A $65 million public-private plan for the redevelopment of a vacant downtown office building is raising eyebrows for its unusual approach and potential risk to taxpayers.
The plan calls for a private developer to acquire the former Bank One operations center, surface parking lots and an adjacent parking garage from a private owner for $18.5 million, then sell the 1,680-space garage to the city for $18.5 million.
The developer, Tadd M. Miller, would spend as much as $65 million to convert the former office building into apartments and develop retail and residential on the adjacent surface lots. He also would buy back 600 spaces in the garage over 20 years by repaying $6.6 million in tax abatements for the former operations center and pitching in additional payments totaling $2 million.
City officials say the deal provides a boost to a run-down area and gives the city control of enough parking to support the future redevelopment of the Market Square Arena site—all without any upfront cash, no issuance of bonds, and an automatic tenant for the garage. The developer would take out a loan to buy the property, and the city would make the payments over 20 years using revenue from the garage.
But some observers question whether the city, which would take control of the entire property if the deal doesn’t materialize within 18 months, is taking on too much risk and overpaying. Sales disclosures show the properties most recently sold in July 2004 for a total of $13.5 million—$3 million for the former operations center and $10.5 million for the parking garage. Some also wonder whether waiting for a stronger real estate market would have yielded a more ambitious project at a smaller cost to taxpayers.
Fair market value
City officials would not release two appraisal documents they relied on for the $18.5 million garage purchase agreement, citing a state law that calls for confidentiality. But they acknowledged the appraisers used a "prospective value approach" that assumes successful completion of the operations center redevelopment. The valuations also assume surface parking lots on the former MSA site will close after a variance allowing gravel instead of pavement expires.
They say the appraisals, which estimated values of $18.6 million and $18.9 million, comply with a state law that requires cities appraise land acquired for redevelopment at "fair market value."
The private owner selling the garage and office building is an affiliate of Columbus, Ohio-based Smoot Construction, which had partnered on a failed 2004 plan for two high-rise condo towers on the MSA site. Smoot bought the properties from Bank One in July 2004, and would realize a roughly 6-percent annual return from its purchase price if the deal closes with Miller and the city.
"At least on paper, it seems there’s a component in here that’s incentive to get the site developed," said John C. Snell of Fishers-based Snell Real Estate Evaluation Co., of the city-ordered appraisals. "The question is whether the garage carries more value because of the development being brought."
He said the city likely asked the appraisers to consider factors such as the revenue from the developer’s purchase of 600 spaces in the garage in the valuations. He said such requests are normal.
"An appraiser can’t be concerned with politics or economic development," Snell said. "They must respond to financial criteria."
But the future-value approach does carry risk: If the appraised value of a property is tied to certain assumptions and those assumptions don’t materialize, the appraisal won’t mean much.
That’s part of what has flummoxed Pat Andrews, vice president of the Marion County Alliance of Neighborhood Associations.
She’s upset that the public was told about the deal only 48 hours before the Metropolitan Development Commission approved the arrangement June 3, and that the plan includes few details on how the city will repay the loan.
She also questions city incentives for apartments, one of the most robust portions of the downtown real estate market. Downtown apartments are roughly 95-percent occupied.
"Why on Earth are we giving a deal to a market segment that should be able to stand on its own?" Andrews said. "When can the taxpayers in this county expect downtown to bring in money to support itself? With attitudes like this from the 25th floor, it’s going to be difficult to ever stop subsidizing downtown."
Andrews said her reading of state law is that appraisals must be at current value, not potential future value, to protect taxpayer investments. As it stands, the developer is getting an "extraordinary" deal, she said.
"Obviously, the owner is willing to sell [the properties] for a total of $18.5 million, which happens to be the right amount the appraisals came up for the garage alone," Andrews said.
City officials say the deal has protections for taxpayers. If the development falls through, the city will take control of all of the property at no additional cost other than the loan payments and seek proposals from other developers.
The city also plans to seek ideas for a small retail development on a narrow slice of land between the garage and Market Street that could bring additional revenue to the garage. The project would be designed to create a more pedestrian-friendly environment.
Veteran developers privately question whether the awarding of incentives to the apartment project signals a change in policy for the Ballard administration. For the last two years, economic development officials in the mayor’s office have consistently told applicants that projects must create a substantial number of jobs to win incentives.
The mayor’s communications director, Robert Vane, said in an e-mail that job creation continues to be a priority.
"However, every situation is unique, and in this case, the development of the neareast side is important to the strength of downtown," Vane said. "We believe that this development will spur additional work in the area, which in the long term will create jobs and a stronger tax base."
Miller, the developer, said he’s been trying for about eight years to find a way to fix up the blighted building between New Jersey, East, Washington and Market streets. The principal in locally based Kosene & Kosene Residential said he hopes to enlist investors, including possibly Kosene, to finance the project but will do it on his own "if that’s what it takes."
Miller, whose company TM Miller Enterprises Inc. gave $1,000 to the mayor’s reelection campaign in September 2008, has sold city officials on the deal. Now he must get lenders on board.
Finding a way to jump-start the redevelopment of such an eyesore building makes sense, said Colliers Turley Martin Tucker principal Abbe Hohmann.
"We need to have some things happen over there," she said. "To get anything going in this market is a positive."
Demand strong enough?
Even if the developer can land financing and build the apartment project, there is no certainty downtown can absorb another 600 units, said George Tikijian, a leading local apartment broker.
Downtown’s roughly 3,000 apartment units are close to fully occupied today, but several new projects in the works including the Cosmopolitan on the Canal will add to the supply. Add to that several condo projects, including the 105-unit Maxwell, that are being converted to apartments because of sluggish sales.
"Six-hundred new units is an awful lot for a market of about 3,000 units," Tikijian said. "Even for the strongest housing market, that’s a big increase in supply."
David Flaherty, the CEO of locally based Flaherty & Collins Properties, thinks the market will support the project. Flaherty is developing the 200-unit Cosmopolitan, which won a 10-year tax abatement from the previous mayor, Bart Peterson.
He said the project is worthy of city incentives, in part because development downtown is more costly than in the suburbs. The biggest reason is parking.
"Everything in the financing world is hard to get done today, but with city assistance the easiest to get done is downtown apartments," Flaherty said. "And it does make sense for the city to own that garage since it owns Market Square; it secures their value in the whole MSA site."
The deal gives the city an option for 18 months to buy the surface parking lots on the western half of the former bank property for a new transit center. If the city lets the option expire, Miller hopes to build a second phase of apartments with a retail anchor, possibly a grocery store.
Downtown residential real estate agent Kurt Flock would’ve liked to see more owner-occupied homes in the plans, since owners often have more discretionary income to support local businesses.
"But the fact is, you just need more people," said Flock, who owns Flock Real Estate Group with his wife, Kate. "Renters and owners are both good for downtown."