What If the Center City Developers Don’t Build the Senior Housing?

Tuesday, December 4, 2018, 5:36 am
By: 
Alice Dreger

Above: The Center City District project viewed from the east from atop the parking garage above CVS. The building to the left is expected to house mostly young adults.

We reported this week that the Center City District developers are now actively seeking people aged-55-and-up to rent apartments in the planned senior housing component of the project. This "Ask ELi" column addresses a question we get a lot from readers when we write about the project: What happens if the developers don’t build that senior housing?

The short answer is that if the developers don't complete the senior housing within one year of completion of the building on Grand River Avenue, they lose the ground lease from the City that enables them to own and profit from the new retail space along Grand River Avenue and the air rights above the parking garage, where the senior housing is to be built.

The longer answer follows.

The background:

The $132 million public-private deal known as the Center City District redevelopment is supposed to include a pair of major new structures:

  • Along Grand River Avenue, a 12-story building (shown to the left in the photo above) that will house a Target store on the ground floor and, above that, market-rate rental apartments, aimed at students and young professionals. This is privately owned by the developers.
  • Along Albert Avenue, a new publicly-owned parking garage (shown to the right in the photo above), with retail space owned by the developer on the first floor along the street, and five floors of rental apartments for people age-55+ built above the parking.

Here is a rendering from the City’s website, annotated by ELi, showing how it will look if the buildings are constructed as anticipated. Grand River Avenue is in the foreground.

As we explained yesterday, the developers are building the 55+ rental housing because East Lansing has a law requiring big downtown developments like this one to dedicate at least 25% of their housing units to something other than typical student housing.

The law would not be needed if there was a strong market for this kind of housing in downtown East Lansing. There isn’t. That’s why many people wonder if the senior housing is really going to be built.

The basic financial deal:

The deal between the City and the developers – Harbor Bay Real Estate and Ballein Management – is complicated enough to reach hundreds of pages, so we’re focusing here on just the components that matter for the senior housing part of the deal.

City Council couldn’t legally sell downtown Parking Lot 1 without the permission of a majority of East Lansing voters. But they could give the developers a long-term lease on the air rights to that property without asking voters. That’s what Council did.

The developers got a 49-year lease from the City enabling them to construct, own, and operate (a) the retail space along Albert Avenue and (b) the senior housing.

Under that lease, the developers will pay the City $200,000 per year (with an inflation adjustment) for the right to own and operate the Albert Avenue retail space and the senior housing. That Albert Avenue-side structure is expected to look like this:

You can see the ground floor of retail, the parking garage levels above that, and then the senior housing, called Newman Lofts, above the east side of the parking garage.

The public infrastructure for this project, including the new parking ramp, is really expensive – exceeding $20 million. East Lansing couldn’t afford to put up that money, so it made a $58 million tax increment financing (TIF) deal whereby the next 30 years of eligible new taxes from this project will go to pay for a bond that chiefly (but not entirely) pays for the new public parking garage and street reconstruction.

So what happens if the developers don’t build the senior housing?

The Center City project is being built using Special Use Permits from the City. In theory, if the developers did not build the senior housing component of the project, the City could pull those permits, and the new Landmark apartment building along Grand River Avenue would no longer be legal to occupy. That would be a disaster for the developers.

But City Attorney Tom Yeadon has said he could not conceive of the City actually exercising such a punitive option, at least not without encountering a very expensive lawsuit.

So, the major agreement made between the Center City District developers and signed by Mayor Mark Meadows for the City in October 2017 was supposed to create another, specific, strong financial reason for the developers to complete the senior housing.

It was supposed to specify that if the developers didn’t finish building the senior housing within one year of finishing The Landmark apartment building, the developers would lose the 49-year ground lease the City has given them.

That ground lease of public land is thought to be worth millions of dollars – because the Albert Avenue retail space is supposed to be so valuable – giving the developers a big incentive to build the senior housing.

Below: Rendering of the sidewalk along the planned Albert Avenue retail space.

But ELi broke the story that, even though construction had started by November 2017, the penalty for failure to build the senior housing was missing from the agreement signed in October. After we reported this, Council subsequently obtained an addendum to the agreement to fix this. (The amendment also fixed other problems with the agreement.)

So, what if the developers do fail to build the senior housing?

Might the developers still decide to not build the senior housing, to walk away from the 49-year ground lease, if, for example, they decide the senior housing is economically infeasible and they can’t find enough tenants for the Albert Avenue retail space? (So far, there's one named tenant for the retail space.)

If that happened, the City would lose the annual lease payment of $200,000 that it’s counting on, at least until it could find another developer with whom to make a deal. The City needs those funds, because Council promised all of the new tax revenue from the project for 30 years. It’s counting on that lease payment to pay for public services for this project, since there won’t be property taxes from the development to do it.

The City would also have to take over, at least temporarily, the retail space and take on all the costs of operating it.

Keep in mind that the Center City bond is supposed to be paid off with new tax revenues from the project, including new taxes from the privately-owned Albert Avenue retail space and the privately-owned senior housing. If the developers walked away from the senior housing and Albert retail space, that would mean there would be (at least temporarily) a loss of key tax revenues that are supposed to pay back the Center City bond.

As it is, the City-wide property tax reduction that will begin on January 1 (in response to the new income tax) is going to make it hard to pay back the Center City District bondholders, as the project is now going to produce millions less in new property taxes than was calculated when the deal was struck. If the developers were to walk away from the ground lease, it would be even harder to pull enough taxes from the property to pay back the bondholders.

Below: Mayor Mark Meadows at the Center City District construction celebration

That bond is a “non-recourse” bond, and the City’s bond attorney has said repeatedly it therefore poses the City of East Lansing no financial risk if there are inadequate funds to pay it back.

So who would take the hit? 

While originally planners expected the Center City bond to be bought by a bank, apparently no bank was interested – perhaps because of the risk involved. ELi broke the story that the bond was ultimately bought by Scottsdale Capital, a company owned by Peter Paul Bell, the father of the Center City District principal developer Mark Bell, of Harbor Bay Real Estate.

Bell’s father essentially rescued the deal. And so it would seem the lead developer in this case has a higher than usual incentive to make sure the project produces a lot of property taxes.

Mayor Mark Meadows, who has been a proponent of this project since before a plan was even submitted, has been saying in meetings recently that he fully expects the senior housing component of this project to be completed as planned. As we reported yesterday, the developers are now actively advertising for tenants.

Update, December 6: Panels are now going up for housing over the new parking garage structure.

 

You may also be interested in:

Seniors Sought for Planned Downtown Rental Apartments

$700K in Local Taxes Earmarked for Developer’s Attorneys, Financial Advisor, and Father

Investor to Buy Center City Bonds Is Apparently the Developer’s Father

ELi’s Comprehensive Guide to the Center City District Development

Planning Director Suggests City Has Overbuilt Parking Ramps

 

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