More Details Emerge on Lease of Lot 1 for Center City Deal

Friday, November 17, 2017, 8:32 am
By: 
Alice Dreger

Above: Architect’s rendering of the new retail space along Albert Avenue.

With the recent release of the remainder of the Center City District legal agreements, signed by Mayor Mark Meadows on October 31, key components of the $132 million deal with regard to the Albert Avenue “active senior” housing and retail space have now become available. An ELi review of the land lease agreement, which underlies the developer’s ability to build and own those two Albert Avenue components, shows what appears to be a key variation from what Council and the public had been led to expect.

City Council and the public had been told that the 49-year lease of Lot 1 land to the developer would pay the City $200,000 per year (with an annual inflation adjustment). The way the lease was ultimately written and signed, however, the lease payment is now split up between the senior housing ($120,000 per year) and new retail space ($80,000 per year) to be built along Albert Avenue.

Constructing the lease this way—with the annual payment divided into two separate components for the retail and senior housing—means that making sure the developer builds the senior housing component isn’t just critical to the diversification of downtown housing. It’s also critical to the City of East Lansing earning the full funds it expects from the redevelopment. Structured the way it is now, the land lease for the senior housing is worth about $9 million to the City over the life of the lease.

Structuring the lease this way also assigns a specific cost to the developer for the new retail space to be built on Lot 1. The public land to be used for building about 20,000-square-feet in new, prime downtown real estate is now set to be leased to the developer for $80,000 a year (with an inflation adjustment).

That comes to the developer paying $4 per square foot per year to lease public land to build out and operate the new Albert Avenue retail space. For comparison, nearby retail space in older buildings along M.A.C. Avenue is currently being offered at $10-16 per square foot, and the former Cosi restaurant space on Grand River Avenue is currently listed for lease at $39 a square foot.

How much the City earns for its general fund from the lease matters in part because of the tax-increment financing (TIF) deal for this project. The way the agreements were structured, one hundred percent of certain newly-generated local property taxes on the redevelopment, including those that would otherwise go to the City's general fund, will be diverted away to pay for the parking garage and other public infrastructure components. This will be in effect for thirty years.

The new tax revenue being "captured" to pay for the public infrastructure on this project are the taxes designated for the City's general fund, the City's solid waste fund, Lansing Community College, Ingham County, East Lansing Public Schools, Ingham County Intermediate School District, CATA, and the Lansing airport. In all, this is expected to come to about $56 million over thirty years to pay for the public infrastructure to enable this public-private deal in East Lansing.

The basis for the ground lease from the City to the developer:

The Center City District plan calls for two major new structures, one on Grand River Avenue to include a Target store and market-rate rental apartments, and one on Albert Avenue. It is the latter one of concern here. The Albert Avenue structure (shown above) would be built on what until last week was City surface parking Lot 1, the big parking lot across from HopCat and Harper’s.

The Albert Avenue structure would include three components. The central one would be a new City-owned parking garage, known in the documents as Building B2. Wrapped along the front of the parking garage, along Albert Avenue, would be the new strip of retail stores (called B1), to be owned by the developer. Above the parking garage would be the active-senior rental apartment housing component (B3), also owned by the developer, restricted to people aged 55 and up.

The senior housing is set to consist of 92 rental apartments with high-end amenities, including an outdoor deck constructed above the parking garage, shown below, exclusively for residents of the senior rental units.

But what does it mean for the developer to own property—the senior housing and retail space—on land leased from the City? This is where things get complicated, and it’s the reason the agreements, signed recently for the City by Mayor Mark Meadows and for the developer by Harbor Bay’s Mark Bell, are so long and complex.

City Council could not legally sell Lot 1 to Bell or any other developer without permission of the voters. That’s because the City Charter says that selling a property worth as much as Lot 1—which has been grossing about $750,000 per year as a parking lot—requires that Council get permission of a majority of voters.

So, Council couldn’t just sell the land for the retail space and the air rights for the senior housing to Bell’s company without the voters’ permission. But Council could, according to City Attorney Tom Yeadon (below left), agree to lease highly valuable Lot 1 air rights via a “ground lease” without the voters’ permission.

This long-term-lease approach has allowed Meadows (above right), on the City’s behalf and with Council’s permission, to enter into the agreement where the developer can own the retail space and the senior housing using air space leased, in this case for 49 years. At the end of the 49 years, if the lease is not renewed, the City will own the retail space and senior housing.

Laws and incentives created to get the senior housing:

This City Council has been unhappy that most of the housing downtown is student rentals. So, it has created a law, Ordinance 1384, to require that big downtown projects like this dedicate at least 25% of their residential components to something other than typical student housing. For example, this can be owner-occupied condos, senior housing, or low-income housing.

Ordinance 1384 forces developers to build-in project components that are high financial risks. (If these alternative-housing options were sure bets, Council wouldn’t have to have a law to get them built.) Pretty much everyone agrees the senior housing component of the Center City District project is at high risk of being a money-loser for the developer, particularly since Council required high-end amenities for the senior rentals.

That meant Council had to build into the Center City District agreements a strong incentive to build—or rather, a strong disincentive not to build—the senior housing component. In the case of the Center City District deal, the big incentive/disincentive was this: if the developer didn’t build the senior housing component, it would lose the ground lease.

That meant the developer would lose control of the Albert Avenue retail space and lose the air rights above the parking garage—effectively losing millions of dollars in assets. That would be a big disincentive for the developer not to build the senior housing.

What the City Attorney says about the penalty for not building the senior housing:

As it turns out, the ground lease for Lot 1 (shown above) says nothing about this penalty for not building the senior housing. In fact, in all of the 243 pages of legal agreements between the City and the developer—pages which include the lease agreement—there is apparently only one line that refers to what Councilmembers had indicated they wanted built into the deal about loss of the ground lease for failure to build the senior housing.

Here is that line, on page 28 of the Master Development Agreement: “Further, except for a failure to complete Building B3 [the senior housing], termination of the Master Ground Lease shall not be a remedy pursuant to this Agreement.”

I asked City Attorney Tom Yeadon to confirm that that line is the only reference to loss of the ground lease for failure to build the senior housing. He confirmed this. He says it is enough to protect the City’s interests: “It is a clear indication of the Parties’ intent and available remedies as far as I am concerned.”

Asked what defines “failure to complete” the B3 senior housing building, leading to loss of the ground lease, Yeadon referred to another portion of the Master Development Agreement, which requires that the senior housing building be completed within twelve months of the Grand River Avenue apartment building receiving a Certificate of Occupancy from the City. (A Certificate of Occupancy is issued when a building is determined to be safe enough to occupy.)

According to Yeadon, if the developer doesn’t obtain a Certificate of Occupancy for the senior housing by one year after the developer obtains the Certificate of Occupancy for the market-rate rentals on Grand River Avenue, the ground lease will be terminated. In practice, termination of a lease like this would likely involve protracted legal action.

 

Read ELi's recent report on the demolition of Lot 1 happening without the expected financial protections for the City. 

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