In Wake of City Center Demise, $1.6 million is Tied Up and City is a Reluctant Landlord

By STEPHEN SIEGEL
Falls Church Times Staff
October 3, 2012

When the grand City Center project planned for the area near Maple Avenue and Annandale Road fell apart along with the economy, it cost Falls Church City badly needed revenue it was counting on to help keep the residential tax rate in check.

But it also has forced the city to become an accidental landlord and continues four years later to tie up more than $1.6 million in City money, the Falls Church Times has learned.

The City in 2008 purchased two properties as part of the proposed City Center project: an apartment building at 208 Gibson Street and a commercial storefront at 201 West Broad Street. The purpose of those purchases was to facilitate traffic flow, enhance economic redevelopment, and possibly add a small park in the area. But the demise of City Center put all that on hold and left the City managing two properties it doesn’t even want.

The Gibson property was purchased with the city’s eminent domain powers, which compel property owners to sell, even if they don’t want to, while the Broad Street property was considered for eminent domain but ultimately was consummated in a voluntary negotiated sale, city officials say.

Officials planned to demolish the Gibson property in order to extend Shirley Street along the southeast side of Big Chimneys Park, where the Bowl America now stands. Bowl America would have been demolished and rebuilt as part of the City Center plan, and Shirley Street would have continued through to Annandale Road.

Officials also wanted to demolish the Broad Street property, at the southeast corner of the intersection with Maple, in order to move Maple to the east and align it with a planned relocation of Maple north of Broad. That, in turn, would have allowed the construction of a proposed central pedestrian plaza where north Maple now runs.

Those are legitimate reasons for governments to buy properties or use their eminent domain powers; street improvements and pedestrian spaces are public uses, which is why state law and the Constitution envision and allow such transactions.

Unfortunately for the city and its residents, it hasn’t worked out like officials hoped. The street improvements have not been made; Shirley Street can’t be extended without purchasing the Bowl America property, which isn’t going anywhere without the City Center plan.

And realigning Maple is no longer a priority, because of the City Center’s demise and because the City has dropped plans for the pedestrian plaza.

The result is that the city is now the owner and landlord of a 2,560 square foot apartment complex on Gibson and a small commercial building on Broad.

The Gibson property was purchased for $650,000 and brings in just $29,000 annually from the apartments. In the case of the Broad Street property, which houses Matt’s Tailoring and KH Art and Framing, the city agreed to pay a whopping $1,025,000 for a tiny, 4,734 square foot parcel. It brings in income of only $33,000 per year, spokeswoman Susan Finarelli said.

There are two criteria that must be considered when evaluating officials’ decisions in these cases: One is to see if they paid what appears to be a reasonable price for the property. Another is to decide if the money spent is justified by the results the investment obtains, or was intended to obtain.

In the case of the Gibson property, it seems clear the city paid a fair price. Comparable apartment buildings on the same block were purchased for more than the city paid by former City Center developer Atlantic Realty, and City Assessor Ryan Davis assessed the property for $760,000 in 2009 — $110,000 more then the city paid. The property is still assessed above the purchase price today, at $685,000, city records show.

But was it worth $650,000 to extend Shirley Street? Reasonable people may disagree. In a telephone interview, City Manager Wyatt Shields said the city wanted to “have a public right of way along the south side of Big Chimneys Park in order to ensure that the park maintained a public feel to it and also as part of the City Center transportation plan.”

The Broad Street parcel is perhaps more problematic. In that case, City officials paid about 2.5 times the assessed value — $1,025,000, when it was assessed at $412,000. And they did so voluntarily — not after being compelled to in an eminent domain court case — which would seem to indicate they thought that parcel was crucial to the area’s redevelopment.

Asked how they arrived at their offer, Mr. Shields said, “We did have an appraisal. We had a broker that advised the city on the transaction. That there was a going business there factored into the price. It was a long negotiation; it went on for well over a year. Ultimately, we did feel that our desire was to move forward in good faith with our side of the things that needed to be done to fulfill [the City Center] project.”

Had City Center then been built, the Broad Street property, at the southeast corner of the intersection of Broad and Maple, would have been demolished; Maple would have been moved to the east, and a small city park would have been added near Maple and Annandale.

Longer-term, the plan was to also relocate Maple north of Broad, running it through where the CVS parking lot is now, creating room for a central pedestrian plaza where Maple now runs, so that parcel was crucial not only to City Center, but to the city’s plans for the north Maple corridor.

“For over 30 years, the city vision was to bulldoze everything on the north side of Broad Street and start over,” Mr. Shields said. But those plans were dropped in 2009. “Since then, the Council has taken steps to affirm the existing built environment of the north side of Broad Street. The idea of having a central plaza and much higher densities is no longer part of the city’s plan.”

In other words, the City paid over $1 million to buy a small parcel and then dropped the idea that required the purchase — the realignment of Maple and the pedestrian plaza — a year later.

To be fair to city officials, plans do change, especially when the City Council changes. And the city didn’t expect the City Center project to evaporate.

Mr. Shields said the city still hopes to salvage its investment, perhaps by combining it with adjacent parcels for a future development.

“I think it’ll end up being useful,” Mr. Shields said. “At the time the decisions were made, it was part of a larger project. We did what we committed to do. We held up our end of the bargain. It’s unfortunate we couldn’t proceed. But the investments will accrue to the city and the city’s taxpayers. In the long term, they will be a beneficial investment.”

But even if they are, was the $1 million price tag justified for the Broad Street parcel? It was 2.5 times the assessment, which seems like a lot. However, governments generally have to pay well above assessments in eminent domain cases, said Jeremy Hopkins, an eminent domain attorney in Norfolk.

Mr. Hopkins, who represents property owners throughout Virginia, said in a telephone interview that when governments compel property owners to sell, they are required to pay for private properties according to the doctrine of “highest and best use,” which means that the property is valued, for transaction purposes, based on what an owner could build there; it is not valued according to what the existing building is worth, which is how it is assessed for tax purposes.

That frequently results in a price that is well above assessed value. But in this case, the city opted not to use eminent domain, and voluntarily paid that price, which surprises Mr. Hopkins, who said he’d never seen a government voluntarily pay 2.5 times an assessed value — he’d seen it only when it is compelled by a judge.

Ms. Finarelli said the city opted not to use eminent domain in this case and handled it in a voluntary fashion because the cost of hiring an outside attorney would have driven the cost of acquiring the property even higher.

Mr. Hopkins said that is plausible. “The government does save money when it chooses to negotiate fairly rather than litigate aggressively. It’s not uncommon to see the government spend nearly as much on litigation expenses as it does on the property,” he said.

Nevertheless, the city now, between the two properties, has $1.6 million tied up and little to show for it, other than $62,000 in annual income, although that is a 3.8 percent return, a higher figure than many bonds or bank accounts would earn.

“It’s better than nothing,” Mr. Shields said, adding: “That’s not an argument for the City making real estate investments. “We were trying to facilitate the economic health of downtown. That was the purpose.”

Going forward, the city’s options on the Gibson property are limited. Having purchased it with its eminent domain powers, the city now is restricted from turning around and selling it to a private developer or property manager, officials say.

Mr. Shields said one option is to expand Big Chimneys Park. Another is to see if Shirley Street can be extended through at some point in the future.

Since the Broad Street property was not purchased with eminent domain, no such restrictions should apply. Perhaps a developer will buy the one-story First Virginia Bank building next door and want the city property as well in order to accommodate a larger project.

However, with the property now assessed at just $379,000, it may be a while before a developer will pay enough to allow the city to recover all of its more than $1 million investment.