Globe and Mail – Heritage projects suffer collateral damage in downturn

May 8th, 2009
Robert Fung has turned some of Vancouver’s worst eyesores into high-end housing. But the financing model he used to cover the added expense of saving the city’s grand old buildings has run into a brutal new reality.

Robert Fung has turned some of Vancouver’s worst eyesores into high-end housing. But the financing model he used to cover the added expense of saving the city’s grand old buildings has run into a brutal new reality.

Globe and Mail – Heritage projects suffer collateral damage in downturn

Kerry Gold
Special to The Globe and Mail
Friday, May. 15, 2009

Developer Robert Fung stands on Water Street in Vancouver’s Gastown, surveying a row of heritage buildings that comprise one of the city’s most beautiful streetscapes.

They represent some of the city’s oldest buildings, and each of them had been long neglected until Mr. Fung came along and restored them as work, retail and condo spaces.

“He’s the poster child of heritage,” says Heritage Vancouver president Don Luxton.

But with the downturn in British Columbia’s property markets, Mr. Fung now sees himself tied to a complex financing model that no longer works.

The Alhambra building, circa 1887, anchors Water Street, the most historic block in the city. It is part of Mr. Fung’s $60-million, three-phase, five-building project that involves “a high level of heritage restoration.” The condo building Terminus, once on Heritage Vancouver’s Top Ten Endangered Sites list, is the first phase. The heritage building, with its sleek, uniquely modern interior, is finished and mostly occupied. The Garage condos next door, once the location for the city’s first jailhouse, will be complete by November.

The Alhambra itself is a three-building, retail-office complex with an historic interior courtyard that wraps the corner of Carrall Street, and it is far from complete. Nearby, on Hastings Street, Mr. Fung has the mixed condo-retail heritage buildings the Paris Block and Annex, which are not quite sold out and finishing construction next year.

Mr. Fung celebrated an official opening party recently for his nearby Flack Block, a fully restored heritage office building at Hastings and Cambie streets that now recalls its former glory of 1899. Over the years it had become a derelict haven for heroin users in an area still rife with drug problems.

Mr. Fung says his work on in the area not only saves buildings, but revitalizes the local economy and gives residents a serious morale boost.

As he surveys his work, Mr. Fung appears his usual serene self, despite the setbacks that have occurred over the last couple of years. His Trapp Block heritage project in historic New Westminster is “on hold.” The Terminus had been sold out – until some of the owners couldn’t complete their purchases due to the economic downturn. It means several of the units are still for sale.

“Of course I’m worried about the downturn,” he says. “The Terminus building was sold off, and we’ve received some of the suites back. I only planned to sell it once.”

As well, heritage restoration costs significantly more than building new from the ground up, which is why Mr. Fung depended on city incentives for his Gastown projects. Aside from grant money, he has relied on millions of dollars in bonus density transfers to fund the six heritage projects in the area. The practice allows Mr. Fung to sell unused density from his projects to another developer, in order to cover the high cost of heritage restoration. The density cannot be sold, however, until the projects are completed.

More than anybody, Mr. Fung made use of the incentive. To put it in perspective, Mr. Fung says there is about 500,000 square feet of transfer density currently banked by the city. His share is 400,000 square feet – and in this market, nobody is looking to buy.

“We have satisfied the need to create some investment in the area, we’ve satisfied the need to save buildings and to create more economic diversity in the neighbourhood,” he says. “At the back end, we also need to sell this density to pay the bank back – not being able to do that is a huge problem.”

It could get much worse.

Through the heritage building rehabilitation program, the city approved a record amount of transfer density. Marco D’Agostini, the city’s senior heritage planner, estimates that if all approved projects are completed, there is potentially 1.5 million square feet of bonus density that would be for sale. That figure is part of the reason the city put the heritage building rehabilitation program on hold in 2007, and has kept it on hold. Mr. D’Agostini says its future is under review and a report will go before city council next month. The program includes façade grants and property tax exemptions, which Mr. D’Agostini expects council to continue. It’s the transfer density that is the sticking point. There is simply too much density banked for it to be absorbed into the market.

The sale of density to offset the cost of heritage restoration is a market-driven tool that’s been used effectively for years, says Mr. Luxton of Heritage Vancouver. It is, he says, the best tool heritage advocates have to protect historic buildings. In 2003, the policy was extended to include the neglected historic neighbourhoods of Chinatown, Gastown and the Downtown Eastside. It stimulated more than $400-million in heritage development in those areas, including the Woodward’s building, which is currently under construction and nearing completion.

“The density bank worked really, really well for many, many years,” Mr. Luxton says. “But in 2006 it just went right over the top. Part of the reason was several large projects came on stream all at once, including Woodward’s and the Evergreen Building [in Cole Harbour] – and whamo. There was nowhere to put all that density.”

“No one had anticipated things would slow down quite so much,” Mr. D’Agostini says.

“Robert has got carrying costs, and they have realized the projects, they’ve done them, and they’ve got bills to pay to contractors and everybody. It’s part of the reason they proceeded with the projects, because they could sell the density and recover the costs,” Mr. D’Agostini says.

“You could say those developers knew what they were getting into, but at the same time we want to make sure we are trying to be helpful wherever we can. We can’t force another person to buy density … there is only so much we can do as well.”

The city can help by not banking more density until equilibrium has been achieved, he says. “If we keep creating more density, it will, I think, have a significant impact on the value of any density that’s been created. We may completely devalue the tool.”

As the largest holder of banked density, Mr. Fung simply wants the city to make the program work. He recognizes the city is attempting a solution, but he says it is slow in doing so.

As well, he believes the city could do more for developers like him who played a vital role in restoring old neighbourhoods. He argues that even in the strongest real estate market, the city controls the absorption of the density. The city controls the value and amount available for transfer, as well as zoning laws that would make transfer of that density possible.

“They pay the developers for daycare by giving them density, so they should be taking density from us and doling it out with other packages of amenities to other developers,” Mr. Fung suggests. “Otherwise, they compete against us.

“It bothers me that there’s not more energy put into making the system healthy and recognizing that the city, in doing this, has led a lot of people down the garden path. But the stroke of a pen is all it takes to make it work properly.

“I’m hoping what will change is a recognition that the program as it exists is non-functional,” Mr. Fung says, “and has been very unfair to the people who’ve made it successful for the city.

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