Center City due diligence report found satisfactory by city
The City of East Lansing has approved the due diligence report for the multi-million dollar Center City District redevelopment project, clearing the way for developers to begin securing further financing for the project.
“We did a review of the letter and staff has conveyed to council that we believe the letter satisfies the due diligence process to this point and that we will be moving forward with the further steps in the development agreement,” City Manager George Lahanas said Tuesday afternoon.
The decision finalized at approximately 4:30 p.m. Tuesday, half an hour before the end of the second and final business day the city was given to make a decision on its level of satisfaction.
The State News obtained the staff report, prepared by community and economic development administrator Lori Mullins, which detailed city staff’s review and ultimate recommendation that the city alert developer Harbor Bay Real Estate of the report’s approval.
Harbor Bay could not be reached for comment at the time of publication.
“With a positive due diligence report that supports the project feasibility and validates statements made by the developers, review of the LLC complete, a solid development agreement, and a project that will bring additional revenue, 55+ housing and a grocer to downtown East Lansing, staff is optimistic about the proposed redevelopment project. We therefore recommend that the City notify the Developer that the report is satisfactory to the City," the staff report stated.
The staff report was generally positive and commended third party consultant Development Strategies for its thoroughness and attentiveness to the issues it was tasked with, given the information it had in its domain at the time.
The staff report also identified some of the missing details as the proof of funding letter, final approval of State financial incentives, the final project construction documents and bids for construction.
Proof of funding, however, is central to the project's launch and without one, no work on the project can commence and might now be tied up with the due diligence findings on the proposed age-restricted housing units.
“The proposed age-restricted housing also seeks to achieve the highest rents in the market, with comparatively few local households able to afford these rents,” Development Strategies wrote. “Placing age restrictions on the property simply further restricts demand by eliminating a large segment of the rental housing market.”
Staff addressed this and Development Strategies later statement of there being enough market support for the project indicating, based on a recent survey of residents over 50 and its own “anecdotal discussions with local seniors and alumni living in other places,” there was in fact enough support.
Staff was satisfied with questioning over the proposed rents as well, saying they felt the developer would lower rates to meet the market.
But the feasibility of the project comes with a caveat, despite the confidence of the developer, Development Strategies and City staff, it could collapse according to the staff report if a lender finds the proposed rates to be a concern.
“If the lender’s due diligence also questions these lease rates then that could affect their projections of project feasibility as well and it is possible that the project will not obtain financing,” the staff report said. “If that were to happen, the City is not at risk because no work will commence on public property until after proof of funding.”
City Councilmember Erik Altmann, who supported city staff’s decisions to approve the report, indicated the vast importance of a proof of funding saying it had to be in place “before a shovel hits the ground.”
Altmann indicated the lender would delve deeper into the project than the due diligence report to produce the proof of funding.
“At that point everything is going to have to be in place,” Altmann said. “That’s in some ways a much more stringent test than the due diligence.”
Altmann was satisfied with the due diligence report calling it a test on if the developer was legitimate in the facets the city needed looked into and had the capacity for this type of project.
But Altmann did raise a slight concern over the 55-year-old and over housing component study because a project of this type has no comparable project in which to garner a potential future for the project’s success in the market.
“That’s both good and bad, it means that there’s a lack of evidence that the product already works but at the same time there’s a good chance there will be higher demand because the product doesn’t exist yet,” Altmann said.
But Altmann pointed out MSU being directly across the street from the development would bring in older alumni and city data indicated a strong support for 55 years of age and older housing.
“You put it all together, it seems like a reasonable bet,” Altmann said.
Prior reports of the due diligence report had indicated not-yet-finalized details of the project, such as not-yet-finalized sources and funds and pro forma, which might be a cause for concern over the project’s viability.
However, staff discussed further with due diligence report consultant, Development Strategies, who responded “‘the documents are as complete as should be expected at this point in the process. As they proceed with their financing options, they will have a more firm sources and uses statement and pro forma.’”
Harbor Bay Real Estate Advisors can now pursue financing for the project and might have found a financier for the public portion of the project through Robert W. Baird & Co. Incorporated, or Baird.
In a letter to Mullins, Brian J. Lefler, Managing Director of Public Finance for Baird, “is diligently working on securing financing for the public portion of the Center City District Project having an estimated cost of $24.4 million.”
The public financing is to be sold in non-recourse bonds by the East Lansing Brownfield Redevelopment Authority and it could be bought by an institutional investor or investors according to Lefler’s letter.
“The institutional investor will review the documents and conduct its independent due diligence for the project,” Lefler wrote. “In approximately 45 to 60 days, a term sheet, when issued, will be the genesis for the ELBRA financing documents, including a closing date.”