Hartford Business Journal

26 Hartford Business Journal • March 9, 2020 • www.HartfordBusiness.com Why public subsidies are critical to new downtown Hartford housing construction By Joe Cooper jcooper@hartfordbusiness.com S ome taxpayers scoff when a wealthy real estate develop- er secures a public subsidy to fund new housing con- struction in downtown Hartford. But that support is necessary if the city wants to see more apart- ments sprout in and around the central business district, according to a new study by East Hartford real estate advisory firm Goman+York Property Advisors LLC. In fact, taxpayer dollars are cru- cial in supporting new apartments because high construction costs and operating expenses make it difficult, if not impossible, for developers to achieve a 12% to 18% return on invest- ment (essentially the minimum ROI most would accept to do a project) based on the market rents that can be charged downtown, the study said. The Goman+York study — which was commissioned by the Capital Re- gion Development Authority (CRDA), a quasi-public financier of most downtown Hartford projects — pro- vides two hypothetical examples of a typical housing project to demon- strate why a subsidy is needed. In the first example, the project has development costs of $250 per square foot, monthly market rents of $2.35 per square foot (that equates to a 650-square-foot apartment hav- ing monthly rents of about $1,527), and annual operating expenses of $9.87 per square foot. The net rent ($9.87 in annual oper- ating costs subtracted from $28.20 in annual rents) is $18.33 per square foot. That project's return on investment, without subsidies, is 7.3% ($18.33/$250), far below what it would take to entice a developer, the study says. Using that same hypothetical example and providing a $100-per- square-foot public subsidy, which equates to 40% of the overall devel- opment costs, bumps up the return on investment to 12.22%. If you're thinking that's a significant public subsidy it is, but CRDA, which largely of- fers low-interest loans, isn't pro- viding all of it. State Depart- ment of Economic and Commu- nity Development (DECD) loans/ grants, various state and fed- eral tax credits, brownfield loans, and city tax abate- ments are among other financing sources develop- ers use to hit their minimum-required return on investment, the study said. For example, the $24-million Spectra Boutique Apartments at 5 Constitution Plaza, which debuted in 2015 with 190 studio, one- and two-bedroom units in the former Sonesta Hotel, received $9.6 mil- lion in state and federal historic tax credits, a combined $6 million in loans from DECD and CRDA, and a favorable tax assessment for blighted properties, the study said. Spectra Boutique, developed by New York's Girona Ventures and Wonder Works Development and Construction Corp., is currently 94% occupied and charges monthly rents ranging from about $1,100 to $1,900, the study says. The study didn't reveal the devel- oper's estimated ROI. R. Michael Goman, principal of Goman+York, said public financing will be needed to encourage adaptive re-use of non-residential buildings in Hartford for at least the next five years, or as long as Connecticut's population continues to decline or flatline. Goman said an increase in popula- tion would drive greater demand for housing and increase rents, which would less- en the need for public subsidies on new housing construction. "Until we see that change, I think you need the government to step in and incentivize new housing product," he said. "CRDA is a vehicle in which we do that, and you can see that on the street." The ROI issue, Goman says, is com- mon in most small cities, especially in the Northeast, where construction- cost growth has outpaced rents at ag- ing residential buildings for decades. "Virtually any project that we have looked at, particularly in downtown areas, … in order to make the num- bers work, the community needs to participate," Goman said. "This isn't something specific just to Hartford." Deal Roundup A 17,600-square-foot shopping center in Wallingford has changed hands for $1.6 million, brokers say. Northern Star CT Inc., led by prin- cipal Ed Lin, recently acquired the re- tail property at 200 Church St. from New Haven attorney Edward A. Renn. Tenants include a printing/market- ing company, and several restaurants and retail stores, among others. Broker O,R&L Commercial LLC said it represented the buyer and seller in the deal. • • • Yale University has acquired an industrial complex in Hamden for more than $1.2 million. Yale bought the 25,534-square-foot industrial facility, which has several existing tenants, at 105 Leeder Hill Dr., from Stengel & Tomasulo Realty LLC. Hamden's Press/Cuozzo Real- tors represented both parties in the transaction. Joe Cooper is HBJ's web editor and real estate writer. He pens "The Real Deal" column about commercial real estate. THE REAL DEAL R. Michael Goman, Principal, Goman+York Property Advisors LLC Why public subsidies are needed Here are the numbers and math of a hypothetical Hartford multifamily development without subsidies and why it wouldn't attract a private developer. Required return on investment (ROI) 12% – 18% Development costs $250 per square foot Market rents $2.35 psf/month – $28.20 psf/year Operating expenses $9.87 psf/year Net rents $18.33 psf/year Actual ROI with no subsidies ($18.33/$250) = 7.33% Source: Goman+York market studies and project research PHOTO | HBJ FILE The Spectra Boutique apartments, at 5 Constitution Plaza, is among the many office-to-apartment conversion projects in downtown Hartford that received some level of public subsidy.

• Cover