Major Parts of Center City Deal Still Up in the Air

Monday, October 2, 2017, 9:10 am
Alice Dreger

Above: Developers’ rendering of a redesigned alleyway, with the back of the planned Target store to the left and new parking garage to the right.

It’s been over three months since East Lansing’s City Council approved the Center City District redevelopment proposal, the $132 million project set to dramatically alter the landscape of East Lansing’s downtown. Last Tuesday, state-level approvals came through on the $58 million tax increment financing (TIF) deal that was also okayed by East Lansing’s City Council back in June.

So why hasn’t the project started?

Signs from the latest East Lansing Brownfield Redevelopment Authority (BRA) meeting suggest the deal is still morphing in important ways, legally and financially. Bonds that the BRA had been planning to issue after the project is built may instead be issued very soon as a way to help the developer get construction financing in place.

Additionally, the City Attorney is still negotiating terms of a multi-million-dollar lease of public land with the developer, and still negotiating over two other key legal and financial agreements, described below.

So while it looks like the deal was closed back in June, in fact, major parts are still in play. This week, East Lansing’s government expects to hold several key meetings to try to move the project toward commencement.

Background on the project:

The Center City District project requires a highly complex public-private deal. The private developer for the project is a limited liability company (LLC) comprised of Harbor Bay Real Estate, whose principal is Mark Bell, and Ballein Management, a local landlord business run by brothers Greg and Brad Ballein. The developers’ LLC is named “HB BM East Lansing.”

The Balleins own the property in the 100-200 block of East Grand River Avenue to be used for private development in the project. This includes the buildings that have housed the former locations of Sundance Jewelers, Noodles & Company, and the Verizon Dealer, and those that still house Charlie Kang’s and Clever Clover. This is a stretch of buildings that goes from just east of Urban Outfitters to just west of Lou & Harry’s, as shown here:

Those buildings are slated, under the Center City District redevelopment plan, to be replaced by a 12-story building, including an urban Target store on the ground floor and, above that, about 273 market-rate apartments for about 400 people. This has been called the “Grand River Avenue building” or the "south building" in planning, shown here in the developers’ rendering as if looking across Grand River Avenue from MSU:

The project also includes the use of public land just north of there, namely Parking Lot #1. That's the publicly-owned surface parking lot across from Harper’s and Hop Cat. Here the developer will construct the “Albert Avenue building,” as shown in one rendering here:

The Albert Avenue structure will have three component parts: (1) a large new public parking garage for about 620 cars; (2) new retail space along Albert Avenue, tacked on the front of the parking garage; and (3) five stories of senior rental housing above the parking garage, including about 92 rental apartments. About 300 of the new parking spots will be leased at a discount to the developer for use by apartment residents and Target customers in the private portions of the development.

What’s going on with the “lease” to the developers of Lot #1?

According to the East Lansing City Charter, City Council can’t sell Lot #1 without approval of East Lansing voters. That’s because it is a very valuable piece of land, estimated to be worth at least $10 million, and Council can’t sell such valuable properties without majority voter approval.

To get around this problem, to allow the developers to own the new retail space on Albert Avenue and the senior housing rental building without Council having to go to the voters to ask to sell Lot #1, City leaders came up with a scheme whereby they would turn the project into a commercial condominium with three units: the retail space (called B1 in the plans), the parking garage (B2), and the senior housing (B3).

In the deal as laid out to date, the City will technically own the land of Lot #1 and will own the parking garage, but will provide a “land lease” for 49 years, renewable for another 49 years, to the developers, allowing them to build and own units B1 and B3. The retail space along Albert Avenue and senior apartments will be private development, privately owned, built in leased air.

Above: The Albert Avenue structure set to replace Lot #1, as seen looking down from the northwest.

The developer had wanted to pay $50,000 per year with an inflation adjustment for this land lease, but in June City Council obtained an agreement for a lease payment of $200,000 per year with an inflation adjustment. That agreement was contained in a long, complex deal called the Master Development Agreement.

In most cases, City Council as a whole approves all the details of a master development agreement. But in the case of Center City, because the developers insisted they had to get moving or lose the Target deal they and City Council wanted, Council agreed to approve the development agreement without many key “exhibit” agreements fully worked out. Council said the City Attorney could work those out and then Mayor Mark Meadows could sign off for the City when ready.

At last Thursday’s East Lansing Brownfield Redevelopment Authority (BRA) meeting, East Lansing’s Planning Director Tim Dempsey said there were still three items on which the City Attorney and the developers’ attorneys have not come to agreement. One of those is the ground lease. That’s a very important ingredient in this deal.

And, as it turns out, the City doesn’t currently own Lot #1. Which means the City can’t actually enter into any lease agreement on it just yet.

Wait, who owns Lot #1?

Right now, the East Lansing Building Authority, not the City, owns Lot #1. The Building Authority is a corporate entity set up essentially to manage properties for the City. It can take various actions with properties under its control, including using them for leases, parking lots, and bonds. Apparently at some point years ago, East Lansing's Building Authority took on ownership of Lot #1.

Above: Looking through the exit gates to Lot #1 towards the back of the buildings to be demolished.

We’ve discovered this wrinkle because of a surprise meeting that just showed up for this coming Thursday—a special meeting of the Building authority, which normally meets only once a year. The only item on the Building Authority’s meeting agenda this week is a quit claim deed for Lot #1.

City Manager George Lahanas tells ELi, “The Building Authority needs to deed Lot #1 over to the City." He explains that "the debt [once owed on it] is now paid off and the authority no longer needs to own it, plus it’s necessary for the City to enter into the ground lease.”

What else is holding up the start of the project?

The other two items Dempsey named last week as of-yet unsettled are (1) the condominium agreement and (2) an estoppel agreement sought by the developers’ attorneys.

The first item, the condo agreement, is another critically-important agreement, as it will lay out the responsibilities and rights of the City and whoever owns the private components of the Albert Avenue building for many decades to come. That it’s not done suggests there are still points of disagreement between the City and the developers.

And the estoppel agreement? Dempsey says this relates to the master parking lease, which is set to cover about 300 spots in the new garage. The entity likely to be the senior (primary) lender for the private development—not yet named—has asked to get in writing a promise from the City that the master parking lease will remain in effect even if the developer defaults on the loan. This would protect the lender’s security, as the discounted parking lease is a major asset for the private developers.

What this detail tells us is that the would-be senior lender for the private development hasn’t yet fully committed. So it would appear that the developer doesn’t yet have the financing for the private development fully in place.

Dempsey told the BRA on Thursday that the parties hope to have these agreements “buttoned up” in the next few days.

As Council has authorized the mayor to sign off when ready, odds are good the public won’t be able to see what is in these agreements before the City is committed to them. In fact, according to the approval City Council gave by a vote of 5-0 in June, Council members don’t even have to be shown the agreements before they are executed by the mayor. (Whether the prior authorization of the mayor to act for Council includes the estoppel agreement, which appears to be a new item, is unclear.)

So, what’s going on with the bonds?

This project involves a tax increment financing (TIF) deal in the amount of approximately $58 million for thirty years at 100%. In other words, for thirty years, all the new property taxes that can be legally “captured” from this project will be used to reimburse the developer for expenses related to the project, up to a total of about $58 million.

In this case, none of the captured taxes will reimburse the developer for the private components of development, like some TIF deals do. All of the captured taxes for this project will be used to pay for public infrastructure, including the new parking garage, the rebuild of Albert Avenue, and major reconstruction of water and sewer lines in the area. Tens of millions of dollars in the TIF will also be used to pay for interest on the money the developer essentially has to borrow to pay for all that public infrastructure.

Above: Rendering of the retail space and sidewalk on the front of the new parking garage on Albert Avenue.

In this deal, City Council negotiated to make sure that if the developers’ expenses on all that public infrastructure plus the associated interest costs came to more than the captured taxes ultimately cover, that will be the developers’ problem. In other words, the developers are taking the (major) risk that the taxes won’t be enough to pay for all the City wants to have built for the City.

To help the developers out in trying to get financing for this, the City has agreed to have the East Lansing BRA issue non-recourse revenue bonds worth about $31 million. Under this scheme, the BRA issues bonds that promise to use the captured-taxes to reimburse those who invest in the bonds.

If the captured taxes aren’t enough to repay the bonds, that’s tough luck for the investors in the bonds. Because the bonds are “non-recourse,” the City and the BRA can’t be held responsible if the taxes come up short.

Odds are these bonds are going to have to promise a pretty high interest rate to attract investors willing to take this risk. But the higher the interest rate, the less likely it is that there will be enough taxes to pay back the investors. So, it’s a bit of a chicken-and-egg problem, one that may only be solvable if the developers essentially buy the bonds and then turn around to try to sell them, promising investors some additional security.

Originally the BRA wasn’t going to issue these bonds until the project was built. That’s when investors could know what tax revenue the project would produce, and the revenue would start flowing right away to start paying back investors.

Now the developers are asking the BRA to issue the bonds in advance of the project’s start. That seems to be because they can’t find another way to finance the construction of the public infrastructure. Their plan is to draw money step by step as needed from the bonds for construction, as normally happens with construction loans. (Developers only draw what they need, chunk by chunk, during construction in order to avoid having to pay interest on funds they don't yet require.)

The challenge of doing the bonds this way, though—doing them now instead of after the project is built—is that this means months or even years of money borrowed through the BRA bonds without any source of revenue to pay interest, further ballooning the amount owed to anyone who buys the bonds. Under this scheme, the egg is getting pretty big compared to the chicken.

And that doesn't even count what happens if the property tax reduction passes in November with the proposed income tax. In that case, by our calculation, the amount of taxes the can be captured would drop in this case by about $4.3 million, making it even harder to pay back investors.

The BRA moves to say “we’re serious,” to help the developers and the project:

City Planning staff had hoped to bring the bond resolution to the BRA this past Thursday for approval, essentially issuing the bonds. But the attorneys are all still working out the details, so, instead, Planning staff asked the BRA to help out the project by passing a “resolution of intent to issue limited obligation tax increment revenue bonds” in the amount of $31 million. (The bonds are much less than the TIF amount because the captured taxes have to be used to pay back the bonds plus interest owed to investors.)

That resolution that was passed Thursday appears to be designed to assure potential investors that there will, in fact, be bonds secured with the 100% of tax increment captured revenues for 30 years. Why bother with an “intent to bond” resolution? It is another sign that the financing arrangements still aren’t cohering—that investors may be skeptical of this project and want more assurances.

The resolution passed on Thursday does not bind the BRA to issuing the bonds, but it hints at the problem of the tax revenues being insufficient to pay back investors. It states that the bonds will be “payable solely from the Tax Increment Revenues and the other sources provided at the time of sale of the bonds” (underlining added).

Those “other sources,” according to Dempsey, would be “any developer pledge or guarantee beyond the TIF,” not anything the City or the BRA would put up. It would appear the developer is having to find some way to reassure investors beyond the TIF plan.

That means that potential investors get that this deal is not simple, and not a financial sure-thing the way it was laid out originally.

The passed "intent to bond" resolution also includes, as various “whereas” clauses, statements meant to reassure that the project is about ready to go. For example, it includes a “whereas” stating that “the City and the Authority have approved a Master Development Agreement.” But, as noted above, in fact there are key agreements attached to that Master Development Agreement—including the ground lease and the condominium agreement—that are still not worked out.

At last Thursday’s meeting, Dempsey asked BRA members to make themselves available late this week for a possible emergency meeting to approve the bond resolution itself. The developers are keen to get going on the project, and they can’t start until all the agreements are done, the financing is in place, and the City has been shown proof of the financing.

Above: Developers’ rendering of the Target store along Grand River Avenue.

As we’ve previously reported, the developers’ deal with Target requires that “the store’s white box must be delivered by September 1, 2018, to avoid penalties.” The “white box” stage of construction is when a retail space is ready to be turned over to a retailer for set-up.

Experts in construction say it’s going to be very difficult if not impossible for the developers to make that deadline. Harbor Bay’s Mark Bell has said that without Target as the anchor tenant, the project is not doable. Target might be willing to wait. But any delay throws uncertainty into that key part of the deal.

What else do we know?

According to Dempsey, Lot #1 will “close no sooner than October 9. The new garage has a tentative 12-month schedule” for construction. The City is looking to see if DRW/Convexity might lend its soon-to-be-vacant land at the blighted corner of Abbot Road and Grand River Avenue for extra City parking while Lot #1 is under reconstruction.

Asked about reports that Christman will be the general contractor on the Center City District project, Dempsey confirmed those reports. He noted that that company was awarded the construction for the recent MAC garage reconstruction “and we were satisfied with their work, completing it according to specifications and on time.”

Even though the Park District project has fallen through, the City is still engaging Publicom, an East Lansing-based public relations firm, to help downtown businesses survive anticipated construction from Center City.

“They are working on a Construction Guide for businesses that we hope to have out in the next week or two,” Dempsey told ELi last week. “In addition, they’ve been helping the DDA [Downtown Development Authority] and DMB [Downtown Management Board] on possible marketing ideas so downtown customers know that businesses are still open and accessible.”


Editor's note: The following paragraph was added on October 3: "And that doesn't even count what happens if the property tax reduction passes in November with the proposed income tax. In that case, by our calculation, the amount of taxes the can be captured would drop in this case by about $4.3 million, making it even harder to pay back investors." We originally intended to include this information but neglected to do so in the original publication. A typo was also corrected on October 3.

Nobody covers the reality of development in East Lansing like ELi does. Check out our complete coverage of the Center City District project and the Park District Development project. And don't miss our coverage on TIFs plus special coverage of issues like how developers see working in East Lansing, why there's so much retail space downtown, and challenges to diversifying dining options downtown.

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