Melvin B. Miller
Editor & Publisher

Overpricing Roxbury development

One of the largest remaining development projects in Roxbury is referred to by the experts as Parcel 3, or P3, for short. This is an eight-acre site across from Police Headquarters on Columbus Avenue. The selection of a suitable developer for P3 has already been painfully slow, but now progress has ground to a halt.

The Boston Redevelopment Authority has determined that all three proposals submitted by potential developers have failed to meet the “minimum financial requirement,” and are therefore unqualified. Rather than reject all of the proposals out of hand, the BRA has called for revisions.

Roxbury residents must understand that their influence over the development of this site is in jeopardy. An “Oversight Committee” is supposed to represent the community’s interest, but it is not clear that the difficulty now faced is well understood. The problem is an unrealistic ground lease requirement.

A common practice in real estate development is for the owners of prime land to require the developer to pay an annual ground lease, an amount that will be included in the rents paid by the tenants of the apartments, shops and business offices which are built. However, if the ground lease is too high, it will cause the developer to raise rents to a non-competitive level.

A ground lease sounds like a simple concept, but as defined by the BRA, it is actually quite complex. First of all, the assessment is based not just on the size of the lot, but on the gross floor area of the building constructed if that is greater than the land area. This means that the ground lease on a ten-story building would be 10 times that of a one-story commercial building.

The BRA calls for a ground lease of $3 per square foot for the first five years. There are roughly 377,665 square feet in the 8.67-acre P3 site, which means the annual ground lease would be $1,132,996 per year. However, some of the proposals call for construction of more than 1,000,000 square feet. This would call for an annual ground lease of more than $3 million. Even worse, the amount of the lease would increase every five years until it reaches $26.75 per square foot in 61 years.

If this sounds to you like a very high price for Roxbury real estate, you are right. It is. The value of the P3 site, based upon the 5 percent present value of the ground lease, is $143 million. A valuation of the Fan Pier on the Waterfront, using the same ground lease approach, is $115 million. However, the Fan Pier covers 20 acres, compared to only 8.67 for P3. This would make the Roxbury land 2.87 times more valuable than the prime waterfront land on the Fan Pier.

Clearly, the amount of the ground lease is excessive. The BRA knows this. In a letter to the developers, the BRA stated that “… the terms of the ground lease may be negotiable.” How, then, can developers respond definitively to the BRA’s request for proposals before the amount of a reasonable ground lease is determined?

Many community residents would not ordinarily be concerned about such issues, but an excessive ground lease can distort the character of a project. The expense could make it more financially prudent for developers to propose projects which are undesirable. Imagine the adverse financial impact of a sophisticated development with a large number of square feet of space that is only half-rented.

The Oversight Committee must find a way to keep the community more informed on the progress of the project and the BRA must substantially lower the amount of the ground lease. The community does not want a big box store like Wal-Mart or college dormitories on P3.