Above: Architect's rendering of the Albert Avenue structure of the project, with retail on ground floor, the parking garage above that, and senior housing above that. (Seen as if looking from the direction of the Marriott Hotel.)
East Lansing’s Downtown Development Authority (DDA) and Brownfield Redevelopment Authority (BRA) voted yesterday to approve the five-page addendum to the Center City District deal. The same addendum was approved by City Council earlier this week. The financing for the project is now expected to be wrapped up next week, with construction on the $132 million project starting shortly thereafter. Demolition has recently been taking place in preparation for construction.
It is expected that next week, Scottsdale Capital will put up funds “not to exceed $31 million” to obtain bonds from the East Lansing BRA. This is essentially how the developer will fund construction of the public infrastructure portions of the project, including the new parking garage. The public infrastructure is expected to cost about $24 million. Additional funds have to be put up to fund the bonds themselves, which is why the bonds will be for millions of dollars more than the public infrastructure construction cost.
Under the project’s tax increment financing (TIF) plan, over 30 years, about $56 million in property taxes will be diverted from the developer-owned portions of the project to pay back public infrastructure construction and other agreed-upon costs, with interest of 5%. The bond investors take a risk that there won’t be enough taxes to pay back the full amount of the principal and interest, as this is a “non-recourse” TIF-revenue bond. The future tax revenue is the only security provided for the bonds.
Scottsdale Capital, the bond investor, is an Illinois-based investment company owned by Peter Paul Bell, father of Mark Bell, the principal developer of the Center City District project. Bell’s company, Harbor Bay Real Estate, is doing the project in conjunction with East Lansing-based Ballein Management. The development partnership is officially known as HB BM East Lansing LLC.
Brad Ballein, one of the developers, is a member of the East Lansing DDA and BRA. He recused himself from the discussions and votes yesterday, as he has done throughout the process.
The approved addendum to the development agreement between HB BM East Lansing LLC and the City, DDA, and BRA allows for a deposit of funds equal to 100% of the expected cost of the public infrastructure, including the parking garage, as a way of guaranteeing the City completion of the public infrastructure in the event the developer fails or walks away.
The money put up by Scottsdale Capital for public infrastructure construction will go into a trustee-controlled account that will be dispersed upon approval of the City and trustee, ensuring that the funds are used as intended. Huntington Bank has been chosen to hold the funds and act as the trustee.
This approach is being used instead of requiring that the developer provide a performance bond or a letter of credit in the amount of 125% of the cost of the public infrastructure construction. The development agreement was renegotiated in order to add this new form of security (100% deposit in a trustee-controlled account) as a way to satisfy the City’s requirement for guarantee of completion of the public infrastructure construction. Without this, the developer could not provide the guarantee that the City required prior to construction of any of the buildings starting.
The performance guarantee does not cover construction of what the developers will ultimately own, including the retail space along Albert Avenue, the senior rental housing above the parking garage, and the 12-story building on Grand River Avenue. It only covers the public infrastructure construction.
Above left, the Grand River Avenue building with the small-format Target store on the first floor; right, the Albert Avenue structure.
DDA/BRA Vice Chair Douglas Jester ran yesterday’s meetings, as Chair Peter Dewan was absent. At the DDA’s meeting, Jester asked how, if the City had to take over construction, the parking garage could be completed by the City without also paying for and building the retail space along Albert Avenue on the first floor of the garage structure, which is set to be the developer’s property and so does not count as public infrastructure. Does the 100% guarantee cover the cost of building both, Jester asked, so that the parking garage could really be built with the funds set aside with the trustee?
(Disclosure: Most of the discussion at these meetings about the addendum has been generated by questions I have put forward in writing and in public comment periods.)
In response to Jester’s question, City Attorney Tom Yeadon said that if there was a half-built structure and the developer walked away, the City could use the funds deposited with the trustee to raze the half-built structure or to finish the parking garage. Director of Planning Tim Dempsey then explained that the space for the retail would be built as a shell in this case, with internal completion of the retail space done via some other approach (for example, by engaging a new developer).
As we previously reported, the City has used the opportunity of the amendment to the Master Development Agreement to clarify a number of other parts of that agreement so as to make the City potentially less vulnerable to unintended financial risk.
The addendum to the agreement now clarifies the penalty for the developer not building the planned senior housing and also clarifies the developer’s responsibility to see that the City’s parking system obtains at least $350,000 in parking fees from construction workers. (If that total isn’t reached, the developer will make up the difference.)
According to the attorneys present yesterday, including bond counsel, there will be funds allotted in the BRA bonds ready to pay for some exceptional construction problems. This would be necessary, for example, if there is an unexpected interruption of sewer or water service that the developer doesn’t fix quickly and that the City is therefore forced to fix quickly.
Also discussed at the meeting was the section of the Master Development Agreement that refers to a total of $40,000 to be spent on a public relations (PR) campaign to bring visitors to downtown to utilize existing businesses during construction. That section of the Master Development Agreement refers to the City or DDA paying $20,000 of that amount and a “Bond” paying for the remainder. But the Agreement does not specify which “bond” it means to pay for the last $20,000. (The term “bond” is used in the agreement for both the BRA financing bonds and the construction completion guarantee bonds.)
About this, Yeadon and the developer’s attorney, Jarrod Smith, conferred and agreed with each other that the BRA bonds are to be used to put another $20,000 towards the public relations campaign. The $20,000 paid earlier by the DDA towards the Publicom contract has now been fully spent, so City staff says they need additional funds to keep helping downtown businesses survive the construction.
City staff told DDA members that they would receive information at their meeting next week about how the first $20,000 was spent as well as plans for future spending.
After this discussion, the DDA and later the BRA (which has the same membership as the DDA) voted unanimously in favor of the addendum.
After the DDA vote, Jester paused “to make one follow-up comment.”
He said that, in October, when being asked to vote on this deal, he had “expressed concern about these things being rushed, with opportunities for mistakes, and I think we are seeing some of that here.” He “urged” that in the future, more time and care be taken.
“This one has felt rushed many times,” he said, “and I think it shows.”
See ELi's complete reporting on the Center City District deal here.