Work at the stalled Filene’s redevelopment project could resume well before Boston’s wounded commercial market rebounds, under a breakthrough construction phasing plan now being weighed by developers Vornado Realty Trust and Gale International.
The new plan, proposed to the Boston Redevelopment Authority by Vornado and Gale after heavy pressure from the city, would have the development team fill in the project site’s gaping hole with an underground parking garage, topped by a low-rise retail structure. That work, estimated to cost around $75 million, would feature foundations and building pads to allow the second phase, the project’s tower component, to proceed when credit markets normalize and commercial demand increases, according to industry sources.
“[Boston Mayor Thomas Menino] has made it clear he expects the development team to really try to consider a new template, things not traditionally included in a development pro forma,” BRA Director John Palmieri told Banker & Tradesman. “[The mayor] has used the term ‘sense of urgency.’ The hole is a real problem. It’s a signature location. We need to be attentive to a development program that will remove this blight from an important neighborhood.”
A joint venture between Vornado, Mack-Cali Realty Corp. and JP Morgan paid $100 million in cash for the development site. Gale, the project’s lead developer, manages the two LLC’s that control the site, but has just a 0.005 percent equity stake, or $500,000, in the venture.
Tough Talk Gets Results
Construction on the 39-story, mixed-use project came to an abrupt halt in the fall of 2008, when lenders yanked financing commitments from the $700 million project. Since then, Vornado and Gale have chased a rapidly deteriorating commercial market downhill.
Gale CEO John Hynes has twice floated plans for slimmer, cheaper versions of the proposed hotel, office, residential and retail tower, but financing remains elusive.
The loss of the project’s two anchor tenants has not helped matters. The law firm Fish & Richardson decamped to Fan Pier, while Vornado bought Filene’s Basement out of bankruptcy to cancel its long-term retail lease at the site.
The $75 million phased solution would restore the continuity of Downtown Crossing’s streetscape, while preserving the viability of future construction above. Similar phased parking foundations preceded air rights development at the TD Garden and the former Lafayette Place mall just down the street from Filene’s, now known as the Lafayette Corporate Center.
Banker & Tradesman previously reported that city officials were threatening Vornado and Gale with regime change, with all options on the table – up to and including eminent domain – if the developers couldn’t generate movement at the Downtown Crossing site.
That tough talk appears to be paying dividends. The Filene’s redevelopers are radically altering their development schedule. And after publicly attacking Vornado on multiple occasions, Palmieri said Menino is now “willing to entertain gap financing” to help the project move forward.
“It’s about creating jobs, expanding the tax base and removing the blight,” he said.
Preparing For Battle
At the same time they were revamping their development program, the site’s developers also appear to have been readying themselves for a courtroom battle.
Annual reports from Vornado and Mack-Cali show in 2008, the Filene’s joint venture partners booked a $69.5 million impairment charge on the project. New SEC filings from each company show no such write-down in 2009 – a year in which commercial markets deteriorated significantly. Several industry sources told Banker & Tradesman the decision not to recognize a second impairment may have been made with an eye towards having to defend a high project value before an eminent domain jury.
Gale, Vornado, and JP Mogan offered no comment for this story. Mack-Cali did not return calls seeking comment.
The new phasing concept would bridge the gap that has left the Filene’s redevelopment hamstrung. Menino has repeatedly demanded that Vornado and Gale restart work at the site, which has blown a deep hole in the heart of the city’s downtown commercial district. But Vornado and Gale have been unwilling to build a smaller, more easily financeable project, because such a project would lose buckets of money.
The project’s owners need a substantially sized project to make any return on their investment. Demand for such a project currently does not exist in Boston. So the Filene’s site owners have been forced to wait for a rebound in a market that’s still deteriorating.
Between the midpoint of 2008 and the end of 2009, a wave of 1.7 million square feet of vacant office space hit the Boston market, driving the vacancy rate to 17 percent. During that same time, rental rates for Class A office space in Boston fell 28 percent, from $69 to $50, according to data from Jones Lang LaSalle. Brokers have forecast slight declines in occupancy and rental rates in 2010.
“This is not a city project. It’s a private sector initiative, and they ran into a buzzsaw,” Palmieri said. “They’re facing significant hurdles with financing. We understand that. But it’s very important to us to identify a path forward. We’re working to figure out a plan that they can finance, and that meets with our approval.”
