Publication Date: Wednesday, February 25, 2004
Bad investment or good investment?
Bad investment or good investment?
(February 25, 2004) City a first-time landlord in soft market
by Bill D'Agostino
Follow the large birds flying on the mural decorating Palo Alto's newest parking garage and they will lead you to an empty two-story building.
It may not seem like much at first, but behind the blue awning and tinted windows on the corner of Lytton Avenue and Bryant Street sits a $3.5 million public real estate investment -- one that doesn't seem as solid as when the city originally planned it.
"When we first calculated, the market was up," said Bill Fellman, the head of the city's real estate division.
The city is expecting to begin advertising two for-rent spaces in the building -- retail on the ground floor, office on the second -- in March, after the construction has been completed and the building has been turned over to the real estate division.
The 7,410-square-foot building represents the public's first venture of this sort in commercial real estate and is designed to generate income for the city. Although the city owns numerous properties around town, most are parkland, city buildings, or -- like the Cubberley Community Center -- rented to nonprofits at subsidized rates
But to break even, the city needs to make $320,000 a year for the next 20 years. Thus, it needs to grab more than $3 a square foot per month.
Although that's approximately what similar properties downtown are going for now, it's a far cry from what city officials originally projected. When the city first began building the office, similar properties were going for $4.50 a square foot.
The residents who would be hurt the most by the possible downfall in city income are teenagers. The revenue is supposed to help provide services for teens since the combined parking/office project was the death of the city's teen center, which had been located on the same spot.
Although the project was built at the same time as the parking garages, it is technically a separate project. That's important because unlike the garages, which were paid for through a monthly assessment of downtown businesses, the office building is paid for using the city's general fund revenues, through a bond.
Developer Chop Keenan believes the city will have no problem finding a good tenant. A high-class restaurant will find the building ideal, Keenan said, especially since it is located right next to the parking garage. The city should expect to get $3.75 per square foot, he predicted.
"They'll be successful," Keenan said. "That's a great space."
E-mail Bill D'Agostino at bdagostino@paweekly.com
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