Just as construction timelines were about to formalize, Wilmington’s Gateway Project deal has fallen apart.

The city’s memorandum of understanding with the developer, East West Partners, expired Wednesday. And despite spending four years and six figures preparing for the massive project, the firm won’t seek to renew it. 

When the city council declined to apply for millions in grant funding to subsidize the inclusion of workforce housing in the mixed-use proposal last month, members didn’t appear to realize that doing so would effectively kill the deal.

The vote to apply for the grant failed 2-4.

In a statement Thursday morning, the city billed the decision to not pursue a development agreement as mutual. It’s not clear whether the city will attempt to seek another round of proposals, but a spokesperson said it will “consider options and strategies to realize its long-term vision for a thriving northern downtown.”

“The city remains committed to realizing the full potential of our transformative vision for downtown’s northern gateway in a thoughtful and responsible way,” said Mayor Bill Saffo.

Landscaping and a “Welcome to Wilmington” sign frame a fallow concrete spread where the aspirational Gateway Project was supposed to go. It combines more than 4 acres of downtown properties the city bought in anticipation of creating a mixed-use development.

Wilmington first partnered with Chapel Hill-based East West Partners–the only firm to respond to the city’s request–to create the sprawling project in 2019, envisioning apartments, a grocery store, and a visitor center. East West was also ready to acquire another adjacent blighted block on its own to build a much-desired hotel.

As negotiations over a development agreement firmed up this year, the city pushed to make sure that up to 20 percent of the residential units would be affordable for households earning $61,800 or less, at least for the first 20 years. The city refers to these units as “workforce” or “affordable” housing, often interchangeably, to describe the kinds of places police officers, nurses, or teachers could afford to live.

Including below-market-rate units helps both parties in the partnership provide a public benefit–a legal metric the city must meet in order to engage in these types of arrangements.

At 20 percent workforce housing, the numbers could make more sense for the city. East West would get the city’s land, which was last valued at $8.5 million but is likely worth more now, at no cost. By law, the city has to get back at least as much as it puts in–so at a minimum $13 million, between the grant and the value of the land. The city estimates that the value of the workforce housing is somewhere between $13.5 million and $16 million over 20 years.

In this case, that would be about 60 of the proposed 300 units, which would have cost East West about $8 million. So the city offered to apply for the $4.5 million grant through the New Hanover Community Endowment to lessen the burden (the endowment only awards grants to public or nonprofit entities, so East West couldn’t otherwise secure it on its own).

For most council members, the arrangement was too sweet. Giving away at least $13 million seemed excessive.

At the meeting last month, Councilman Kevin Spears laughed incredulously. “I’m in the wrong business. I should be a developer. I need to get off the council–that’s where the money is. I mean, are we OK with this?”

McKay Siegel, a partner at East West, said Monday the firm could have potentially absorbed the cost of reserving 30 units for workforce housing. “At 10 percent, maybe we could have figured it out,” he said.

Gateway’s demise highlights the hurdles in bringing affordable housing to market in the current economic climate. It it also illustrates some of the challenges in public-private partnerships. For the government, officials risk scrutiny in giving too much away. For developers, incentives may lose their sheen when covered in red tape. After all, East West was willing to walk away from free downtown real estate.

It’s also the latest local public-private partnership to flop. 

The city’s dream to redevelop an old bus garage on Castle Street attracted just one proposal in 2019. That deal also called for the inclusion of affordable housing, but plans stalled and the building was in such disrepair it was eventually razed. 

“I’m in the wrong business. I should be a developer. I need to get off the council–that’s where the money is.”

Councilman Kevin Spears

The county’s first iteration of Project Grace, the museum-library reimagining to include a small portion of workforce housing in an adjacent private development, also drew just one bidder. That original plan collapsed last year after a state commission rejected it, though a new developer swooped in and narrowly saved it this week.

Elected officials agree housing affordability is a problem, and they should do something about it. But how much should they throw at the issue? And how can they effectively incentivize it?

Last year, New Hanover County officials ditched a contemplated $50 million housing bond, and instead committed to spend $15 million to address the issue over five years, disappointing affordable housing advocates. 

More than 4 acres of vacant land in downtown Wilmington, where the city’s dream of developing the Gateway Project, hit a major setback. (Johanna F. Still for The Assembly)

Liz Carbone, vice-chair of the Cape Fear Housing Coalition, said that while she wasn’t familiar enough with the Gateway arrangement to comment, the group is always encouraging creative public-private partnerships to add more affordable units. The coalition urges local governments to consider “transformational funding” and policy decisions to “more substantially address the overwhelming need for rental and homeownership opportunities for residents of all incomes,” she said.

Public-private partnerships ought to have significant affordability components, Carbone said, and aim to support even lower income levels than are commonly targeted. 

But as more units are reserved for workforce housing and at lower rates, the finances get less attractive, Siegel said. “I think there’s a misunderstanding of how projects get financed and the types of burdens that a project can take on.”

Like affordable housing, ample retail space is another offering the public and often governments try to encourage, but the market is timid. Given historically high-interest rates, Siegel said it’s a lot simpler to support financing market-rate apartments that are bound to fill up with dependable tenants. “You’ve got to be able to prove [retail] to a bank,” Siegel said. “I don’t know that the rents on the north end of downtown get you to new construction [retail] rents right now.”

“I think there’s a misunderstanding of how projects get financed and the types of burdens that a project can take on.”

McKay Siegel, partner at East West Partners

The revitalized north end of downtown is taking shape, with a new amphitheater, a growing Brooklyn Arts District, and swaths of waterfront redevelopment. But foot traffic still isn’t quite at a level that would make financial sense for East West, at least not until the impact from the city’s recent move into its new headquarters in the former Thermo Fisher Scientific building, across the street from the Gateway site, is more clear.

So the retail risks, paired with the out-of-reach workforce housing request, make the project nonviable, Siegel explained. “It’s easy for us to understand the vision living here, it’s quite another thing when you go to finance it,” he said. 

East West previously partnered with the city to construct River Place, a downtown luxury condominium development that included retail. It didn’t have any affordable housing–back in 2014, when planning began, the term had barely entered the local public lexicon. As a public-private partnership, the public benefit was the parking deck, Siegel said. 

For the Gateway Project, the public benefit was supposed to be workforce housing. 

On Oleander Drive, Siegel’s firm is erecting hundreds of apartments at the former golf driving range, set to include 10 percent workforce housing. At the council meeting last month, Councilwoman Margaret Haynes noted the city didn’t have to subsidize that project (she voted in favor of applying for the grant).

Siegel said the macroeconomic conditions have changed drastically since they planned The Range on Oleander.

East West included workforce units in the Oleander project to secure an incentive–the first policy the city created in 2020 to encourage below-market-rate units. The carrot removes a density cap in exchange for including at least 10 percent workforce units, so developers can theoretically build as many units as they want instead of abiding by per-acre limits. But the bait isn’t that alluring: “It’s not like the profit level is infinite,” Siegel said. 

In the meeting last month, councilman and commercial real estate agent Charlie Rivenbark, voted against applying for the grant. He cited the city and county’s financial support of Starway Village, a project entirely composed of workforce units, as a deal he was more comfortable with. (The city and county contributed more than $5 million combined in pandemic funds to that project, and the state pitched in $9 million).

At the meeting, Rivenbark captured the crossroad: “How bad do you want affordable housing?”

An excerpt from this article first appeared in The Wilmington Dive, The Assembly’s weekly newsletter for the Cape Fear region. Subscribe here.

Johanna Still is The Assembly‘s Wilmington editor. She previously covered economic development for Greater Wilmington Business Journal and was the assistant editor at Port City Daily.