Why is it so hard to build in Providence?

Under review: A rendering of a $50 million student-housing development on Richmond Street proposed by Dallas-based ?Phoenix Property Co. The project would occupy a full block in walking distance to a proposed ballpark. / COURTESY PHOENIX PROPERTY CO.
Under review: A rendering of a $50 million student-housing development on Richmond Street proposed by Dallas-based ?Phoenix Property Co. The project would occupy a full block in walking distance to a proposed ballpark. / COURTESY PHOENIX PROPERTY CO.

The small brick building on Richmond Street in Providence doesn’t look like it has the power to delay a $50 million development. But it already has.

The building once stood alongside Interstate 195. With the highway removed, it now stands in isolation, next to cleared land – Parcel 28 – that is ready for development. A Dallas developer of student apartment buildings has the entire block under contract.

So, what’s the problem? The quarter-acre that supports the brick building and parking lot falls under city development review. The 1.25-acre cleared site is controlled by the I-195 Redevelopment District Commission.

One development site: two sets of development review standards, two different permitting processes.

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The city and the I-195 commission are trying to work out an arrangement for the parcel, as well as for others in the highway-redevelopment district that have adjoining lots that might fall under city rules. But that work-around will take time, too.

“It’s a wrinkle. It will be a bit of a challenge,” said Jason Runnels, executive vice president and a principal of Phoenix Property Co., who signed the purchase and sale agreement for Parcel 28.

Such delays, it seems, come with the territory for would-be developers in Providence.

Development is not predictable, to the point of being difficult. Companies that have built projects in the city, or who want to, describe a market beset by financial obstacles, administrative hurdles and, as a result, a yearslong paucity of new construction – even as cranes have seemingly dominated the skyline in Boston.

A contributing factor has been the state’s economy. Rhode Island, which was among the states hit hardest in the Great Recession of 2008-09, also has had a slower recovery than other New England states, according to a report by Mary A. Burke, a senior economist with the Federal Reserve Bank of Boston.

Her analysis found the depth of the housing price declines in Rhode Island and the loss of manufacturing jobs were the greatest contributing factors.

Despite the poor general economy and loss of jobs, however, Providence has construction costs that remain as high as in Boston, according to development professionals. But the rents that can be collected from buildings in Providence, whether from business tenants or apartment residents, don’t approach those of Boston.

And the property taxes are higher here – particularly for residential buildings. In Boston, an apartment building falls under the residential tax rate, currently $12.11 for each $1,000 of assessed value. In Providence, the same building pays the commercial rate of $36.75.

All of this amounts to what developers call a “feasibility gap” for Providence, the void between rents and costs of construction.

“That’s why you see all those cranes up in Boston,” said Tony Thomas, partner at The Foundry, which has renovated the former Brown & Sharpe Manufacturing Co. in Providence into premier office space and apartments. The latest phase of The Promenade, which began in October, will convert one of the factory buildings to 196 loft apartments.

“The fundamental problem is there’s a huge disconnect with the costs associated with developing a project and the rents you can collect,” he said. For its latest project, The Foundry had to produce almost 50 percent equity “because of that gap,” he said.

Not every developer is in a position to do that.

Cities across the country use different tools to spur development. Tax-increment financing, which sets up a geographic region and allows a municipality to issue bonds repaid by the additional taxes in that region, is one approach.

“There’s going to have to be some creative thinking about how to get this going,” said Steve Durkee, senior associate development director for Cornish Associates.

Some in Providence are more optimistic about what’s happened recently. Daniel Baudouin, executive director of the Providence Foundation, noted that many older buildings are being converted to new uses, and said downtown has several significant expansions by the colleges and universities in progress.

“A lot of it is the institutions, which is great, because they’re going to drive our economic development,” he said.

The traditional government response to encourage new development has been tax-reduction incentives, which helps to close the feasibility gap in the market.

Historical buildings in the past may have qualified for state historic-preservation tax credits. But for new construction in Providence, the tax-stabilization agreement was the norm. Major projects from Providence Place to the 10-story GTECH Corp. corporate headquarters used the device, effectively delaying the full payment of city property taxes on improvements being made to a site. The length of the agreements vary. The GTECH agreement, for example, approved in July 2003, will delay full payment of property taxes for the $54.8 million structure until December 2026.

In 2013, the building paid about half of the $2 million tax bill that otherwise would have been owed, according to a report by the city’s internal auditor. Before construction of the building, the vacant land generated just $236,600 in city property tax. At the time, it was the first significant office building erected in Providence in 16 years.

City officials now are re-examining this traditional tool of economic development, rethinking how and whether to award the tax incentives.

Developers argue a longer, more graduated phase-in of taxes would help because it would allow companies to budget for the property tax increases.

Mayor Jorge Elorza, who took office in January, views the TSA as a legitimate tool for economic development, said Brett Smiley, the city’s chief operating officer.

The administration wants to change the process for awarding the agreements, making them more consistent and predictable, including making them an administrative function, rather than a City Council-approved process. That change could involve the council voting on parameters for how the tax agreements would be awarded, but applicants would go before the city assessor or finance department for approval, with the decision based on whether they met the requirements or not, Smiley said.

This could depoliticize the process, he said, making them a standard length and a straight-forward application. In the past, he said: “It was perceived that you needed the right lobbyist or the right lawyer to receive a TSA.”

In an interview, City Council President Luis Aponte said one of the changes being discussed could involve administrative approval for small projects, those of up to $5 million or possibly $10 million in size. This would include smaller efforts in city neighborhoods, outside downtown.

“It would send a clear message there is an opportunity to develop in Providence in a clear and predictable way,” he said.

The city also may standardize the tax incentives for larger projects, including through a common expiration length. But the council review would still be a requirement, said Aponte, who challenged the idea that the council’s involvement adds unpredictability to the development process.

“There is a presumption out there that a TSA should be given as a right,” he said. “From the council’s perspective, our goal is not to stop development. We want to make sure we send a message that absolutely, we are in favor of good development. But the city has to be protected.”

Jan Brodie, executive director of the I-195 commission, spoke recently to the City Council in a special meeting on the former highway lands, addressing the feasibility gap that has made development difficult in Providence.

“What developers look for are fixed numbers,” she said. “They need to go to their banks, they talk to their equity investors. They need to know what the numbers are going to look like.”

Aside from the issue of tax incentives, the permitting and inspection process is laborious, developers and business representatives say. Although improvements were made under the Taveras administration, the steps to an approved project are not always clear, and it’s easy for a development to become delayed.

John Sinnott, the Rhode Island district manager for Gilbane Construction Co., which builds projects nationally, said many cities have a kind of “one-stop-shop” for development, where fire, public works, sewer, electrical and other permit services all flow through one office.

Pasadena, Calif., and Peoria, Ill., among other smaller cities, use this system. “You know the steps you have to take and you know how much it’s going to cost,” he said.

Providence officials are trying, he said, including extra effort by key planning-department staff in recent years. But other cities already have made economic development a priority. “Saying something and committing to it are two different things,” Sinnott said.

How big of a deal is this? Up to 25 percent of development costs can be in the pre-construction stages, Sinnott said. A delay in a project approval can mean a delay in getting a building leased or opened; or simply create more professional fees for the applicants.

The Elorza administration is making electronic permitting a priority, for example, according to Smiley. This would, among other things, eliminate the requirement for out-of-state developers to come to City Hall for filing revisions and updates. Department agents could make notes on an application, which the developer could access online.

Even for small businesses, the old fashioned, in-person approach has contributed to delays. Kaitlyn Roberts, owner of Easy Entertaining, a catering business and café in Providence, applied in 2013 for a beer-and-wine license to complement the business, which already had been open for a year. The application triggered a new set of inspections.

That process took six months, and involved three different inspections for fire code compliance, including a private contractor who checked the ventilation hoods.

“It was perplexing to me that our city was in a state of financial distress, and yet they would not let me give them taxable revenue for alcohol sales.”

Eventually, she got the beer and wine license, after asking her state representative for help. “There needs to be a liaison in City Hall for business,” she said. “And let’s put things online. Let’s pretend it’s 2015.”

The city process will soon impact the I-195 lands.

Out of the 19 acres made available for development in Providence following the relocation of I-195, the Phoenix-Lincoln student housing site is the first to move forward.

Late last month, the new owners of the Pawtucket Red Sox announced their interest in 8 acres among the I-195 parcels, along the Providence River, which would provide a city home for a new stadium. James J. Skeffington, president of the new ownership group, said recently he hoped to know by April if the proposed site, along with an adjacent property owned by Brown University, is suitable.

The student apartment building proposed by Phoenix-Lincoln would be within walking distance of the proposed ballpark. The development will occupy a full block between Chestnut, Friendship, Richmond and Clifford streets.

The Dallas development company and the I-195 commission recently extended the purchase-and-sale agreement deadlines by another month, to give the company more time to negotiate a tax agreement with the city.

If the company doesn’t reach an agreement by April 1, it can leave the sale.

The matter of development review, and whether the city or commission has control of that, is a problem that can be resolved, Runnels said. Tax incentives are the make-or-break element. He declined to specify what the company is seeking.

City officials said recently the development company has had discussions with the administration about a tax-stabilization agreement. The agreement has yet to reach the council, but Smiley said there is time for the city to review any arrangement. “We can meet their deadline,” Smiley said.

On the site and design review issues, one resolution could be if the I-195 commission adopts the city requirements for parcels that border city fragment lots.

According to Runnels, Phoenix-Lincoln began the purchase process with the understanding that the full block would fall under the I-195 guidelines. He later learned the quarter-acre lot would fall under city requirements.

Runnels was diplomatic about the issue. Every city has its own permitting process, he said, including Boston, where the company erected a 17-story student apartment building near Northeastern University. The $75 million project was completed in January.

The greatest challenge to working in Providence is the finances, not the review process, Runnels said.

“The problem in Providence, from our perspective, is the tax rate is so high,” he said. “It’s more than double what we face in other markets.”

Until it knows if a tax-stabilization agreement will be approved, the company is holding off on spending more money on the project. The April 1 deadline is needed because the company wants to open the apartments to student leases by fall 2017.

The target date could still be met, Runnels said, “if we get everything going in the right direction.” •

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3 COMMENTS

  1. The new owners of the PawSox must be aware of these problems. That is why the new owners should have given Pawtucket a chance to make the needed improvements in McCoy Stadium. Pawtucket could have provided the funds for these renovations by putting a $2.00 surcharge on each ticket sold. For the last seven years, the average attendance at McCoy Stadium has been just under 9000 fans. 1.3 million dollars could be raised each year to pay for the needed improvements. No tax deal, no property donations and no bonding fees would be needed. Gasolene prices are very low, heating oil prices are very low, the economy is getting better and the loyal fans in the Blackstone Valley will fill McCoy Stadium. In 2005 and 2006, the PawSox led the league in attendance. To be fair, the new owners of the PawSox should have given Pawtucket a chance to make the required improvements to McCoy Stadium. Everyone should be demanding that the new owners of the PawSox give Pawtucket this chance.

  2. While I can agree with Ken B. on many issues posted, the one thing that is quite obvious today is that Pawtucket is not the best venue any longer. Despite leading in attendance in 2005-2006 (10 years ago!), the truth is attendance has been falling quite rapidly the past few years. McCoy is in the middle of nowhere and there is absolutely nothing to do after the game but leave. The stadium (while nice) is not able to be utilized to it’s fullest economic potential. Providence is much better suited for that. Now, I’m not saying that there isn’t anyplace where it could be better in Pawtucket, it’s just not it’s current location. Also, let’s not forget that Pawtucket did absolutely NOTHING about this issue for years. Isn’t it funny how the city said they had all these big, bold plans for the McCoy area AFTER the team said “See you later, aligator”? Also, I think it’s also very important to note that there are many “loyal fans” of the team that do not live in the Blackstone Valley.

  3. To Ken C The average cost of a ticket at McCoy would be $10.00 with free parking. What is it going to cost to go to a game at a stadium in Providence? In addition, access to McCoy Stadium would be easier and reduce carbon emissions in Rhode Island. The 6 mile Providence & Worcester (P&W) rail right of way from Pawtucket to the Washington Bridge in East Providence could be developed to provide a MBTA Commuter Rail connection to McCoy Stadium and provide a new bike path that would connect McCoy Stadium to the East Bay Bike Path. Baseball fans who live in the East Bay, the East Side and Fox Point could ride their bikes to watch the PawSox at McCoy Stadium. These two projects would be developed using mostly federal funds.