Financial Problems of PDIG Project Raised at DDA Meeting Today

Image: The blighted PDIG-owned property now scheduled for a mortgage foreclosure sale and the subject of an additional lawsuit.

East Lansing’s Downtown Development Authority (DDA) held a specially-scheduled meeting today to review the financial due diligence report for which it had contracted on the Park District Investment Group’s (PDIG) $92 million proposed project at Grand River Avenue and Abbot Road. Considering the development agreement and tax increment financing (TIF) plan for this project were also on the DDA’s agenda, but the DDA delayed action because of financial issues that were brought to their attention just before the meeting.

The National Development Council’s report (view it here), dated June 24, gave the project a basically clean bill of health, which surprised some given the decade-long controversy over the financial viability of this project by the current owners. The report largely cast its evaluation in the limited context of whether the city should grant a TIF incentive to the project and concluded that the “developer has the expertise and the financial capacity to complete the project as proposed” and “TIF financing is merited in this case.”

The TIF plan proposed by PDIG would reimburse the developer for certain expenses over 25 years from taxes it would otherwise owe the City of East Lansing and other government entities, so that East Lansing and other government units would forgo $17.4 million in tax income.

The National Development Council (NDC) report said that “significant litigation” over the past six years involving partners in the project appear to have been “primarily related to macro-economic conditions precipitated by the financial crisis…From our investigation it appears that the pending lawsuits will not hinder the developer in any way.”

The NDC report did not mention any problem with the mortgage on the property that is at the heart of the PDIG project, a mortgage owed to Mountain Vista Real Estate Opportunity Fund I, LLC (and recently assigned to DDR MV City Center, LLC, both subsidiaries of DDR, a publicly-traded real estate company headquartered near Cleveland). This morning, DDA members were notified of a foreclosure sale of this property scheduled for July 30 because the borrower is in default; notice of this sale appeared in Legal News of June 29 (yesterday), and PDIG’s representative at the DDA meeting, Tom Eckhardt, said he learned about it only last night.

The foreclosure sale notice states that the current amount of the mortgage is $38.6 million, a considerable increase from the original amount of $12.5 million. A foreclosure auction off the property at the end of July raises serious questions about a development proposal by the current owners.

During the DDA meeting, NDC’s Cory Leon said via a phone link that PDIG had failed to provide his firm with documentation of its court filing on June 18 in Cuyahoga County, Ohio. That filing shows a contract dispute between City Center Two Project LLC, the company from which PDIG bought the property, and Mountain Vista.

Leon said he was disturbed and “was not at all happy” that PDIG failed to disclose this information, since they were supposed to provide information about all pending litigation as part of the financial due diligence process. In response to questions, Leon said that this litigation is “far more important and far more relevant than the other lawsuits” and that it “could possibly change my report.” He agreed to review the court filings and report to the DDA before its Infrastructure Committee meeting on July 16.

Another omission in the financial due diligence report is verification of the strength of commitment of the hotel operator for the project, which was supposed to be part of the scope of work. Indeed, the report gives no indication that the consultant received any documents from a hotel operator with a license from Intercontinental Hotels Group (IHG) to operate a Hotel Indigo at this location.

In 2014, PDIG had provided a letter from a Michigan-based hotel operator saying that he was partnering on the proposal, but that agreement ended when IHG refused to extend the agreement in January 2015. (See ELi story on this.) IHG subsequently renewed the agreement with PDIG, but for a smaller hotel, and PDIG stated that a Chicago-based entity had agreed to participate in a joint venture partnership with them to operate the hotel and participate in financing of the project.

Apparently PDIG has not provided any information about the hotel operator, as it promised the Planning Commission it would. During the past several weeks, two sources have indicated that the Chicago-based entity may not commit to the project and that PDIG may be looking for yet another hotel operator with a license agreement with IHG to partner with. The due diligence report provides no insight into the current status of this partnership.

All five City Council members have said that inclusion of a hotel is crucial to their support for this project.

As of now, Council has scheduled a special “work session” at 6:00 pm next Tuesday, July 7, to consider the PDIG proposal. Because this is a “work session,” and not a “regular” meeting, it will not be broadcast or video recorded. (The regular meeting will begin at 7 pm.) At the 6-7 pm meeting, the Council is expected also to consider DTN’s request to renew its predevelopment agreement with the City and the DDA for a project in the Park District at the West end of downtown and the Bailey Community Center proposal.

To read ELi's previous coverage of the concerns about PDIG, see "What's the Fear about PDIG?" and "Is the Troubled Developer Really Connected to PDIG?"

DISCLOSURE: The author expressed concern about the lack of information about a hotel partner during the public comment period of the DDA meeting.

Reminder: You can communicate with Council in person at its weekly meetings or write to Council directly at council@cityofeastlansing.com. You can speak or write on any issue involving the City, not only what is on the published agenda.