Downtown Initiative: $500,000 here, $7.3 Million there, pretty soon we’re talking real money…

A quick reminder of this evening’s public forum [Mon., Nov. 20th] on the failing Downtown Initiative.

Tonight’s agenda starts with this gem

The 2000 Comprehensive Plan’s goal for downtown is to “enhance the downtown’s role as the center of the community, with a pedestrian orientation and a human scale.”

I consider the 104′ multi-building development on lot #5 to be a stake through downtown’s heart. I’m not alone. Many residents find the scale of this development anything but “human”.

Former Council member David R. Godschalk, the Stephen Baxter Professor Emeritus in UNC’s City and Regional Planning department, waved the redflag in 2005 claiming

The developer has put too much building on these two small parcels. The nine-story building on lot 5 is out of scale with the existing downtown streetscape and soars above the 90-foot height allowed in the town center 2 district of the Chapel Hill zoning ordinance.

Scale aside, why else is the Downtown Initiative failing?

• Redevelopment of the blighted Wallace Deck and adjacent lot – off the table
  • “As a result of these material economic changes, the Town Negotiating Committee and the Developer have reevaluated the proposed Lot 5 and Wallace Deck projects.
  • Reevaluated? The Wallace Deck improvements, the real honey for this bee, are GONE.
• Lease amount dropping from $7.9 million TO $1 (ONE) DOLLAR per year
• Taxpayer contribution increasing 14.6 times, %1360 – from $500,000 to $7.3 million
• Moving from a manageable $500K out of “on-hand” funds to $7.3 million
  • supposedly borrowed at %5
  • sum added to our Town’s current debt
  • impacts our debt ratio, bond rating and forward ability to borrow
  • “the Town would incur an estimated annual debt service cost of $725,000 in the first year, decreasing annually by about $18,000”
• RAM’s original equity investment of $23 million has dropped to $12.5 million – nearly %50 drop in equity investment, though, on the plus-side, it’s upfront money.
• Borrowed monies using COPs financing mechanism – a secured debt normally reserved for essential building
  • COPS (“certificates of participation” [PDF]) are usually used to finance essential buildings and projects (sewer, water, schools, etc.)
  • My research to-date indicates the dominant private-public partnership using or proposing COPs in NC are prisons, coliseums. convention centers, etc.
  • Town income directly affected – “Revenues to pay the debt service on the proposed borrowing would be property taxes, sales taxes, and parking revenues above those we are currently receiving.”
• Shrinking PUBLIC SPACE – from 31,000′ in the original proposal, to 27,215′ (no published usage patterns – Are we accepting RAM’s restrictive idea of “public”?).
• Missed opportunity for internal space for public use – arts facilities, museum, etc.
• Commitment to provide affordable commercial space for local economic development is missing.
• No commercial space for an integrative tenant, like a grocery store, that reduces off-site travel by the condo-residents and draws folks in from surrounding neighborhoods.
• After 50 years, the developer gets a “sweetheart” deal to acquire the land and air rights for $2 million (imagine the value of that property 50 years hence).
• Developer is supposed to find 10-15 additional on-street parking spaces (the incredible difficulty of doing the Downtown Parking Task force, of which I’m a member, just discussed).
• “Owners” of affordable housing units HAVE TO LEASE OFFSITE PARKING, 21 spaces rented at below market rates.

The deal with RAM Development was never very good, at least for the Town. RAM’s payment of $7.9 million ($4,750,000 to lease Lot 5, a one time lease payment of $3,150,000 for the air rights over the Wallace Deck and the Rosemary/Henderson street lot) was a steal of a deal.

$7.9 million for 99 years of use of citizen-owned, prime downtown real-estate? Incredible.

$99 for 99 years? Impossible!

Several folks pointed out that RAM’s original projected rate of return, less than %3, was financially infeasible and would have to be “re-traded”. Last year I publicly stated that RAM had over-promised and would under-deliver – that dramatic renegotiation upwards, more inline with Grubb’s competing bid, was an inevitable result.

For instance, I work on the corner across Church St. and remember well the Devil’s own time the construction crew had digging my building’s basement. I never bought into the idea the Town would only pony up $500,000 to build underground parking structures in the granite ladened Lot #5 – and I sure as heck found it difficult to believe that RAM, our Council members or any other longtime residents would buy this malarkey.

When I brought this and similar issues up with our leadership, both then and since, I was told “not to worry” and “the deal is the deal”.

Why should the citizens of Chapel Hill pay the piper? Remember how “thrilled” RAM was to get a piece of Chapel Hill’s action?

In the most stark example, Grubb’s financing model would produce a 21.77 percent return on its $10.5 million investment in condominiums on the Wallace Deck site. Ram sees only a 2.98 percent return on its $23 million investment there.

“If they’re willing to do it for that,” Harris said, “God bless ’em.”

Even if the company wanted to, Grubb couldn’t make a counteroffer, Stainback said, explaining that the proposals are considered “best and final offers.”

Two council members asked Cummings whether Ram’s financial model was too good to be true.

He said no projection ever is exactly right but that his company hopes to ride the growing trend of people returning to downtown.

After the meeting, Ivy Greaner, Ram’s managing partner, said the profit margins are healthy enough to sustain the project.

But Ram also is seeking a foothold in North Carolina. The company is willing to make less money in Chapel Hill to get a centerpiece project in the Triangle.

“This is a special town,” Greaner said, in a suitor’s tone. “We love Chapel Hill.”

N&O

Guess the Chapel Thrill has worn off for RAM. We’re special, just not $7.3 million special.

The Town and Ram claim costs have unforeseeably skyrocketed in the last year

In the time that has elapsed since the Developer formulated the development plan for Lot 5 and the Wallace Deck sites and the Town negotiated the October 24, 2005 MOU with the Developer, construction costs have increased by as much as 30 percent and interest rates have increased significantly.

yet we’re supposed to accept that the other rosy projections, like a %5 borrowing rate and an above average return on parking fees, retail and property taxes will pan out?

Since the original deal was inked, the national average cost of building materials hasn’t exceeded %11, with a recent flattening (due to lower energy, aggregate and raw material costs) of an annualized increase between %5 and %7.

Worse, last October, after closing the deal (N&O), Keith Cummings, president of Ram,

…personally guaranteed with his own money that the project will be completed as planned, according to the document signed Monday. Any increased costs — because of issues such as the rising price of construction materials — are to be borne by Ram.

Personally guaranteed.

Come on, I feel like the Town’s citizens are being taken to the cleaners on this deal.

Until I see the specifics of the %30 increase, I must assume it was part of the “shell game” of under-bidding to win the contract.

If this turns out to be the case, what must we expect of RAM’s projections (“guarantees”) concerning their luxury, mega-condo development – the largest in Town’s history – at 425 Hillsborough Street?

And once we’re hip deep into this development, what restricts RAM from coming back to the well? Quite frankly, while I’d hate to “throw away” any taxpayer investment, it certainly would be easier to back out of a $500K losing proposition than a $7.3 million boondoggle. The modest protections of paying on delivery don’t seem sufficient.

The return of the public’s investment better be phenomenal to justify this private-public partnership. With this project’s current fiscal track record, financial prudence, above all, should steer our leader’s decision, especially when we go against our Town’s tradition of letting the voters decide to take on such massive financial obligations.

Speaking of prudence, beyond the $7.3 million demanded by RAM, the Council is supposed to approve a major chunk of debt tonight for the Homestead Park Aquatic Center. As today’s HeraldSun reports

The next key step comes tonight, when the Town Council will consider approving a contract with the Resolute Building Co. to build the Homestead Park Aquatic Center. The contract on the table is for $5,238,000, although the town manager would be authorized to approve up to $530,000 in change orders if necessary, as the work proceeded.
…
In the town’s 2006-07 budget, the council authorized borrowing another $750,000 for the Homestead project. That’s in addition to the bond funds the town and Orange County both are allocating for it.

Orange County is putting about $4.3 million into the project in bond funds approved by voters across the county, and Chapel Hill is contributing about $1.2 million in bond funds.

That’s nearly $2 million of debt we’re taking on – with a possible upward tick already projected. Strange that the citizenry had a voice in taking on that $2 million obligation, but we’re left out of directly approving an amount 4 times as large.

I’m going this evening with my concerns, fully expecting Council to answer each issue fully before moving forward. Hopefully the missing issues of public access, accommodations and facilities will be covered.

Here’s the “new deal” being proposed this evening.

• Town leases building pad to Developer under Ground Lease for a term of 99 years (the “Ground Lease”). Rent under the Ground Lease will be $1 per year plus the various benefits the Town will realize from the development of the Lot 5 Project, including but not limited to public space to be developed by the Developer at its cost but owned and operated by the Town, public art corresponding to 1% of the total cost of the project, affordable housing that will be required to be subsidized by the Developer, LEEDs certification of the project, the additional cost of placing the Condominium Parking underground, the enhanced tax base, and the general economic developments that will be generated for the entire downtown area.
• The Developer shall have the right, which shall be assigned to the condominium association upon turn-over, to terminate the ground lease and acquire fee simple title to the land and/or air rights on the date that is 50 years after the commencement of the ground lease. The termination fee shall be $2 million.
• The Developer will construct approximately 137 for sale condominium units (15% of which shall be affordable for a total of 21 affordable units) and approximately 28,540 square feet of retail.
• The Developer will construct, pursuant to plans and specifications approved by the Town, the public plaza/public space aggregating approximately 27,215 square feet. All of such public space will be owned and operated by the Town.
• The improvements on Lot 5 will be LEEDs certified.
• Developer will construct an underground parking garage below the condominium/retail building containing approximately 161 parking spaces (the “Town Parking”) that will be available to the general public including retail patrons (i.e. no monthly rentals). The remaining parking spaces aggregating approximately 169 will be allocated to the owners of the condominium units (the “Condominium Parking”).
• Developer and the Town will seek to secure appropriate permission for an additional ten (10) to fifteen (15) on-street parking spaces that will be allocated to the Town.
• The Town Parking would be located on the first level of the underground parking garage and the Condominium Parking would be located on the level below the Town Parking.
• Upon completion of the parking garage, the Developer will convey to the Town, fee simple unencumbered title to the Town Parking at a purchase price equal to $7,245,000, which represents Developer’s current estimate of the cost to design, permit, finance, plan, supervise, and construct the Town Parking (“Town Parking Costs”). Developer agrees to provide documentation as may reasonably be required by the Town and the Local Government Commission to assist with the financing of the purchase of the Town Parking. The Town may, at its option, elect to audit the Town Parking Costs and in the event said costs are less than $7,245,000, the Developer shall refund the excess amount within 30 days of demand thereof. In the event the audit indicates that a refund is due, the Developer shall also reimburse the Town for the cost of the audit not to exceed $20,000
• Parking for the affordable housing units will be provided by the Town at the Wallace Deck or other Town-owned property. A below market rental rate would be charged for such parking.