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Risky business: Should the CTA get mixed up in a development deal?

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The 20-acre lot at the corner of North and Cicero avenues is vacant, overgrown with weeds, and littered with debris, like any one of a number of lots all over the west and near-northwest sides.

But in a matter of months, developer Patrick Daly would like to start building a $22 million shopping center there, and a $50 million industrial park nearby (13 blocks away), anchored by a Chicago Transit Authority bus garage. They'll call the shopping plaza the Harold Washington Center; it should employ 500 workers, the I-park 1,500 more. Already most residents in the surrounding white, black, and Hispanic working-class areas of Austin and Humboldt Park are excited. Indeed, you won't find a community group or politician in opposition.

"It's a wonderful deal for the community," says Alderman Percy Giles of the 37th Ward, where the project is located. "We need shopping, we need development, and we need jobs. This deal has them all."

There's only one problem. The CTA, which owns the land at North and Cicero, had planned to build a bus garage there, not a shopping center. The federal government in fact expects them to build their garage there, and has already awarded the CTA $26 million for the project. If the CTA does not build the garage at North and Cicero, the feds have threatened to take that money away. And even if the feds could be persuaded to approve a new construction site, the proposed I-park and garage at Kilbourn and Chicago would be so inconveniently, noncentrally located for the CTA that they would have to spend an extra $650,000 a year running their routes from that point.

Any other inconveniences? Oh yes, the CTA has already spent about $2.5 million in federal funds to demolish the old bus garage at North and Cicero, and the feds say that they must be reimbursed that amount if the new garage is built anywhere else but on that site. Furthermore, the CTA has already spent $100,000 of its own money on real estate consultants who have negotiated with Daly, the prospective developer.

Giles and Daly tell the CTA: relax. Don't worry. We'll make sure you don't lose any money, either from the feds or from increased operating costs, through an assortment of government subsidies, including a cut on property taxes.

All of which leaves the bureaucrats at the CTA in one heck of a predicament. Scratch the deal, and they face the wrath of Giles and his disappointed constituents. Plow ahead, and they take a mighty risk. Should the deal fail, they could wind up with no bus garage, no federal dollars, and a bankrupt shopping center at the corner of North and Cicero.

To put it all in the longest possible perspective, it's just another example of how, when it comes to economic development, the city's poor and working-class neighborhoods are destined to be screwed, because there's no one willing to risk the boost they need.

"This wouldn't happen in the suburbs," says Gloria Chevere, the CTA's administrative chief. "The developers are using us to, in effect, subsidize their deal. In the suburbs, developers don't look for subsidies. They just build." (Daly was out of town and unavailable for comment.)

The story begins in 1984, when the CTA received funding from the federal Urban Mass Transportation Authority (UMTA) to replace the antiquated 60-year-old garage at North and Cicero with what the experts call a state-of-the-art bus-storage facility. "Most of our bus garages have outside storage, but the new one at North and Cicero will be big enough to store about 250 buses indoors," says Ron Weslow, a public information officer for the CTA. "That way, you dont have to run diesel motors when it's cold, which wastes fuel, pollutes the air, and causes a noise problem. We tore down the old garage in early 1987."

That was just fine with most locals.

"The bus garage was a mess," says Mary Volpe, executive director of the Northeast Austin Organization, a community group in the area. "Prostitutes and drug dealers gathered there; there were fights in nearby taverns. When the garage went down, things got more peaceful. There has to be a better use for that corner."

Giles agrees, in part because of all the phone calls he received from developers once the site was vacant. (It is arguably the largest and most conveniently located of several vacant lots in the area.) One of those developers was Daly, who had viewed the site, conducted some demographic surveys, and come away convinced it could support a 220,000-square-foot shopping center.

"Within a one-mile radius of the proposed center are 54,000 people with an average household income of $25,000 and very few retail outlets serving them," Daly told Mark Hornung of Crain's Chicago Business. "There's plenty of opportunity to go forth and do good for the community."

Daly's enthusiasm fired the spirits of residents. "There are poor people here, yes," says Volpe, who has lived in the area her whole life. "Some people go from paycheck to paycheck. But they still shop. We struggle, but a lot of us work. Except for some smaller stores along North, all we've got around here for shopping is the Zayre at 1450 N. Cicero. A lot of our people go to the Brickyard Mall or the suburban malls to do their shopping."

So in early January, one day before the CTA was to solicit bids on the garage project, Giles rushed forward. "I told the CTA that I had chances to put together a plan that would meet everyone's needs," says Giles. "It would create jobs, and allow them to build their garage."

The CTA, although they still accepted bids on the North-Cicero location, agreed to delay the garage project, and hired real estate consultant Steven Stratton to negotiate with Daly. During the first week of May, the results of those negotiations were splashed across the front page of Crain's in an article headlined: "CTA, Wexler eye West Side deal."

Now that was big news. Jerrold Wexler is a real estate magnate who has developed hundreds of projects all over the country, among them expensive properties on North Michigan Avenue. If a man like Wexler wants aboard, Giles and Daly breathlessly assured the CTA board at a hearing in May, you can just about figure this project is all systems go.

"A guy like Wexler, he makes a few phone calls and he gets cash," says one real estate analyst familiar with the deal. "Wexler likes to do joint ventures with smart young guys. That's what Daly is. Daly knows shopping centers; he's built a lot of them. Wexler puts his money behind talent like that."

It would be a two-part deal, Daly explained at the May CTA hearing. He and Wexler had formed a joint venture (Dalan/Jupiter Inc.) that would buy a 65-acre plot of land at Chicago and Kilbourn and clear it for the I-park that would also house the bus garage.

But the Chicago-Kilbourn site has problems, CTA board members argued. It's further away from our routes. If our base of operations were there, we would have to spend an extra $650,000 or so a year.

Those expenses will be covered, Daly countered, with the rents you receive from Dalan/Jupiter, which will own and manage the shopping center. Plus, Caterpillar Capital Co. has expressed a strong interest in building a cogeneration plant at the I-park that will provide you with cheap electricity, enabling you to reduce your utility bills at the garage up to $200,000 a year.

What about the feds? the board members asked. UMTA insists we build at North and Cicero. They won't want to change plans in the middle of the game; they won't want to have to review new site plans and bid specifications. They have told us that if we change sites, they will take our $26 million and award it to another project in a different city.

Oh, don't worry about UMTA, Giles and Daly responded. A little lobbying and arm twisting from Chicago's well-connected politicians (like our congressmen), and they'll come around.

CTA board members were still skeptical. That's great that you want to build an I-park, they told Daly. But why should the CTA be involved in any way?

Well, your garage will provide stability and therefore be pivotal to attracting other tenants, he responded. Besides, we're building the I-park to meet your needs for a bus garage.

So, in other words, the CTA said, the I-park, which is supposed to provide 1,500 high-paying jobs in a community that's starving for investment, is really only incidental to the most immediate, urgent, and feasible project, your shopping center.

You might say that.

The CTA might have ended the deal right then and there as too risky, if not for one technicality: they no longer had the right zoning for a bus garage at the North-Cicero site.

It was a startling revelation, but the old bus garage had operated under a zoning variance--a variance that was lost now that the lot was empty. To operate their garage at North and Cicero, the CTA found at their May meeting, they would need a new zoning designation, which requires the approval of the City Council, which usually follows the advice of the local alderman (Giles), who was suggesting that if the CTA did not go along with the Daly project, he would go against their zoning. And the CTA would be stuck with nothing but weeds at the corner of North and Cicero.

As one CTA insider puts it, "Giles has us by the balls. He knows it. We know it. And he knows that we know it."

So, after the May hearing, it was back to the drawing board: the CTA opted to spend more time reviewing the project, which seemed to grow more complex and convoluted by the day.

As it now stands, the argument goes that the CTA would make up some of the $650,000 by renting the North and Cicero site to the developers for the shopping center. But to make the project a break-even deal for the CTA, Daly suggests the agency request a "Class Eight property tax abatement," which requires approval by the City Council and Cook County Assessor Thomas Hynes. If granted, the abatement would mean that, although property taxes in the shopping center would remain at $3 per square foot, only $1.40 would be paid into the county's coffers, with the remaining $1.60 per square foot going to the CTA. That would give the CTA about $350,000 a year, since the shopping center will be about 220,000 square feet. Stratton, the CTA's consultant, says that with the tax abatement, plus rent and the energy savings given them by the cogeneration plant, the CTA should break even on the deal. Stratton is careful to add, however, that that outcome depends on Daly's ability to round up stores for the shopping center, as well as Giles's ability to win approval of the tax break from the City Council and Hynes.

The latter may be a challenge. Tax breaks usually go only to developers in poor communities who prove that they need the abatement to reduce rents and thus lure tenants who otherwise would not operate there. Daly makes no such claim. On the contrary, he insists that franchises like Jewel, Dominick's, Zayre, and Builder's Square will operate at North and Cicero at market rents, and that the tax break is needed only to accommodate the CTA.

"The economics of the shopping center work," says developer Donald West, one of Daly's partners on the deal. "The economics from the standpoint of the CTA don't work. That's why we need the tax abatement."

If that's true, why, then, should Hynes grant them one? That would mean using tax dollars intended for such essential Cook County services as schools on a bus garage that could operate more efficiently at the North-Cicero location. Granted, the shopping center might generate jobs and sales-tax revenue. But if the area is hot for development, as Daly insists it is, then he should build the shopping center at another location where the CTA need not be involved. Indeed, there are abandoned lots all over the area just waiting to be developed, as Giles and Volpe can attest.

On top of all the other problems, time is rapidly running out. UMTA wants to hear from the CTA no later than mid-September the final word on where their garage will be. That means Daly must get not only letters of intent from prospective tenants but firm commitments in favor of the tax break from Hynes and the City Council by September 7, when the CTA board meets to render a final decision on where to build the garage. CTA board members are skeptical Daly can do that.

"You can't expect to rush into the assessor's office and get a tax break," says J. Douglas Donenfeld, chairman of the CTA board's finance, audit, and budget committee. "It takes months for these kinds of breaks; the standards of proof are severe. You have to prove that, but for this break, you couldn't do the development. But they're saying that they'll get market rents and give the tax savings to us. I don't know that Hynes will side with that."

In addition, Donenfeld notes, there's no guarantee that the cogeneration plant will be built at the I-park, or if it is, that it will provide the savings Daly promises.

"What's worse is what happens if the shopping center fails," says Donenfeld. "If that happens, we would have to dip into our general operating revenues to cover the gap caused by operating the bus barn out of Kilbourn."

Proponents of the deal counter by saying, so what, no deal is risk-free.

"Pat Daly has made a commitment; so should the CTA," says Giles. "I've seen [Daly] miss very important meetings in other parts of the country so he could stay in Chicago and meet with the community. I've seen him have to rush around in a helicopter. Don West has told me that he would like to see this project done as a humanitarian gesture. They have put an awful lot of effort into this; they want it to work."

"So you make a bunch of bureaucrats work another 15 minutes rerouting buses--that's easy," adds a real estate analyst who supports the project. "So you make a phone call to UMTA and tell them the deal's changed. Big deal. Are you going to chill a shopping center and an industrial park 'cause you're worried about recovering operating costs? This delay has nothing to do with facts, and a lot to do with rudderless leadership and cautious bureaucrats at the CTA."

CTA officials, of course, see things differently. They say that if Daly and Wexler want to oversee the regeneration of the west side for financial or altruistic reasons, God bless them. Certainly Wexler and Daly have the money; they have access to enough cash to build shopping malls and industrial parks all over Austin, not to mention Humboldt Park, Garfield Park, and North Lawndale. What they (and their backers) lack is the derring-do (some might call it courage) to assume the risk that such ventures entail.

But who can blame them? Daly and Wexler are savvy operators; they did not get rich by investing money in poor neighborhoods. Developers long ago figured out that the only way to make money building for the poor is to get someone else--usually the federal government--to pay for it.

Alas, the federal government stopped investing in poor neighborhoods about the time Ronald Reagan assumed the presidency. So in effect Daly and Wexler have asked the CTA to assume their risk instead. To which the "cautious bureaucrats" of the CTA respond: if two smart fellows like Wexler and Daly don't have full faith in Austin, why on earth should we?

"We have some time, and our staff is still working to make the deal work," says the CTA's Donenfeld. "But I don't have much hope. We're in the business of public transportation, not development. If we have to get a zoning approval without Giles's support, that's what we'll have to do. But I think we would be doing a disservice to our public if we climbed aboard a risky deal like this."

Art accompanying story in printed newspaper (not available in this archive): photo/Bruce Powell.

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