Review of the Cost of Redevelopment Financial Missteps // Eliot Singer

I have heard from a number of people asking me to review the history of the costly pursuit of redevelopment in East Lansing, in case anyone wishes to challenge the “not our fault” party line from city hall with regards to financial troubles. This is a summary, based on previous analysis.

1) Somewhat more than 20 years ago, Meadows, Singh, Jester, et al hired “Ted Almighty” Staton as city manager and gave him bonuses for bringing in development. Staton was an advocate of a corporate model for government, including giving him bonuses for doing his job. I’ll leave it to Meadows and the rest to explain why Democrats would hire someone whose beliefs about government fly in the face of a public-service model, but the not-surprising results were: a shift from city government’s top priority being neighborhoods and public services to development, the use of “creative” financing, legally questionable practices (such as to avoid public vote on selling city property), propaganda and secrecy replacing genuine community involvement, rewarding friends and punishing enemies, and concentration of power in city hall (hence his nickname).

2) Since the last time voters were asked to approve a debt millage for a discretionary public works project (in 1999 for Hannah Center, now under threat of closure, despite homeowners having paid for it), city officials have issued more than $70 million in bonds for discretionary public works projects (including Lotto 1) without seeking debt millages. Parking structures that do not pay their own way with parking revenue are discretionary public works projects. The reason officials do not ask voters for debt millages, the traditional and proven approach for funding discretionary public works, is they fear voters will say no.

3) DDA TIF District #2 is paying taxes to the general fund at 1991 levels. This is the main area of downtown and generates far more than its share of public safety costs (due to party scene). TIF District #1 is University Place, which was supposed to finally contribute to the tax base (the original 1986 plan was 20 years, but that was extended to 30 years), but tax diversion was extended another 30 years to pay for repairs. DDA districts were never intended to last more than 20 years, but East Lansing’s is now a permanent welfare state, with no drop-dead date. DDA accounts, according to state law, are supposed to be at arm’s length, meaning any supplemental funding from the city would be booked as an IOU, but Staton deliberately moved development authority accounting from the city’s finance department to the planning department, where no one has accounting qualifications, and several DDA financial obligations have been ignored (e.g., 4.3% of the debt service for the City Center parking structure from DDA TIF #2, shortfalls in paying for downtown maintenance), which by now add up to well more than $1 million. There are also considerable staffing costs for development authorities, including paying the city attorney to attend meetings.

4) Prior to Lotto 1, the city’s unfunded debt services liabilities for discretionary public works came to ~$55 million. Unfunded means after designated revenue sources for these liabilities, notably net parking and tax increment revenue.

a) In 2002, during Meadows’ first stint as mayor, voters approved sale of the old DPW building after being told it would be sold to a developer, which would cover the cost of a new building with no need for bonds. Within a few months, the first set of bonds was issued, followed by more the next year to cover cost overruns. The total debt service cost is ~$15 million over 25 years, averaging ~$600,000 per year. The development, of course, never happened (at one point Council approved a project with its favorite “trusted partner,” Strathmore, that fell through, as usual). The only proper way to fund this kind of major public works project is a debt millage, but city officials wanted to build a fancy, state of the art, building in their newly annexed Northern Tier, and it is likely voters would only have approved debt mils for a much less expensive renovation of the old building.

b) The shortfall on debt service for various parking structures (Division/University Place, City Center, Albert Place, repairs) was running well more than $1 million per year, before the Division St. bonds recently matured. The total shortfall, over a period from 1986 through 2026 (some bonds extend even later), comes to ~$25 million.

c) Using the official TIF numbers, the shortfall in debt service for Avondale Square is ~$5 million. Using more inclusive numbers, the shortfall is more like $7 million. Meadows insists Avondale Square was not a mistake because he didn’t know there would be a recession. (His buddy, Staton, is a follower of the extreme laissez faire Austrian School of economics that pooh-poohs recessions and depressions, not matter how deep.) However, by time the Avondale project had gotten off the drawing board, many reputable economists were warning of a housing bubble and dangerous lending practices, so city hall should have engaged in risk assessment instead of plowing ahead. Anyway, once HUD offered only a loan, secured by future CDBG funds, not a grant, as requested, the subsidy per home became ~$100,000, even if the project had gone ahead according to schedule.

d) The unfunded debt liability for the City Center II Evergreen bonds is ~$10 million, which is of course the tip of the iceberg when it comes to CC II (and its Park District sequel). Remember the Evergreen properties were bought for 3 times their market value when the economy was in free fall and community activists were screaming warnings about the developer. City hall has refused to attempt any accounting of the cost of consulting fees, staff, city attorney, and so on over a period that stretches back to c. 2000. State taxpayers were forced to write off $700,000 for the Little Bank Building, when MEDC let the city off the hook for a loan. The city failed to pursue breach of contract against the developer over his commitment to pay for demolition of the Little Bank Building, demolition finally paid for by taxpayers. Documents from the Cuyahoga litigation between the developer and high-risk lender proved morphing CC II into the Park District led to the lender to postpone foreclosure, adding about 3 more years of delays (the reality based-community had warned to do nothing after the demise of CC II and let the private sector do its thing). The 2008 brownfield plan, approved by city, development authorities, and MEDC, had absurd assumptions to “get to yes” that would have led to more than $10 million in shortfall, even if the project had been built and everything had gone right. (We’ll ignore the $40 million in bonds in the official financing plan, including ~$6 million to the developer for part of the private financing and ~$9 million for a performing arts theater that other evidence suggests would not have cost more than $3 million to build, and was a lie anyway.) Along the way, there are such niceties as Staton’s attempts to excuse and cover up the developer’s record, inappropriately close ties between city officials and the developer (and breaches of city’s ethics code), the clean bill of health fiasco, the MBT Credit fiasco, and so on, for which there has been no accountability. The years and years of blight were caused by the pursuit of CC II, and the city could easily have required demolition long before it did, if it hadn’t waited until the properties were acquired by a developer without close ties to city hall.

5) The city has taken a “come and get ‘em” approach to brownfield and other tax incentives, using incentives as a first not last resort, never driving a hard bargain, and never punishing developers for breaking promises that were used to justify the tax incentives. (Promises have been broken over and over.) Costco was given twice the tax break for EL as by Meridian Township in a jointly taxed location. Only a small fraction of brownfield expenses for sites justified by being functionally obsolete (not to be confused with former industrial or major historic preservation sites) involve demolition or environmental clean up or are more costly than for sprawl sites. How much potential tax revenue has been lost by a government that caves every time a developer says, if you make me pay taxes, I won’t build, is hard to estimate. By now I’d put the figure for city taxes alone at ~$15 million.

6) The Lotto 1 project was a backroom deal with a blatant run-around the city charter’s requirement of voter approval to sell city property. There was no RFP so different developers could compete publicly. A $200,000 lease is a small fraction of what the city would have received by selling Lot 1 (if voters approved the sale, with a minimum price of $15 million, a reasonable estimate) and earmarked the revenue toward paying down legacy costs—remember, the original lease was only going to be $75,000 and even after Council, under public pressure, raised it to $200,000, someone tried to sneak $150,000 into the final agreement, which was caught by an observant citizen, not anyone in city hall, notably the city attorney whose job it is to review legal documents). The “public purpose” seems to be that about 1/4 of the apartments are for seniors (at public cost of over $500,000 per apartment), but not only has MSU now announced plans for its own senior housing at Spartan Village, ample evidence suggests the Lotto 1 senior apartments are just a placeholder. The developer has refused to say how much he will charge or who will manage, at more than $30 per annual square foot (a minimum to make the overall project viable, using comparative and estimated pro forma data), the senior apartments would be cost prohibitive, and there is that drawing with seniors on the roof, not a gray hair among them. The city has agreed to refinance the ~$26 million in “no-recourse” bonds in 2020, without having seen a spreadsheet showing “coverage ratio” for debt service costs versus tax increment revenue projections (on the grounds the current bond purchaser, the developer’s father, was a private placement), Even before interest rates started to rise, unofficial estimates show refinancing as a “no-recourse” bond is unfeasible in the open market, and no provision was stipulated in the legal documents for what will happen if the city cannot refinance. Over $500,000 in legal fees to the city’s bond attorney and the developer’s attorney and bond consultant were added to the bond in secret, in addition to the standard 1% commission.

7) East Lansing government (and its friends at MEDC) long ago lost track of the theory behind tax diversion, which (like supply side economics in general) is to stimulate growth and bring in much greater tax revenue for public services than the tax revenue lost to diversion. The fact that developments require public services, especially student apartments and late-night bars, has been persistently ignored. Buildings that are merely functionally obsolete/underutilized, even if empty, as opposed to true blight leading to a downward spiral, can wait for redevelopment until there is a market. There is no evidence that subsidizing apartments for rich college students has prevented student housing developments at sprawl sites. Urban planning ideology about “density” is irrelevant for the Lansing area (and easily challenged even for big cities). The three examples of true blight in East Lansing in recent years: City Center II, the boarded-up former Taco Bell, and the former restaurant at Trowbridge Plaza left to rot after it closed, were all caused by the hope for brownfield redevelopment: abandon a building and city officials will come with lucrative offers instead of threats. Tax diversion for redevelopment is an idea that dates back 40 years and has been practiced in East Lansing for more than 30. Not a single East Lansing tax diversion project has lived up to its original plan, with several major, costly, fiascos. Even the first City Center, which had strong public support and a conservative TIF plan, has been plagued with problems: developer deciding not to build technology offices in former Jacobson’s, so city cluelessly did the TIC; closing of The Gap and Powerhouse Gym in an independent building included in TIF plan; closure of Barnes & Noble; a significant portion of condos not occupied by permanent residents. Now, after the closure of Cosi, in the prime retail location, left empty because they want cost prohibitive rent, there is talk of a dope-shop.

8) City officials have refused to undertake their own review of tax diversion projects or learn anything from past mistakes (or even admit to them). Reforms proposed by community activists, based on review of projects, have been ignored. Only with such reforms is there any chance tax diversion can serve the public interest. Among these:

a) No crooks, deadbeats, cronies, or backroom deals (the last added because of Lotto 1).
b) No development authority bonds, or bonds for any discretionary pubic works, without voter approval.
c) Require detailed explanation for how level of tax diversion or incentive is commensurate to public purpose; this should be built into the site plan review.
d) Loss of tax incentive if developer reneges on promise for which incentive was given.
e) Require pro forma from developer for any project involving tax incentives or public-private partnership.
f) Require cost comparisons with sprawl site, whether or not a sprawl site is being considered (loop hole in current state law).
g) Require projects whose excuse is functional obsolescence or underutilization provide enough new tax revenue to pay for their public service costs (probably no more than 50% tax diversion), with some exception (voter approval?) if there is a strong enough public purpose to warrant subsidy.
h) No piggybacking of discretionary public works on tax diversion projects (e.g., if Ann St. Plaza was of sufficient public importance, as opposed to providing outdoor space for the developer’s tenants, to warrant public financing, it should have been done with voter approved debt millage, which would have ensured a much better plaza).
g) Replace monies in brownfield plan that go to city and state development officials with upfront fee to eliminate incentive for developtocrats to approve projects.
h) Democratize development authorities.

Many of these reforms should have been done at the local level. Others need revisions to the horrific state development authority legislation (which is all about making tax diversion, however irresponsible, as easy as possible, not about managing risks in the public interest). That means electing state legislators who want reforms.

– Eliot Singer

1 thought on “Review of the Cost of Redevelopment Financial Missteps // Eliot Singer

  1. I am writing to correct a few inaccuracies in Eliot Singer’s review of the history of development in East Lansing. I don’t know what happened in the Staton era, so I will focus on what has happened more recently.

    One of Mr. Singer’s themes is that we should ask voters to pay for infrastructure projects by approving debt millage instead of financing projects with TIF dollars. The problem with this argument is that debt millage financing is more than 3 times as expensive as TIF financing. For example, a $100 million project financed with debt millage costs taxpayers $100 million. But, because the city captures taxes from other jurisdictions under a TIF plan, we can finance a $100 million project with less than $30 million in city tax dollars. In addition, the city already has the 5th highest property taxes in the state, so at least I am reluctant to ask residents to pay more property tax.

    With respect to the Evergreen properties and “City Center II,” Mr. Singer leaves out a most important point – the buildings on the corner of Abbot and Grand River have been demolished! In addition, the DDA has been able to cover the interest payments on their debt, and it likely that the Evergreen properties will be developed and off the DDA’s books soon. It has taken a long time, but we have eliminated the blight on that corner.

    I have to disagree with almost everything Mr. Singer writes about the Harbor Bay/Lot 1 project. First, this was not a backroom deal. It was a hard fought negotiation that lasted for more than a year. Second, Mr. Singer vastly understates our revenue from this project. My goal, as one of the lead negotiators, was to make sure that we fully replaced the revenue from Lot 1 and also generated enough new revenue to cover the cost of services that will be provided to the properties. The developer threatened to walk when we would not relent on this goal, but he eventually agreed. Once the project is up and running, the city will see approximately $950,000 per year in parking and lease revenue. I also disagree with Mr. Singer’s speculation that the 55+ apartments are not viable. The market study that Council saw showed a demand for just this kind of property. Mr. Singer is also incorrect about the responsibility for refinancing the bonds. If there are no buyers, the developer is the one left holding the bag, not the city. That is what “no-recourse” means. Finally, the argument that we could have simply sold Lot 1 for $15 million is specious. While it is true that we might have been able to make a one-time chunk of money by selling, that would have meant giving up control over what would be built. We almost surely would not have gotten an Urban Target, a modern 55+ apartment complex, and a new parking ramp.

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