Lost projects of Knoxville: Why big promises often come with unexpected delays

What ever happened to ________? You fill in the blank. Sometimes it seems like we’re teased more than we’re rewarded with new downtown projects.

Take the Andrew Johnson Building on South Gay Street and the proposed riverside high-rise adjacent to Neyland Drive as examples, both happening more slowly than surely. The inside of the former Hotel Knoxville on East Hill Avenue is still being worked on, and the only thing worse than a divisive structure is an empty one.

But like all good things in life, building up Knoxville for a new generation takes time. And developers are faced with a multitude of challenges daily, often sending their dreams back to the drawing board.

Downtown restaurant owner Jim Klonaris has seen it happen with his own Jim’s on Jackson, a steakhouse that would anchor his proposed mixed-use Excelsior development in the Old City.

Any time you put your name on a project, you want it done right. And while it's still possible to build a restaurant, residential units and a boutique hotel on site, it might require bringing in partners from outside the Klonaris family the way things are going.

When he first started working on the project, Klonaris told Knox News, banks were loaning at an 85% rate, something Klonaris was comfortable with on his own. But roughly two years back, bank regulations got tighter.

Klonaris said he's now expected to cover 35%, or $7 million of the $20 million project, and "that's so far out of my world I can't even see it."

"There's a handful of people that can do it," he said. "But then there's the appetite to do it."

A few weeks of delays can push downtown projects back a full season

If securing capital isn't a problem, navigating the red tape of local government can be, especially when your project is set on a tight schedule.

Sarah Harris, chief investment officer of Bluedog Capital Partners, has experienced this firsthand as her company works to develop apartments at the former MAC Auto Loans site on the northern edge of downtown on West Fifth Avenue.

“As far as the timeline of this project, our initial target was to be in the ground last year,” she told Knox News. “But I’m sure as every other developer is telling you, it’s a very lengthy process with the permitting in Knoxville.”

Harris was told to expect a two-to-three-month period for the permitting process, she said, but it has now been more than seven months just because there is so much "clog in the pipe."

Delays aren't apples-to-apples. A few weeks of waiting can cause seasonal setbacks as cold and wet conditions can also put a project behind. If contractors are not able to finish their work by established deadlines, Harris said, the expectation is they move on to their next project and come back when they can.

Private developers compete with public projects in Knoxville

Leigh Burch III has found “labor is the stickiest cost by far” right now, leading him to press pause on his Capitol Lofts project that would bring 123 apartment units to West Vine Avenue near the 100 block of Gay Street.

“We have the financing commitment and the cost, and we have a PILOT,” Burch said, referring to a payment-in-lieu-of-taxes benefit used by local government to encourage development. “And the costs are just prohibitive for now. And we are starting to spend a little time to try to tweak the design. ... This is not a project I feel like is ‘if.’ It’s more of a ‘when.’”

City of Knoxville PILOTs are approved through Knoxville’s Community Development Corporation, a public housing authority that also serves as Knoxville’s redevelopment arm. Developers seeking a PILOT typically transfer the property to the city's Industrial Development Board, which accepts payments equal to the amount of the current tax value over the course of a PILOTs duration.

Because KCDC is in the development world, Burch said, the entity seems to be more understanding when it comes to project delays.

But some private developers feel like they are competing for attention with public redevelopment projects. The city is working with KCDC on the proposed pedestrian bridge, the Old City baseball stadium and the Reconnecting Knoxville project that will link East Knoxville, South Knoxville and downtown.

The future of Knoxville's growth has been one of the top conversations among local leaders in recent years, with the city adopting Recode Knoxville in 2019. This overhaul of zoning ordinances, much like the recently approved Advance Knox on the county level, guides where certain types of growth are allowed for years to come.

The McClung Warehouses site along West Jackson Avenue, where buildings were destroyed by fires in 2007 and 2014, is one of Knoxville's next big priorities for redevelopment. The city, which owns the property, is expected to put out a request for mixed-use proposals on the site this year.

It's not the worst idea for local government to sit on an empty lot until the right opportunity comes along. The property won't generate any additional tax value that would come with a new development during the waiting period, but it won't lose money for the city, either.

It's not as simple for private developers.

Waiting to develop comes with multiple costs, whether you own or lease

Developers can spend "tens of thousands of dollars a month" sitting on a piece of empty property, Klonaris said. For one, you still have to pay property taxes without the cash flow that would come with a completed project.

If you're leasing property and working slowly on a project, you're losing money in rent each month.

Fortunately for Klonaris, he has other downtown businesses like Kefi and The Vault that bring in money. In September 2021, Knox News reported on why "portfolio players," or those with established businesses, are usually better equipped to take on new projects − especially in a downtown area where costs can be prohibitive.

"Under normal circumstances, I would not be able to financially just sit on this property indefinitely because I borrowed money to buy it," Klonaris said.

So, what do you do? You can sell your property and walk away with a profit, but starting the cycle over can delay progress further as new owners decide on a new plan.

"There's people buying properties like mine at any chance they can," Klonaris said. "I've had some inquiries that are so strong that, at some point, I'd be foolish not to take a financial offer and walk away from the whole project.

"And I'm trying not to because I really do have a dream to do that project with all the pieces."

On the flip side, there's an opportunity cost for owners who can't find tenants to take on projects for their property. Ilana Brodt, whose family owns the former TVA Credit Union building at the corner of Gay Street and Wall Avenue, called upon a fellow developer who wanted to build a hotel and restaurant there a while back.

That deal didn't go through, she said, so her family is working on a plan to build out the space themselves with an arcade-style shopping center housing multiple vendors sharing a common space. Apartments could be built up above.

It's a need, Brodt told Knox News, but it has also required going back to the drawing board. She could have rented the building out as office space and made some quick money. But the first thing she likes to do is "think about the concept and how it will enhance downtown."

"I don't like empty buildings," Brodt told Knox News. "I think it's a disservice to the city to have a building sitting empty if you can develop it or sell it."

Sometimes underground surprises are waiting for Knoxville developers

Even when the funding is there and a project is approved, developers might still have to wait. Sometimes you don't know what kind of land you're dealing with until you start digging in.

"We were delayed approximately six or seven months due to bad soils," developer Tim Hill told Knox News about Hatcher-Hill Properties' mixed-use project taking over the west side of Gay Street's 200 block.

Perhaps, no developer knows this challenge more than the team behind the high-rise planned just east of the Henley Street bridge along the downtown side of the Tennessee River.

Knox News first reported on the site in 2018 when developers announced The T at Riverfront, a project that would have added nearly 300 downtown apartment units across 19 floors. The project was delayed, scaled back and scrapped before new plans were recently announced for the steep-sloping property fronting West Hill Avenue and towering over Neyland Drive on its other side.

Rick Blackburn, a local project manager and representative of the owners, told Knox News in 2021 the riverfront topography had made building a foundation costly and was the biggest holdup.

Crews have examined the site in a handful of areas for potential underground challenges, he said, but conditions can change in a matter of feet. Developers won't know for certain what awaits them underground until construction begins, but caves are always a possibility when building close to the water.

This 'disconnect' between developers and Knoxville residents

At a certain point, developers might just have to bite the bullet and begin work. Nashville-based BNA Associates, the same group behind The Oliver Hotel on Market Square, delayed redeveloping the Andrew Johnson Building on South Gay Street due to challenges caused by COVID-19.

In March, Knox County sent a letter to the developers requesting construction start soon on a new hotel to avoid legal action.

Because BNA was patient with the county, which didn't turn over the building until five years after the company's $6 million bid was selected in 2017, the county has been patient with the developer. Chris Caldwell, the county's chief financial officer, previously told Knox News "we feel some responsibility" for the delays.

Mark Mamantov, a lawyer representing the county, told developers in a letter the county understands high interest rates and supply chain issues caused by the COVID-19 pandemic caused delays. However, the county also acknowledged projects with similar scopes have been taking place here despite these circumstances.

Developers understand community members expect them to deliver on projects, even when communities sometimes struggle to understand the challenges developers face. It can be hard for communities to relate to multimillion-dollar projects, often leading to the unfair expectation developers should have the means to build or renovate quickly and without the help of public partners.

But one man's George Washington is another man's Benjamin, and costs will always be relative.

"I think there’s a huge disconnect between people that are in business and creating jobs and the people outside of that bubble really understanding what it takes to make that happen," Klonaris said.

Ryan Wilusz is a downtown growth and development reporter. Phone 865-317-5138. Email ryan.wilusz@knoxnews.com. Instagram @knoxscruff.

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This article originally appeared on Knoxville News Sentinel: Downtown Knoxville residential, commercial projects face delays