The announcement this week that Dallas-based Gatehouse Capital has pulled the plug on its Milwaukee Hotel Palomar and Residences development is drawing new attention to the fact that there is still no development occurring on any of the land owned by Milwaukee County in the Park East corridor.
The $150 million, 22-story development planned for the northwest corner of West Juneau Avenue and Old World Third Street was to include 63 luxury condominiums, a 175-room boutique hotel, a restaurant owned by Food Network star Michael Symon, a nightclub, a spa and fitness center, retail space and a parking structure.
Milwaukee developer Rob Ruvin, who was a minority partner in the Palomar project, retains an option on the property, said Milwaukee County Executive Scott Walker. Ruvin told county officials that he is working on a new development plan for the site, Walker said. Ruvin could not be reached for comment.
The Palomar development was seen by many as a catalyst that would help attract more development to the Park East corridor, and the death of the project is a major blow to efforts to revitalize that area.
"The loss of Palomar is huge," said Rick Barrett, managing partner of The Moderne LLC, which is hoping to build a 30-story condo tower across the street from the Palomar site. "That is just such a tremendous loss for our whole city."
The collapse of the housing market and the financial industry crisis are major reasons for the difficulty in attracting development to the Park East corridor.
However, the demolition of the freeway was completed about five years ago, back when the real estate boom was in full swing and years before this recession began. Yet none of the county-owned properties in the corridor have been developed, and the recession only makes it even harder.
With the failure of the Palomar project, local government officials are thinking about what can be done to attract development to the 14 vacant county-owned acres in the corridor.
Problems with PERC
Some developments have occurred in recent years, or are still under construction, on privately owned property and a former city-owned property around the county land. Those projects include the Manpower Inc. corporate headquarters, the redevelopment of the former Pabst brewery, Mandel Group Inc.’s North End project, the Flatiron condos, a Staybridge Suites hotel and an Aloft hotel.
Development of the county-owned land is subject to higher standards to ensure that the projects create community benefits. The Milwaukee County Board adopted those standards, called the Park East Redevelopment Compact (PERC), for reviewing developments on the county-owned land in the Park East corridor. The PERC requires developers to pay union-scale wages for construction projects on the county land. In addition, the PERC indicates that developers that hire local employees, provide job training or create green space would be more likely to be selected.
However, developers criticized the PERC, saying it would discourage development. The Milwaukee Common Council rejected a proposal similar to the PERC.
The County Board approved the PERC by over-riding County Executive Scott Walker’s veto. Now Walker says the board should consider repealing the PERC.
"I vetoed that and said at the time it would be a barrier to development of the Park East corridor," Walker said.
Walker conceded that the recession is a major reason that development is not occurring on the land now, but he said, "I believe the community benefits played a role" in discouraging development of the county’s property.
James T. Barry III, president and chief executive officer of commercial real estate brokerage Colliers Barry, said the fact that few local developers have shown any interest in developing the county-owned properties demonstrates the negative impact that the PERC has had.
"To me, that speaks volumes," Barry said.
Department of City Development Commissioner Richard "Rocky" Marcoux, said another problem with the county-owned property is that the parcels have been sold in large blocks. Larger properties require larger developments, which requires more financing and greater risk, and that prevents many small developers from even trying to develop those properties, he said.
The county should break up some of its Park East properties, especially the property east of the Milwaukee River, into smaller pieces and then sell those smaller properties to developers, Marcoux said.
Yet another problem for the county-owned Park East property is that the county does not examine the financial feasibility of a project when a developer bids on a site, Marcoux said.
"When developers respond to the (county’s) RFPs, nobody is asking if the project is viable," Marcoux said. "Nobody is asking if there is a gap in financing."
After the county selects a developer and its project for the property, the developers seek approval and tax incremental financing from the city.
"Every (Park East) project (proposed for a county property) so far there has been a gap that the city has been asked to fill after the county awarded the land contract," Marcoux said.
Developers and projects are being selected by the county without considering what amount of financial assistance the city will need to provide and whether or not the city will be willing to provide it, Marcoux said.
"The county should be asking themselves, ‘Are we willing to fill that gap?’" Marcoux said. "If they are unable or unwilling to do so, then shouldn’t they bring the city in (to negotiations)? We should be at the table."
City officials should be included in the evaluation process at the beginning so the developer tells them what financial assistance the project will need and city officials can express if that is a reasonable request, Marcoux said.
In the case of the Palomar project, DCD officials and Gatehouse had a tentative agreement for a $2 million TIF package for infrastructure costs, Marcoux said. The TIF proposal was to be submitted for review by aldermen in the fall.
However, then the capital markets collapsed and Gatehouse said it needed to come up with a new TIF request.
"The market did change, and it changed dramatically," Marcoux said.
Gatehouse decided to pull the plug on the project when it could not obtain the additional financial assistance from the city necessary to make the development viable.
"As the residential and credit markets worsened to historical levels, Gatehouse Capital attempted to obtain a higher level of assistance from the City of Milwaukee, which unfortunately failed to materialize," Gatehouse CEO Marty Collins said in a prepared statement. "The project is simply impractical in this new business climate without a much larger assistance package."
Marcoux and Gatehouse representatives have so far declined to disclose how much financing the developer was seeking from the city when it decided to kill the project.
"We would have had to have a larger TIF, a longer TIF (to pay off) to make up for the market conditions," Marcoux said. "The number kept climbing. (I am) not going to go through our negotiations with them."
Mary Beth Waite, director of sales for The Residences at Hotel Palomar, said local officials needed to do more to support the Palomar development, and in general need to work harder to attract economic development to Milwaukee.
"We need to focus on growing business in our community," she said. "The city and county and Milwaukee 7 are failing in their attempts to capture businesses, and we need to hold their feet to the fire. The Palomar was more than brick and mortar to provide shelter for men and women committing to living downtown. The Palomar was bringing three major business brands to the state. This project was about job creation and the infusion of new companies to bring new partners in progress to our community. The plan as designed would generate 600 construction jobs and 230 full time benefited positions for hotel, condo, convention, and community services operations.
"Kimpton, WTS Spas, and Michael Symon all have consistent histories of giving back and participating in non-profit efforts in every community they become a part of. We needed this high-style hotel to attract more and better conventions," Waite said. "A common complaint in the industry is that Milwaukee does not have enough ‘good’ hotels. I had already been getting calls to book rooms for conventions upon completion and strong interest from the Chicago Olympic committee to reserving spaces out as far as 2016, based upon their optimism that the Windy City would capture the world event. All of this spreads an infusion of cash to other city businesses, museums and transportation hubs."
However, Marcoux pointed out the taxpayers have already invested $40 million in city, state and federal funds to tear down the freeway spur and install infrastructure to the corridor to prepare the corridor for development,.
"It’s not appropriate for us to fill in the gap (for a development) because of the spike in the credit markets," Marcoux said. "You can help the market, but you can’t make the market. The city can’t step in and create the market."
Marcoux said TIF requests to the city will continue to be evaluated on their merits, and each request and project is different.
Walker said he agrees with Marcoux that some of the county’s properties should be broken up into smaller chunks and that the Department of City Development should be included in discussions with Park East developers early in the process. Walker said his office is working on a proposal that would establish a better working relationship with DCD for Park East projects on county-owned land.
The county board has been reluctant to include city officials in the process, he said.
"For whatever reason, the county board has been very parochial (on the Park East projects)," Walker said.
County Board Chairman Lee Holloway said city officials have not asked the board to get involved with the county’s Park East process.
"If the city of Milwaukee is interested in taking over management of these properties, they are more than welcome to make a public presentation to a County Board committee," he said. "So far, that has not happened."
Despite the dismal economy and Milwaukee County’s failure to attract development to its land, Marcoux said he is optimistic that the Park East corridor will eventually be developed.
"It’s a prime location," he said.
Andrew Weiland is the managing editor of BizTimes Milwaukee.