FEATURE ARTICLE, MAY 2006

GAINING APPROVAL, THEN GROUND
The risky business of public-private partnerships in developing commercial real estate.
Ned O’Hearn

O’Hearn

In other words, Superstitionville would be a developer’s paradise.

Developers, local governments, and citizens have a long and often times turbulent history. Developers have learned — many times the hard way — that they can encounter obstacles even after receiving an appreciative nod from planning commissions and hints of satisfaction from city councils. If the neighborhood isn’t on board, even the most advanced projects can experience the indignity of ultimate rejection.

Scottsdale developer Fred Unger is fully aware of the risks involved in municipal partnerships. In 1997, he was the local partner behind a concept that would have redefined part of downtown Scottsdale through a series of interlocking canals. Subject to referendum, the project dubbed the “Canals of Scottsdale” suffered a thumping defeat at the polls. The “West’s Most Western Town” wasn’t ready to become the “Venice of the West.”

Unger, however, proved to be resilient, resourceful and responsive. Acknowledging that fitting yourself in has advantages over squeezing someone out, his latest development on the south bank of the Central Arizona Project canal that meanders through downtown Scottsdale will be more in keeping with local tastes.

Now under construction, the 120,000-square-foot development, called South Bridge, will consist of four buildings fronting 1,000 linear feet of the downtown waterway. It will feature specialty retail (no chain stores allowed!), trendy restaurants and swank office condos built atop a city-owned parking garage. What galvanized a lot of support was designing each building to appear as if they had been built during different time periods.

For years, Scottsdale has savored the idea of reenergizing its eclectic downtown by luring shoppers from upscale Fashion Square Mall to the north. The problem was the proverbial “can’t get there from here” — at least not easily. In the way was a dusty vacant parcel with a troubled development history and a canal that wasn’t conveniently bridged.

The empty lot issue was resolved when Scottsdale broke tradition and approved twin 13-story towers on the site as the residential component of a ritzy multi-use project. The bridge issue was resolved when the city invested $11 million in canal bank improvements. All that was missing was a compatible connecting project on the south side of the canal.

That’s when Unger — at the city’s invitation — reentered the picture. But not without trouble. His first challenge was that he didn’t own all the property needed along the canal bank.

“We needed critical mass to create something special,” reflects Unger. “This meant buying out leases and tying up properties we didn’t own — all without a signed development agreement with the city. It was pretty risky.”

Unger’s vision extended even further west when an RFP was issued for a city-owned piece known endearingly as the “Rose Garden.” Unger wanted the parcel to offer a cohesive plan along the full stretch of the south bank opposite the sprawling North Waterfront project. But for this he would have to compete for council approval with a Las Vegas developer wielding significant local political clout.

“It’s gut wrenching,” admits Unger, who already had other critical parcels under control at no small expense and needed more. “You have to make the initial investment — something that can involve huge dollars — and then wait and see how the politics turn out.”

Gary Roe, a consultant retained by Unger to manage the delicate city negotiations, is no stranger himself to the municipal body slam that developers sometimes endure. Roe was Scottsdale’s top redevelopment guru when another vacant sore spot — an out-of-style shopping center known as Los Arcos Mall — was targeted for revitalization as a glamorous retail-entertainment complex anchored by a new arena for the Coyotes National Hockey League franchise. Roe backed the proposal, only to see it founder and eventually fail when the city council changed hands. The arena ended up in Glendale.

“The risks are always there,” admits Roe. “What you have to do is measure the potential benefits against the cost of rejection. This isn’t a business for the light-hearted.”

In the case of the Rose Garden site the politics proved to be sticky, but Roe and Unger narrowly prevailed on a 4-3 council vote.

“People sometimes think that developers have limitless funds and can roll the dice politically every time,” says Unger. “That isn’t reality. There’s usually a lot at stake on the developer’s side and plenty to lose if a proposal fails to win approval.”

“If you want to kill a project, time is your most powerful tool,” observes Roe, whose consulting practice is founded on a deep understanding of how bureaucracies work — or sometimes fail to work. “I’ve seen opposition citizen groups manipulate time masterfully, and cities use it almost inadvertently. Cities move slowly even when the commitment is there because so many people and so many department heads get to have their say.”

“We had a fixed-price deal with the city,” adds Unger. “You can imagine what was going on with our construction costs while negotiations were dragging on. This project was on life support more than once.”

When the construction cranes come down, the flowerbeds get planted, the shop doors swing open and the crowds swarm in, there’ll be no public perception of how it all came to be. No evidence of the risks that Roe can recite fluidly from experience — “development risks, political risks, financial risks and marketing risks…any one of them can take you down.”

The walls of Fred Unger’s Spring Creek Development offices in downtown Scottsdale are adorned with classic western art. One might say it aptly reflects the cowboy spirit and grit needed to ride alone into a big-time public-private development project.

Ned O’Hearn is a principal with Scottsdale-based Boulders Realty Advisors.

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