Street of Dreams
About 90 families that rent city-owned apartments along historic ulica Boguslawa in Szczecin will move by April 1 to make room for a $100 million commercial real estate project that will convert two city blocks and 44 buildings into a shopping and entertainment complex as modern as any in Western Europe or the United States.
The relocation of the first 90 families marks the first stage of a scheme, which will uproot 2,200 Szczecin residents from dilapidated, city-owned buildings. The residents will move to new apartments funded by the project's developer, American Retail Systems (ARS) of Wroclaw, a property development and restaurant firm that owns 14 Pizza Hut and KFC franchises across Poland.
"Poland has never seen anything like this before. We are literally creating a downtown," said Henry McGovern, president of ARS, as he circled the center of a Szczecin map on his office wall.
In most Polish cities, a project of this magnitude would incite angry protests from private apartment owners reluctant to see their neighborhoods transformed. Several such protests have stalled major new office and public transit projects in Warsaw (See WBJ, Jan. 19-26, 1998).
The mood is different among the residents who inhabit the charcoal-gray apartment blocks along ulica Boguslawa, where 841 of the 922 apartments slated for demolition are owned by the city, which left them in such a state of disrepair that most people want to move.
"I do not claim to speak for everyone, but I'm anxious to get out," said Zita Zebowska, a retired transit official who has lived in the same apartment for 15 years along ulica Boguslawa. "I want to live in a normal environment, where I don't have to step over drunks on my way to work."
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The plan to transform Szczecin's downtown - tentatively dubbed "Centrum Boguslawa" - became official on Feb. 20, when the city council narrowly approved transferring ownership of 44 apartment buildings on land encompassing almost two entire city blocks to American Retail Systems (ARS). According to officials with the Szczecin city government, this is the largest transfer of downtown property to a private company in Poland's history.
"This is huge. If this works, then it will become a model for other Polish cities," said Sylwester Lechicki, one of 35 city councilors who voted in favor of the land transfer.
Developers likely to take a close interest in the project include ING Real Estate, the real estate subsidiary of ING Barings, which is planning a project of similar size on publicly owned property in Warsaw. The bank is still waiting for city permits to construct Zlota Centre, a 170,000 square-meter complex - hotel, restaurant, cinema, office, parking - between Warsaw's central station and the Holiday Inn hotel.
"It will be interesting to watch a project of this size," said Eugene Houx, project developer at ING Real Estate in Warsaw, referring to the Szczecin scheme.
Many developers may wonder, for instance, how ARS managed to convince a city government to hand over 44 downtown buildings.
The answer lies in a yellow-and-orange apartment development called "Somosierry," about 15 minutes outside Szczecin's city center. There, construction crews are putting the final touches on 90 new apartments that will house the first several hundred residents displaced by the new development along ulica Boguslawa.
In exchange for six downtown buildings, ARS agreed to pay about 50% of the cost of building those 90 apartments to Szczecinskie Towarzystwo Renowacyjne (STR), a municipal development agency that is responsible for building the replacement housing.
And that's just the beginning: To complete all four phases of its seven-year project, ARS has signed a contract that will require it to fund 100% of the cost of building another 800 to 850 apartments, like those at Somosierry, for an estimated 2,200 people. That will cost the private developer about $20 million - adding roughly 20% to the total cost of the project.
"For years this city has been waiting for a rich Western prince that will pay for all of this. What's remarkable here is that they may have found one," said Tomasz Weinert, a Szczecin architect.
The benefit for the city is that it finally has the opportunity to dispose of 18 dilapidated apartment buildings that it doesn't have the money to repair or renovate. The developer, meanwhile, will have the right to construct a multiplex cinema, shopping center, restaurants, office building and leisure center on two blocks of downtown property.
"In simple terms, the city is giving us land and we're paying for housing," ARS' McGovern said.
The chicken factor
This is not the first time that a foreign developer has made big promises to the Szczecin city government. In 1991, a consortium of Norwegian developers, Urban Renewal Group Norway (URGN), proposed creating a downtown commercial center in roughly the same area. URGN promised to secure a loan from the European Bank for Reconstruction and Development (EBRD) if the city promised to contribute land and buildings to the project.
Ultimately, the city council canceled the plan when the URGN failed to meet its contractual obligation to fund the cost of building replacement housing for the displaced tenants.
"The (Norwegians) had great designs, but they never proved they had enough equity to fund replacement housing," said Zbigniew Becker, vice president of STR, who has been involved in overseeing city renovation projects since the early 1990s. "In a project of this magnitude, you have to show you're willing to risk your own capital."
ARS showed it was willing to take such a risk. From the very beginning of its negotiations with the Szczecin city government, the developer promised to assume the cost of building the replacement housing. ARS silenced many critics late last month when it paid zl. 9 million ($2.6 million) in cash that will fund part of the cost of constructing the Somosierry project.
"I don't mean to sound arrogant, but that's chump change," real estate consultant Stuart Gross said.
ARS comprises five private shareholders. This includes Don Kendall, PepsiCo's founder and chairman for 27 years. Since arriving in Poland in 1995, ARS has built 14 Pizza Hut and KFC restaurants, which are generating roughly $20 million in sales a year.
McGovern said about 60% of the project will be financed through bank loans. Commerzbank has already promised to provide a loan for the first phase of the project - a retail center that will cost about $12 million to build. McGovern would not disclose the loan amount. ARS has also begun talks with Citibank and Bank Rozwoju Eksportu (BRE) for additional project finance packages.
As proof of its commitment to the project, ARS agreed to pay a $10 million penalty if it fails to deliver on its promise to build the new commercial center and fund the cost of constructing the replacement housing.
"ARS was the first company that came along that was willing to back up its ideas with real capital," Becker said.
The presence of two KFC restaurants in downtown Szczecin also worked in the company's favor, Becker added. Those restaurants generate 170,000 customers each month in a city with just 417,000 residents.
"People here have a weird thing about chicken," McGovern said.
According to Becker, that local affection for chicken was one of the main reasons why 35 of Szczecin's 60 city councilors voted in favor of the project last month (19 abstained, six voted against). "KFC is not a phony idea here. It's a known quantity. That made the entire project more real and tangible."
Renters want out
Most of the 2,200 people who live along ulica Boguslawa rent their apartments from the city government. As renters, they are legally required to move provided the city finds them alternative housing of similar quality within Szczecin's city borders, Becker said.
According to Jozefina Szukala, who's lived in a rented apartment at ul. Boguslawa 49 since 1951, most of the renters are eager to move out.
"As long as I can remember, people here have been waiting for something to change, for renovations and repairs," Szukala said, gesturing at the graffiti and olive-green paint coming off the interior walls of an apartment building that will be destroyed to make room for a multiplex cinema.
Instead of repairs, national governments in the 1970s subdivided the apartments to make room for more tenants. A four-person family that once had 60 square meters of apartment space was forced to share its bathrooms and kitchens with one or more other families of similar size.
The city government inherited the problem in 1990, when the national government transferred state land to municipalities. The city lacked the money to renovate the buildings and the political will to hike rents to market rates. According to Becker, current rents on the downtown blocks cover just 30% of the cost of maintaining the buildings.
"The city isn't sitting on a pile of money, and neither are the tenants," Becker said.
The result is that apartments have steadily deteriorated, and Szczecin residents avoid the area after dark, Weinert said.
"The ideal of (public) housing was one of bikes, public parks and children in strollers," Weinert said as he drove by the apartment blocks scheduled for demolition. "The reality is that apartments are falling apart, and people are pissing in the courtyard."
Residents complain of drunks passing out in their doorways and a general absence of security.
Krzysztof Kiech, 18, and Mariusz Walosz, 16, two residents along ulica Boguslawa, said they are often asked to deal with the drunks because most of the residents are too old to handle them. "First we ask them nicely (to leave). If they refuse, we get enough of us together and we kick them out," Kiech said.
"I took a look at those new apartments and they're pretty cool," Kiech said as he flicked his cigarette in the middle of the courtyard. "Most of us will be glad to leave."
One owner at a time
Ironically, a minority of private apartment owners remains the most significant obstacle to the largest single land privatization in Szczecin's history.
Of the 922 apartments within the area slated for the development, 81 are privately owned. Legally, neither the developer nor the city can displace the private apartment owners without their consent.
Winning that consent will be a costly and time-consuming process. The developer and the city must negotiate deals with each of the private owners. Aware of the stakes involved in the project, some owners are requesting generous cash payments or property in exchange for their apartments. "A single owner could potentially hold this entire project hostage," Becker said.
Negotiations with private owners will be the primary responsibility of Gross, a real estate consultant from Washington, D.C., hired by ARS as project manager. Gross spent 18 years working for Arthur Andersen before founding Gross International Financial Advisors, which along with Ohman, a Swedish investment bank, advised CS First Boston on the acquisition of $630 million worth of real estate from the Swedish government.
"Still, it doesn't take a doctorate in finance to devise a negotiating strategy with private owners," Gross said. "We have to pay them off. There's no other way. Some people will take the money after one meeting and move on. Others will be more difficult."
One private apartment owner said he would move only if the developer found him enough land to build a warehouse and distribution facility. Another family wanted to move, but a clause in a family will forbade them from selling their property.
"We are still trying to calculate the cost of (buying out) the private owners," Gross added
But the city government has one trick up its sleeve that could give ARS an upper hand, said STR's Becker. In city-owned buildings where a handful of private apartment owners refuse to move, the government can announce expensive renovation plans. The private apartment owners will be required to pick up most of the tab because most of the renters will already have moved out.
Becker estimates those renovations could cost as much as zl. 1,400 per square meter. A family that owns a 60-square-meter apartment could be hit with a renovation bill of zl. 84,000. "This is not a threat, this is a straightforward consequence of (private owners) sitting on their apartments," Becker said.
Even so, the minority of private owners will still be better off than renters who have already upgraded their apartments. Residents at ul. Boguslawa 9, an apartment block soon to be emptied of tenants, cited the example of Edward Bogucki, a father of two children who has spent 10 years renovating his apartment.
"He's got a nice apartment, but he's going to lose all of it," said Szukala, who lives in a nearby building.
Tenants who have upgraded their apartments will be given priority, behind elderly and sick residents, in the choice of replacement apartments, Becker said. Even so, there is no guarantee that their new apartments will be as big or as nice as their original ones.
"In a project of this magnitude," Becker said, "you'll never satisfy everyone."
Visions of Las Vegas
For now, however, McGovern and Gross would rather talk about their vision for downtown Szczecin than the thorny land issues which could stall the project. ARS held a general shareholders meeting last week in Szczecin to discuss financing and to give Kendall an opportunity to meet with city officials.
Phase One of the project will consist of 10,000 square meters of shops and clothing stores along ulica Boguslawa. Once complete, ARS will launch construction of Phase Two, which will contain a multiplex cinema, restaurants and a major department store covering 40,000 square meters. Ster Kinekor of South Africa has already signed a letter of intent to operate a 10-screen cinema as part of Phase Two.
The third phase will involve covering the entire length of ulica Boguslawa with a glass atrium. The fourth and final phase will include a hotel, office building and condominiums, adding another 60,000 square meters to the entire project.
McGovern and Gross get visibly excited when they show off plans for the project. "You see the way the city works now is that you've got the Radisson out here, a KFC over here, and a bunch of stores over here," McGovern said as he waved his pencil around a city map. "There's no center. We're going to build that center."
The atrium over ulica Boguslawa will hold the cinema, shops and restaurants, turning the street into a covered pedestrian walkway that will be cut off from Baltic storms and nearby traffic. To keep the "Old World feel" of the project, ARS will keep the Germanic facades of many of the existing apartment buildings, most of which were built in the late 19th century.
"Just think about it, we're going to cover a street. That alone is going to draw people to this area," McGovern said.
As of last week, however, McGovern and Gross were still debating how to build that atrium. McGovern had just returned from a business trip to Las Vegas, where he was shown a covered street that put on a laser-light show every hour. "I mean, it was amazing. People were pouring into the street to see this," McGovern said.
Talk of a laser-light show evoked smirks from Gross, who wants the project to retain a European flavor. "Now come on here," he said. "Let's not get carried away. I mean, do you really think that people here want this Americana bullshit pushed down their throats?"
"But it's so cool," McGovern retorted. "I mean, we could really do this."
The relocation of the first 90 families marks the first stage of a scheme, which will uproot 2,200 Szczecin residents from dilapidated, city-owned buildings. The residents will move to new apartments funded by the project's developer, American Retail Systems (ARS) of Wroclaw, a property development and restaurant firm that owns 14 Pizza Hut and KFC franchises across Poland.
"Poland has never seen anything like this before. We are literally creating a downtown," said Henry McGovern, president of ARS, as he circled the center of a Szczecin map on his office wall.
In most Polish cities, a project of this magnitude would incite angry protests from private apartment owners reluctant to see their neighborhoods transformed. Several such protests have stalled major new office and public transit projects in Warsaw (See WBJ, Jan. 19-26, 1998).
The mood is different among the residents who inhabit the charcoal-gray apartment blocks along ulica Boguslawa, where 841 of the 922 apartments slated for demolition are owned by the city, which left them in such a state of disrepair that most people want to move.
"I do not claim to speak for everyone, but I'm anxious to get out," said Zita Zebowska, a retired transit official who has lived in the same apartment for 15 years along ulica Boguslawa. "I want to live in a normal environment, where I don't have to step over drunks on my way to work."
=========
The plan to transform Szczecin's downtown - tentatively dubbed "Centrum Boguslawa" - became official on Feb. 20, when the city council narrowly approved transferring ownership of 44 apartment buildings on land encompassing almost two entire city blocks to American Retail Systems (ARS). According to officials with the Szczecin city government, this is the largest transfer of downtown property to a private company in Poland's history.
"This is huge. If this works, then it will become a model for other Polish cities," said Sylwester Lechicki, one of 35 city councilors who voted in favor of the land transfer.
Developers likely to take a close interest in the project include ING Real Estate, the real estate subsidiary of ING Barings, which is planning a project of similar size on publicly owned property in Warsaw. The bank is still waiting for city permits to construct Zlota Centre, a 170,000 square-meter complex - hotel, restaurant, cinema, office, parking - between Warsaw's central station and the Holiday Inn hotel.
"It will be interesting to watch a project of this size," said Eugene Houx, project developer at ING Real Estate in Warsaw, referring to the Szczecin scheme.
Many developers may wonder, for instance, how ARS managed to convince a city government to hand over 44 downtown buildings.
The answer lies in a yellow-and-orange apartment development called "Somosierry," about 15 minutes outside Szczecin's city center. There, construction crews are putting the final touches on 90 new apartments that will house the first several hundred residents displaced by the new development along ulica Boguslawa.
In exchange for six downtown buildings, ARS agreed to pay about 50% of the cost of building those 90 apartments to Szczecinskie Towarzystwo Renowacyjne (STR), a municipal development agency that is responsible for building the replacement housing.
And that's just the beginning: To complete all four phases of its seven-year project, ARS has signed a contract that will require it to fund 100% of the cost of building another 800 to 850 apartments, like those at Somosierry, for an estimated 2,200 people. That will cost the private developer about $20 million - adding roughly 20% to the total cost of the project.
"For years this city has been waiting for a rich Western prince that will pay for all of this. What's remarkable here is that they may have found one," said Tomasz Weinert, a Szczecin architect.
The benefit for the city is that it finally has the opportunity to dispose of 18 dilapidated apartment buildings that it doesn't have the money to repair or renovate. The developer, meanwhile, will have the right to construct a multiplex cinema, shopping center, restaurants, office building and leisure center on two blocks of downtown property.
"In simple terms, the city is giving us land and we're paying for housing," ARS' McGovern said.
The chicken factor
This is not the first time that a foreign developer has made big promises to the Szczecin city government. In 1991, a consortium of Norwegian developers, Urban Renewal Group Norway (URGN), proposed creating a downtown commercial center in roughly the same area. URGN promised to secure a loan from the European Bank for Reconstruction and Development (EBRD) if the city promised to contribute land and buildings to the project.
Ultimately, the city council canceled the plan when the URGN failed to meet its contractual obligation to fund the cost of building replacement housing for the displaced tenants.
"The (Norwegians) had great designs, but they never proved they had enough equity to fund replacement housing," said Zbigniew Becker, vice president of STR, who has been involved in overseeing city renovation projects since the early 1990s. "In a project of this magnitude, you have to show you're willing to risk your own capital."
ARS showed it was willing to take such a risk. From the very beginning of its negotiations with the Szczecin city government, the developer promised to assume the cost of building the replacement housing. ARS silenced many critics late last month when it paid zl. 9 million ($2.6 million) in cash that will fund part of the cost of constructing the Somosierry project.
"I don't mean to sound arrogant, but that's chump change," real estate consultant Stuart Gross said.
ARS comprises five private shareholders. This includes Don Kendall, PepsiCo's founder and chairman for 27 years. Since arriving in Poland in 1995, ARS has built 14 Pizza Hut and KFC restaurants, which are generating roughly $20 million in sales a year.
McGovern said about 60% of the project will be financed through bank loans. Commerzbank has already promised to provide a loan for the first phase of the project - a retail center that will cost about $12 million to build. McGovern would not disclose the loan amount. ARS has also begun talks with Citibank and Bank Rozwoju Eksportu (BRE) for additional project finance packages.
As proof of its commitment to the project, ARS agreed to pay a $10 million penalty if it fails to deliver on its promise to build the new commercial center and fund the cost of constructing the replacement housing.
"ARS was the first company that came along that was willing to back up its ideas with real capital," Becker said.
The presence of two KFC restaurants in downtown Szczecin also worked in the company's favor, Becker added. Those restaurants generate 170,000 customers each month in a city with just 417,000 residents.
"People here have a weird thing about chicken," McGovern said.
According to Becker, that local affection for chicken was one of the main reasons why 35 of Szczecin's 60 city councilors voted in favor of the project last month (19 abstained, six voted against). "KFC is not a phony idea here. It's a known quantity. That made the entire project more real and tangible."
Renters want out
Most of the 2,200 people who live along ulica Boguslawa rent their apartments from the city government. As renters, they are legally required to move provided the city finds them alternative housing of similar quality within Szczecin's city borders, Becker said.
According to Jozefina Szukala, who's lived in a rented apartment at ul. Boguslawa 49 since 1951, most of the renters are eager to move out.
"As long as I can remember, people here have been waiting for something to change, for renovations and repairs," Szukala said, gesturing at the graffiti and olive-green paint coming off the interior walls of an apartment building that will be destroyed to make room for a multiplex cinema.
Instead of repairs, national governments in the 1970s subdivided the apartments to make room for more tenants. A four-person family that once had 60 square meters of apartment space was forced to share its bathrooms and kitchens with one or more other families of similar size.
The city government inherited the problem in 1990, when the national government transferred state land to municipalities. The city lacked the money to renovate the buildings and the political will to hike rents to market rates. According to Becker, current rents on the downtown blocks cover just 30% of the cost of maintaining the buildings.
"The city isn't sitting on a pile of money, and neither are the tenants," Becker said.
The result is that apartments have steadily deteriorated, and Szczecin residents avoid the area after dark, Weinert said.
"The ideal of (public) housing was one of bikes, public parks and children in strollers," Weinert said as he drove by the apartment blocks scheduled for demolition. "The reality is that apartments are falling apart, and people are pissing in the courtyard."
Residents complain of drunks passing out in their doorways and a general absence of security.
Krzysztof Kiech, 18, and Mariusz Walosz, 16, two residents along ulica Boguslawa, said they are often asked to deal with the drunks because most of the residents are too old to handle them. "First we ask them nicely (to leave). If they refuse, we get enough of us together and we kick them out," Kiech said.
"I took a look at those new apartments and they're pretty cool," Kiech said as he flicked his cigarette in the middle of the courtyard. "Most of us will be glad to leave."
One owner at a time
Ironically, a minority of private apartment owners remains the most significant obstacle to the largest single land privatization in Szczecin's history.
Of the 922 apartments within the area slated for the development, 81 are privately owned. Legally, neither the developer nor the city can displace the private apartment owners without their consent.
Winning that consent will be a costly and time-consuming process. The developer and the city must negotiate deals with each of the private owners. Aware of the stakes involved in the project, some owners are requesting generous cash payments or property in exchange for their apartments. "A single owner could potentially hold this entire project hostage," Becker said.
Negotiations with private owners will be the primary responsibility of Gross, a real estate consultant from Washington, D.C., hired by ARS as project manager. Gross spent 18 years working for Arthur Andersen before founding Gross International Financial Advisors, which along with Ohman, a Swedish investment bank, advised CS First Boston on the acquisition of $630 million worth of real estate from the Swedish government.
"Still, it doesn't take a doctorate in finance to devise a negotiating strategy with private owners," Gross said. "We have to pay them off. There's no other way. Some people will take the money after one meeting and move on. Others will be more difficult."
One private apartment owner said he would move only if the developer found him enough land to build a warehouse and distribution facility. Another family wanted to move, but a clause in a family will forbade them from selling their property.
"We are still trying to calculate the cost of (buying out) the private owners," Gross added
But the city government has one trick up its sleeve that could give ARS an upper hand, said STR's Becker. In city-owned buildings where a handful of private apartment owners refuse to move, the government can announce expensive renovation plans. The private apartment owners will be required to pick up most of the tab because most of the renters will already have moved out.
Becker estimates those renovations could cost as much as zl. 1,400 per square meter. A family that owns a 60-square-meter apartment could be hit with a renovation bill of zl. 84,000. "This is not a threat, this is a straightforward consequence of (private owners) sitting on their apartments," Becker said.
Even so, the minority of private owners will still be better off than renters who have already upgraded their apartments. Residents at ul. Boguslawa 9, an apartment block soon to be emptied of tenants, cited the example of Edward Bogucki, a father of two children who has spent 10 years renovating his apartment.
"He's got a nice apartment, but he's going to lose all of it," said Szukala, who lives in a nearby building.
Tenants who have upgraded their apartments will be given priority, behind elderly and sick residents, in the choice of replacement apartments, Becker said. Even so, there is no guarantee that their new apartments will be as big or as nice as their original ones.
"In a project of this magnitude," Becker said, "you'll never satisfy everyone."
Visions of Las Vegas
For now, however, McGovern and Gross would rather talk about their vision for downtown Szczecin than the thorny land issues which could stall the project. ARS held a general shareholders meeting last week in Szczecin to discuss financing and to give Kendall an opportunity to meet with city officials.
Phase One of the project will consist of 10,000 square meters of shops and clothing stores along ulica Boguslawa. Once complete, ARS will launch construction of Phase Two, which will contain a multiplex cinema, restaurants and a major department store covering 40,000 square meters. Ster Kinekor of South Africa has already signed a letter of intent to operate a 10-screen cinema as part of Phase Two.
The third phase will involve covering the entire length of ulica Boguslawa with a glass atrium. The fourth and final phase will include a hotel, office building and condominiums, adding another 60,000 square meters to the entire project.
McGovern and Gross get visibly excited when they show off plans for the project. "You see the way the city works now is that you've got the Radisson out here, a KFC over here, and a bunch of stores over here," McGovern said as he waved his pencil around a city map. "There's no center. We're going to build that center."
The atrium over ulica Boguslawa will hold the cinema, shops and restaurants, turning the street into a covered pedestrian walkway that will be cut off from Baltic storms and nearby traffic. To keep the "Old World feel" of the project, ARS will keep the Germanic facades of many of the existing apartment buildings, most of which were built in the late 19th century.
"Just think about it, we're going to cover a street. That alone is going to draw people to this area," McGovern said.
As of last week, however, McGovern and Gross were still debating how to build that atrium. McGovern had just returned from a business trip to Las Vegas, where he was shown a covered street that put on a laser-light show every hour. "I mean, it was amazing. People were pouring into the street to see this," McGovern said.
Talk of a laser-light show evoked smirks from Gross, who wants the project to retain a European flavor. "Now come on here," he said. "Let's not get carried away. I mean, do you really think that people here want this Americana bullshit pushed down their throats?"
"But it's so cool," McGovern retorted. "I mean, we could really do this."
