Will The Gallery be a windfall for city?

Jan. 29

Previous coverage

By Kellie Patrick Gates
For PlanPhilly

A city agency may find a richer revenue stream if Foxwoods Casino opens at The Gallery at Market East.

Here’s how it would work. The Philadelphia Redevelopment Authority owns The Gallery – an unusual circumstance for an agency that usually finances projects, then gets out of ownership. The RDA leases The Gallery’s commercial space to the Pennsylvania Real Estate Investment Trust – or PREIT – for about $650,000 annually through several long-term lease agreements. PREIT is essentially The Gallery’s landlord, renting out the space inside to various tenants through subleases.

But now that Foxwoods hopes to become PREIT’s tenant, city officials are wondering whether PREIT is paying enough. And so the city has hired Jones Lang LaSalle, a global firm that specializes in real estate services and investment management, to assist the RDA and Commerce Department through negotiations with PREIT.

“If the property becomes more valuable, we want a better deal,” said RDA Executive Director Terry Gillen, who is also the mayor’s point person on casinos.

City staffers and Jones Lang LaSalle experts started to conduct research to determine what financial impact Foxwoods would have on The Gallery about two weeks ago, Gillen said.

Casino-Free Philadelphia attorney Paul Boni said the city should determine whether The Gallery is the right place to put a casino before it investigates the lease issue.

“The city is potentially wasting a tremendous amount of money by spending money on collateral issues when they haven’t made a decision yet – or so they’d like us to believe – on the fundamental question of whether this is appropriate at this location,” Boni said.

“If it’s not going to fit, why pay someone to figure out what the rent is going to be?”

Boni also said that any economic studies should consider a casino’s potential economic impact on surrounding businesses, homes and families. Casino-Free, Asian Americans United and others who oppose a casino at The Gallery worry that it would take customers away from other area business, decrease demands for homes in the area, and increase gambling addiction, thus having a negative impact on families.

City officials have promised to examine these issues before making a decision, but Boni said he’s tired of hearing the promises and wants to see it happen before the proposed project moves further along.

Even before Foxwoods pondered moving to The Gallery, PREIT had been working for more than a year on plans to improve the space, which many people think has never realized its potential. But Gillen said the work of Jones Lang LaSalle, which has offices in Philadelphia, will only consider two scenarios: The Gallery as it is, or The Gallery with Foxwoods.

When asked whether the possibility of getting more money for the PREIT leases makes a Gallery location for Foxwoods more attractive to the city, Gillen declined to answer, saying to do so would reveal too much of the city’s strategy.

“I would hope that when all the facts are weighed, just the opportunity to make a few more dollars on the city’s part isn’t going to be the guiding light,” said Washington Square West Civic Association vice president and zoning chair Carl Engelke. “If all the other information came back that (a casino at The Gallery) is the worst thing that could possibly happen, my hope is that the money aspect would not be the ruling factor.”

Washington Square West has not taken a position on Foxwoods moving to The Gallery, saying that it needs more information about the proposal and its impacts. Engelke approves of the city’s analysis of the market value of the property, saying it’s always good to have as much information as possible.

And if the full project analysis proves that The Gallery is the right spot, Engelke said the city should try to get more money to lease the property.

Orest Mandzy, managing editor of Commercial Real Estate Direct and a Doylestown resident, said that the value of commercial property is all about foot traffic. Casinos have increased foot traffic and real estate value in other places, like Vegas, he said, so it’s logical the same thing would happen here. But logical doesn’t mean definite, he said, because the city has never had a casino. “In Philadelphia, maybe the book is still out on that,” Mandzy said.

Still, from his perspective, the bigger question is a legal question: Can the City change their financial arrangement with PREIT before the terms of the leases expire?

“PREIT, they’re not dummies. They’ve got a team of lawyers, and they have negotiated a lease – in their minds, a rock-solid lease,” he said. “If the city has an out, then shame on PREIT.”

When asked if the city could somehow make PREIT renegotiate the lease, or if it would try to persuade them to do so, Gillen again said answering the question reveals too much strategy.

If the current lease agreements stand until they expire, the city won’t be getting any additional money for a very long time. The shortest lease – 30 years for the Burlington Coat Factory space – doesn’t expire until 2033. The leases for Gallery I and Gallery II expire in 2074 and 2083 respectively.

Some have little doubt about what Foxwoods would do to The Gallery’s value.

“Certainly we would anticipate the property values, not only of The Gallery, but of the properties that surround it, to increase in value if and when Foxwoods makes the move,” said Chuck Ardo, spokesman for Governor Ed Rendell, a casino proponent.

Gillen said the analysis isn’t far enough along for her to say whether Foxwoods would boost the value of The Gallery. The current economy also makes it harder to predict, she said. “It’s a very uncertain time in the real estate business.”

She is not expecting the findings of Jones Lang LaSalle to be wrapped up in a single report, but rather that the consultant and the city agencies will “have a series of conversations” as the Foxwoods proposal moves forward and the city talks with PREIT.

“Governments are good at some things,” she said, “but we need real estate experts to guide us so that we know we’re making a good deal.”

PREIT representatives declined to comment for this story.

Contact the reporter at kelliespatrick@gmail.com