U.S. cities seek ways to aid property developers

* Local govt's get creative to support urban projects

* Developers see benefits from public-private deals

By Nick Zieminski

NEW YORK, Jan 6 (Reuters) - U.S. municipal and state governments, despite facing their own cash shortfall, are finding ways to help local property developers navigate the current downturn, in some cases rescuing projects that would otherwise fall victim to the credit crunch.

Such public-private partnerships highlight the increased role of the public sector in a business where the help of bureaucrats is typically not wanted. In atypical times, such aid may be a stepping stone toward the eventual return of private capital.

Las Vegas' city council voted last month to move its city hall, a decision Mayor Oscar Goodman called a "mini-stimulus." It is a complicated deal that frees up the building's attractive current location for the development of a district anchored by a sports arena, since Vegas hopes to attract a Major League franchise.

"The city needs something like this right now," said Eric Louttit, Vice President of Finance at Forest City Enterprises Inc (FCEa.N), a national developer of retail, office and apartment properties.

Louttit, the project developer of Forest City's Las Vegas land, said that, without the move, downtown development could remain stalled for years.

"The economy is really quite bad," he said. "I don't think there's any legitimate hope of any private sector developer coming in."

Unemployment in Las Vegas has soared as tourism slumped, construction froze and a housing boom turned to bust.

"The city needs to step up and be a job creator," Louttit said.

The city is relying on low-interest bonds to fund construction of the new City Hall. Forest City plans to build office and retail space around it and won development rights to a 61-acre former rail yard for a hotel and casino.

The Las Vegas experience is a good model of a public-private partnership, said Thomas Powell, CEO of ELP Capital Inc, an investment advisory firm that buys real estate debt and equity, mostly in the western United States.

Such partnerships are more important because of the dearth of private capital and because city-controlled land is key at a time when many mid-sized cities are looking to revive their downtowns. The crisis, meanwhile, has made city and state government officials more willing to work with business, since they are keen for any incremental tax revenue.

"It's much easier for business people to speak with government officials about anything that creates jobs," Powell said.

He cited a senior housing project in Reno, in which his firm owns a stake, where government approvals took 60 days instead of the usual six months.

To be sure, voters do not always support helping developers. A Las Vegas city council member opposed additional borrowing. Also, without a base of economic activity, big investments do not have a big impact. Detroit plowed money into sports venues, but its downtown remains a ghost town.

Sometimes the public sector seeks private investors, not the other way around. In New York City, the Port Authority is seeking a new equity investor to share the development costs for the World Trade Center 1 tower. [ID:nN04226578]

Still, cities are getting involved.

Seattle, is looking to its musical roots as the birthplace of grunge rock music. It has repealed admissions taxes on small concert venues to drive economic development in some neighborhoods. It is also making federal stimulus funds available to private business projects that involve infrastructure improvements.

CLEVELAND'S EXPERIENCE

In Cleveland, the city and state of Ohio, with the local Port Authority, helped revive the Flats East Bank development, where the Cuyahoga river meets Lake Erie. The residential, retail and entertainment project is the largest private-sector investment under way in Cleveland in a generation.

The downtown project -- along with a proposed casino and a medical marketplace and trade show facility -- will be a catalyst to revitalize the central business district, attracting suburbanites and addressing a need for space. No new office building has gone up in 17 years.

But the project was all but dead until local government lent a helping hand, said Adam Fishman, Principal at Fairmount Properties, which has partnered with Scott and Iris Wolstein of The Wolstein Group to develop Flats East Bank.

When the credit crisis hit in 2008 and banks stopped lending, "the music stopped. We were left with a terrific development, but no resources to develop it," Fishman said.

So the city provided a 20-year, $30 million loan with money borrowed from the U.S. Department of Housing and Urban Development. The loan requires Scott Wolstein to guarantee completing the first phase of the $270 million project, set to include a new office tower. Wolstein is executive chairman of Developers Diversified Realty Corp (DDR.N).

"The city's access to that money was a linchpin for us," Fishman said.

Ohio provided financing and a tax credit to Ernst & Young, the anchor tenant. The plan also includes an agreement that would fund development partly from the taxes it would generate. These steps reduced the amount of private funding needed.

Such steps come as downtowns across the United States suffer amid a prolonged downturn in commercial real estate. Office landlords face lower rents, falling demand brought on by 10 percent unemployment and rising supply of space subleased by tenants whose business has shrunk.

Urban central business districts will remain weak until job growth resumes, according to a quarterly forecast by PricewaterhouseCoopers (PwC). Vacancies top 14 percent nationally and are above 18 percent in Seattle, over 21 percent in Silicon Valley and at nearly 13 percent in Washington D.C., according to Cushman & Wakefield data.

Even engines of job growth, such as Atlanta, face problems. Atlanta's central business district has a vacancy rate of 21.7 percent, reflecting "overzealous office development," according to PwC. Boston landlords offer, on average, 6.6 months of free rent to win office tenants or retain current ones.

Private-public partnerships could serve as an beacon of how commercial real estate navigates to eventual recovery.

"If you have a project that is important to the fabric of a community, you have to be patient and open-book with your numbers. But the folks in the public sector understand it takes a Herculean effort," Fishman said.

"Maintaining credibility with them during difficult times is the most important thing we've been able to do." (Reporting by Nick Zieminski; editing by Andre Grenon)