Re-investment and reasonable rents

More with Dulce Ramos

I have more to share of my interview with Dulce Ramos, owner of The Pump Room Boutique, a shoe store located on Milwaukee Avenue in Logan Square from 2003 to 2007. I lost recording of a part of the interview, so Dulce’s words are interspersed below in my own recap and commentary on some of the things we talked about earlier this month.

Building conditions

In addition to outgrowing the space at the original location of the The Pump Room Boutique at 2727 N. Milwaukee Avenue (see An interview with Dulce Ramos), a pipe had burst in the building, warping and damaging the painted floor that had contributed to the unique feel of the store. The building owner was supposed to pay for repair of the floor, but never did. The floor was never repaired, the painting never restored, the feeling never regained. As bad luck would have it, not even a new location at 2630 N. Milwaukee Avenue cured water problems for the store.

Similarly, G-Mart Comic Books (see New Business of the Year) had leaking water issues at its former location at 2760 N. Milwaukee Avenue as well. I also recall discussion in an April 2008 article, “New Logan Square Store Owners Deal with Development Dilemmas,” about the challenges retail tenants face with Logan Square’s older building stock that have not been kept in good condition (the article, once posted at what is now ChicagoTalks, is no longer available, and I’m working from memory).

There’s another conundrum for Milwaukee Avenue: Without tenants and rents, building owners do not have the money to invest in the proper maintenance and improvements of their buildings that would allow them to be suitable for leasing.

Some of this may be self-imposed. Property owners receive a tax break for the assumed depreciation of their buildings (clearly, plumbing and such does not last forever), but in reality the value of these buildings has not depreciated, but greatly appreciated. If property owners were to spend the amount of the tax depreciation that they receive on paper on actual improvements to their buildings’ plumbing, for example, they would have considerably less water problems and damage and be more attractive to prospective tenants.

Now, there are a number of long-term property owners along Milwaukee Avenue, and maybe they’ve reached their limits in allowable depreciation. The value of their buildings having greatly increased, however, puts them in a position to finance the necessary maintenance and upgrades that would entice prospective tenants to pay the rent that would pay down their loans and part of their taxes.

Sales prices and rents

Long-term property owners are also impeding the revitalization of Milwaukee Avenue in Logan Square with unreasonable sales prices. Some properties have been on the market for years. Just like some homeowners holding out for unrealistic prices in today’s depressed real estate market, Milwaukee Avenue property owners have not come to terms with what price the depressed Milwaukee Avenue market will bear.

Rents seem unreasonable too, given the current state of Milwaukee Avenue. In periodically checking various listings, including the Available
Space listing of the Logan Square Chamber of Commerce, I am surprised to commonly see rents of $25 a square foot. For the same or even lower price, a business could rent space on the well-maintained Sheffield Avenue in Lakeview (photo of sample listing right) or on the popular Chicago Avenue in East Village
(photo of sample listing right).

Peopling Places: What do other business owners need to know to help them be successful on Milwaukee Avenue?

Dulce Ramos: I think in any business — on Milwaukee Avenue or any street — the price of the rent is everything. Our rent at the first place was like $1000 a month. That is ridiculously cheap. The second place was $3500 a month, plus taxes.

What did $1000 include?

It was $900 something, and then with the CAM (Common Area Maintenance) fees, water, insurance and all that fun stuff they charge you when you’re a commercial tenant, it would come up to about $1100 a month total. (Dulce does not recall the square footage of the first space, so I am unable to put that rent in terms of $ per square foot.)

And the $3500, did that include anything?

No, and then we were supposed to pay taxes. ($3500 a month for the 1200 square foot space equates to $35 a square foot.)

Dulce also responded that neither building had a tenant improvement (TI) allowance. A tenant improvement allowance covers some or all of the improvements to a space that are necessary for a tenant to open for business. A shoe store, for example, might need a counter, display shelves, improved lighting, or an electrical outlet relocated. A restaurant might need sinks and ovens, refrigerators and additional bathrooms. To the extent that these improvements are attached and must stay with the property (like the light fixtures in your home), they become the property of the building owner. The building owner is also able to depreciate the improvements for tax purposes so it makes sense that the building owner, not the tenant, pays for this type of improvement.

Fantasy re-investment

In this stretch of Milwaukee Avenue between Logan Boulevard and Diversey Avenue, is there a business or storefront that you think has good potential and you could think of ways to redeem it and improve it?

Yea, I think the one that was Fantasy Fashions (photo left)…. That storefront I think is just wonderful frontage, big tall windows…. They need to redo the whole front with newer cleaner looking windows. (They need to redo more than windows; this was the former location of G-Mart Comic Books with the leaking water as mentioned above.)

And then, you know what, compartmentalize it. Turn it into two stores or …just like three shops or something like a co-op effort…. We thought about that with somebody on the space on Milwaukee Avenue…by Wicker Park. My sister and I went there, and it was too large. Then we’re like, “If we could find three other people, we could all pool together,” and you’d have your shoes, your clothes, your accessories. So that store is big enough…. Thoughts like that could go a long way, and that would make it affordable for somebody who wants to be a little funkier, edgier, to start a business…. That would be a really interesting thing if people could do that.

A conversation starter: What is your fantasy re-investment of a business or storefront on this stretch of Milwaukee Avenue?

To be continued.

Scene in Logan Square:

Music, performance and visual art at the Milwaukee Avenue Arts Festival on Saturday, August 9, from 11:00 a.m. to 9:00 p.m. at the corner of Milwaukee/Diversey/ Kimball Avenues to kick off the new season of the newly minted Logan Square Chamber of Arts.

Bonus: simultaneous Milwaukee Avenue sidewalk sale.

2 Responses to Re-investment and reasonable rents

  1. Carter says:

    great piece, very important to educate people about what is truly hampering commercial development – why do these things often seem to boil down to absentee (slum)lords and property speculators?

    Carter: I haven’t figured out yet what’s in it for them (the property owners) to not maintain their properties if they’re vacant. I’m hoping I can talk with a property owner or two to gain more insight. ~ Lynn

  2. Carter says:

    I was thinking of this as I was working my way through “Here’s the Deal,” a book chronicling the saga of Block 37, and this topic comes up quite a bit, it seems to boil down to depreciation and property taxes.

    For building owners speculating that the land is what is going to take off due to future demand, it makes perfect (albeit selfish) sense to try and keep your property taxes as low as possible while you’re sitting on the property.

    Improving your property also increases your taxes, and if your goal is to eventually tear down the current structure, or if you are assuming that’s what a new purchaser of your property will do (a fairly logical assumption in many cases), making a long-term investment is counter-productive.

    As Block 37 illustrates, trying to stop the process can be difficult, if not impossible. I think it’s pretty clear Milwaukee Ave is not currently living up to its potential (measured simply by the number of vacancies), so it would also stand to reason that the land value is also lower than it would be if the strip was thriving.

    So the question would seem to be, how do you motivate building owners to invest in the buildings they own, without having them need to pass on those expenses in the form of rents that people like Dulce can’t afford for the shops people are interested in patronizing? The City prefers the TIF program, but I personally think a better method would be some form of tax credits/relief that could be tied to improvements, much like as a homeowner I can deduct improvements made to my rental unit, or the way owners of architecturally valued homes can have their property taxes frozen. We certainly don’t want the City to be discouraging owners from making improvements to commercial buildings.

    Carter: Yes, Dulce raised that in our interview too: that when improvements are made the County now has a concrete number to plug into its assessment for tax purposes. Commercial property owners too can deduct expenses for maintenance, just as you can for your rental unit. And just like you, improvements are added to the cost basis for depreciation purposes. So yes, there are tax consequences, but I still don’t understand how it makes sense to keep spaces vacant for years. Would that (new) investors would have such patient capital and be willing to wait a few years for their investments to pay off as the long-time owners seem to be willing to wait, …and wait, …and wait.

    Chicago’s storied Block 37 is an interesting context. In that case the City “took” the land and later sold it for less than it had paid for it. And how many owners has it gone through since? In a way, I fear this approach. I haven’t researched all the specifics, but my sense is that something similar happened with the Morris B. Sachs building on the northwest corner of Milwaukee and Diversey Avenues: A long-time property owner held out for a high price, someone paid it, and the City bailed out his heirs by buying it for more than it was worth in the market. While I do hope it will spark some investment in Milwaukee Avenue by other property owners once rehabilitation begins, I don’t think this is a sustainable approach.

    With TIF money, since we have a TIF district, let’s figure out how to use it for its purpose — the revitalization of Milwaukee Avenue (and other streets). I don’t know the details, but I like the idea that Peoria gave developers a time frame: use TIF funds within five years, or forget about using them.

    I think there must be other ways as well for creative minds to work the system to the advantage of the neighborhood.

    BTW, Here’s the Deal has long been on my list of books to read. But, chances are good I’ll get to it before Block 37 is completed, no? ~ Lynn

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