The Silk Mill is Back in Play - Concluded

The historic Silk Mill near downtown Petaluma is back on the market, after two attempts to restore it failed.  The first attempt was a condominium proposal that fell apart when the City Council voted down an exemption from a blanket moratorium against entitlement applications.  The second attempt was a hotel proposal that was abandoned when the owner/developer identified preferred development opportunities elsewhere.

So, what opportunities for the Silk Mill might make sense today? 

Let’s look first at the physical characteristics of the site, followed by the zoning constraints.  Then we can use some market information to draw some preliminary conclusions about the alternatives.

I should note that I have no inside knowledge.  Although I’ve spoken with people who were involved in the condominium proposal and I saw the proposed configuration back when it was active, I haven’t reviewed any cost documents for either of the failed proposals.  I placed a call to the current listing realtor, but didn’t received a call back prior to posting this blog.  Except for two interviews with members of the condominium development group, I relied only on public information.

Although perceived today as a prominent feature along Lakeville Street, the Silk Mill was constructed in 1892, long before Lakeville Street existed.  Nor does it have frontage on Lakeville.  I was probably not alone in being surprised that it has no Lakeville frontage.  However, the grassy and treed lot along Lakeville isn’t part of the Silk Mill.  Instead, it’s a City park.

It’s not a well-utilized City park.  During my several visits to the site, I saw one person using the park, a poorly dressed man who was napping on the grass.  Nor could I visualize neighborhood children playing in the park with its proximity to Lakeville Street.  Nonetheless, it’s a City park.

Also, the strip of deteriorating pavement between the park and the Silk Mill is a public right-of-way, Erwin Street.  It no longer serves anything except the south face of the Silk Mill and hasn’t been maintained in years, but it remains a City-owned right-of-way.

In addition to Erwin Street, the Silk Mill site is bounded on two other sides by public streets, Wilson Street and Jefferson Street.   The fourth side is the back of a one-story strip mall that includes Lolita’s Mexican grocery.  To the north, the nearest neighbor is a propane dealer.  To the west, the neighbors are single-family home and retail, including a veterinary clinic and an auto parts store.

Turning to zoning, it’s important to note that the site isn’t within the Central Petaluma Specific Plan (CPSP).  It’s a surprising omission because the CPSP was adopted to govern new development in the historic downtown and most proposed uses of the Silk Mill would augment Petaluma’s downtown.  However, in the vicinity of the Silk Mill, the CPSP ends at the centerline of Lakeville Street.

In the case of the Silk Mill, the omission from the CPSP probably makes little difference.  The CPSP is a “form-based code”, meaning that great weight is given to the massing and street presence of new buildings.  As the Silk Mill is an existing building which must remain in compliance with historical preservation standards, many of the tenets of a form-based code are moot.

Also, the Implementing Zoning Ordinance (IZO) which governs all of Petaluma outside of the CPSP, puts the Silk Mill is the MU2 zone, which is written to promote consistency with the downtown:

“MU2 (Mixed Use 2) zone. The MU2 zone is applied to the Petaluma Downtown and adjacent areas that are intended to evolve into the same physical form and character of development as that in the historic downtown area.”

The IZO then goes on list various land uses that might be permitted in the MU2 zone.  The uses that seem to have the greatest applicability to the Silk Mill are the following:

Permitted Land Uses- Residential in mixed use building, live/work, hotel, restaurant, general retail, grocery, artisan shop, offices, library, museum, art gallery, dance studio, printing, and publishing.

Conditionally Permitted Land Uses - Artisan/craft product manufacturing.

Not Permitted– Multi-family residential.

Perhaps the most interesting element of this list is that multi-family as a stand-alone use, which was the use proposed back in 2008, is not permitted.  The only way that multi-family can be approved is as a component of a mixed-use project

Elsewhere in the IZO, minimum parking standards are provided for the uses listed above.  Simplified slightly, the parking requirements are 1.5 parking spaces per residential unit, 1 parking space per hotel room, 1 parking space per 2.5 restaurant seats, and 1 parking space per 300 square feet for most other uses.

With this quick introduction to the physical setting and the applicable zoning, what are the land use options?

Parking appears to be the biggest constraint.  I’ve been advised that the area of the building is approximately 38,000 square feet.  If the building was solely devoted to uses excluding residential, hotel, or restaurant, that the parking requirement would be 125 spaces.  As the Silk Mill covers much of its site, there isn’t adequate room for 125 spaces of surface parking.  Even if a parking structure was affordable, which it likely wouldn’t be, it would block the view of the Silk Mill and the view is a part of its historic status.

Having recently visited the Oxbow Public Market and the Emeryville Public Market, the vision of a Petaluma Public Market dances in my head when I look at the Silk Mill.  But when I think about the expanses of parking around the two existing public markets, I realize that the parking isn’t available at the Silk Mill.

So, the proposed use must include some element of residential, hotel, or restaurant.  But parking would still remain tight, even with the lesser parking space requirements.  Perhaps this is where the City park becomes important.  The City needs more parks, not fewer.  But if a Silk Mill developer were to acquire and to improve a parcel at a more appropriate location elsewhere in the neighborhood, it would provide a more usable park for nearby residents and provide room for additional Silk Mill parking.  Not enough parking to make the office or public market uses work, but enough to make the residential or hotel uses a little more physically feasible.

I wouldn’t want an expanse of parking to extend all the way to Lakeville.  Either the existing park trees or re-landscaping should continue to provide a buffer.  But a portion of the park site could provide 25 to 30 parking places which would help the Silk Mill development.

And with the park resolved, the same should be done for the abandoned segment of Erwin Street.  Petaluma has a process for vacating rights-of-way that are no longer needed.  This should be pursued.  Typically, an abandoned right-of-way is split between the fronting parcels.  With the park relocation concept however, the entire right-of-way would become available to the Silk Mill development.  I would expect that much of the vacated right-of-way would still be paved, but would be reconfigured into a site and parking access.

With space for parking thus secured and the more parking-intensive land uses rejected, what remains?  The same residential and hotel uses that previously failed, perhaps supplemented by smaller uses to meet the mixed use standard.

A hotel is certainly appealing.  However, a hotel proposal has just failed.  Yes, the developer abandoned the proposal to pursue better opportunities elsewhere, but if the hotel had been projected as hugely feasible, he probably would have found a way to remain involved.  Plus, in his announcement that the project would be abandoned, he noted the high City impact fees.  The City may be reconsidering its impact fees in the near future, but if the impact fees were the straw that broke the camel’s back, the camel was probably already well-burdened.  Also, hotels are problematic in the current economy.

During the economic slowdown, business travel has slowed significantly, which has impacted hotels.  It’s unclear how much of a rebound will eventually happen.  As a result, lenders are leery of hotel proposals that rely on business travel.

The outlook for tourism travel is similarly cloudy.  Plus, as a potential local hotelier has pointed out to me, there are two hotel markets in Petaluma.  There are the hotels along the freeway that serve the tourists who use Petaluma to rest their heads while enjoying the myriad delights of Sonoma County.  And there are the hotels that serve the people who want to explore the delights of downtown Petaluma.  The Silk Mill is probably in the latter group, but is too far from downtown for guests to comfortably walk there.  Also, there are several potential hotel sites closer to downtown that could pre-empt the Silk Mill market.

Excluding hotels, we return to residential.  However, as strictly residential isn’t permitted under the IZO, we need to augment the residential with another use.

The definition of “mixed use” is unclear in the IZO.  Indeed, it isn’t even listed in the glossary.  However, we’ll assume that a good development team could successfully argue that a single supplemental use meets the mixed use standard.

I’ll assume a small, trendy restaurant, perhaps a forty-seat establishment serving California cuisine.  The previous condominium proposal included 38 units.  If we assume that the restaurant displaces three of the units, we’re left with 35 condominium units plus a forty-seat restaurant.  Applying the parking standards, we’d need 69 parking spaces.  The parking would be tight, but could probably be accommodated.

So, if the preferred land use is 35 condominiums and a small restaurant, is it financially feasible?  The current assessed value of the Silk Mill is a little more than $3.6 million, $2.25 million for the land, $1.35 million for the building, and a few extra dollars for the remaining equipment and furnishings.  The assessment is consistent with the reported asking price of between $3 million and $4 million.

In the current economy, the value of non-residential space is generally disregarded in determining financial feasibility.  Thus, the Silk Mill price can be considered perhaps $3.5 million divided by 35 potential units, or $100,000 per unit.

How does the number work in the marketplace?  It’s comparable to per unit bare land prices in San Francisco.  But in Petaluma, current appraisals on bare land multi-family sites are more in the $25,000 to $30,000 per unit range. 

But perhaps you note that the Silk Mill isn’t bare land.  It already has a fine building in place.  That’s true, but restoration can often be as expensive as new construction.  And restoration under historic preservation standards can be even more expensive.  The comparisons to bare land value are reasonable and perhaps even optimistic.

If developed as condominiums, units in the Silk Mills would likely have prices in the $600,000 range.  If, as is likely with the current mortgage market uncertainties, the units must used as apartments for a couple of years, the monthly rents would be in the neighborhood of $4,500.

Is there a Petaluma market for $600,000 condominiums or for $4,500 apartments?  Sure, at least for a couple of the units.  Is there is a market for 35 units like that?  Much less likely.

And that is where we end up.  It’s a great building that is worthy of restoration.  But the feasibility of the best apparent use is dubious.   What’s the solution?  It could be a number of things.  Grants for historical preservation.  Relief from City impact fees.  People with better ideas than mine.  But restoration will remain a tough slog.

Is my approach the perfect configuration?  Probably not.  There will be many smart people looking at the property with more skill than I bring to the task.  But hopefully this analysis gives an insight to how land use proposals take shape.  And there are many more aspects of the site that could be explored, such as how to improve non-vehicular transportation options to downtown or to the SMART station. 

As always, your questions or comments will be appreciated.  Please comment below or email me.  And thanks for reading. - Dave Alden (davealden53@comcast.net)

The Silk Mill is Back in Play - Part 1

A month ago, I wrote about how retailers end up in their locations. It wasn’t a particularly profound post, mostly just a review of how business location decisions get made in the marketplace. But it seemed to resonate in cyberspace. It was the post that received my most traffic ever, more than six times the traffic of my average post. Many of the readers seemed to come from Washington, D.C. One of the links I provided was to a news report from Washington, D.C. but one wouldn’t expect Washington, D.C. readers to check a California blog for information about their own backyard. Sometimes the internet can be a strange place.

I’m back on the same subject, but with a broader perspective. In the earlier post, I wrote that public opinion has little effect on how land use decisions are made for retail uses. The broader perspective is that public opinion has little effect on most land use decisions.

That isn’t to say that public opinion has no weight. It does. But the weight is far less than we might expect. And much of the weight is proscriptive, through zoning prohibitions adopted following public comment, through denial of land use applications by planning bodies after adverse public sentiment, and through post-approval lawsuits.

Only rarely does public opinion work in favor of a project. The most common example is the encouragement to a planning body to disregard others who oppose an application.

In place of public opinion, the primary determinants on which uses occur on which sites are (1) what uses the consuming public will support, (2) on what uses a developer is willing to gamble, and (3) on what uses a lender is willing to provide funds. It is at the intersection of these three sets that development proposals take root.

I offer this quick summary because a significant Petaluma property may again be heading toward the land use arena. The current owner of the Silk Mill, a historic structure on Lakeville Street in Petaluma, has announced that his abandonment of plans for re-use of the building. Instead, he has placed the building on the market. This is the second proposed re-use of the building that has failed to reach fruition.

I came to Petaluma in the waning days of the Silk Mill operation. I never had the opportunity to see it at work, which I regret. However, I’ve spoken with many members of the community who visited the floor during operation and remained impressed years later by the noisy whirl of production. It was a mainstay of Petaluma employment and pride for many years. And it remains a dramatic and impressive landmark near the heart of town, although now encircled by weeds and marked with broken windows. It has also been designated as a National Historic Landmark.

After the Silk Mill, known in its latter days as Sunset Line and Twine, ceased operation and its equipment was removed, the first proposed re-use was upscale condominiums. The proposal was intended to comply with historical preservation standards and to celebrate the history of the building. A core group of investors devised the configuration and then solicited participation from prominent Petaluma citizens, many of whom likely cared about almost as much about historical preservation as about profit-potential.

As the planning aspects came together, the project was ripe for an entitlement application in early 2008. However, the City of Petaluma was in the midst of a General Plan update. The General Plan would incorporate updated environmental goals, such as water conservation. But at the time, the California Attorney General was suing other municipalities for failing to go far enough with their General Plan environmental goals. In the absence of an adopted water conservation goal, the City imposed a moratorium on new entitlement applications, which appeared to leave the Silk Mill development group sitting on the sidelines.

However, the Silk Mill development group had an argument to make. The expected water use for the condominium project would be less than the historical use by the Silk Mill. Therefore, they asked the City Council to exempt their proposal from the moratorium. The Council denied the request. To this day, at least one member of the development team believes that the denial was based, not on the water conservation issue, but an underlying concern about whether condominiums were the appropriate use.

Without the right to submit the entitlement application, funds were unavailable to continue the development tasks, including paying interest on the acquisition debt. After a few months of hanging on, the development group capitulated and sold the project at a loss.

The buyer reconfigured the proposed project as an extended-stay hotel project. The project moved ahead slowly. However, within the past few months an alternative business opportunity arose for the new developer. He decided to focus solely on the new opportunity. The Silk Mill was again listed for sale. The fate of the historic structure is again uncertain and the economic boost that re-use might provide to Petaluma is again deferred.

In my next post, I’ll look at how the zoning ordinance frames to the options for the Silk Mill and at the site constraints and market conditions that constrict the possibilities.

As always, your questions or comments will be appreciated. Please comment below or email me. And thanks for reading. - Dave Alden (davealden53@comcast.net)