What’s the Real Trouble with the Center City District Deal?

Tuesday, October 24, 2017, 2:06 pm
By: 
Alice Dreger

Above: East Lansing's City Council and Harbor Bay's Mark Bell.

ELi broke the news Saturday morning that the lead would-be developer for the Center City District redevelopment project claims he is “walking away.” Since then, many online comments and communications to ELi have blamed East Lansing’s city staff or City Council for this outcome—either for getting in the way of the development (the majority of comments) or engaging in a deal that never should have gotten his far.

So, what has really happened with the Center City District deal?

Because I’ve been reporting steadily on this project for our readers since it was first announced in February, it is possible (with the help of various sources quoted below) for me to explain how this project’s problems are similar to and different from problems encountered by other projects, like the Park District redevelopment.

One editorial comment: Yes, this article is long. But if you really want to understand what makes these projects work or not work in East Lansing, then you have to understand the real-life complications and particulars and not assume simple answers.

What we know about the immediate reason for the “implosion”:

Mark Bell of Harbor Bay Real Estate called Mayor Pro Tem Ruth Beier this past Friday evening to tell her the developers—a partnership of his company and Ballein Management of East Lansing—were “walking away” from the deal made with the City. Specifically, Bell told Beier in a voicemail:

“I never thought I’d actually say these words, but unfortunately the Center City project has come to a halt. I don’t know if you’re aware. We certainly can talk about it. But there’s been some recent correspondence that has more or less imploded and besides that, the City and the developer are at an impasse, and unfortunately we’re walking away.” Bell added that he was “very perplexed” as to “how we got here.”

Mayor Mark Meadows told ELi this Saturday morning that the problem was that Bell’s company couldn’t come up with the financial insurance required by the City to start the project. Meadows referred specifically to the performance bonds that City Council had required in the Master Development Agreement—bonds that would be paid for by the developer to assure that if the project started and then collapsed financially, the City would not be left financially harmed. (The bonds would pay to finish or undo half-finished infrastructure.)

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.”

Beier also told ELi the performance bonds were the issue, adding, “It is disappointing to lose the project, but we could not compromise on this issue.”

Below: A rendering of the “amenity deck” Bell and colleagues said they would build above the parking garage as part of the senior rental housing for Center City District.

Last night at the Council of Neighborhood Presidents meeting, Meadows and Councilmember Erik Altmann said Bell never called them as he did Beier. But Meadows reiterated that the issue was the performance bonds. He told those at the meeting last night:

“I am not counting on it completely being dead. Whether the developer can meet criteria of city that we are held harmless and will not be responsible for any debt with regard to this, we will see. The objective of original agreement with the developer was to make sure we could complete public infrastructure portions of project without incurring any kind of city obligation. If there’s a way to do that, then I’m okay because that was the objective [of the agreements]. Maybe it isn’t the same language we had in the original agreement, but as long as it reaches the same point, I’m okay with that. But that doesn’t mean we have an agreement on that.”

He suggested that Bell telling Beier he was “walking away” might just be a negotiating strategy, but, Meadows said, he wasn’t going to give up the protections for the City created by the performance bonds he is seeking. Meadows indicated that the developers haven’t produced them and that he doesn’t believe they will anytime soon.

ELi had been reporting that the performance bonds have been a long-running sticking point, and that the developer had not produced on that requirement. But what else helps us understand what happened with Center City District?

Disagreements about the supposed agreements:

In an effort to push the project on an accelerated timeline—which Bell and his fellow developers said was absolutely necessary to keeping the Target store lease and thus to making the project viable—Council voted through a Master Development Agreement on June 20, 2017, without it really being finished.

In fact, the mayor has never signed the Master Development Agreement for the Center City District project. That means the City has never actually entered into a legal agreement on the deal.

When Council voted through the Center City Development Agreement, various “exhibits”—including key sub-agreements—were left unfinished, with Council agreeing to let the mayor sign off when ready.

These included the most important sub-agreements, including the 49-year lease of public land from the City to the developer and the condominium contract specifying who would have what responsibilities in the complicated building set to include both a publicly-owned parking garage and privately-owned retail and apartment space (shown below). For months after Council signed off, and apparently still as late as last week, the City’s attorney and the developers’ attorneys were still wrestling over important issues in the deal, with the City’s representatives working to protect the City.

Moreover, because the Development Agreement was written relatively quickly to get Council to approve it fast, it contained language that appears to be ambiguous to the parties, which is adding to problems in the deal. The section on the performance bonds, for example, is apparently confusing enough that the developers say the Agreement requires one thing and the City says it requires something else entirely.

In short, most of the public thought this was a “done” deal back in June. But the few people watching closely knew it has always remained in flux, with the parties not agreeing on various key items—even if those items are in writing.

Having parts of agreements still moving after Council “approval” is something that developers complain about in terms of the development process in East Lansing. That said, in this case, Bell pushed Council hard to sign off on the Master Development Agreement before key parts of it were done or were clear. Council agreed to do that, figuring it would all probably be worked out later.

“The developer appears to be undercapitalized”:

On Saturday, Meadows said “the developer appears to be undercapitalized,” meaning Bell can’t prove his team has enough money to get the City’s approval to start. According to the agreements, the Center City developers have to put up significant financial insurance (performance bonds or irrevocable letters of credit) and also have to show proof of adequate funding before the City will let the project start.

Why? The City doesn’t want to be stuck with the developer having inadequate funding and leaving us a torn-up or blighted downtown frozen in time. That’s basically what happened with City Center II, the previous redevelopment plan for the Park District (shown below).

But, as we have been reporting, with Center City District and Harbor Bay, a funny thing has happened on the way to “go.”

The City had expected the Center City District developers to go get outside investors for the project—to get the construction loans from banks. In fact, the City was counting on these outside investors to look deep and hard into the developers’ financial assets as a way of protecting the City from a shaky developer taking on a $132-million, core-downtown project.

City staff member Lori Mullins told City Manager George Lahanas in July of this year that the proof to the City that the developers’ finances made sense “will come to the City in the form of the proof of funding letter.” Until the City had such proof, it was not going to let Harbor Bay et al. proceed.

But as it turns out, Harbor Bay’s Mark Bell showed up with a letter from an unexpected investor to front the $31 million needed to build the public infrastructure: a hitherto unmentioned company called Scottsdale Capital.

Late on October 5, 2017, a letter from Scottsdale Capital was produced for East Lansing’s Brownfield Redevelopment Authority (BRA) to get the BRA to vote at a special meeting the next day to issue $31 million in bonds to make the project happen. That letter said Scottsdale would put up the money for the bonds. This meant Scottsdale would essentially fund construction of the public infrastructure.

The address given for Scottsdale Capital on the letter was a location in Richmond, Illinois, and the letter was signed by “Karl C. Williams, Managing Director.”

What the letter didn’t reveal is that the legal address for Scottsdale Capital is actually the same legal address as that of Harbor Bay Real Estate, Mark Bell’s company, in Northbrook, Illinois.

The letter also didn’t reveal who the sole principal is for Scottsdale Capital: Peter Paul Bell, Mark Bell’s father.

The letter also didn’t reveal that the person signing the letter for Scottsdale Capital, Karl C. Williams, is apparently the same K.C. Williams who is also Executive Vice President of Operations & Construction for Harbor Bay Real Estate.

So, what looked like an “outside investor” ready to put up the $31 million it will take to build the public infrastructure for this project wasn’t really an “outside investor” at all. And it seems very unlikely that Scottsdale Capital is going to be doing the kind of highly critical look at Harbor Bay Real Estate’s finances the way the City had hoped a lending bank was going to do to protect the City.

Harbor Bay Real Estate often says it has offices in Chicago and Minneapolis. I can’t find offices for them there. What I do find is an address for Harbor Bay and for Scottsdale Capital in Northbrook that Google Streetview shows looking like this:

This whole scene does not appear to be what the City had in mind in terms of an outside investor increasing our confidence in the developers’ abilities to get this project done.

Inadequate review to avoid these dead-ends?

In an infamous local bit of history, in the case of City Center II and dealing with developer Scott Chappelle’s companies, the City of East Lansing failed to recognize the financial dangers and problems of that deal. The result was prolonged and costly blight at the main corner downtown. The City’s prolonging the deal with Chappelle, round after round, also ultimately gave Chappelle an “in” that let him recently get in the way of what chance DRW/Convexity had in getting the Park District redevelopment done.

Citizen watchdogs had been warning the City for many years that Chappelle was serious trouble and that deal-making with him was both hopeless and dangerous. An external consultant hired by the City to review the developer in that case failed to find what citizen watchdogs found.

After that experience with Chappelle and Center City II, the hope was the City wouldn’t make the same mistake. But former East Lansing resident Eliot Singer, who was the lead citizen investigator of Chappelle, tells ELi he thinks the same mistakes are being made with Center City and Harbor Bay:

“The collapses of both the Park District and Center City projects were due to problems about which City Hall was repeatedly warned but chose to ignore. The 2015 [City Council] election was a mandate for Council to institute significant reforms so public-private development could finally serve the public interest after 30 years of costly mistakes. It chose not to do so.”

Adds Singer, “I have no idea how much money was spent on staff time and consultant fees for these latest projects.” We estimate it at tens of thousands of dollars, all of it unrecoverable. “But,” says Singer, “I do know the annual debt service payment on the bonds for the properties bought in 2009 for City Center II will jump to about $460,000 next fiscal year until 2035. I hope the public will no longer tolerate excuses and reassurances.”

What debt service payments? Singer is referring to the major financial problem the City now faces in the Park District—owing about $7 million on the Evergreen Avenue properties purchased to support Chappelle’s plans for City Center II. That debt is coming due, and because the Park District deal with DRW/Convexity collapsed following Chappelle’s recent actions, the City is facing a major revenue and expense problem there. And soon.

The City’s money problems become development problems:

As we’ve reported, some of the City’s financial problems stem from costly decisions made on big redevelopment deals in the past. Today, City Council and staff keep trying to use big redevelopment projects to solve some of the City’s major financial problems.

In the recent case of the Park District deal, that meant City staff and Council trying to get developers DRW/Convexity to do a project big enough (intended before and after, shown below) to create so much in new property taxes that the City could pay off the Evergreen Avenue debt and build the new public infrastructure needed in that area for the new redevelopment. This included rebuild of roads, sewers, water lines, etc.

In the case of the Center City District deal, that has meant trying to get the developers to do a project big enough to create so much in new property taxes that the City could get a new parking garage and a major rebuild of Albert Avenue. This also included major reconstruction of sewer and water lines.

The wrinkle created by this approach is that it forces projects to be much larger than they otherwise would have to be, and thus increases the challenges of getting the projects done in terms of finances and construction.

The big-TIF approach also means that Council is committing new property taxes from these projects to the projects for decades, rather than bringing in new revenue to the City’s general fund. And the City needs a lot more money in the general fund. (That’s why Council is trying to pass an income tax.)

So, to try to get around this problem of TIFs diverting new property tax revenue away from the general fund, City Council tries to push deals that will create revenue for the general fund in some fashion.

The last-approved Park District TIF was for 80%, meaning 20% of new City property taxes would at least be coming to the City’s general fund. In real dollars, it meant the project was still going to produce about $230,000 in new local taxes per year even during the TIF plan. And the TIF plan was for “only” 21 years. After that, all the new tax revenue would go to the various local jurisdictions as normal.

Above: Center City District plan for along Grand River Avenue.

In the case of the Center City District project, though, the TIF was for 100% for 30 years—it was maxed out. And that meant Council was looking for other ways to get money from the deal, and that pushed them to ask the developer for a lot more than the developer originally wanted to give, including raising the annual rent payment from the developer to the City from the original plan of $50,000 per year to $200,000 per year. In the end, Council negotiated a deal that would obtain over $400,000 per year in new revenue from the project for the City’s general fund.

But pushing projects to produce more money for the City to deal with the City’s financial problems means making it harder for developers to get a deal done. Back in May, Mark Bell told Ruth Beier in an email, “we are stretched very thin under the current deal terms.” Indeed, that stretching-thin may be the reason Bell can’t get an outside investor who isn’t related to him and his company to fund the public infrastructure construction.

So, in a way, the City’s financial problems, including its $200 million debt and looming budget crisis, may be causing these big deals ultimately to fail. One could say the City should just let developers build what they can with their own money and let whatever new taxes come to the City as they will, without complicated public-private deals that involve TIFs. Beier has sometimes said she thinks that’s exactly what should happen.

But some members of Council, including Erik Altmann, prefer to use the TIF approach in part because it diverts taxes away from other local entities like Ingham County, the trails millage, Lansing Community College, and CATA and puts those tax revenues instead into East Lansing redevelopment.

Then there’s Ordinance 1384 and the challenges it causes:

The current City Council passed a law called Ordinance 1384 which was designed to diversify housing in the downtown. When first passed, Ordinance 1384 said that for big downtown developments with residential components, at least 50% of the housing had to aimed at something other than student rentals. This “other” housing could come in the form of owner-occupied condos, senior rental housing, or some other alternative to the typical student rental housing.

Ordinance 1384 caused a major problem for the Park District plans, as ELi reported, and Council subsequently reduced the requirement in the ordinance to 25% non-student-rental housing. But this is still a tough “ask” for developments downtown; the reason this kind of “other” housing hasn’t happened is because there’s little market for it. It’s a nice idea, but it’s a market nightmare according to developers.

Harbor Bay and the other Center City District developers tried to deal with Ordinance 1384 by promising senior rental housing above the new parking garage to be built along Albert Avenue. The Park District developers tried to deal with Ordinance 1384 by promising owner-occupied condo apartments along Evergreen Avenue (shown below), where some apartment buildings used to stand. But in both cases, Ordinance 1384 caused trouble in terms of potential profit margins, financing, and more.

Because Ordinance 1384 effectively forces developers to build what isn’t readily marketable, they say it forces them to have to build very large projects to make up for expected losses on those portions of the projects. These large projects that have components which have these dicey market propositions are anything but low-risk when it comes to actual execution.

The Lansing Regional Chamber of Commerce is not happy:

When Saturday’s news broke, Steve Japinga, Director of Government Relations for the Lansing Regional Chamber of Commerce, indicated significant disappointment. Asked for a statement, the Chamber’s Director of Marketing and Communications, Eric Dimoff, sent the following:

“East Lansing residents have identified the city budget and downtown development as top priorities. Business investment, economic growth and job creation supports a positive and prosperous region, all of which address budget challenges as well as opportunities to reinvest in our infrastructure and core communities. We don’t believe empty storefronts and parking lots are a path to prosperity. The Michigan Avenue Corridor remains a top priority for the Lansing Regional Chamber and we will continue to advocate for new development and investment connecting East Lansing, Michigan State University and Lansing.”

I asked Japinga and Dimoff several times if they think City Council should not be insisting on performance bonds to protect the City. They have had no response.

On Sunday, Japinga posted the following tweet, suggesting that because the Center City developers are “walking away,” East Lansing voters should reject the income tax proposal on November 7’s ballot:

Asked about this, Meadows says, “I still think the performance bonds described in the Development Agreement or their equivalent are necessary.” About Japinga’s tweet, he said, “He moved from East Lansing to Lansing, which has an income tax. He walked away but not, apparently, from an income tax!”

Said Beier, “I don’t really want to get in a fight with the Chamber about taxes. In general, Chambers of Commerce oppose taxes. People who actually live in East Lansing are a different story. We tend to be thoughtful, intelligent voters who weigh the pros and cons before making decisions. I fully expect voters to do that with respect to the income tax/property tax cut. If voters want to maintain services and put the city back on solid financial ground, they should vote yes on these two proposals.”

What would “productivity” look like?

After Saturday’s news, I asked Dan Bollman (among others) for an on-the-record comment. I asked him because Bollman has for years served voluntarily on commissions for the City, including on Planning Commission, and owns a local architecture firm, east arbor architecture (which presents its name using lowercase). Bollman recused himself on Planning Commission’s deliberations on Center City because his firm had an office in one of the properties set to be demolished by the project.

Here’s what he said:

“As you know, I was never a great fan of the project, but I take no joy in seeing it fall apart either. Though 'east arbor' needed to move to make way for the Center City project, we are doing really well in our new space. However, East Lansing is not well served with a long string of vacant buildings downtown. The question remains what we—as individuals—are going to do about it.”

Below: The span of Grand River Avenue properties rendered vacant in anticipation of the Center City District project. (The apparent curve is created by the photo being taken with a panoramic approach.)

Bollman goes on, “As I scrolled down the ever growing list of negative Facebook comments, I really wanted to ask how people were planning to redirect their schadenfreude to more productive ends. We might all start by patronizing the displaced and remaining businesses, to make sure they continue to survive. (I know I will have no problem visiting Mackerel Sky slightly more often!)”

He also recommends people engage with meaningful service: “While it is too late to consider a run for City Council this year, any number of city advisory boards and commissions have empty positions (even the Planning Commission has been having issues maintaining its nine seats). Neighborhood boards always seem to need more participation. There's a vacancy on the School Board that needs to be filled.” This, he suggests, is a more productive approach than Monday-morning quarterbacking on development news.

Bollman was unusual in being willing to comment on the record. But he has not been the only in-the-know member of the community to express to ELi worry about what’s going to happen with all those newly-vacant properties along Grand River Avenue, owned and operated by Ballein Management.

We asked the Balleins what they see happening with those properties now. They have not responded.

So what’s next downtown?

Given that Bell called Beier and not Meadows or Altmann, it’s possible he’s just looking for the requirements by the City to be reduced so he can still get the project done. But at this point, it’s impossible for him to meet the deadline set out in the Target lease, and he said he needs that deal to make the project work. Given what’s been going on, it seems unlikely the City will allow construction to commence anytime soon.

As for the performance bonds, even if City Council wants to change the terms of the performance bonds in the Master Development Agreement to lower protections for the City and get the project to move forward, Council will have to vote to do so, and that’s not on the Council’s agenda for tonight.

And then there’s the question, since the Scottsdale Capital letter, of whether the City and East Lansing’s Brownfield Redevelopment Authority trust this developer.

As one expert in local development wrote to ELi, without wishing to be named, “The ghost of Chappelle still haunts every major project [in East Lansing]. Development is always uncertain and risky, but the paralyzing fear his memory creates, as he was able to con another and another extension, focuses everyone on a weird kind of safety.”

Today, between that “haunting,” the financial problems the City faces, and the City’s crumbling infrastructure (which ends up requiring so much money to support redevelopment), East Lansing is an especially difficult place to get very big, very complicated, public-private redevelopment partnerships done.

 

You may also be interested in:

Ask ELi: Is the LSJ’s Editorial on East Lansing Development Accurate?

Is the Current City Council Stalling Downtown Redevelopment?

ELi’s Comprehensive Guide to the Center City District Redevelopment

ELi’s Comprehensive Guide to the Park District Redevelopment

Two Big Redevelopment Proposals, Treated Differently