Late in its meeting Tuesday night, East Lansing’s City Council adopted an addendum to the Master Development Agreement for the Center City District project that, most significantly, contains a new performance-guarantee option for the developer. The City of East Lansing’s Development staff hope this change to the contract will enable construction to begin soon on the site, which has recently seen demolition to public and private properties in preparation.
The new performance guarantee option—meant to protect the City by ensuring completion of the project’s new public infrastructure in the event the developer has financial difficulties—has apparently been negotiated with the developer following the developer’s inability to meet the terms of the original agreement.
East Lansing’s Downtown Development Authority (DDA) and Brownfield Redevelopment Authority (BRA) must also adopt the Addendum to the development agreement before the City issues a construction permit.
Those two bodies, which share the same membership, are set to hold special meetings midday today for the purposes of reviewing the addendum. The BRA will also be asked to approve BRA bonds that will help the developer with financing the public infrastructure construction.
The Center City District project site, located in the center of downtown East Lansing, includes a stretch of properties in the 100-200 block of Grand River Avenue and, across the back alley, the former City parking lot on Albert Avenue. Along Grand River Avenue, the plan is to build retail space for a small-format Target store plus an additional eleven stories of student-focused apartments, as shown here:
There will be three components to the separate Albert Avenue structure, shown below: retail space on the ground level along Albert Avenue, a four-level parking garage above that, and a five-story apartment building above the parking ramp to rent to people 55 and older.
The City is set to own the parking ramp, and the developer will own the Grand River Avenue properties as well as the retail space and senior housing in the Albert Avenue structure via a long-term air rights lease from the City.
The developers for the project are East Lansing-based Ballein Management and Illinois-based Harbor Bay Real Estate, with the project partnership legally known as HB BM East Lansing, LLC.
On Tuesday night, East Lansing’s Director of Planning Tim Dempsey and the City’s bond counsel, Bill Danhof of Miller Canfield, presented to Council the changes contained in the proposed Addendum, which was first made public last Friday.
The Addendum gives the developer a new option for providing security to the City for completing the parking structure and public infrastructure improvement, namely that $24,389,518 in net proceeds from the issuance of BRA bonds will be deposited in a trust account that can be drawn down only with the approval of the City. This would mean effectively that 100% of the expected costs of the public infrastructure improvements would be trustee-controlled.
The previous options for performance guarantee called for either a letter of credit for 125% of the cost of the public infrastructure or a performance bond guarantee in the amount of 125% of the cost of public infrastructure. The developer was unable to come up with either of these performance guarantees, so this new option has been negotiated.
When asked by Mayor Mark Meadows on Tuesday night if this form of performance guarantee was more favorable to the City than the options in the original Master Development Agreement, Danhof replied, “In my opinion, this is better... Cash is better than looking at [having to deal with a] surety company and arguing with them” if the developer should fail or walk away from the project.
The full amount of $24,389,518 must be deposited in a trust before the City will issue a construction permit for the next phase of the project. The general contractor is the Christman Company, a generally well-regarded company which has agreed to let the City take over the developer’s role in the same contract in the event the developer cannot see it through.
Dempsey told the Council that the contract with Christman is a “Guaranteed Maximum Price” contract. This type of contract means that Christman takes on much of the risk of costs being higher than anticipated.
Illinois-based Scottsdale Capital is expected to put up about $30 million (including the $24,289,518) to fund the public infrastructure by “buying” bonds from the East Lansing BRA. The BRA bonds promise to pay back investors with thirty years of taxes captured from the project, providing a 5% interest return. The bonds have to be for more than the construction costs because of costs related to doing the construction financing via the BRA bonds to be paid back through tax incrementing financing (TIF).
The BRA bonds are “no recourse” bonds, meaning that if the taxes generated by the project turn out to be too little to pay back principal and interest as expected, the bond investors will have “no recourse.”
It is probably for this reason that the bond investors have turned out not to be a typical bond-purchasing company, as had originally been envisioned, but Scottsdale Capital, which is owned by Peter Paul Bell, father of Mark Bell, the lead developer of the Center City District project. As we previously reported, Scottsdale Capital turns out to have the same legal address as the developer.
On Tuesday night, Dempsey told the Council that he hoped the closing on the BRA bonds would be possible next week. The demolition of both halves of the project site is nearing completion, and City leaders and the developers are anxious to see construction started.
The Addendum adopted by the Council on Tuesday night also clarified two other parts of the development agreement on which East Lansing Info reported in mid-November. First, the Addendum specifies that the developer is responsible for assuring that the City will receive $350,000 in parking revenue during the construction phase, to make up for some of the loss of income to the City from the demolished Parking Lot 1.
Second, the Addendum clarifies that, if the developer fails to build the rental apartments for seniors above the parking ramp, the City will terminate the lease of public air rights from Lot 1 to the developer. That means, in effect, that the developer will lose control of (and lose profit from) the retail space along Albert Avenue if it fails to complete the senior rental apartments.
This was designed as a disincentive for the developer to fail to build the senior rental housing that the Council insisted upon as part of this large downtown project.
Council approved the Addendum as presented to it by staff, with the exception of correcting typos.
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