Conversion experience

Nov 2, 1997, 11:00pm CST

DOWNTOWN -- Sometime next year, someone will wake up, turnover and stare the Flying Red Horse straight in the eye.

That someone will be privileged enough to occupy a two-storypenthouse apartment atop the Kirby Building at 1509 Main St. Heor she will pay top dollar for the rooftop pool, covered parking anda staggeringly glorious view south across the central businessdistrict, including the Magnolia and Adolphus buildings.

"This building is one of the beautiful ladies of downtown," saidAlice Murray, who is overseeing the conversion of the 1913 LateGothic office building. "It's an incredible opportunity."

The success of conversions and other residential developmentsalong downtown's periphery has now prompted developers to gostraight to the heart of the city. Within the next 18 months, thenumber of units renting in the central business district will risefrom 180 to 1,098.

"There's been a lot of activity and we've gotten a little revenue,"said Jack McJunkin Sr. of Centre Development Corp., whichdeveloped the Joske's building at 1900 Elm and is currentlyrenovating the 509 Elm building. "But when everyone starts gettinginto the same thing, it makes me nervous."

The 1900 Elm complex leased 60% of its 124 units within two weeksof opening this year, which should have soothed McJunkin'snerves. But the lack of retail infrastructure and the novelty of themarket still give developers jitters.

Sneaking up on downtown

Since Dallas developed largely after the invention of theautomobile, it has no tradition of urban living as do older cities likeNew York, Chicago or Boston. However, as the office vacancy ratedowntown rose during the 1980s, developers with experience inother parts of the country saw an opportunity for the turn-of-the-century buildings that remained in Dallas' core.

Lew Wood was one of those developers, having seen the successof loft apartments in downtown Chicago. He tried to buy the AdamHats building at the corner of Canton and Central Expressway in1987 but couldn't find an interested lender.

"I tracked it over the years, and in October of 1992, I contracted topurchase the 2220 Canton building," said Wood. "But I was still tooearly."

Meanwhile, new development around the periphery established asolid market for intown housing. Post West, the REIT formerlyknown as Columbus Realty Trust, established a market for upscaleinner-city housing with its new developments in the Uptown andState-Thomas neighborhoods. Those aren't conversion projects,but they provided a bridge of residential real estate between thePark Cities and downtown.

"Ten years ago, there was an abundance of moderate-priced land,"said Post West president Robert Shaw. "For the purpose ofproviding housing, it made sense to explore that."

Wood sold the Canton building to Westdale Asset Management andused the proceeds to buy the building that became Murray Lofts.Together with John Miller Co., Wood's Pan-American Capitaldeveloped two loft complexes from cotton gin factories and a thirdfrom the erstwhile headquarters of Farm & Ranch and Holland'smagazines.

The very first conversion projects began south of the centralbusiness district. In the early 1980s, former SMU professor and cityadministrator Bennett Miller began carving studios and lofts out ofsome 25 buildings in the light-industrial area south of Old City Park.

The lofts have been snapped up by artists and others "who don'tmind finding syringes on their doorstep in the morning," Millersaid.

Miller's current project is the American Beauty mill, a 1913-vintageflour mill he's converting to 82 lofts. Each unit will have an openfloor plan, high ceilings and huge banks of windows.

The mill is miles from any kind of shop or restaurant, facing twovacant buildings owned by the Dallas Independent School Districtand another Miller conversion project.

"I think this is going to be an exciting place to live," said Miller,standing on the roof where a pool and artwork will be installed.

"Most of our tenants are non-traditional people, artists, graphicdesigners and so on. But we have bank executives, too -- they'renot all flakes," he said, a hint of a grin showing beneath his beard.

Shaw's success north of Woodall-Rodgers, and that of Wood andJohn Miller in Deep Ellum and Bennett Miller in Old City Park, haveenabled developers to go straight to the heart of downtown. Withinthe next two years, at least six of the central business district'soldest buildings will open as apartments.

The city's Intown Housing Program has been aggressive in makingloans based on the federal Department of Housing and UrbanDevelopment's Section 108 program, which loans money to citiessecured by their Community Development Block Grant funds.These loans have enabled Pan-American and Hall Financial Corp.,among others, to secure financing above and beyond equity onhand and available bank loans.

"We provide `gap' financing for projects," said Cherryl Peterman,director of Dallas' planning and development department. "Weborrow from HUD and loan it to developers. It's a true lending risk."

Developers are stringing together Section 108 funding, historic taxabatements and more traditional private loans for conversionprojects such as the Kirby building, the Santa Fe railroad complexand the Mitchell building. The HUD funding requires a percentageof units to be rented at below-market rates to people making lessthan 80% of the city's median income.

"It was an extremely difficult deal, with equity financing, historicaltax credits, the Intown Housing Project and HUD," said Wood,whose Deep Ellum lofts have 30% of their units rented at below-market rates. "We applied to the city in February 1994 and didn'tclose until September of 1995."

As difficult as the deals may be, they are snapped up both atmarket and below-market rates. Downtown projects are leasing upto 60% to 90% of capacity within 90 days of opening, Petermansaid.

Where's the beef?

And eggs? And milk?

Aside from grass, the only thing downtown apartments lack issupporting retail development. The closest grocery stores are theUptown Albertson's, the La Fiesta at Ross and Greenville or theMinyard's on Martin Luther King by Fair Park. Rumor has it there's adry-cleaning outlet downtown, but video stores and bodegas arenowhere to be found.

"We're discussing this with all types of city officials, developers andowners," said Janet Cobb, who co-chairs the Central DallasAssociation's retail subcomittee. The subcommittee commissioneda report on the potential for downtown retail development andexpects it to be completed this month.

"We're going to start with two blocks of Main Street and work out toall of downtown," said Cobb, the co-owner of Cobb RestaurantGroup. "It's an exciting project -- this isn't a report that's going to siton someone's coffee table."

But Southwest Properties CEO Cliff Booth said there's convenienceenough already to keep downtown living from being a hardship.

"Most people drive to the grocery store anyway," Booth said. "I liveon Main Street. I'm not telling you I rely on downtown, but there's adrugstore here, and there's a guy who sells fruit in my building. Youwon't see a big grocery store down here, but you'll see smallerspecialty shops."

The economics of downtown leasing will be interesting to watch.Projects funded through Section 108 typically have about 33% oftheir units set aside as "affordable," depressing prices at one end ofthe market to as little as 92 cents per square foot.

On the other end, developers are getting as much as $1.25 persquare foot on the open market. The average rent in the intownmarket is $1.077 per square foot, the highest in the Metroplex,according to M/PF Research Inc.

"Being across from Neiman's ought to be worth a nickel," saidMurray, laughing.

Whether demand can accommodate both a rising supply and arising price remains to be seen, however. The number of apartmentunits on the market will grow by 610% over the next 18 months,according to the Central Dallas Association.

"It's a matter of building blocks," said Larry Fonts, president of theCDA. "The true urban core is perhaps a bit slower than some of theneighborhoods, but not much. I think we're on the cusp ofsomething great.

Dallas has a lengthy tradition of building gleaming, new palaces onthe prairie. But in the central business district, it's the charm ofolder, shabbier buildings that will make or break the hottestresidential market in the Metroplex.

Welch Suggs

Staff Writer