 

            In order to jump-start the implementation of the Downtown Small Area Concept Plan, the development should focus first on sites controlled by the Town, the University, and the Hospital in the subject area.  Specifically, efforts should be addressed toward developing Town Parking Lot 5, Town Parking Lot 2, the University’s 440 North and 440 South Parking Lots, the 440 West Franklin Street building.  Simultaneously, the parties should continue to study the subject area, keeping an eye open for additional residential development opportunities along Rosemary Street on institutionally or privately owned land. 

 

B.            Recommended Physical Development Plan

 

We believe that the most effective and financially feasible approach to downtown development requires the full and enthusiastic participation of both the Town and the University (with support from the Hospital being an added bonus).  This level of participation means that each institution would contribute land, sponsor projects, and front a limited amount of recoverable costs for seed money and assistance loans to employees.  Given the type and placement of current downtown land uses relative to the location of the developable sites, we believe that the following land use structure is most appropriate for the downtown.  Further, the extent of development suggested provides a critical mass that should spur additional private development.

           

            1.            Phase I -- Town Parking Lot 5.  Office space, retail space and structured parking (probably above and below grade) are constructed on this site.  More specifically, the program includes:

 

-            Office space, above the retail space and parking structure, occupied primarily by the University (e.g., current 440 West Franklin Street tenants) with the remainder occupied by existing local private businesses;

-            Retail space, on the ground floor along West Franklin Street, occupied by local retailers and/or regional chains (including a grocery store, if not otherwise sited); and

-            Parking spaces, in a parking structure running from West Rosemary Street to the back of the retail spaces, to support commercial and retail uses on and near this site.

 

            Alternative parking spaces will need to be made available to FGI in place of the spaces it currently leases on Lot 5 that will be unavailable during construction.  FGI’s parking needs could be accommodated by (a) setting aside some of the spaces in each of Town Lots 3 (on the south side of the 400 block of West Franklin Street), 4 (on the north side of the 100 block of West Rosemary Street), and 6 (on the south side of the 100 block of West Rosemary Street), and/or (b) leasing private space (such as in the Puech lot at 317 West Rosemary Street or the Fine lot at 135 East Rosemary Street).

 

2.            Phase II -- 440 West Franklin Street.  Either (A) the building is demolished and retail facilities and housing units are built in its place, with associated parking on the 440 South Lot, and additional housing units, with associated parking, are built on the 440 North Lot, or (B) the building is completely rehabbed (if this is possible) and used for office and retail space, structured parking is built in the 440 South Lot, and housing units, with associated parking, are built on the 440 North Lot.

 

In the first, more probable scenario, the program includes:

 

-            Housing units, on both the 440 West Franklin Street and 440 North Lot sites, occupied by employees of the Town, University and/or Hospital (new, lower paid professionals and/or long-term, lower paid staff);

-            Possibly some retail space, on the ground floor along West Franklin Street, occupied by private tenants; and

-            Parking spaces adequate to support residential units (and retail space, if included) on these lots.

 

In the second scenario, the program includes:

 

-            Office space, on the upper floors of the 440 West Franklin Street building, occupied by the University and private tenants;

-            Retail space, on the ground floor of the 440 West Franklin Street building, occupied by tenants providing support services (including a grocery store, if it is willing to be located this distance from the crossing of Columbia and Franklin Streets);

-            Housing units, on the 440 North Lot, occupied by employees of the Town, University and/or Hospital (new, lower paid professionals and/or long-term, lower paid staff); and

-            Parking spaces, on both the 440 South and North Lots, adequate to support commercial, retail and residential uses on this site.

 

3.            Phase III - Town Parking Lot 2.  To the extent that one or more tenants are prepared to make long-term commitments to occupy space in a new Class A office building on this site – taking the construction process from “speculative” to “build to suit” – an office building, with ground floor retail space and associated parking, will be constructed on this site.  More specifically:

 

-            Retail space, on the ground floor, occupied by tenants providing support services (including a grocery store, unless already located on Town Parking Lot 5 or at 440 West Franklin Street);

-            Office space, on the upper floors, occupied by private tenants; and

-            Parking spaces adequate to support retail and office uses on and off this site.

 

            4.            Phase IV - Additional Development.  Additional affordable housing units should be built on other downtown sites.  The University may determine that it has additional buildings and/or vacant land near the campus that it can commit to this project.  The Town should consider making available other sites that it currently owns or purchasing/condemning appropriate parcels.  The Hospital should consider buying available lots to produce housing for its employees.  Also, quality affordable housing projects proposed for the downtown by private and/or non-profit developers should be supported.  Finally, a child-care facility should be developed on a downtown site that is convenient to both residents and employees of the Town, the University and the Hospital.

 

C.            Benefits of Recommended Physical Development Plan

 

1.            All of the institutions benefit from the implementation of this plan.  This plan will produce needed affordable housing in downtown for employees of each of the institutions.  In addition, each aspect of the development will help create a more livable, dynamic and desirable community that, in turn, provides an additional incentive for residents and businesses to locate in downtown.  Further, developing a comprehensive program will serve as a model for other communities and will bring national attention to Chapel Hill and these institutions.  And, it provides each of the institutions with an ideal opportunity to act as a “good citizen” of the Town.

 

2.            The University receives additional benefits.  The University also benefits from this plan by: centralizing some its downtown offices into one location; moving its tenants from 440 West Franklin Street into Class A space (out of space which is in poor condition); not using debt capacity by leasing new space (vs. rehabbing a building owned by University); not inconveniencing its employees with all of the problems involved with working in a building that is under construction and from which toxic materials are being removed; and avoiding a construction rehabilitation process (if this is even feasible, given that the building may be deemed to be functionally obsolescent).

 

3.            The Town receives additional benefits.  The Town also benefits from this plan by:  receiving more tax revenues from improved properties and their tenants, and ground lease and participatory lease revenues.

D.            Programs and Services.

 

            In addition to physical development, University, Town and Hospital employees will benefit from the creation of a housing resource center and the implementation of housing assistance programs.  A housing resource center would provide employees with a place to go to obtain important housing information and staff assistance in accessing the available services.  Specifically, the resource center would house a user-friendly computer program and maintain a web site that provides personal housing affordability, mortgage, and home buying services information.  Employees would be able to obtain information on local, state and federal government housing programs as well as bank/federal entity programs that are applicable and available to the employees.  In addition, a list of selected firms that are willing to provide discounted housing related services (e.g., brokers, title companies, insurance companies, moving companies) would be available.  Further, the resource center would provide homeownership counseling services and administer home buying assistance grants and loans that the institutions may decide to offer.

 

 

PART THREE – NEXT STEPS (See Exhibit D – Development Plan/Schedule for further details)

 

A.        Obtain Agreement of all Three Institutions.

            1.            Make presentations to decision makers in all three institutions.

2.         Prepare development agreement setting forth concept plan, financing and ownership structure, and institutions’ obligations and benefits.

            3.            Execute development agreement

 

B.        Create Non-Profit Entity.

            1.            Prepare organizational documents for new non-profit organization (“CHNP”).

            2.            Submit 501(c)(3) application.

            3.            Three institutions loan, in the aggregate, $100,000 seed money to CHNP.

 

C.        Begin Development Planning.

            1.            Select architect.

            2.            Select builder.

            3.            Develop program.

            4.            Review additional land opportunities.

            5.            Prepare initial cost analysis.

            6.            Select lender/investment banker.

           

D.            Undertake Development Plan.

            1.            Design buildings.

            2.            Obtain financing.

            3.            Begin construction.