City Must Respond to Financial Review of Center City District Plan by Tomorrow

Above: Developers' rendering of the planned Grand River Avenue building, with Target on the ground floor and unrestricted rental apartments above, as seen from the MSU campus.

East Lansing’s City government received on Friday, July 7, a summary of findings concerning due diligence items about the $125 million Center City District project prepared by third-party consultant Development Strategies. The City released the document to the public via a press release shortly after 6 p.m. on Friday and also added it to the City’s dedicated page on the project.

According to the Development Agreement made between the developers and City Council for this project, “the City will have two business days after receipt of such report to notify the Developer whether or not the report is satisfactory to the City. If the results of the report are not satisfactory, then the City must provide a notice of termination of this agreement within two business days. The Developer then shall have three business days to cure any defect identified. The determination as to whether the defect is cured shall be at the sole discretion of the City.”

The two business days in which the City must decide whether “the report is satisfactory” ends at close of businalltomorrow, Tuesday, July 11.

Given that the City Council already unanimously approved, the Development Agreement, site plan, and Tax Increment Financing plan for this project at its June 20 meeting, the decision City staff makes regarding how to react to the due diligence report — on this very quick turnaround schedule — carries considerable weight as to whether or not the project with Harbor Bay Real Estate Advisors of Chicago and the local Ballein family company will go forward.

The Development Agreement language about the due diligence process gives the City another option that could be relevant if, for example, the City finds that the report to be incomplete or inconclusive: “The City, however, reserves the right to reasonably extend the time of review if necessary and the City will provide the Developer with written notice of any such extension.”

The three-page letter submitted by external consultant Brad Beggs of Development Strategies in St. Louis, Missouri, contains somewhat mixed findings. Beggs’ company was specifically contracted to consider five topics regarding the financial feasibility of the project. According to the letter, the consultant was asked to:

1. verify developer's equity position in the project;
2. validate the proposed sources and uses of funds statement;
3. test pro forma for reasonableness of assumptions;
4. review housing market studies for appropriate methodology and reasonableness of conclusions;
5. substantiate the terms of the Target lease.

On two of the five items (#2 and #3), Beggs’ letter says he received insufficient information to draw a conclusion. Regarding sources and uses of funds statement, the letter says, “With various aspects of due diligences and development agreement exhibits not yet finalized, the sources and uses of funds are in flux. Therefore, it is too soon for us to validate this information.”

Regarding the pro forma, or projections of operating costs and income, Beggs writes: “Like the sources and uses of funds statement, the pro forma has not been finalized. The developer did provide a preliminary five-year operation projection…” While he concludes the section about the pro forma by saying “the current projections are sound and result in a preliminary market value above costs, which reflects the project’s feasibility,” he qualifies this statement by noting that “income and expenses will vary depending on the final development program.”

Regarding the developers’ equity position, Beggs concludes that Harbor Bay has adequate resources to cover over $20 million as equity and that another partner’s ownership of the site will generate some of the equity, but says that this has yet to be valued and will require an appraisal. (The letter refers to “Harbor Bay and its development partners,” but doesn’t explain who those “development partners” are.)

Development Strategies was also asked to review the two market studies prepared for the developers by Danter Company, which were provided to the Planning Commission and the public only in a heavily redacted form. The developers apparently provided the consultants with complete versions of the two market studies - one on the 92-unit building restricted to adults over 55 years old (to be built on top of a new parking garage on Albert Street where the public surface parking lot is now located) and the other building with housing for 434 people aimed at the student market (on Grand River Avenue across the alley from the new parking structure).

On the question of marketability, Beggs’ letter says the 55+ age-restricted building “seeks to achieve the highest rents in the market, with comparatively few local households able to afford these rents.” It points out that older MSU alumni might rent these units “as a secondary residence,” but concludes, “We do still have concern, however, that the rents for these 92 units likely exceed achievable levels.”

Regarding the student-oriented apartment rental building, above the proposed Target store and directly across from campus, the letter concludes that occupancy should not be a problem because of its location. But the letter also notes that the analysis in the Danter Company report “should lead to the conclusion that now or in the near future there may be too much student-oriented housing….”

Beggs says that he has “no concerns about the lease or other matters” involving the 22,225 square feet “flexible format” Target store. The letter indicates “the store’s white box must be delivered by September 1, 2018, to avoid penalty.” (The "white box" stage of construction is when the space is ready to be turned over the retailer. The store would open months later.)

Beggs’ letter does not state an overview evaluation of the five due diligence topics the company was asked to review. Rather, it concludes with the somewhat more general statement that “we find no reason to question the developer’s efforts to collaborate with and provide the City of East Lansing a mixed-use development of very high quality.”

Several Councilmembers are away on vacation at this time, but Councilmember Erik Altmann tells ELi, "I can’t comment until I hear from staff. I also want to hear from community members who have expressed an interest in this step of the process. But I do want to note that this is only one of several checks built into the development agreement. For example, there is a proof of funding requirement [in the Development Agreement], which deals with financing issues the consultant was not able to address. So in terms of risk management there is a larger context."

Mayor Pro Tem Ruth Beier also said she does not wish to comment until she hears from staff.

Contacts for the City concerning the Center City District due diligence report are listed on the City’s news release as Tim Dempsey, Director of Planning, Building and Development (tdempse@cityofeastlansing.com, 517-319-6864) and George Lahanas, East Lansing City Manager (glahana@cityofeastlansing.com, 517-319-6920).