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Usually, creating an arts neighbourhood is a problem that solves itself. Artists tend to find their way to the cheapest, unsung areas of town, turning unused, derelict factory space into studios and gradually gentrifying the area. Restaurants follow, and higher end boutiques. At the end of the process, the artists are often squeezed out, forced to forage anew in another desolate corner of the metropolis.

Urban thinkers, from Richard Florida (who coined the term "the creative class" to describe the new drivers of urban renewal) to Toronto's own Jane Jacobs, are underscoring the role of artists in creating vibrant, safe communities and, with them, economic prosperity. But how does one go about building a "centre for art, culture and entertainment" from scratch?

It's the question that drives the discussion around the Distillery Historic District in Toronto's industrial West Don Lands, an urban renewal project that is unprecedented in North America.

The suite of 45 vintage Victorian industrial buildings on 5.2 hectares at the foot of Parliament Street was, for a century and a half, the home of the Gooderham & Worts Distillery, at one time the largest distillery in the British Empire. The original architect of the site, active in the mid-19th century, was David Roberts Sr. His son, David Roberts Jr., designed the later buildings on the distillery site, as well as Toronto's famous Flatiron Building and the York Club at St. George and Bloor Streets.

It is to the Gooderham & Worts Distillery (which fronted directly onto Lake Ontario until the waterfront landfill left it landlocked in 1918) that Al Capone came in the night to load his boats with bootlegged alcohol, destined for the Prohibition-clenched United States. As heritage sites go, this is about as good as it gets.

Taking this shell -- abandoned since 1990, when the distillery ceased production -- and turning it into an authentic culture zone is the task that Cityscape Development Corp. (John Berman, Mathew Rosenblatt, James Goad and David Jackson) and their backers (husband and wife Bill Wiener and Lillyann Goldstein and members of Mr. Wiener's family) have set themselves, against towering odds. Their efforts to date have been heroic.

Opening last May with a fledgling roster of tenants -- among them Corkin/Shopland Gallery, Sandra Ainsley Gallery, Fluid Living, Rossignol & Associates Design firm, and the brave Balzac's Coffee House, the first on the block -- the initial spin was good. Gorgeous, soulful spaces, interesting businesses, a pedestrian cobblestone zone in a city overrun with cars, and vintage charm galore.

But it's not all lace-frilled delight and sugar plums in this old world enclave. Talk to some of the tenants and you quickly realize that life in Cityscape's Victorian fairy tale has been a little more Dickensian than they bargained for. Art dealer Monte Clarke, who still maintains his original gallery in Vancouver, says his sales have more than doubled since he moved from Queen West to the Distillery District, but he adds that last week was the first time he got heat in his gallery. He is not alone.

Another dealer in the complex was shielding his work station with a plastic tarp on the day I visited, so the workers who urinate onto the floorboards upstairs wouldn't irrigate his desktop. "I think Toronto wants the Distillery District to succeed," one tenant told me last week. "I just don't think people know how fragile it is."

The landlords have troubles of their own. There's the fact that the site turned out to be below the flood plain, with the groundwater contaminated by industrial remains of a coal treatment plant just to the north. (It has since been cleaned up.)

Inside, the story was just as daunting. When Cityscape took the property on, just two years ago, heat to the buildings was provided by 300-degree steam, with radiators that delivered second-degree burns to those unfortunate enough to touch them by mistake. The entire system had to be replaced. Ditto the electrical supply.

And because of the area's formidable historic status, the developers cannot so much as change an outdoor lighting fixture without the approval of city hall.

Not enough of a challenge? Well, then there are the sewers, or rather the lack thereof. When Cityscape bought the site, the buildings had almost exclusively been used for storage, not for human habitation.

Whatever sewer lines existed were cut, and the 61-centimetre exit pipe at Parliament was replaced "basically with a garden hose," Mr. Goad said, remembering in horror the evening last spring when the sewers backed up into Sandra Ainsley Gallery minutes before an event. "As all the people were arriving in their mink coats, we were pumping raw sewage into the parking lot," he recalled this week, straining a bit to laugh at the memory. Efforts to dig new sewer lines have been vexatious to say the least.

"Have you ever tried digging in sand?" he asked, referring to the soil beneath the distillery that was originally waterfront marsh. Then he made a little collapsing gesture with his hands.

The landowners have other troubles. One can't help but speculate on how much these anchor tenants are actually paying in rent.

Mr. Berman, for example, described to me handing Ms. Ainsley her space "basically for free" for her initial period at the distillery, saying, "Here's the key. Go for it." Several dealers have confided that they have yet to sign binding leases, with their contractual negotiations bogged down in details.

Two of the largest restaurants are owned by Mr. Berman and Mr. Rosenblatt themselves, with their wives operating stores on the prime Trinity Street frontage. Revenue from the film industry has also plummeted, because of the unavoidably messy and noisy renovation of the site.

Watchers of the distillery project should remember that all the major historical-site rejuvenation projects in Canada -- such as Granville Island in Vancouver, Pier 21 in Halifax or the Old Port development in Montreal -- have been federally funded projects built on federal land.

The Distillery District project, however, is an initiative of private entrepreneurs on privately owned land with no public support. Add to that the fact that the owners are also making the commitment to keep the chain stores out; no quick-fix Gap and Starbucks franchises to keep the bankers happy. (So far, the group has committed $30-million to the project, and counting.) Their payback will come, the argument goes, with the construction and sale of three condo and retail buildings on the site (or the sale of the rights to build them to another developer). The first of these structures, planned at 400,000 square feet, has already been approved by city planners.

But the partners are making their gamble in the post-9/11, post-SARS era, with the tourist economy in a state of suspended animation. The desirability of the condos will hinge on the success of the heritage regeneration project, but the reverse will also be true.

Were Cityscape attempting this in another country, they might have rosier odds. Bennie Gray, who owns the Custard Factory, a dynamic cultural live/work complex in Birmingham, England, reports that his development received three massive infusions of capital from the British government, totalling more than £3-million ($6.7-million), in recognition of the developer's role in job creation and urban renewal. (The Custard Factory is half the size of the distillery project.) By way of contrast, Sheila Copps has yet to visit the site.

There are hopes that the arrival of Soulpepper Theatre Company and George Brown College will bring a new vitality, helping to set a more sophisticated tone than the buskers and cart vendors of last summer. Construction of the new, jointly-funded, 40,000-square-foot performance facility and theatre school is scheduled to begin next year. (George Brown is also hoping to move their design school to the site.)

But will Soulpepper sign on the line? Soulpepper artistic director Albert Schultz declined to return calls when asked to speak about his distillery plans.

Mr. Berman and Mr. Rosenblatt insist they are a heartbeat away from a deal with the theatre company, but that was the case with the Museum of Contemporary Canadian Art for month upon month this year in its bid to relocate from its Sheppard Avenue and Yonge Street location. Bogged down in a year of negotiations, with city hall acting as intermediary (the city funds the gallery), MoCCA and Cityscape finally fell out of bed when the city came back with a deal that involved lower rent payments and the request for assistance with more capital improvements, so that the institution could meet the required museum-grade conservation standards.

Art consultant Fela Grunwald has been acting chairwoman of MoCCA throughout its efforts to relocate. "We did negotiate and we did come close," she says, but at the end of the day, "they didn't get what we were about. They couldn't give us the autonomy we need."

Issues of contention included the mandatory contributions to collective Distillery District advertising; the requirement that tenants participate financially and activity-wise in community events; restrictions around renting gallery spaces for use in film shoots (a major potential source of revenue for a contemporary art museum); and the lack of control over the programming in the common outdoor spaces -- events like Toronto Partigras! and Woofstock, a community dog show, which contribute, Ms. Grunwald says, to a "carnival atmosphere" not conducive to the museum.

Now, MoCCA is on the brink of a deal with a Queen West landlord.

"He really believes in the arts," Ms. Grunwald says. "He understands what we are trying to do, and he is busting his ass to help us. I don't know if there was that empathy at the distillery."

Margie Zeidler, landlord of the thriving 401 Richmond Street arts building (Richmond Street West and Spadina Avenue), also stresses the need for arts landlords to take a different approach.

"Traditionally, the landlord wants an ironclad 10-year lease with no room for change. But the world doesn't work like that any more. People need the flexibility, particularly small businesses and cultural organizations."

The payback is there, she says, if you hang in. "Everyone told us in the nineties that we should kick out the artists and pull in the dot-coms, but we didn't," recalling the moment when rents quadrupled almost overnight in her downtown neighbourhood. "If we had, we would have been in real trouble now." The big expenses come, she says, with changing tenants. Today, the building is worth at least ten times as much as the $1.5-million she paid for it in 1994, with a zero per cent vacancy rate.

Of course, Cityscape paid a pretty penny more than $1.5-million for the distillery; $10.75-million, according to Mr. Berman and Mr. Rosenblatt, and this blunt financial fact will inevitably influence the demographic of the tenant mix.

Thankfully, the city has mandated within the development a place for the small culture producer.

The Case Goods Building and the Cannery, on the southern flank of the property, has been leased to Tim Jones of Artspace, a not-for-profit organization that has developed a number of low-cost artist live/work properties around the city. (Artspace had to find $2-million for the renovation, including $900,000 from Cultural Spaces Canada, with Cityscape contributing $600,000.) Walking the halls and meeting his 63 tenants -- small-scale theatre producers, painters, artisans, an opera company, weavers -- the creative excitement is palpable, with all the players waxing eloquent about the new creative synergies that proximity makes possible. As well, key stakeholders in the district, like Jane Corkin, are digging deeper into their commitments; Ms. Corkin is renovating a 6,000-square-foot space, which is scheduled for completion next year.

The other good news is that the quiet money behind the Distillery Historic District shares the ideas about regeneration-through-culture that Ms. Zeidler and Mr. Jones know so well. Visit investor Lillyann Goldstein at her own Wallace Studios compound, over at Wallace and Lansdowne in the city's industrial west end, for example, and you discover a similar community of creative workers -- filmmakers, caterers, set builders, sound engineers, editors -- united in a common endeavour.

(Ms. Goldstein surprised her Cityscape partners last week by publicizing her family's heretofore private part in the project, implying they have played, and will play, a larger role in the development than has previously been acknowledged.) But to create such a community from zero and on such a massive scale is an experiment that urban planners around the world are watching carefully.

"The truth is," Mr. Jones says, "you can't engineer bohemia, but you can create the conditions in which it can thrive."