News Analysis: The Pickle in the Park District

Tuesday, April 10, 2018, 7:43 am
By: 
Alice Dreger

Above: Demolition of the vacant commercial properties, as seen from Peoples Church's Memorial Garden last fall.

The owners/developers of the now-empty corner lot downtown are expected to come back soon with a revised site plan. But even if City officials approve the new site plan, as they did the last, the project could still hit the same vein of problems it did last time around.

Today, ELi explains the challenges of the project area and considers what could be done to address them to finally move redevelopment of these properties forward.

The project area:

The project area we’re talking about used to be known as Center City II and is now known as the Park District, for its proximity to Valley Court Park.

Chicago-based DRW bought the privately-owned properties in the Park District following a foreclosure against a previous owner. In the Park District, DRW now owns three property areas (comprised of six legal parcels), all now vacant and surrounded with fencing:

  1. the lot at the northwest corner of Abbot Road and Grand River Avenue, where the “big bank building” stood until last October;
  2. the lot on Grand River Avenue just west of there, just east of Peoples Church;
  3. a lot north of there, at the southwest corner of Evergreen Avenue and Valley Court Drive, where the Evergreen Arms apartments once stood.

(For a larger version of this map, click here.)

The project area is also generally understood to include a series of publicly-owned properties, owned by East Lansing’s Downtown Development Authority (DDA). These include 303 Abbot Road (the southwest corner of Abbot Road and Albert Avenue) and a series of properties running along the east side of Evergreen Avenue. The Evergreen Avenue properties are now occupied by older rental houses and a more modern brick rental building, behind Dublin Square.

The “Park District” area is also understood to include the various public streets in the area, along with adjacent public surface parking lots.

Why the project is likely to include a big tax increment financing (TIF) deal:

In theory, DRW and its partner Convexity could propose site plans for their privately-owned properties and avoid the extra layers of review and trouble involved by doing a public-private redevelopment deal. If DRW/Convexity proposed plans for their own sites that were acceptable to City Council, approval of those site plans could in theory be relatively quick and relatively simple.

Below: What DRW/Convexity proposed last time around for the main corner, before demolition and the proposed redevelopment.

That’s what happened with The Hub, the project now being built near MSU’s campus, by Core Spaces. In fact, Core Spaces is affiliated with DRW – so these developers have an experience of doing a project that way in East Lansing. The Hub proposal included no Brownfield tax increment financing (TIF) deal, so it didn’t have to go through approval by the East Lansing Brownfield Redevelopment Authority (BRA) and the Michigan Economic Development Corporation (MEDC). It also included no public land.

But there are two reasons City Council is very likely to want to do a Tax Increment Financing (TIF) deal with the Park District and to roll in public properties.

For one, the City’s vision for redevelopment in the Park District has always included major infrastructure rebuilds – streets, sewers, water, and so on, including realignment of Albert Avenue for better flow. But the City is strapped financially, so it doesn’t have the money to do all that work. The City has always planned on having a developer put up the funds and be paid back later through newly-generated taxes from the project (TIF).

That’s essentially what happened with the totally separate Center City District project, wherein a $58 million TIF plan is being used to pay for street work, sewers, and a new public parking garage, and to pay the developer 5% interest on the cost plus $700,000 in expenses. To do this kind of work in the Park District, the City and DDA would have to give over parts of public land to do street realignment and would have to do a TIF deal to pay for the major infrastructure rebuild.

The other reason the City will want a TIF and will want to involve public properties is this: The City has a major financial problem on its hands with the Evergreen Avenue properties owned by the DDA. With about $7 million in debt coming due soon on those properties, and with the City in financial distress, City Council is likely going to want to see a plan for the Park District that somehow pays off all or part of that debt.

Below: Some of the DDA's Evergreen Avenue properties.

Where did that Evergreen Avenue debt come from? As we’ve previously explained, in 2009, in an effort to support the project proposed by the previous owner/developer Scott Chappelle, the DDA bought the properties which were owned then by various landlords. This was an effort to support what Chappelle wanted to do, because the City Council and the DDA believed it would be good for East Lansing.

The City’s taxpayers are ultimately responsible for the DDA’s debt, and the City has only been paying interest on the Evergreen Avenue properties debt. The DDA paid about three times what the Evergreen Avenue properties are now worth. So, simply selling them off now to the highest bidder won’t solve the problem.

Somehow, the City has to come up with about $7 million to pay those properties’ debt off, and soon. It seems likely City Council will want either a TIF to solve this problem or will want the developers to purchase the properties in exchange for some kind of major give-back.

So, while technically DRW/Convexity could try to get a project to sail through without a TIF, involving only their own properties, in reality City Council will probably require a complex public-private partnership from this deal to try to deal with its own financial problems.

But that’s not the whole story:

After a round in early 2017 in which the City Council ticked off the developers, City Council and DRW/Convexity came to a new agreement about site plans and a TIF plan in June 2017. The deal then went to the MEDC for state-level approval.

At that point, Chappelle, the previous owner/developer who had lost the properties to foreclosure, effectively killed the project by insisting he had rights to the tax incentives DRW/Convexity was seeking from the state. The Michigan Attorney General’s office rendered an opinion in the matter, effectively agreeing with Chappelle (avoiding being sued by him).

Below: Owner-occupied condos that DRW/Convexity proposed building at the northern most property in the last round:

These tax incentives included a $10 million Michigan Business Tax (MBT) credit that Chappelle and the Attorney General said DRW/Convexity couldn’t get without Chappelle’s consent.

Chappelle also claimed at that time that he would be due about $6.1 million out of the taxes set to be captured under the Brownfield TIF, a TIF plan that requires state-level approval.

DRW/Convexity’s problems were made even worse by the MEDC’s determination at that time that the Brownfield TIF would have to be pegged to the approval date from Chappelle’s time, shaving a decade off the reimbursement period, and making the finances unworkable.

The City and DRW/Convexity recently went through a series of formal maneuvers to cancel all the previous agreements with Chappelle, to try to wipe the slate clean and start over. I recently contacted MEDC to ask if that means the project can move forward now.

According to Otie McKinley, Media and Communications Manager at MEDC, the MBT tax credit program is “no longer an available attraction tool” for redevelopment – the program was discontinued. So, if DRW/Convexity still wants to try to get the previously-approved $10 million MBT tax credit, they’d have to get Chappelle to consent.

That would mean paying Chappelle off. If DRW/Convexity is now willing to do that to move ahead, it’s worth noting they didn’t reach a deal to get that done last time around.

Last time around, DRW/Convexity told ELi the project wasn’t doable without the MBT credit and with the backdated TIF plan start. But let’s imagine that now DRW/Convexity comes back with a project that doesn’t require that $10 million credit. The developers likely would still have to go for a Brownfield TIF for the reasons named above. While the TIF could be started with a new date, making it more financially feasible, it would still require state-level approval by the Michigan Strategic Fund, which is advised by MEDC . . . which was seriously concerned about Chappelle's legal threats last time.

So, in theory, with the various formal cancellations recently carried out, DRW/Convexity and East Lansing would be asking the state to approve a new Brownfield plan to which Chappelle should have no say. McKinley agreed with this framing in theory when I put it to him.

But in practice, Chappelle could again worry the MEDC by suggesting he might sue if he’s not paid off out of a new Brownfield TIF plan.

Chappelle has been making noises that suggest this maneuver is likely to happen. Through one of his attorneys, Thomas Eckhardt, Chappelle advised the City on February 22, 2018, that his companies “expended approximately $6,100,000 in expenses related to the subject project and expect to be reimbursed through the approved tax increment financing and/or applicable tax credits.” In other words, he’s saying no matter what Brownfield TIF is brought forward, he’s owed $6.1 million out of new taxes on the project.

ELi has made requests to Chappelle’s attorneys to explain how his companies could have spent $6.1 million on the Park District redevelopment when they never so much as demolished the dilapidated buildings on their own properties, but we’ve received no such explanations.

Below: The four-story building at the main corner during demolition (demolition paid for by DRW).

Nevertheless, Chappelle made clear, as the City moved earlier this year to cancel all previous deals with him, that he believes he is owed $6.1 million in future taxes from whatever DRW/Convexity (or any future owner) might build on the properties he lost to foreclosure.

On the last round, when Chappelle rattled a legal saber, MEDC and the Michigan Attorney General effectively told DRW/Convexity and East Lansing they’d have to make him go away. That could well happen again even with a new Brownfield TIF; the state’s agency could refuse to approve a Brownfield TIF if it is worried about getting sued.

So what are the options?

It looks as if the City and DRW/Convexity have four options if they want to move forward:

  1. Convince MEDC to ignore legal threats from Chappelle and go ahead with a Brownfield TIF. Chappelle could still sue under this and cause delays and run up costs, including for the City.
  2. Pay off Chappelle, in which case DRW/Convexity might score the $10 million MBT credit and the Brownfield TIF.
  3. Sue Chappelle in civil court to try to make him go away. That could take years and cost a lot of money.
  4. The City and DRW/Convexity agree to a plan that does not involve a TIF, as happened with The Hub. In that case, the City would have to find other ways to pay for the infrastructure needed and the Evergreen Avenue properties debt. (The City might eventually pay these expenses with new taxes from this project, but the City would need to find millions of dollars to deal with these expenses up front.)

Back when the City was still trying to work with Chappelle on his proposal, various citizen watchdogs warned that in continuing to enter into renewed deals with him, the City could be effectively delaying redevelopment of these properties for many years to come. (Disclosure: ELi Managing Editor Ann Nichols and I were among the people making that warning.)

In essence, that’s what has happened; Chappelle is using those last deals he made with East Lansing’s government as a legal lever, while the City is also hampered by the debt obligation it entered into on the Evergreen Avenue properties back when it was trying to work with Chappelle. It's worth noting that some City officials moved forward with Chappelle years ago because they were afraid then that, if they didn't, he would sue the City.

And that is the pickle in the Park District.

 

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