Businesses Moving Into University Place – But What About That Rent for the City?

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Sunday, March 8, 2020, 8:00 am
Alice Dreger

Photo by Gary Caldwell for ELi.

Good news for East Lansing’s downtown: a pair of successful local companies are moving into space that has been vacant in University Place, the complex on M.A.C. Avenue that includes the Marriott Hotel and that sits on land owned by the City of East Lansing.

ELi readers may recall that the City Council was due to discuss a $3.5 million for that land. So who is moving in, and what’s happening with the public-private deal that made University Place possible?

First: Here comes a financial firm and a barber school.

Martin Commercial Properties has announced that it has brokered a lease for Financial Technology, Inc. — known as FinTec — for 6,800 square feet of office space at University Place. FinTec is currently located at 1500 Abbot Road in an office building just north of Reno’s East.

According to the press release from Martin, “FinTec is an established financial services firm that specializes in employee benefit plans and professional wealth management.”

FinTec has been in business for 40 years and is expected to move in by July 1. The company’s chairman, C. Richard Herrold, is quoted in the press release as saying, “This move demonstrates our confidence in the future of our firm as well as the vibrancy of East Lansing.”

People passing by University Place on Albert Avenue may have noticed the appearance of another new tenant: Douglas J is opening up a barber school in the space where that company used to have a salon school.

Right now, the owners of the commercial space at University Place are paying the City almost nothing for the public land lease.

In the mid-1980s, the City Council of East Lansing decided to support this major redevelopment through a public-private deal. The City owned the land and the Council decided to approve a project that would result in three integrated components: a parking garage; a hotel; and major office space. The idea was to transform downtown East Lansing.

The project was structured as a commercial condominium deal, which allowed the City Council to enable private development on the land without approval by voters. If the City had sold the land to the developers, voters would have had to approve the sale.

The condo includes the three components: (1) the underground parking garage, owned by the City; (2) the hotel; (3) the office space. The last two are now owned by Columbia Sussex, and thanks to the original deal, Columbia Sussex is paying only $10 a year for the ground lease of public land.

Above: The publicly owned garage under the hotel, owned by the City of East Lansing. (Photo by Gary Caldwell)

Meanwhile, for about 33 years, all of the East Lansing real estate taxes on this property have been going to pay for the parking garage, and that will continue for about another 27 years, under a record-breaking 60-year tax increment financing (TIF) plan. That’s because the parking garage had to be rebuilt recently. The City is currently paying about $30,000 a year to help upkeep the property and draws revenue from the parking lot.

All this has meant that this major piece of public downtown real estate has been used for about 35 years by private developers with virtually no rent or real estate taxes going from it to the City’s general fund for general use.

But that’s due to change in 2026. According to the original deal, at that 40-year mark, the lease rate will be reset then to 12 percent of the fair market value. That’s expected to shoot the rent to the City up from $10 a year to over $500,000 per year.

Columbia Sussex has consequently asked if they could just buy the land from the City for $3.5 million, to avoid paying that rent. Any sale of the land would have to be approved by voters, and Council would have to vote to put the question on the ballot.

But Council members aren’t very interested in this offer.

At the Feb. 18 discussion-only meeting of Council, Director of Planning Tom Fehrenbach told Council that the $3.5 million figure undervalues the land. He also explained that if Columbia Sussex were to not renew their lease or to default, the hotel and/or office building would become the property of the City.

Above: Director of Planning Tom Fehrenbach at the Feb. 18 City Council meeting. (Photo by Raymond Holt)

Council member Mark Meadows started the conversation, saying he didn’t see this offer as a good one.

Mayor Pro Tem Aaron Stephens agreed. Stephens said that if there’s going to be a sale, he’d like to see the property go on the open market to see what the City could really get for it.

Mayor Ruth Beier said she saw absolutely no reason to sell the land for $3.5 million or to renegotiate the lease terms, as Columbia Sussex has also suggested. Beier noted that in 2026, either the City will finally start getting real rent from the property — over $500,000 annually — or it will end up owning one or both of the other components — worth millions.

Either way, Beier said, the City is in a great position and has no reason to negotiate.

But City Manager George Lahanas expressed apprehension that Columbia Sussex won’t be able to keep the project viable when the rent rises by that much.

Derek Haught, Vice President of Finance for Columbia Sussex, came forward to tell Council that while the hotel had been a success, the office space had struggled.

According to the lease terms, the hotel unit is responsible for 60 percent of the upcoming rent (about $300,000 per year) and the office unit for 40 percent (about $200,000 per year).

Above: Derek Haught of Columbia Sussex. (Photo by Raymond Holt)

According to Haught, Columbia Sussex bought the hotel unit in 1994 and then bought the office space because the then-owner of the office space wasn’t going to renew the lease with the City. Haught told Council the previous owner had gone into default.

He suggests now that the office space might not be viable with that big a ground-lease payment, because it has been hard to rent space (much remains available even after the FinTec lease) and the costs of upkeep are high.

Haught told Council he wants to negotiate a new deal that is “win-win.” He said he wants to sit down and talk more with City staff, an idea which Council generally supported.

Council member Jessy Gregg said she was “sympathetic” in principle particularly because Columbia Sussex has been “a great partner," and, she said, she had no interest in having the City own a hotel.

But, Gregg said, she could “think of fifty things” the City could do with office space there, if Columbia Sussex walks away from that lease.

Above: Elevators leading to the office space at University Place. (Photo by Gary Caldwell)

Gregg added that the “this whole thing speaks to my general distaste for complicated public-private partnerships.” She called on City officials not to “do this again.”

Beier concluded the discussion by telling staff she supported further discussion between them and Columbia Sussex.

The City Council is not required to take any action on this matter. But it would not be surprising if we see this matter come back to Council sometime soon. © 2013-2020 East Lansing Info