Developer and City Far Apart on Park District, But Negotiating

The City and Convexity Properties, developer of the Park District project at Grand River Avenue and Abbot Road, appear to both be interested in reaching agreement quickly, but they are wide apart on a number of significant issues.

Last week, City Council approved a site plan and tax increment financing (TIF) deal for the proposed project, but the developer was not left happy. While the site plan was basically approved as expected, the $26 million tax plan passed by Council heavily favored the City—so heavily that the developer called the plan unworkable.

Newly-available documents show likely points of negotiation:

The distance existing between the two major parties—the City and Convexity—is evident from two documents that became available only in the last few days—one, a draft development agreement just produced by the City Attorney (pdf), and the other a December 20, 2016, memorandum from Convexity’s representative laying out its desired terms with the City for this project (pdf). The memo proposes very different financial terms than the City proposes. The memo also proposes that Convexity be given the right to significantly expand the project to include an additional eight- or nine-story building. We explain more about that major new building below.

Now the two sides are trying to move forward by working on a development agreement. This is a complex legal document that would work out all the terms of the deal, and would include as parties the developer, the City, the City’s Downtown Development Authority, and the City’s Brownfield Redevelopment Authority, which is involved with TIF deals. The process of negotiation over the development agreement leaves open the potential for significant changes to the tax deal and other financial arrangements.

Despite being 37 pages long, the City’s draft development agreement was described yesterday by City Manager George Lahanas as a “shell” because so many complicated issues have yet to be negotiated. All told, the draft agreement identifies 14 exhibits that must ultimately be incorporated into the document, none of which is included with this draft. Much of the text of this draft document is taken from the last draft agreement from June 2015 that the City worked on with the Park District Investment Group (PDIG), the former owner of the blighted properties along Grand River Avenue.

Major issues involving planned parking garage financing remain to be worked out:

Two of the most difficult components of the current draft development agreement are a “purchase agreement” for the developer to buy properties owned by the Downtown Development Authority (DDA) and a “parking agreement.” This all relates to the part of the plan that involves a large new parking garage being built on land currently owned by the DDA along Evergreen Avenue, just north of Peoples Church.

The parking agreement will detail the terms of a lease and number of spaces in the parking ramp. The idea is that the developer will lease from the City a certain number of spaces in the parking garage that are needed for residents in its buildings. Both of these components are described in the draft as involving “terms to be negotiated.”

The purchase agreement for the DDA-owned land and the financial arrangements for both construction of the public parking ramp and leasing of spaces in this ramp by the developer once it is built are complicated for several reasons.

Few development projects include construction of a large public parking ramp, and in this case, it is to be built on land to be purchased by the developer from the DDA and then transferred by the developer to the City. Secondly, these are large expenditures; the DDA currently owes $5.6 million on the Evergreen Avenue properties that it acquired years ago for this purpose, and the properties are worth at most about half the amount the DDA owns. And constructing a five-level ramp costs approximately $11.4 million, not counting interest.

Questions of who will pay how much for what:

The developer and the City are currently far apart on how to handle the financing of this project. When City Council approved a Tax Increment Financing (TIF) plan of about $26 million, Council specified that the tax captured by the redevelopment TIF should be used to cover costs of public infrastructure improvements (about $4.6 million) and acquiring the DDA-owned land and constructing the parking ramp there ($20.6 million). In other words, it’s designed mostly to cover the City’s expenses, not the developer’s. The Council’s TIF plan also specifies that only 80% of the incremental tax revenue will be captured for reimbursements for eligible costs in the TIF and the remaining 20% will pass through to the City and other nearby jurisdictions.

The 4 -1 vote of the Council on the TIF, with Councilmember Shanna Draheim alone voting against, reflected the view, as stated by Mayor Mark Meadows, that the Council was “only willing to give a TIF in which the developer is paying us money that we pay them back for infrastructure improvements and a public parking garage.” 

But David Nelson, representing the developer, told ELi after the Council vote, “The project cannot go forward under this TIF plan.” Councilmember Draheim told ELi, “The notion that we would expect developers to pay for all that [public infrastructure] and not get reimbursed for interest would be irresponsible.”

As noted above, ELi obtained this week a memorandum from Nelson at Convexity Properties (a part of DRW Trading Group) that was delivered to the City just before Christmas stating what the developer believed at that time were the “terms under which Developer can proceed.”

This letter, which can be considered a statement of what was the developer’s starting negotiating position, was received by members of Council but was not released to the public until after ELi found out about its existence and filed a Freedom of Information Act order to obtain it.

While the December 20 letter can be seen as Convexity’s starting point, the Council’s vote on the TIF last week might now be seen as a statement of the City’s negotiating position.

The memo from Convexity includes terms that, if they were ever to be adopted, would cost the City considerable money for the parking ramp that the developer would build on its behalf. First, Convexity had proposed that the $5.6 million in existing debt on the DDA-owned land would be “retired through payments made from parking revenue” rather than being included in the TIF, as was later adopted by the Council. In the December 20 memo, the developer offered to help with “restructuring this debt,” but not to buy the land from the City, as the City has indicated it wants the developer to do in order to relieve the DDA of the debt.

Convexity also had proposed, in this memo, that the City would pay the developer $7 million when the developer completed the parking ramp and transferred it back to the City. This is the portion of the cost of construction of the ramp that was not included in the TIF plan that the developer proposed.

Possibility of another major new building that isn’t on the approved site plan:

Convexity’s memo also introduces a major possible expansion of the project. The memo asks that the developer be given the right to build on the City-owned parking lot at Albert and Abbot Roads (just south of Dublin Square) “in consideration of the Developer’s significant financial investment, the associated risk(s) and the positive impact the proposed development will have on East Lansing.”

The developer wants to be able to either purchase or lease this property for a period of 50 years in order to build “an eight or nine story building with approximately 100,000 leasable square feet.”

This additional building has not been discussed before as part of the Convexity project. However, it is similar to a building that local developer DTN proposed at this site in 2014. That planning stopped when East Lansing residents voted not to sell this parking lot and a second lot on Abbot to the developer for this project. (Since then, East Lansing voters amended the City Charter, making it easier to get voter approval for the sale of City-owned property.) The language of Convexity’s letter would allow the developer to build here without requiring a sale of the land.

Talks go on, behind the scenes as well as in public meetings:

ELi just found out about and obtained this Convexity memo on Tuesday of this week. The terms desired by Convexity in this memo have not been mentioned in any subsequent meetings about this project by the DDA or City Council.

Attorney David Pierson, representing the developer, was present at the DDA Executive Committee meeting yesterday, but he had no comment for the DDA or ELi at that time. It is clear that discussions between the developer and the City are ongoing. It is also clear that all the potential parties are wanting to move as quickly as possible, in order to get the blighted buildings demolished and also to gain approval from the Michigan Strategic Fund for a possible $10 million State tax credit for this project.

City Planning staff believes that the Michigan Strategic Fund will not consider the application for this credit (which is linked to a credit agreed to by the State for a previous project proposal on this site) until the site plan, TIF plan, and development agreement are completed. That would serve as evidence that the project will indeed be going forward.

Mayor Mark Meadows said the January 17 meeting of Council that he wants the development agreement to come to Council at its January 31 meeting, when Council will again consider extending the deadline for Convexity to begin to demolish the buildings on Grand River Avenue. He suggested that they could perhaps delay another week.

Meanwhile, the DDA will discuss the draft development agreement for the first time at its meeting on January 26, and a decision is not expected at that meeting. The development agreement requires the assent not only of Convexity and City Council, but as noted above, also the DDA and the Brownfield Redevelopment Authority (which has the same membership as the DDA).

This will create an unusual situation in which the DDA and Council will be considering the development agreement terms simultaneously. (The DDA is a party to the agreement because of its ownership of the Evergreen Avenue properties and a parcel at Abbot and Albert Roads. The Brownfield Redevelopment Authority is a party because of the TIF plan.)

Asked about the Convexity memo after it surfaced, City Councilmember Shanna Draheim told ELi yesterday, “I anticipate that the City and the developer will be working together over the next few weeks to find areas of common interest as we negotiate the development agreement and I’m hopeful we’ll find solutions that work for both of us.”

Responding to questions from ELi, Councilmember Erik Altmann told ELi that part of the challenge of the project is that the new taxes that will be generated by the redevelopment simply can’t cover everything the City and the developer want to see covered in terms of expenses while still allowing some new taxes to come into the City to help cover services that must be provided to the new development. He says, if the tax increase on the properties after redevelopment isn’t large enough to cover all the parties feel must be covered, “then we will have to be flexible…and look at other project configurations.”