the cafe at 79 Daniel St. is the latest chapter in the story of the rising cost of real estate in Portsmouth 

Pedestrians on Daniel Street will soon notice a brand new coffee shop in the space previously occupied by Caffe Kilim.
The latest development at 79 Daniel St. represents another link in a chain of ownership changes stretching across the last dozen years. And with downtown property values soaring, the story of Caffe Kilim reflects a shifting business atmosphere in Portsmouth’s main artery.

Construction is underway on Zarella’s Café, which has remained vacant since the Kilim coffee shop relocated to Islington Street in September. The new café will offer Green Mountain Coffee and light snacks, said owner Patrick Pagnani, of Epping.

Pagnani purchased the ground-level condominium from Greenway Management in May 2006 for just shy of $430,000, according to public records. Reached by phone on Jan. 16, Pagnani said he expects Zarella’s Café to open sometime in March. He owns both the property and the new business, which will include 16 tables with seating for up to 36 customers, according to a building permit.

No changes will be made to the building’s exterior, but extensive interior remodeling has already begun. Paperwork included with the building permit details plans for a second, interior front door, lower ceilings, a new counter for coffee sales and two bathrooms. Construction costs were estimated at $25,000.

Like many downtown commercial spaces, the three-story building has changed hands numerous times over the last decade, the property values leaping higher with each transaction. Records available at the Rockingham County Registry of Deeds show that the building sold for slightly over $60,000 in 1985. More than 10 years later, in 1996, a new buyer purchased the building for more than $140,000. Caffe Kilim opened in the ground-level unit that year.

The following year, in 1997, Lawrence McManus bought the building for more than $216,000. McManus sold the building in July 2001 to Calanna Inc. for $435,000. The president of Calanna Inc. was Matthew Govoni, owner of Breaking New Grounds, who sold it three years later for $585,000 to Greenway Management, a N.J. company.

“It was strictly a property that was available and I thought it was a good investment,” Govoni said recently.

Caffe Kilim has not been so lucky. Co-owners Yalcin Yazgan and his wife, Janice Schenker, tried repeatedly to purchase the building themselves, but were unable to come up with the cash in time. After purchasing the building in 2004, Greenway Management divided the property into three condominiums, with residential units on the second and third floors and a commercial unit on the ground level. The two residential units sold for a combined $535,000.

Yazgan and Schenker again attempted to purchase the ground-level space, but Pagnani beat them to the punch. The cafe space sold for $430,000, meaning the value of the entire property had increased by $380,000, or 65 percent, since Greenway had purchased it two years earlier.

The Kilim owners hoped to remain downtown after their lease expired in September.

“(Pagnani) ignored our request to negotiate a new lease,” Schenker said. “We never talked about a lease extension or anything else.”

The Kilim owners had been planning to open a grocery store on Islington Street, but when it became clear they would not be able to keep the coffee shop on Daniel Street, they decided to relocate, instead.

The property left behind has been vacant since September, but Pagnani said he did not want to discuss the building’s history, and would not answer questions about Caffe Kilim.

Jane James, of Marple & James Real Estate in Portsmouth, said rapid changes in building ownership and property values are common across the Seacoast.

“Things change hands and property values change, I mean it’s not unusual,” James said. “It’s sort of market forces at work.”

Average rents and property values vary depending on the size and location of a space, as well as factors such as storage space, James said. Although prices are going up across the board, James said that costs should not be prohibitive for well-managed independent businesses.

“My perception is that the wealth of the coffee business is not done by a chain, it’s done by the Kilims and the Breaking New Grounds and the Popovers and places like that,” she said.

Govoni, who originally opened Breaking New Grounds on Market Street in 1993 before moving into a more prominent location in Market Square in 2004, agreed that a balance can be struck between rising rents and increased business. Property values increase as Portsmouth becomes a more popular destination, which is good for local businesses.

“The businesses in my opinion have gotten a lot busier and more successful over the years that I’ve been here,” Govoni said. “The popularity of Portsmouth has definitely gone up. Certainly the traffic that we see here has gone up over the years.”

But other downtown property owners worry that rising property values and tax assessments will make it difficult for smaller independent businesses to turn a profit.

“I think there are impacts in terms of the type of businesses that can afford to be downtown,” said Paul Sorli, owner of the Portsmouth Gas Light Company on Market Street. “The bottom line to it is, can the independently owned stores continue to afford the property taxes?” he asked.

Sorli’s property taxes increased by almost 30 percent between 2005 and 2006, and other businesses saw even bigger increases. Nine properties located on Bow Street jumped from a combined assessed value of $5,712,800 in 2005 to $9,216,800 in 2006, reflecting an average annual increase of 34 percent.

Along with rising property taxes, the cost of renting, maintaining and insuring downtown property is on the rise, Sorli noted. He started the Gas Light Company in the late 1980s and used innovative ideas to make it work. But he wonders whether he would have been able to start the company with today’s prohibitive real estate costs.

Although they remain bitter about losing their Daniel Street space, Yazgan and Schenker said the move to Islington may have been a blessing in disguise. High downtown apartment rents and condominium conversions have forced some of their most loyal customers to move to neighborhoods off Islington Street, keeping them close to their favorite coffee shop.