9th Square Developer Seeks A Bail-Out

Saying it’s running out of cash, the developer of the Ninth Square downtown apartment and retail district is asking the city to forgive $9.9 million in unpaid interest and obtain another 15 years worth of tax breaks.

The city is not necessarily going to say yes. The DeStefano administration is in the midst of discussions with the developer, Yale, and the Connecticut Housing Finance Authority (CHFA) about the best approach to keeping the Ninth Square project afloat 15 years after it breathed new life into the blocks southeast of the Green.

In the Ninth Square the city used public money to help a private developer — a partnership of McCormack Baron Salazar and Related Companies — fix up historic but neglected three- and four-story brick buildings and construct some new brick ones throughout the district. The Ninth Square lies southeast of the Green and is bordered by Chapel, State, George, and Church Streets. The developer created 335 new apartments, with a mix of low-income and middle-class renters, plus 49,000 square feet of stores and restaurants and galleries. That was the start of a broader rebirth of downtown into a place where people live and hang out at night.

Now the developer says it’s in trouble. And needs more help.

The city now faces the question of whether to invest more resources in the Ninth Square, perhaps through a renegotiated deal with the developer; or to let market forces alone determine the future of the district and the survival of affordable housing there.

The developer made an ambitious request for a new deal in a memorandum last month to ​“all stakeholders.”

The memorandum asks all the project’s lenders (CHFA, New Haven, and Yale) to refinance a total of $86 million under a new entity created by floating a new set of state tax credits for the project.

It asks the lenders to forgive all unpaid interest accrued to date, which adds up to $9,858,936 for the city, according to calculations by the Livable City Initiative (LCI), New Haven government’s neighborhood anti-blight agency.

It also asks the city to renew a tax abatement deal. The developer had a tax abatement deal for 15 years with the city. The deal expired last year. Under the deal, the developer has paid $789,000 a year in taxes rather than the full $1.218 million it would otherwise owe. The memorandum requests that the city provide a new deal setting taxes at $750,000 a year. The memo does not mention how long the new deal it would take; city officials understand the request to last at least 15 years.

“The property is suffering from significant, accelerating and unsustainable negative cash flow,” the developer states in the memorandum. Meanwhile, the properties need ​“in excess of $10 million” in renovations, including ​“all new kitchens and bathrooms in apartments plus energy efficient upgrades.”

The developer would use new tax credits and the restructured debt to perform those renovations as part of the requested deal. (Technically, a separate tax-credit partnership owns the Ninth Square properties; the developer is the controlling partner in that partnership.)

The developer also promises as part of its requested deal to keep much of the apartments ​“affordable,” though not as many as now. The apartments are a mix of market-rate and subsidized; about 57 percent currently are rented to low-income families, according to LCI Executive Director Erik Johnson. The developer promised in the memorandum to keep 40 percent of the project ​“affordable”: 20 percent rented to ​“very low-income families” who are below 50 percent of area median income, and another 20 percent rented to families who earn up to 60 percent of area median income. (One requested change: Right now those tenants have ​“portable” federal Section 8 program vouchers that follow them if they leave the Ninth Square. The developer seeks to have the housing authority approve ​“project-based” Section 8 coverage that stays with the apartment no matter who lives there.)

McCormack Baron officials declined to respond to requests for comment.

“We’re wrestling with” McCormack Baron’s request, Mayor John DeStefano said in an interview. ​“The issue for me is even if you extend all this subordinate debt, is it ever going to be collected? I don’t know if this project will ever be able to pay off the subordinate debt” to the city. (The city is second in line after CHFA in any foreclosure. Because the project is ​“under water,” with debt higher than its real value, the city could not reasonably expect ever to collect any money.)

DeStefano called it a ​“fair statement” that after 20 years the buildings could use an upgrade. The question facing City Hall is whether refinancing and extending the debt is the best way to make that happen and keep an integral downtown development going strong — or whether allowing market forces to lead to a foreclosure of the property and a potential new owner would produce better results.

One complicating factor: Whether in these challenging fiscal times the administration can credibly bring a request to the Board of Aldermen to give a second round of long-term tax forgiveness along with debt forgiveness to a St. Louis-based developer. A second complicating factor: Allowing the Ninth Square to slip could endanger efforts to build up other nearby properties, like the former Coliseum site, at a time when the area has begun booming.

“It’s a good project. We want to promote mixed-use development in downtown,” said Downtown Alderman Doug Hausladen. ​“But I don’t see how in these tough times we’d be able to swallow that sort of [tax] loss without putting more strain on the neighborhoods.”

CHFA Operates In Secret

The biggest player in these negotiations is CHFA, the primary debt-holder.

Publicly, at least, CHFA expresses no reservations like DeStefano’s.

CHFA spokeswoman Lisa Kidder said CHFA is committed to coming to terms with the developer on a restructuring deal. (The decision-makers at CHFA, a quasi-public state agency, declined to be interviewed for this article.)

“Everybody feels like it’s a great project,” Kidder said. ​“There is a way [to a deal]. We just have to find out the way.”

CHFA Vice-President Dara Kovel, the actual decision-maker, refused requests to answer questions from the press. Instead she issued this statement through Kidder: ​“Ninth Square is a cornerstone development in New Haven’s downtown with a capable, diligent owner. The Connecticut Housing Finance Authority is continuing to work with the owner, the City, Yale, and DECD/DOH [Department of Economic and Community Development/Department of Housing] to come up with the best strategy for recapitalizing the property and restructuring the financing. The financing for this property is complex and once we have a workable plan, it will be presented to CHFA’s Board of Directors for approval.”

At a Sept. 24, 2012, meeting, CHFA’s board voted unanimously to grant the developer a six-month moratorium on payments on a $13.7 million outstanding loan, with all late fees waived, while a restructuring deal is worked out. Cash flow from the project, after expenses, was put in escrow for ​“future debt service after the moratorium ends.”

The moratorium did end, in February. Negotiations continue. Public minutes from the Sept. 24 meeting do not mention any discussion of the issue or any sense of questions being raised about the moratorium. Kidder said the agency will not answer questions beyond what’s in the minutes.

The ​“Place-Making” Question

The upcoming debate over the Ninth Square will tackle questions sure to resurface in other coming development debates in town — for instance over the eventual rebuilding of the Church Street South housing complex across from the train station.

At issue is whether and how much government should contribute — and in what way — if it wants private development to accomplish public goals not supported by the market. In this case, that would mean having apartments for low-income families included in the mix.

Back when the Ninth Square deal was originally negotiated (the late 1980s and early 1990s), cities generally accomplished those goals in part with tax forgiveness, federal housing grants (in this case, an Urban Development Action Grant, or ​“UDAG”), and federal tax credits that get distributed through the states (in this case, through CHFA). Technically, developers in these projects borrow the money. But most policymakers don’t reasonably expect the money to be repaid — rather the debt is often extended and renegotiated a decade or two later. In part, policymakers had to offer loans rather than grants because of the way tax credit deals were structured, according to Johnson.

Mayor DeStefano argued that in the future policymakers might want to make the cost of government assistance more ​“transparent” up front and in the form of grants rather than unrealistic debt.

For New Haven, Ninth Square offered a second benefit beyond bringing mixed-income housing downtown. It sparked a renewal. It led to the redevelopment of other housing in the immediate area. It brought street life in the form of restaurants and gallery space. It eventually helped create a market for the construction of the 32-story 360 State apartment tower. A successful co-working space, the Grove, has popped up there; the Grove has expanded with the help of a state effort to promote urban ​“place-making,” the new buzzword of essentially having Connecticut cities look more like the new Ninth Square, with housing, arts, offices, street life, and an entrepreneurial environment.

“This is an opportunity to have a place-making conversation in the city,” Erik Johnson said of the coming debate over Ninth Square’s request. ​“What are legitimate public investments to justify place-making?”