Proposed New Deal for Center City Released, Confirming ELi's Reporting

Friday, December 1, 2017, 5:25 pm
By: 
Alice Dreger

Above: Demolition of the Center City District area as seen today.

The City of East Lansing has just released a proposed five-page addendum to the major agreement between the City and the developers of the $132 million Center City District project, a complex public-private redevelopment deal. The proposed changes confirm what ELi has been reporting: that lead developer Mark Bell of Harbor Bay Real Estate has been unable to obtain the financial guarantees the City had been requiring to protect the City, and that two major parts of the agreement were murky enough to need clarification for further financial protection of the City.

The Center City District project calls for a new publicly-owned parking garage to be built on Lot 1—the garage to be wrapped on the front with developer-owned retail space along Albert Avenue, and to be topped with five stories of senior rental housing, also to be owned by the developer. Along Grand River Avenue, the developer is to build a 12-story building with a Target store on the ground floor and market-rate rental apartments above.

We broke the story earlier today that East Lansing’s City Council is set to review the addendum this coming Tuesday, because the developer has been unable to come up with the financial guarantee to the City as required by the original agreement. When we provided that report a few hours ago, the addendum was not yet available.

Now it is, and we can report the details of it. There are three major changes:

Offering a new way to provide the City with a financial guarantee of completion of the public infrastructure:

The original agreement called for the developers effectively to have to put up 125% of the projected cost of the public infrastructure—including the new parking garage—to ensure that if the developer went belly-up, the City could have the funds to finish the public infrastructure. City Planning Director Tim Dempsey told ELi yesterday the cost of the public infrastructure is about $24 million.

We have been reporting for months that the developer couldn’t come up with a performance bond or letter of credit to satisfy this 125% financial insurance requirement. At one point, the developer was so frustrated with his inability to satisfy this requirement, he said he was “walking away” from the deal.

The new proposed addendum, to be considered by Council on Tuesday, shows that Council is now being asked to consider offering another option to the developer, namely letting the developer deposit about $24 million in a trustee-controlled account which the City could access, relatively quickly, to finish paying for the public infrastructure if the developer defaulted on the deal.

Getting the developer to guarantee $350,000 in parking fee income during construction:

The proposed addendum, if accepted by the City and the developer, would also fix two other problems that ELi pointed out in the original development agreement. The first involves a guarantee of parking fees, and is aimed at making up some of the money the City is losing by closing parking Lot 1 for the project. That lot had been bringing the City about $750,000 a year in gross revenues, until it was closed for the project.

The original development agreement stated that contractors would park in other City lots and pay the City at least $350,000 in parking fees, specifically by having contractors’ workers park in City pay-lots during construction. The problem, as ELi noted in a special report, was that the contractors were not part of the legal agreement, so requiring them to pay these fees meant nothing legally.

When it was brought to his attention, Mayor Mark Meadows told ELi this was “probably an oversight” and that it was not really an issue—that the language in the original development agreement was adequate to protect the City.

But the proposed addendum now states unequivocally that “The parties agree that the Developer guarantees the payment of $350,000.00 in parking fees by the construction workers, contractors and subcontractors” (emphasis added).

It also specifies that, if any balance on this amount is owed, it will be paid at the conclusion of the construction period, something that ELi noted was not made clear in the original agreement.

Specifying the penalty for not building the senior housing:

The proposed addendum also seeks to fix a problem with the long-term ground lease that ELi highlighted in another special report. This involves the air-rights lease of Lot 1 to the developer for 49 years, which the developer needs to build the retail space in front of and the senior rental housing above the new parking garage.

Council and the public had originally been told that, in order to guarantee that the developer would build the senior housing component of the project—a component with a lot of financial risk to the developer—the lease between the City and the developer could be cancelled by the City if the developer didn’t build the senior housing. That would mean the developer would lose the right to the retail space along Albert Avenue, something worth millions of dollars.

But the lease signed by Mayor Mark Meadows on behalf of the City didn’t specify that penalty for failure to build the senior housing. For its part, the Master Development Agreement made only one glancing reference to the right of the City to cancel the whole lease if the senior housing wasn’t built.

Asked why this wasn’t in the lease, City Attorney Tom Yeadon told ELi that the one glancing reference in the development agreement was enough: “It is a clear indication of the Parties’ intent and available remedies as far as I am concerned.”

But, now, the proposed addendum makes much clearer the City’s intent and remedy. If the senior housing isn’t completed (that is, given a Certificate of Occupancy) within 12 months of when the rental apartments along Grand River Avenue are finished (that is, given a Certificate of Occupancy), then the City can terminate the master ground lease, leading to “forfeiture” of the Albert Avenue retail space from the developer to the City.

There can now be no question that is the “intent” of the lease agreement.

What’s next:

The deal isn’t sealed yet. City Council and the developer still have to agree to these terms. Council will be discussing and presumably voting on the matter on Tuesday night at its meeting, which starts at 7 p.m. in City Hall. (This item is last on the end of a long agenda.)

After that, on Thursday at midday, East Lansing’s Downtown Development Authority (DDA) and Brownfield Redevelopment authority (which has the same membership as the DDA) will have to also approve the new deal. That’s because those authorities are also parties to the matter. (In practice, the DDA and BRA follow what Council wants.)

If all this is agreed to, it would appear that at that point, the way is cleared for the developer to proceed with construction. At that point, Mark Bell’s father’s company, Scotsdale Capital, will have to put up the funds to make the public infrastructure construction possible. The way the deal is designed, the financial risk falls chiefly on the developers and their funders.

Eventually, Scotsdale Capital or whoever buys the debt from that company will be repaid over thirty years, for principal and interest, with new taxes “captured” from the project in a Tax Increment Financing. If all goes as planned, somewhere around $56 million in new local taxes will ultimately be diverted to pay back the developers for the cost of the public infrastructure and financing of that debt.

 

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