Special ELi Investigation: Why Haven’t the Center City Developers Started Paying Rent for the Public Land?

Wednesday, July 31, 2019, 7:30 am
By: 
Alice Dreger

The $135 million public-private deal over East Lansing’s Center City District project centered on City Council’s decision to lease to the developers, for 49 years, the City’s most lucrative property – what had been surface parking Lot 1 downtown.

If the Council had decided to sell the 1.36-acre lot downtown, Council would have had to get voter approval according to the City Charter. Leasing the public land allowed Council to make the deal without the voters’ approval.

Before Parking Lot 1 was closed for this redevelopment project, it was grossing $750,000 per year for the City of East Lansing, making it easily the City’s most lucrative property.

For the lease that allows the developers to use that public land for private development, the developers are supposed to pay the City $200,000 per year of rent. Those payments are supposed to start when the new parking garage on Albert Avenue opens.

ELi has discovered that the first level of the parking garage officially (though very quietly) opened to the public on July 17. So, when is the City of East Lansing going to start getting its $200,000 annual lease payments?

We have been asking this question for several weeks and getting no answers. City officials – including the Mayor, City Manager, City Attorney, and Director of Planning – have either not answered, or told us to go ask the developers.

In response to that suggestion, we contacted Steve Willobee. While the Center City deal was being hammered out, Willobee worked for the Lansing Economic Area Partnership (LEAP). But, after the deal was complete, he started working for the project’s lead developer, Harbor Bay Real Estate.

Willobee responded to ELi’s question about this on July 20, three days after the parking garage opened for public use: “Thank you for your inquiry about our first-year ground lease payment. . . . At this moment, we are working with the City on this. As soon as this is completed, we will let you know.”

Since then, all follow-up questions about the lease payments to all parties have gone unanswered.

Based on a special ELi investigation, here’s what we have ascertained so far.

The City has opened (only) one level of the garage, apparently specifically to support Target.

At the meeting of East Lansing’s Downtown Development Authority (DDA) last week, Mayor Pro Tem Erik Altmann said he had driven into the new parking garage and parked in one of the spaces designated for the new Target store. He asked if that meant the garage was open to the public.

Director of Planning Tim Dempsey answered it was, but that the City wasn’t widely advertising it. Dempsey didn’t say why the City wasn’t letting the public know, but he did say he hoped the rest of the garage would be open by early August.

ELi used the Freedom of Information Act (FOIA) to see what the City has issued so far in the way of a Certificate of Occupancy (CO) for the parking garage.

The CO is the document that says the local government has found a building is safe for occupancy. Often for big commercial structures, temporary COs are issued to allow occupancy before everything is finished, because there are so many details in a big commercial structure.

Use of FOIA by ELi shows that the City issued a temporary CO related to the new parking garage on June 14, 2019 (see it here). That temporary CO opened only the first level of parking and specified that “Target employees are the only ones permitted to park in this area.”

No other businesses in the area were given permission to use the public garage for their employees or customers at that time. This restricted temporary CO for the public structure appears to have been issued specifically to help Target get ready for that store’s opening.

Last Thursday, Dempsey provided ELi a second, later temporary CO (see it here) which still restricted parking to the first floor, but broadened the language about who could use the garage – essentially confirming Altmann’s understanding that the garage was open to the public.

According to the second CO, now “Target employees and public are permitted to park in this area.”

Confusingly, that second temporary CO has the same date as the first: June 14. Scott Weaver, the Building Official whose signature appears on both, tells ELi the date of the second one should actually have read July 17.

The second temporary CO again appears to have been an effort by the City to help out Target. The second temporary CO, opening of the first floor of the garage to the public, came the day of Target’s “soft opening,” the day after Target staged a media event with public officials.

The legal agreements for the Center City District deal make clear why the CO for the garage matters so much in terms of the money.

Back in June 2017, East Lansing’s City Council voted unanimously to a Development Agreement with developers Harbor Bay Real Estate and Ballein Management. That’s when Council agreed to have the City lease Lot 1 to the developers for 49 years starting at an annual sum of $200,000 and increasing with an inflation adjustment each year.

The approved site plan called for the building of what amounts to a three-part structure on the Albert Avenue site of the public land:

  • Running along Albert Avenue street-level side of that is the developer-owned retail space. That’s where Jolly Pumpkin, Barrio Tacos, and Foster Coffee are due to move in. This is called “B1” in the agreements.
  • Behind and above that is the new 600-space public parking garage, with a ground-floor entrance/exit and four stories of parking above that. This is called “B2” in the agreements.
  • Above the parking garage on the east side are five stories of developer-owned rental apartments called “Newman Lofts,” restricted to residents aged 55 and up. The current estimate is that those apartments will open in October. This part of the building is called “B3” in the agreements.

The $200,000 annual rent is essentially for the ground lease of the old parking lot. The ground lease that allowed the developer to build and own B1 (the retail space) and B3 (Newman Lofts).

So, when will the City start to see the rent payments on the ground lease? Here’s what the Development Agreement signed by Mayor Mark Meadows on behalf of the City says:

“The $200,000 annual rent shall commence following the issuance of the Certificate of Occupancy for Building B2 [the parking garage], and for that first year thereafter shall be a pro-rata payment of the $200,000 annual rent based on the percentage of Building B1 [the retail space] that is leased. Starting one year after the issuance of the Certificate of Occupancy for Building B2 [the parking garage], 100 percent of the annual rent will become payable annually, regardless of the percentage of Building B1 that is leased.”

The lease agreement further specifies that “Rental payment shall begin on the first day of the first month following the date on which a Certificate of Occupancy is issued for the Parking Structure Unit.”

So, given that a temporary CO was issued back in June for the parking structure, shouldn’t the lease payments have started July 1?

Well, as noted above, the first year payment to the City is to be prorated based on percentage of the retail space that the developers have leased out to commercial tenants. Harbor Bay has confirmed that Barrio Tacos, Foster Coffee, and Jolly Pumpkin will be leasing out some of the space.

But Harbor Bay has declined to say when those leases will actually start.

Below: Harbor Bay's Mark Bell and Steve Willobee (then working for LEAP, now working for Bell, at the celebration of the start of the construction.

So it’s possible that, even if the rental payment period were to have officially started on July 1 because the first temporary CO was issued on June 14, the initial payment would be zero. That’s because, based on signals provided by the coming tenants and the developers, none of the retail leases have officially started.

Still, even if the initial payment is zero, starting the rental period clock as soon as possible would ultimately be a good thing for the City, because the sooner the rental period starts, the sooner the 12-month period of prorated rent ends, and the sooner the City gets the full sum of $200,000 per year.

Has the clock started? Based on what City officials have and haven’t said, and based on Harbor Bay’s response to our questions, it doesn’t look like they think it has. That could be because the developers (and maybe also the City) don’t think that the temporary COs issued so far start the ground lease clock.

It appears the 243 pages of legal agreements on this deal don’t say what happens if the CO that is issued is temporary rather than permanent, for part of the garage and not the whole thing, as is now the case. This possibility of temporary COs doesn’t seem to have been anticipated in the agreement.

This may explain why the developers have made no rent payment so far – because they (and perhaps also the City) are interpreting the agreement to mean the lease payments start when the permanent CO for the parking garage is issued.

But if that’s the case, the first rental payment could come a long time from now. That’s because, not only can it take a long time to reach final CO stage for something as big and complicated as a parking garage, communications from building official Scott Weaver suggest there is no CO specific to the parking garage.

Weaver indicates there will be just one CO covering the entire Albert Avenue structure, including the retail space, senior housing, and parking garage.

Responding to questions from ELi, Weaver wrote last Friday, “The Permit [that] was applied for covered the Garage and Residential units so when they have completed the residential units a Final CofO will be issued for everything.”

In his response, Weaver added, “This [CO] also applies to the commercial spaces at the street level as well, because they are tied to the suppression and alarm systems.”

Based on delays experienced in issuing the final CO for projects like the Bailey Center, it could be months, perhaps even another year, before the final CO for the residential portion of this new Albert Avenue structure is issued. That could mean the lease clock and the ground lease rental payments to the City don’t start for a long time.

Below: City Attorney Tom Yeadon, who represented the City in the deal.

The agreements between the developers and the City assumed there would be separate COs issued for the retail space (B1), the parking garage (B2), and senior housing (B3). Again, the signed agreements do not seem to have anticipated what has actually happened.

Is it possible the developers and City will agree the rental payments should start soon? Yes. But right now, neither party will say what’s going on.

What about new taxes from the project? Will those at least start flowing soon?

The City Council entered into a Tax Increment Financing (TIF) deal on this project that captures all eligible new taxes from this project for the next 30 years to reimburse expenses related to the project.

That TIF capture comes to about $58 million of taxes. Most of that will goes to pay for the new parking garage and 5 percent interest payments to cover money investors put up via a bond to pay for the new garage.

As ELi reported previously, about $470,000 of captured tax money in the TIF is going to pay for Harbor Bay’s private lawyers and financial advisors. Another $244,000 of captured taxes is going to pay an “origination fee” to the bond investor. That bond investor, as ELi discovered, is lead developer Mark Bell’s father.

Once all the parts of the project are open, East Lansing’s new income tax will apply to the rents the developers receive on the apartments and retail space, and will also apply to income generated by the businesses occupying the new space. Additional income will be coming in from the new parking garage.

But because new property tax revenue will be captured for the TIF and won’t go into the City’s general fund to help pay for public services like police and fire services for the big new development, the ground lease payments are especially important to the City’s budget.

City staff originally anticipated the lease payments starting this March. When they will actually start – and what the amount for the first year will actually be – remains to be seen.

 

Postscript: Director of Planning Tim Dempsey announced this week that he is leaving the City to work for Public Sector Consultants. He said in his announcement that he will be working statewide with communities on the economic development challenges they face.

Correction: When this article was originally published, it contained an error about when staff expects the rest of the garage to open. It is expected to open in early August.

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