Above: Architect’s rendering of a reconfigured Albert Avenue, seen from the Ann Street Plaza, under the Center City District plan.
East Lansing’s City Council is set to hold public hearings on the complex Center City District proposal next Tuesday, June 20, starting at 6 p.m. It seems likely Council will make significant votes on the project at that meeting, and, in preparation, the City posted a number of new documents on the project this Wednesday afternoon.
A draft development agreement is now available:
The newly-posted documents include a 41-page draft development agreement that spells out expectations for the City and the developer in terms of legal obligations, financial arrangements, construction timelines, and more. (The named developer is an LLC that has the address of Harbor Bay Real Estate.) The draft agreement refers to two dozen “exhibits” that are not attached, so there are a fair number of key details we still cannot ascertain.
The draft development agreement also raises a number of seemingly significant questions that appear unlikely to all be answered before Tuesday’s meeting. We summarize some of those below. You can see the full list of questions about the draft development agreement that I sent to the City Attorney and Council yesterday evening by clicking here.
ELi recently reported on the 48-page development agreement between the City and DRW/Convexity, the developers for the blighted Park District—a project that, like Center City, will require somewhere around $130 million to complete. We noted how the City was using the Park District development agreement to build in numerous legal and financial protections for the City. In that case, City Council further refined the draft agreement before approving it.
The Center City District plan is far more complex than the Park District plan in terms of the deal’s legal and financial structuring, as explained further below. In the case of Center City, the City would allow large private redevelopment on City property, and the City’s Brownfield Redevelopment Authority would be issuing bonds to support the project. Council has been insistent that financial risk to the City be minimized in this deal, and the development agreement is where much of that risk minimization must necessarily occur.
The current site plan:
We have taken what is now available from the City on the Center City District plan and updated our comprehensive Reader Guide to the proposal in order to show details and renderings of the latest site plan. To view details of the revised site plan and current renderings, click here.
How the development of private property on public land would work:
This project involves two major structures. One would be privately owned and built on private land, now known as the Grand River building. The second is significantly more complicated, and is now known as the Albert Avenue building.
Below: The proposed Albert Avenue structure, including parts B1, B2, and B3, described below. The HopCat building is to the left in this image, and Albert Avenue is the street in the foreground.
The Albert Avenue building would be built on what is now City Parking Lot #1, the surface parking lot across from Harper’s and HopCat. This building would be legally structured as having three separate elements, although physically the three parts would be intertwined.
These three parts would be legally structured as three units of a commercial condominium. This allows the developer, Harbor Bay, to build private property on public land without requiring an approval vote of the citizens of East Lansing.
The three elements are identified this way in the development agreement:
- B1: new retail space along Albert Avenue, to be owned and leased out by the developer.
- B2: the parking garage above that, to be owned and operated by the City.
- B3: the active senior housing rental apartments above that, to be owned and leased out by the developer.
To make all this happen, the plan is for the City to give the developer a 49-year ground lease to develop and own the private properties (B1 and B3) on the public land. The draft development agreement gives the developer the option to renew the ground lease for another 49 years after the first 49 years.
The current plan calls for the developer to pay the City $200,000 a year (with an inflation adjustment) for these rights. A new memo from City staff indicates that this project is expected to generate about $422,000 in annual net new revenue for the City, including the $200,000 ground lease.
The tax-increment financing (TIF) plan:
The current plan calls for use of a tax-increment financing (TIF) scheme to reimburse the developer for various costs, including the cost of constructing the parking garage and other publicly-owned infrastructure plus a 5% interest allowance.
The TIF would be for thirty years at 100%; in other words, all potential new taxes that can be “captured” in a TIF will be used to pay for this project for thirty years. The current total cap is about $58 million and it would run the full thirty years. (For comparison purposes, the Park District TIF was for 80% and capped at $19.6 million. It allows for a thirty-year payout but is expected to be completed in 21 years.)
Earlier this week, City staff told ELi that the Center City District development agreement was being drafted to limit the TIF reimbursements to public infrastructure, so that none of it would be used to pay for private development. The draft development agreement, however, does not appear to make that specification.
Additionally, it is unclear how limiting the TIF reimbursements to public infrastructure would work given the physically-intertwined structure of the Albert Avenue building. It’s challenging to say which part of the construction is required for the publicly-owned properties and which is for the privately-owned properties. For example, the building requires a more significant foundation than the parking garage would otherwise need by virtue of the plan to build B3 (senior housing) on top of the garage.
The TIF has been said by City staff to be designed so that if the new taxes are insufficient to cover what is supposed to be reimbursed, the developer, not the City, is on the hook for the gap.
Below: The planned building for Grand River Avenue. (Read about the site plan here.)
Public bonds to support the redevelopment:
To make the financing of this project work, Harbor Bay is seeking to have the East Lansing Brownfield Redevelopment Authority (ELBRA) put out bonds to pay for construction. The TIF revenue will then be used to pay back the bonds.
An April 2017 letter just released by the City from bond counsel raises questions about how this would work. It advises the City, “It is important to note that the bonds cannot be sold publicly until the Project is complete [i.e., completely built] and sufficient tax revenues are being generated to support a bond sale.” That’s because there won’t be new taxes to generate TIF until there are new buildings to tax.
The letter explains that the consequence of this is that “there is no stream of revenue to support the bonds until the Project is complete. For that reason, an initial bond will be placed with the construction lender or other bank to provide financing until the Project is complete and sufficient revenues are being generated to support a bond sale.”
This would seem to suggest that Harbor Bay is going to have to find some way to finance upwards of $27 million in construction costs for several years before the ELBRA bonds can be issued. It isn’t clear how that works at this time.
Additionally, City staff has previously said that even with a thirty-year, 100% TIF that presumes no downturn in real estate for thirty years, there is still about a gap of $1 million on paying back the bonds by using the TIF. The agreements are said by City staff to make this financial gap the problem of the developer.
Below: Harbor Bay’s Mark Bell presenting to Planning Commission on April 26, just before Planning Commission voted to not recommend the project to Council. At that meeting, Bell made false representations about endorsements from businesses and MSU.
“Due diligence” means examining whether the developer has the experience, financial resources, and general trustworthiness to be likely to see a project through. We have been trying to ascertain whether the City has been undertaking a “due diligence” review of the developers and their plans for this project, but we have not gotten answers.
Back on May 11, the City Manager told ELi, “We would make satisfactory completion of a financial due diligence process a contingency in the development agreement for moving forward with the project.” The Development Agreement draft, however, does no such thing. It simply makes reference to Council having requested a due diligence review. It does not say the City does not have to go through with the deal if it finds the developer appears to lack the experience or financial resources to complete the project.
There are various places in the draft development agreement where the developer cannot proceed unless the City is shown proof of the developer having financing being in place. (This is not the same as a due diligence review.) In these instances, the City is given only two weeks to review the financial documentation before the City forfeits its right to raise concerns and the developer has the right to proceed.
The draft development agreement also provides only two weeks for the City’s review of various other things, like infrastructure plans and performance bonds. By contrast, in the Park District agreement with DRW/Convexity, the City has four weeks for review before the City forfeits its right to raise concerns.
Below: A rendering of the Target store on Grand River Avenue. (The developer has told ELi there will be no daylight renderings of the buildings available for review, which is why all these renderings show the buildings at night.)
Other questions raised by the draft development agreement:
As noted above, there are many questions raised by the Center City District draft development agreement, particularly when it is compared to the development agreement City Council approved for the Park District redevelopment project. Chief among those questions are:
- It appears to be the case that the Center City District developer can obtain the land lease without ever building the structures, and could then sell the lucrative land lease on Parking Lot #1. Is this, in fact, the case?
- Under Ordinance 1384, City Council requires projects like this to have at least 25% of their housing be for something other than the typical student-rental market. In the Park District, DRW/Convexity has elected to build owner-occupied condo apartments, and in the Center City District, Harbor Bay has elected to build rental senior housing. In the Park District development agreement, DRW/Convexity faces a $2.5 million penalty if it builds its likely-student-rental component but fails to build the condos. Why does this development agreement contain no penalty if Harbor Bay builds its likely-student-rental component but does not build the “active senior” housing? What financial or legal incentive does this developer have to actually build the active senior housing?
- The Park District development agreement contains strict deadlines for construction all the components. Why does the Center City District development agreement contain no deadlines for the start and completion of buildings, including for the active senior housing?
- City Council has been moving to increase parking rates all over town to raise revenues. In the Park District agreement, DRW/Convexity is required to pay market rates for a master lease of parking spaces. Does the City intend, as the draft Center City District agreement suggests, to commit to giving Harbor Bay the right to heavily-discounted parking in the new garage for thirty years in a master lease of over 300 parking spaces?
- Why in some places does the Center City District agreement indicate infrastructure must be completed in 10 months and in other places 36 months? How long will streets and parking in the area be unavailable, and how long with the area be under construction? Why are there no penalties to the developer for failure to complete within a specified time period?
What will happen Tuesday: The agenda for Tuesday’s Council meeting on this project calls for Council to discuss three major elements of the proposal: the site plan and related special use permits; the proposed $58 million TIF plan; and the development agreement. (The project requires special use permits because the height of the buildings exceed the height otherwise allowed.) The public can comment on any of these elements.
Council’s five members appear likely to vote on the project Tuesday after hearing from the public and deliberating. The site plan, TIF plan, and development agreement need a minimum of three votes to pass. The special use permits require a minimum of four votes to pass.
Below: East Lansing’s City Council. Susan Woods and Ruth Beier (third and fourth from left) are running for re-election this November.