Center City Demolition Starts Without Anticipated Financial Protections for City

Wednesday, November 15, 2017, 6:50 am
By: 
Alice Dreger

Results of a Freedom of Information Act (FOIA) request obtained yesterday now show that the Center City District developer told East Lansing city staff on October 20 what ELi had reported both before and after that: The financial guarantees required by the City—guarantees meant to ensure completion of the public infrastructure, including the new parking garage—are so expensive for the developer to obtain, they make the project financially unfeasible.

FOIA confirms that this late realization—that he would not be able to meet what the City was asking in terms of financial insurance—was the reason why developer Mark Bell told Mayor Pro Tem Ruth Beier on October 20 that he was “walking away” from the deal.

Then why is demolition of Lot 1 happening in earnest today?

It’s not because Bell has managed to get the financial guarantees in place. Asked about FOIA findings yesterday, Beier told ELi that Bell still has not obtained the financial insurance necessary to guarantee the completion of the public infrastructure, including the new garage.

But, according to Beier, Harbor Bay's Mark Bell needs to start demolition now to meet the terms of his agreement with Target, which is expected to be the anchor tenant in the Grand River Avenue portion of the project. So, the City has apparently let him go ahead and start the project by demolishing public property.

The City has required a special demolition bond for the destruction of existing infrastructure on Lot 1, and Bell's contractor did provide that. However, that bond guarantees only that, if the deal falls apart, Lot 1 will simply be graded flat and covered in gravel.

The developer and the demolition bond will not pay to restore what had until recently been the City's most lucrative property to turn it back into a gated, functional parking lot, as it was until about a week ago. If Bell can't make the project happen, the City is going to have to pay to restore Lot 1.

Until fairly recently, City staff and Council members had been holding out for guarantee of project completion:

Communications obtained yesterday via FOIA seem to show that, throughout early-to-mid October, City staff were telling Bell and his partners that they had to have financial guarantees in place to finish the public infrastructure before they could start demolition. These guarantees could come in three basic forms: (1) performance completion bonds that would pay up to 125% of the cost of the new public infrastructure; (2) a letter of credit worth at least 125% of the cost of the new public infrastructure; or (3) an escrow of 125% of the cost.

All of those would allow the City to obtain the funds to finish the public infrastructure if the developer went belly-up.

Writing to fellow City staff on October 4, Director of Planning Tim Dempsey said, “So HB [Harbor Bay] and Christman [the contractor for the project] are still planning to start next week. However, I still haven't heard when the bonds are expected to close, so there's no way we can let them start on Lot 1 w/o money in hand to actually do our work. I will be having a conversation today with Mark Bell regarding this conundrum and getting an agreement and/or bond in place to protect us.”

Dempsey closed, “Stay tuned.”

The same day, Dempsey told Bell, “we did not envision starting before the public infrastructure bond was closed.”

This seems to have been consistently the attitude of staff through at least October 20. We reported on October 11 that uncertainty was persisting around the project. Dempsey told ELi at that point, “There will be no closure [of Lot 1] until an acceptable performance bond and insurance are in place."

Dempsey cannot have been referring then to a failure on Bell’s part to get the demolition bond for Lot 1, because FOIA shows Christman had by that point provided the demolition bond. The City was at that point still holding out for performance bonds to ensure the construction of the public infrastructure would be completed.

At that point, the City was saying Lot 1 would stay open and would not be demolished until the completion guarantees were in place.

Below: Privately-owned properties emptied along Grand River Avenue in anticipation of the project, owned by the developers and not yet demolished.

On October 20, the developer finally realized he couldn’t produce what the City was asking:

From early on in this deal and throughout the process, ELi has been reporting that what the City was asking would be extremely difficult for any developer to obtain without breaking the bank on a project. In fact, the City had asked for the same kind of guarantee in the Park District deal, and the developers there had told them it was a non-starter, because the cost of obtaining such insurance was so high it made a project infeasible.

As it turns out, Mark Bell, the Center City developer, realized by October 20 that this was indeed the case.

That day, Bell wrote to Dempsey shortly after noon to say, “We cannot offer a performance bond for developer default, as no such performance bond exists. We cannot offer a letter of credit for $25M, as this makes the deal un-financeable. We cannot go to Lloyd’s of London and get a specialty insurance contract, as we’re out of time and this puts an undue burden on the project.”

Bell told Dempsey he thought what the City was asking for wasn’t necessary, “but the city certainly is entitled to its opinion. One thing is certain—we are out of time on this development and we must accordingly each make our own decision, developer and city, on whether to come together or alternatively walk away.”

A few hours later, Bell called Beier to tell her he was “walking away” from the deal. He referred to this correspondence with Dempsey and said, “the City and the developer are at an impasse.” He added that he was “very perplexed” as to “how we got here.”

Asked about what was happening just after Bell’s claim that he was “walking away,” Mayor Mark Meadows confirmed that the issue was that the performance bonds were not in place. At that point, Meadows told ELi, “The developer appears to be undercapitalized at this time, which is likely the reason it was unable to obtain the required assurances.”

Below: Mark Bell presenting to Planning Commission in April 2017.

Bell still doesn’t have the guarantees, but the City has decided to let him demolish Lot 1 anyway:

Yesterday, asked about what happened when Bell suddenly hit an “impasse” and claimed he was “walking away,” Beier told me, “He may have been genuinely confused about our requirement.” But, she says, talks continued: “We met with the developer twice after he said he was walking away.” And now the City is letting Bell demolish Lot 1.

So what’s changed?

Not the situation with the completion guarantees. Beier says those still aren’t in place, although “Harbor Bay assured us that they would get the bond/letter of credit/pile of cash in place.” But, she says, Bell couldn’t wait for demolition to begin because “they needed to start demolition to meet the Target deadlines.”

It appears that it was Mayor Mark Meadows’ decision to go ahead and execute the Master Development Agreement on October 31 that set off Bell’s ability to start with the demolition. Notes Beier, that agreement doesn’t stop the developer from starting demolition before the completion guarantees are in place; it only prevents construction of the new infrastructure from starting before the guarantees are in place. (Read the relevant part of the agreement here.)

Beier insists construction on the parking garage won’t commence before there are guarantees it can be completed: “we need access to enough money to finish the public infrastructure in case he decides to walk away after he starts building. I wouldn’t say that we are not worrying about the construction bond. We are telling him that there will be no construction without a bond or letter of credit that gives us enough $$ to finish the public infrastructure.”

The cost of closing Lot 1:

Lot 1 is now closed and being actively demolished. (The photo above shows construction barriers around Lot 1 blown down from wind last week.) What is that costing the City?

According to Caleb Sharrow, East Lansing’s Downtown Parking Administrator, in Fiscal Year 2017, Lot 1 grossed about $754,000 for the City’s coffers. Back in June, City staff estimated the net revenue from Lot 1 to be about $537,000 a year.

The new parking garage to be built on Lot 1 is supposed to net about $128,000 a year more than the surface parking lot is now said to net. But the loss of the lot’s income for up to two years for construction has always concerned City Council about this deal, particularly as the City is facing financial difficulties. This is, after all, a Lot that's been bringing in at least a half-million dollars a year.

So, the plan has been to make up for some of that loss by requiring the Center City construction workers to park in the City’s Division Street Parking Ramp and pay at least $360,000 in parking fees. In the Master Development Agreement, that amount turned into $350,000. The language therein says this:

“The Construction Containment Plan will provide that the construction workers for the Project will be instructed to park in the City’s Division Street Parking Ramp, and during the construction of the Project, such construction workers, or their respective contractors or sub-contractors, shall pay not less than $350,000 in parking fees to the City as shown by contractor or subcontractor receipts.” (See the relevant portion of the agreement here.)

The Construction Containment Plan, known as Exhibit G, wasn’t included in the version of the Master Development Agreement that Council approved in June. Council decided at that time to let the Mayor and City Attorney work out all the sub-agreements, including this one. (Those sub-agreements ultimately came to over 200 pages.)

As it happens, the Master Development Agreement that the Mayor finally executed by signing on October 31 contains no such instructions in Exhibit G about parking in the Division Street ramp and the gathering of receipts. The Construction Containment Plan doesn’t specify that the developer is ultimately responsible for paying this amount, and the Master Development Agreement names only the contractors and subcontractors in this section.

The contractors and subcontractors are not parties to the agreement. They did not agree to a parking plan that would require them to park in the Division Street ramp and would guarantee the City $350,000 to make up for the loss of Lot 1 to construction.

Meadows calls the absence of a specific $350,000 parking-related financial agreement with the developer in the Construction Containment Plan “probably an oversight.” But, he says that the language of the Master Development Agreement itself is adequate to require the developer to be ultimately responsible for the $350,000.

This week, Meadows told ELi, the City “will not issue an occupancy permit until all loose ends are tied up,” so “there is no need to change the agreement.”

This wasn’t the scene that had been expected:

It’s safe to say from discussions at City Council and the Downtown Development Authority (DDA) as well as from correspondence now obtained from FOIA that the situation as it exists today—with Lot 1 closed and being demolished, without any guarantee the new parking structure will be built, without the developer responsible for restoring Lot 1 to a functional parking lot—is not what was expected to happen.

Asked last night about the situation, ELi heard back the following from Doug Jester, former mayor of East Lansing and current DDA Vice Chair: “It has been the representation throughout the process that work wouldn’t begin until satisfactory financial arrangements have been completed.”

Jester was surprised to hear from me that the demolition bond won’t pay to restore Lot 1 if the project never goes forward. “I was not aware that restoration guarantee is only to grade and gravel," he wrote by email, "and that does leave the City with a risk for restoring Lot 1 to full function.”

 

Read our recent special report: "What's the Real Trouble with the Center City District Deal?"

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