Packard Square Brownfield Project Debated

Washtenaw County board of commissioners working session (May 5, 2011): Continuing a debate that began at their regular board meeting the previous day, county commissioners spent part of their most recent working session getting more information about a brownfield proposal for the Packard Square project in Ann Arbor.

The board had been asked at its May 4 meeting to give initial approval of a $1 million grant application and $1 million loan from the Michigan Dept. of Natural Resources and Environment, for brownfield cleanup at the proposed Packard Square development. The board was also asked to authorize designation of the county’s full faith and credit as a guarantee for any loan that might be awarded, up to $1 million.

It was that guarantee that raised concerns among some commissioners, who were uncomfortable putting the county potentially on the hook for a private developer – especially as the county faces a $17.5 million deficit over the next two years.

Also was a concern that the developer – Bloomfield Hills-based Harbor Companies – had not paid off back taxes owed on the site.

Commissioners discussed having county staff talk with representatives of the city of Ann Arbor, to ask whether the city would be willing to back the loan, rather than the county. The site plan and brownfield plan for Packard Square had been approved by the Ann Arbor city council on Monday, May 2.

Subsequent to the May 5 working session, the county board announced that it will hold a special working session on Tuesday, May 17 to continue discussion of the Packard Square project and a possible change to the county’s full faith and credit policy. That meeting is set to begin at 6:30 p.m. at the Washtenaw County administration building, 220 N. Main St. in Ann Arbor.

In addition, the Packard Square grant and loan application, along with the project’s brownfield plan, is on the agenda for initial approval at the board’s May 18 meeting. A public hearing on the brownfield plan is also scheduled that night.

Packard Square Brownfield Proposal

Brett Lenart of the county’s economic development & energy department, which manages the county’s brownfield redevelopment, began with an overview of the brownfield program. To date, 19 brownfield development projects have taken place in six communities, including Ann Arbor, Ypsilanti and Saline. Projects include the Toyota Technical Center, Zingerman’s Deli, and the Dexter Wellness Center, among others.

Lenart said brownfield incentives have resulted in $323 million in new investments for local projects, and have helped to create or retain 3,500 jobs. Tax revenues that the county will receive in coming years because of those investments are significantly higher than what the taxes would have been without the brownfield redevelopment, he said.

Were it not for the brownfield incentives, these sites would likely not be redeveloped, Lenart said. They are difficult projects – that’s why the incentives are appropriate, he said.

Lenart also noted that the incentives will likely be eliminated under proposed state tax reforms, as part of current budget bills in Lansing. It’s not a tool they’ll be able to use much longer.

Specific to the Packard Square proposal, Lenart noted that the 6.5-acre site – the location of the former Georgetown Mall – includes land contaminated by a dry cleaning business that operated there. It’s been standing vacant and has little potential for reuse, he said.

The developer is proposing a $48 million mixed-use development, with retail and office space along with 230 apartments.

The proposed plan includes $5.1 million of eligible tax increment financing (TIF) activities, captured over a 14-year period. This total includes an estimated $2.4 million in developer-financed costs and $700,000 in interest, as well as $1 million from a state grant and another $1 million from a state loan. Also covered under the plan are $358,222 to be paid to Washtenaw County for brownfield program administrative support (about $25,000 each year over 14 years), and an estimated $1.1 million that will be deposited into the county Local Site Remediation Revolving Fund.

The project is expected to increase the taxable value of the property by an estimated $7.3 million – that’s an increase of about $500,000 in additional tax revenue to several taxing jurisdictions after the TIF repayment period.

Lenart said the county staff was recommending that the board approve the $1 million grant application from the Michigan Dept. of Natural Resources and Environment, as well as the $1 million loan from MDNRE. The combination of the grant and loan would reduce the period of the TIF from 18 to 14 years, Lenart said, reducing the total TIF-captured funds by $2.5 million.

Lenart noted that the county would require that the developer obtain a letter of credit from a bank, as assurance that the county would be able to secure repayment. If there’s a risk, he said, it’s that the county will need to be careful about the terms and conditions of the letter of credit, to ensure it’s in their best interest and that their funds are protected.

Ideally, the board would approve holding a public hearing on the brownfield proposal at its May 18 meeting, he said, and give final approval at its meeting on June 1.

Packard Square: Commissioner Discussion

Conan Smith began by saying that Wes Prater had been right to urge the board to bring this discussion to a working session, before considering it for a vote. [At their May 4 meeting, commissioners had debated whether this project had a significant enough financial impact to the county to require it, under board rules, to first be taken up at a working session. Smith had argued against that move at the time.]

Smith described Packard Square as a badly needed project in Ann Arbor. It’s in an area where affordable housing is needed, on a bus line and within biking distance to downtown. It could be valuable to the economic diversity of the city and the county, he said. The board should rely on the county brownfield redevelopment authority’s review of the project, and take their advice to approve the grant and loan application, Smith said.

It’s incumbent on the board to protect the county’s interests, first and foremost, Smith said. They have tools to help development – through authorizing the county’s full faith and credit and by bonding, among other means – and that’s especially important in areas that are environmentally challenged, like the Packard Square property, he said. There’s a strong public interest in supporting these activities.

That said, the board needs to take every conceivable protection to secure the county’s long-term financial interest, Smith said. His understanding is that the letter of credit offers such protection. He asked for additional details about what risk the county might be taking with this project.

Lenart explained that the letter of credit would be negotiated between the developer and the financial institution, in an amount specified for the benefit of the county. It would allow the county to access the funds under certain circumstances. In addition, the county would have a contract with the developer that would describe how the TIF revenues would be used. For example, the county could specify that they receive TIF revenues for repayment, before those revenues would be available to reimburse the developer.

It would be crucial to structure those two documents – the letter of credit, and the county’s contract with the developer – in concert, Lenart said, especially in reference to milestones and benchmarks that would allow the county to access the letter of credit.

Curtis Hedger, the county’s corporation counsel, stressed that the county gets to negotiate terms – they’ll need to feel comfortable with the agreement before they sign. And it’s key to have the letter of credit be in place for the entire length of the TIF. He also noted that the bank would investigate the developer’s assets very carefully before issuing the letter of credit, which adds a layer of assurance.

One risk that Hedger cited would be if the developer goes bankrupt within 90 days of signing the letter of credit. In that case, a bankruptcy court could invalidate the letter, he said – that’s a major risk. That risk is mitigated by the fact that they’d be getting both a grant and a loan from the state, he said. There’s enough work that could tap the grant funds first, allowing them to pass through the 90-day period without expending additional funds. In that case, if the developer goes bankrupt, the county could simply return the unused loan to the state, he said.

The key thing in the letter of credit is that the terms are crystal clear regarding when the county can access those funds, if necessary, Hedger said, including a detailed list of situations that would trigger the county’s right to collect. If there’s a bankruptcy, the county would be looking to the bank – not the developer – to recoup its money.

Hedger said he’d also recommend including an acceleration clause in the letter of credit, which would state that even if there’s a minor default – like a $50,000 payment – the county would have the right to ask for the entire amount of the loan. The county would be looking to the bank to make Washtenaw County whole, and the bank would have to in turn deal with the developer. That’s why there’s a lot of front-end due diligence by the bank, Hedger said.

There’s always a risk when the county issues its full faith and credit, Hedger said – no one can predict the future. But with a letter of credit that’s both clear and covers a sufficient time period, he added, they should be in good shape.

Lenart added that the county staff would oversee the activities funded by the $2 million in state funds. That adds a level of control about how and when funds are expended, relative to the letter of credit, he said.

Smith then asked about the county’s general policy toward issuing its full faith and credit. Its policy now is focused almost exclusively on public works projects, he noted. He asked Hedger for recommendations about how the policy might be revised.

Hedger said that currently, the county uses its full faith and credit primarily when it issues bonds for county projects or for projects within other local municipalities. Since there will likely be more public/private partnerships in the future, Hedger said, he’d recommend a policy that gives the county more flexibility. It would also be important to be clear that the county won’t do these types of deals unless they lock down some type of security, he said, like a letter of credit.

Packard Square: Commissioner Discussion – Unpaid Taxes

Wes Prater then began his questioning by clarifying that the developer was an LLC. He asked whether the firm owed any taxes. Lenart answered that the taxes aren’t up to date, but that this brownfield agreement would be an effective way to resolve that situation.

[Responding to a query from The Chronicle, county treasurer Catherine McClary reported that Harbor Georgetown LLC owes 2009 taxes totaling $178,025.26 and 2010 taxes of $159,845.57, if paid on or before May 31, for a total of $337,870.83. Interest increases each month. The 2009 taxes are in forfeiture – that is, if not paid by next year, the property would face foreclosure.]

What is the county becoming? Prater asked, exasperated. He likened it to the federal bailout of General Motors, and asked what kind of collateral the company had. “This is kind of outrageous, if you ask me,” he said.

Anne Jamieson-Urena, director of brownfield and redevelopment incentives for AKT Peerless Environmental and Energy Services, was on hand as a representative for the developer. She reported that the developer was getting a 40-year loan backed by the U.S. Dept. of Housing & Urban Development (HUD), which she described as very secure financing for the project. HUD won’t close on the loan until the developer’s taxes are paid, she said. HUD also requires that they prove they have the means to clean up the site – that’s why they need the brownfield deal. Both the city of Ann Arbor and the county brownfield redevelopment authority have indicated they won’t support the project unless all back taxes are paid, she said.

Jamieson-Urena described it as a difficult site to clean up, and a complicated project with lots of moving parts. She said she realized the county board was coming in at the middle of the discussions.

Prater cut her off, saying he wasn’t interested in the developer’s process – his concern is for the county and only the county. It looks like the developer wants the county to pay for the site cleanup so that they can get a loan, he said. The LLC isn’t willing to invest its money, he said, yet they want to get the profits – and taxing authorities will be sacrificing 14 years worth of tax revenues. Prater said he’s OK with the TIF, but not with the state grant and loan being backed by the county. That’s too risky, he said.

When Jamieson-Urena noted that the grant and loan allow the TIF period to be reduced from 18 to 14 years, Prater replied, “I may be dead – and half of this group may be dead by then!” If the developer isn’t willing to reach into his own hip pocket for funding, the county shouldn’t help, he said – or perhaps Ann Arbor should offer its full faith and credit for the project instead.

Dan Smith also commented on the unpaid taxes. He said he didn’t want to change the rules in the middle of the game, but the first thing the developer should have done was to take care of those back taxes. He’s disappointed that the project is this far along and there’s still a tax issue.

When Jamieson-Urena reported that the developer has been making payments, Smith replied that you either pay your taxes or if you don’t like it, take it up with the tax tribunal. The county needs a policy making it clear that taxes need to be current before a project chews up so much staff time and resources.

Smith then said he shared Prater’s concerns over the loss of tax revenue during the TIF period. He also wondered about the need for housing. There seems to be plenty of available housing near Ann Arbor, he said, and it wasn’t clear that they need to be encouraging more construction at this time. Even so, Smith said he thought he’d find a way to support the project, despite his concerns.

But before they move ahead, Smith said the county needs to develop a policy regarding use of its full faith and credit on projects like this. He has concerns that they might be hanging their hat on technicalities in the letter of credit – if they miss something, suddenly they’re more liable.

Smith also noted that they’ve seen numerous banks fail – some for which they wouldn’t have thought it was possible. That seems to have been quickly forgotten, he said. Having a letter of credit, even from a major bank, doesn’t eliminate risk.

Smith said he sits on the board of the Northfield Township Downtown Development Authority. They were given rosy projections about revenues they’d be receiving from a TIF, but those haven’t materialized. People seem to have conveniently forgotten the last three years of history, he said.

Yousef Rabhi asked what would happen if the bank issuing a letter of credit goes under. Hedger said he’d need to look into that and report back.

Rabhi then clarified that the project couldn’t move forward unless taxes were paid. Lenart replied that they couldn’t do the state grant or loan unless taxes were paid in full. Nor would the developer be able to secure the $48 million in financing it needs, he said.

Dan Smith said the issue isn’t about whether the taxes would eventually be paid – it’s that the project has moved ahead so far while still owing taxes. “It’s just not right, is the bottom line,” he said. Lenart agreed, but said it’s also a reflection of the fact that the property isn’t functioning well in its current condition.

Alicia Ping also expressed concern over the unpaid taxes – they should develop a policy on this, she said.

Rabhi, who’s a member of the county brownfield redevelopment authority board, said that group should discuss developing a policy that would require taxes to be paid before a project comes to the county board for approval.

Packard Square: Commissioner Discussion – Policy, Public Benefit

Ping also asked whether the city of Ann Arbor was ever asked about offering its full faith and credit, rather than the county. No, Lenart said, they weren’t asked. The county, through its brownfield redevelopment authority, is the only entity that could authorize the brownfield TIF. If the city, rather than the county, were to give its full faith and credit, it would add a contractual layer to the agreement with the state, he said.

Ping then asked about the staff oversight required – how would that be compensated? Lenart said the county could pull off a fee of up to 3% out of the $2 million grant/loan – or roughly $60,000 – to cover administrative expenses. That would pay for county staff time as well as a consultant’s work, who would have more expertise to oversee the work. An additional $25,000 annually would be paid to the county from TIF revenues. Tony VanDerworp, director of the county’s office of economic development & energy, said it would also reimburse their staff expenses up to this point. Ping said that amount seemed low, to cover all those costs.

Ping said her main concern was offering the county’s full faith and credit, and she’d like to see whether Ann Arbor would be willing to do that instead.

Lenart said if the county won’t back the loan, then the city would need to apply for the state grant and loan with its full faith and credit. If the city is unwilling to do that, they’d need to resize the brownfield plan, he said.

Barbara Bergman wanted to know what public benefit would be derived from the project. Aside from the tax revenue, what’s in it for the citizens – is it just access to affordable housing?

Lenart cited as benefits the addition of market-rate apartments, and the removal of about 2,500 tons of contaminated soil.

Removing contamination was certainly a benefit, Bergman said. As for the housing, does the project fit the city’s goals? Lenart noted that the city council had recently approved the project’s site plan and brownfield plan. Anne Jamieson-Urena said the apartments would likely be in the $700 to $1,300 range. Responding to a question from Bergman, she said it wasn’t specifically targeting the student market. She described other aspects of the project, which will include retail shops and office space.

Bergman said she’d still like to know what $700 would buy – it wasn’t clear to her if this was the kind of housing needed by the population that has a hard time finding affordable places to live.

Conan Smith pointed out that the board had eliminated the county’s planning staff, which in the past would have been able to evaluate the project. If the commissioners wanted that kind of evaluation, they needed to fund staff resources accordingly. If not, they needed to focus on the brownfield piece and the financing, he said. That piece is focused on the environmental reclamation of the site, he added. Working hand-in-glove with the private sector, they could ensure the site’s cleanup – that’s what the brownfield program is all about.

As a result of the project, they’ll get additional tax revenues from the project and a cleaned-up property, while the developer benefits from getting an asset, Smith said. The city has already vetted the project, he added, and he felt the commissioners should rely on the city’s judgment.

Kristin Judge noted that the county will be losing tax revenues because of the TIF – why doesn’t that show up in the staff memo’s report on the project’s financial impact?

VanDerworp replied that they assume the site wouldn’t be redeveloped without the brownfield incentives to remove and remediate contaminated land, and demolish existing structures. Without the incentives to cover the $5.1 million in cleanup costs, it’s cheaper to buy land elsewhere, he said. The incentives are designed to kick-start redevelopment. And when redevelopment occurs, he added, the county and other taxing entities will eventually see higher tax revenues than they otherwise would.

Judge pointed out that there isn’t any other property available like this is Ann Arbor, so the developer has incentive to put a project there. She also noted that if the Washtenaw Avenue corridor improvement authority (CIA) is approved, that’s another hit to tax revenue. [See Chronicle coverage: "What Does Washtenaw Corridor Need?"]

Jamieson-Urena replied that a CIA is different from a TIF. With a TIF, the county would still be collecting the baseline tax revenue – it’s only the increase caused by the appreciation of the property that will be going to the developer, she said.

VanDerworp told commissioners that they’ll be holding a working session in the future on the CIA. The Packard Square project is different, he said, in that it’s focused on brownfield cleanup.

Responding to a question from Judge, Jamieson-Urena said the developers don’t intend to operate at a loss, but that the return on their investment will be minimal. They’re looking at huge cleanup costs, she said, as well as demolition and other expenses. So Judge asked whether the project made business sense. Jamieson-Urena replied that the brownfield program is in place to help get blighted properties back on the tax rolls.

Judge wondered whether the brownfield plan could be approved without the loan. It could, Lenart said. Judge said she wasn’t comfortable with the county backing the loan. However, she supports the brownfield cleanup, and said the project itself looked beautiful.

They can proceed without the loan, Lenart said, but it will extend the project. The letter of credit is intended to provide a level of comfort in protecting the county, he said. If the board approves that, then they’ll cut the length of the TIF and see higher tax revenues four years earlier.

Ronnie Peterson asked how the project’s timeline would be affected, if the board of commissioners directed staff to return to the city and ask that the city provide its full faith and credit, as Ping had suggested. Lenart said it would delay the state’s approval of brownfield incentives. Jamieson-Urena added that it could put the whole project in “tremendous jeopardy.”

Peterson said he supports economic development, but generally for commercial and industrial projects – not residential. He’d hate to see every residential developer come to them for this kind of support, noting that there are a lot of challenged properties in the county. He asked when the developer needs final approval.

The developer has been working with the city since January, Jamieson-Urena said, and received approval from the city council on May 2. The county’s brownfield redevelopment authority board has also approved it, she reported. They’ve already given the Michigan Dept. of Environmental Quality a draft application, she said – it usually takes MDEQ two to four months to approve a project, after it’s formally submitted.

All they’re asking is that the county board allow them to proceed, she said. They’re not requesting terms of the loan at this point, she noted. Ideally, they’d like to start demolition in the fall of 2011.

Peterson asked whether that meant the project could move forward without the county’s granting its full faith and credit. Lenart replied that the application to MDEQ includes a question asking whether the county would accept the loan and back it with its full faith and credit. They would need to answer that question when they apply, he said. Lenart also noted that several years ago the county had applied for a similar loan backed by its full faith and credit, but that project had never moved forward.

Peterson characterized this request as very unusual, saying it’s not the role of government to use its credit in this way – there are other needs that are more important. It’s also apparent that the developer doesn’t have any skin in the game, he said. The developer is doing this project on credit, yet plans to reap the harvest. He said he could support the brownfield TIF, but wouldn’t support backing a loan for a private developer. That’s not the county’s role, he said.

Bergman recalled that the brownfield project in Ann Arbor – Broadway Village at Lower Town – hasn’t materialized. It’s just empty land behind a fence, she said. Lenart noted that some work has occurred, but the TIF isn’t activated so no money has changed hands.

Conan Smith said it goes back to the issues he raised at the beginning of their discussion: (1) what will they do with this project; and (2) what’s their policy about providing support for private development. He hoped they would support private entities – there will likely be more opportunities for public/private partnerships in the future. One reason these incentives are available is because profit margins are so thin, especially for contaminated sites, he said. Otherwise, dilapidated properties would remain a blight. He noted that while most brownfield projects in Ann Arbor are residential, the county board has also approved many commercial or industrial brownfield projects in other communities.

This is an opportunity to do something good for the community, Smith said. The board needs to ensure that the county is protected, and he thought they had the in-house expertise to do that. They needed to craft a very tight policy to allow them to use this tool to work with private developers, perhaps in a limited way.

Regarding the Packard Square project specifically, Smith supported moving quickly. He said he’s seen projects go down because of delays. Smith also questioned whether requiring property owners to pay back taxes would have a chilling effect on development. Perhaps it would cause developers to choose other properties, he said, leaving the blighted properties to remain undeveloped.

The brownfield redevelopment authority recommended action on this project, and there’s clearly been precedent for backing a loan, Smith said. With the right protection, he supported moving ahead with the project. Then the board should have a robust discussion to craft a policy to guide future projects.

Rob Turner said he generally supported brownfield projects, noting that it would provide jobs for his colleagues in the construction industry. However, he was concerned about the unpaid taxes, and had serious concerns about using the county’s full faith and credit to back a loan for a private developer. He had invested in a development planned along Ann Arbor-Saline Road in the early 1990s, and lost a significant amount when the project went under.

Turner also recalled the savings and loan crisis – that financial sector went completely under, so even with a letter of credit, there’s risk.

He supported Ping’s suggestion of going to the city of Ann Arbor and asking if they’d back the loan. He said he’d love to see the project happen, “but I think it needs to be done without us.”

Prater pointed out that the county’s equalization director, Raman Patel, had told the board that millions of dollars in tax revenue were being diverted from the county, while the county faced a $17.5 million deficit over the next two years. And seeing what’s happened in the financial industry, they need to be cautious, he said. People have tried to live off the government, and now it’s coming home to roost. Federal and state funding is drying up, and the county needs to tighten its belt and figure out how it can provide services without outside funds. “Taking actions such as this are not going to help our cause,” he said.

Conan Smith replied that most of the tax diversion that Patel reported occurs through downtown development authorities (DDAs) and local development finance authorities (LDFAs), which are different from brownfield TIFs. DDAs and LDFAs are designed to capture tax increases tied to market forces, he said, while brownfield TIFs are designed as an incentive to increase the tax base.

Next Steps

Commissioners then discussed the possibility of holding another working session on this topic, and asked staff to draft a policy regarding use of the county’s full faith and credit for this kind of project. Hedger said his concern was about producing such an important policy too quickly, but he noted that they could always choose to amend it later.

On Wednesday, May 11, the county issued notice of a special working session on this topic, slated for Tuesday, May 17 at 6:30 p.m. The agenda includes an update on the Packard Square project, and a proposal for a full faith and credit policy. The meeting will be held at the county administration building’s boardroom, 220 N. Main St. in Ann Arbor.

Present: Barbara Levin Bergman, Kristin Judge, Ronnie Peterson, Alicia Ping, Wes Prater, Yousef Rabhi, Conan Smith, Dan Smith, Rob Turner.

Absent: Leah Gunn, Rolland Sizemore Jr.