Edwards Brothers Vote: Town-Gown Relations

In special session, Ann Arbor city council vote on exercising right of first refusal fails 5-6, three votes short of the 8-vote majority it needed

Ann Arbor city council meeting (Feb. 24, 2014): Mayor John Hieftje welcomed high school students attending the meeting to satisfy course requirement by telling them they were probably getting off easy compared to other nights.

The Ann Arbor city council declined to exercise its right of first refusal on the Edwards Brothers Property at its special session on Feb. 24, 2014. Chuck Warpehoski (Ward 5) compared the process of reviewing the options over the last few weeks to riding a "see saw." (Art by The Chronicle.)

The Ann Arbor city council declined to exercise its right of first refusal on the Edwards Brothers Malloy property at its special session on Feb. 24, 2014. Chuck Warpehoski (Ward 5) compared the process of reviewing the options over the last few weeks to riding a “see saw.” (“Art” by The Chronicle.)

That’s because the meeting was a special session, dealing with just one substantive issue: a resolution to exercise the city’s right of first refusal to purchase the 16.7 acre Edwards Brothers Malloy property on South State Street, and a closed session to discuss that issue.

The council’s 5-6 vote on the land acquisition fell short of a simple majority, let alone the 8-vote majority it needed. That vote came after the closed session, which lasted an hour and 40 minutes. The council then deliberated for about an hour and 10 minutes.

The council’s decision came four days after the University of Michigan’s board of regents had authorized proceeding with a purchase of the property for $12.8 million. The site is located at 2500-2550 South State Street, immediately adjacent to existing UM athletic facilities. It’s assumed the university would use the land at least in part to support its athletic campus.

Voting to exercise the right of first refusal were: Sabra Briere (Ward 1), Sally Petersen (Ward 2), Jane Lumm (Ward 2), Margie Teall (Ward 4), and mayor John Hieftje.

Voting against exercising the right of first refusal were: Sumi Kailasapathy (Ward 1), Christopher Taylor (Ward 3), Stephen Kunselman (Ward 3), Jack Eaton (Ward 4), Chuck Warpehoski (Ward 5) and Mike Anglin (Ward 5).

Deliberations focused on two main issues: (1) the financial risks and benefits; and (2) the city’s relationship with the university.

The motivation for the city to exercise its right of first refusal on the property was based in large part on a desire to protect the city’s tax base. The property current generates roughly $50,000 in annual real property tax revenue to the city’s general fund. But the city’s total revenue from the parcel is just 28% of the total taxes levied by all jurisdictions. The net present value over the next 25 years of the levy from all jurisdictions is roughly $6 million. That was weighed by the council against a purchase price of $12.8 million that reflected a “premium” over the appraised value of around $8 million.

Also a factor weighed by the council was a $218,000 annual holding cost for the land, which reflected a 1.7% interest rate that Flagstar Bank had offered. That’s about half the rate the council was assuming in its earlier review of its options.

Another piece of the financial equation was that the some of the tax abatement previously granted by the city to Edwards Brothers would be coming back to the taxing jurisdictions. That’s because by selling the property, Edwards Brothers would not be meeting all the terms of the tax abatement. There’s a clawback provision in that case – which returns taxes to jurisdictions amounting to a total of $200,000. Of that total, the city’s portion is $90,000. It’s under the terms of that tax abatement that the city had obtained a right of first refusal on the sale of the property.

The deal would have been financed from the general fund. According to the city’s year-end audited statements for FY 2013, the general fund unassigned balance stood at $14,392,854 as of June 30, 2013.

Councilmembers like Eaton and Kailasapathy were clearly opposed to exercising the city’s right of first refusal, based on the substantial risk they thought the city would be taking. Everything would need to go right, in order for the city to come out ahead, they said. Kailasapathy indicated that the “premium” price to be paid by the city for the real estate was a significant reason to vote against it.

Kunselman, in voting against the resolution, relied on what’s become for him a familiar criticism of “speculative development.” He cited in part what he’d learned taking a course on real estate from local developer Peter Allen, a lecturer at UM.

Councilmembers like Warpehoski and Taylor were less adamant about their no votes. Warpehoski thought the odds were “better than even” that the city would come out ahead long-term. But because the city would be gambling with public funds, he wondered if “better than even” was good enough. “Right now, I’m thinking maybe not,” he concluded. Earlier in the meeting Taylor had offered similar sentiments, saying that he’d “regretfully” vote no. “We could have pulled it off; we had a reasonable shot at pulling it off. In light of our mission, I think a reasonable shot is not good enough,” Taylor said.

The sixth vote against the resolution came from Anglin. He responded to one of the arguments made by those who supported the resolution – that by exercising its right of first refusal, the city could leverage some collaboration with the university on the future of the parcel. For Anglin, the price was too high just to sit at the same table with the university.

Petersen, Briere and Lumm specifically mentioned the ability to leverage some cooperation from the university on the future of the land as one argument for exercising the city’s right of first refusal. Kunselman called that trying to take the parcel hostage and holding a gun to the university’s head. But some who supported the resolution saw the possibility that exercising the right of first refusal could lead to improved city-university relations.

Hieftje ventured that the city-university relationship is as good now as it has ever been, adding: It’s a good relationship as long as things happen the way the university wants them to.

Those voting yes generally felt that the risk to the city posed by exercising the right of first refusal justified the potential benefit to the city’s tax base. They also cited the opportunity to control the future of the parcel, and to influence development in that part of the city. Responding to a remark from Warpehoski earlier in the meeting – that the South State Street corridor did not give him “warm fuzzies” – Teall said: “I like it. It’s my neighborhood.”

Some background information on the possible acquisition of the property by the city was released last week, on Feb. 18, the day of a regular council meeting. [Edwards Brothers chart] [Additional offer for Edwards Brothers] [Feb. 18, 2014 memo to council]

This article provides more background on the council’s handling of the issue, a sketch of the deliberations, and a more detailed presentation of the deliberations.

Background on Prior Council Action

Prior to the Feb. 24 session, the council most recently had voted to postpone the question of using its right of first refusal on the Edwards Brothers property. That happened at its Feb. 18, 2014 meeting – after a closed session that lasted about 25 minutes.

Before that, the council had on Feb. 3 postponed the item “to our next meeting” – which at that time was scheduled for Feb. 18. But subsequently a special meeting was called for Feb. 10 to consider the question. That special meeting was then cancelled.

Earlier, at its Jan. 6, 2014 meeting, the council had directed the city administrator and the city attorney to explore options and gather information about the Edwards Brothers land. The due date for that gathering of information was specified in the council’s resolution as Jan. 30 – the same day that the land-purchase item was added to the Feb. 3 agenda.

At its following meeting, on Jan. 21, 2014, the council approved without discussion a $25,550 contract with Atwell LLC for environmental site assessment services on the property. That assessment included a survey of asbestos-containing materials.

The pending sale of the property to UM was announced in a Nov. 27, 2013 press release. The business – a fourth-generation Ann Arbor publishing and printing firm – had signaled its intent to put the property on the market in late July.

An item authorizing the $12.8 million purchase was approved on Feb. 20, 2014 by the UM board of regents, so that the university could move ahead if the city did not exercise its right of first refusal.

The city’s right of first refusal on the property was a condition of a tax abatement granted by the city council three years ago, on Jan. 18, 2011. Purchase by the university would remove the property from the tax rolls. Washtenaw County records show the taxable value of the property at just over $3 million. In 2013, Edwards Brothers paid a total of $182,213 in real property taxes, not all of which is the city’s levy. The total city levy of 16.45 mills on $3 million of taxable value works out to about $50,000.

According to the tax abatement agreement, the event triggering the city’s right-of-first-refusal window of 60 business days was a formal notification to the city by Edwards Brothers, which was made on Nov. 27, 2013. According to a staff memo from city administrator Steve Powers, the city had until Feb. 26, 2014 to exercise its right of first refusal. If the city decided to exercise that right, it had to close on the purchase by Feb. 28, 2014.

Deliberations: Brief Overview

Stephen Kunselman (Ward 3) had possibly telegraphed his intent to vote no on the question by voting against going into closed session on Feb. 18. Discussion of land acquisition is one of the exceptions in the Michigan Open Meetings Act, which otherwise requires that all parts of a meeting be open to the public. Votes to go into closed session require a roll call vote of the council under the OMA.

At the council’s Feb. 24 special session, Kunselman repeated his no vote on the question of going into a closed session.

Before the meeting Community Television Network staffer Christopher Maassen explained to city clerk Jackie Beaudry that a new microphone had been provided for her.

Before the meeting, Community Television Network staffer Christopher Maassen explained to city clerk Jackie Beaudry that a new microphone had been provided for her.

So when deliberations opened, a provisional tally would have already had Kunselman in the no column. But the first four councilmembers to speak indicated they’d be supporting the resolution: Sally Petersen (Ward 2), followed by Sabra Briere (Ward 1), then Margie Teall (Ward 4) and Jane Lumm (Ward 2).

Then Jack Eaton (Ward 4) weighed in against the resolution, followed by Sumi Kailasapathy (Ward 1). Another no vote besides Kunselman’s anticipated expression of opposition would at that point have provisionally settled the issue.

That indication of opposition came from Christopher Taylor (Ward 3), which was a surprise to many – including Kunselman. But Taylor’s position was not adamant. In fact, he wound up arguing that the case for voting yes was stronger than other no-voters had let on.

By the time Kunselman weighed in, that brought the tally to four councilmembers who said they’d be opposing the resolution. Mike Anglin (Ward 5) then added sentiments against the resolution, as did Chuck Warpehoski (Ward 5).

Warpehoski and mayor John Hieftje both noted when they spoke that it was already apparent how the vote was going to turn out.

The tally for mayoral candidates on the vote was 2-2: Briere and Petersen voted for the resolution; Kunselman and Taylor voted against it. All of these councilmembers have declared their candidacy for mayor in this year’s Democratic primary.


Sally Petersen (Ward 2) led off deliberations by saying they all had known University of Michigan has been interested in the property, and that it’s a special situation for the city.

From left: Sally Petersen (Ward 2) and Sabra Briere (Ward 1)

From left: Sabra Briere (Ward 1) and Sally Petersen (Ward 2).

They’d heard consistently from UM that on topics of mutual interest, the university would certainly collaborate with the city, she noted. This is a situation where the city and the university literally have common ground and mutual interest, Petersen said. And figuratively, the parcel’s tax base makes a significant contribution to the ability of the city to provide quality of life to its residents. She said that the issue of quality of life was of mutual interest to both UM and the city of Ann Arbor. It’s a pivotal time and a chance to collaborate well with UM – if the city chooses to purchase the land. And collaborating with the UM is just one option available, she said.

So Petersen was prepared to vote yes – because the city’s acquisition of the land could help improve the city-university relationship in precedent-setting ways. If for some reason the university and the city can’t collaborate, she added, then other options are available. The council was not voting that evening on what to do with the property. Rather, the council was just voting on whether to exercise the right of first refusal. Petersen called it a great opportunity for the city that the city doesn’t have very often. That opportunity was the chance to own an asset that could be mutually beneficial for the quality of life for both the city and the university.

Sabra Briere (Ward 1) was up next. She thanked Petersen for her comments, saying they echoed many of her own thoughts over the last day.

Sabra Briere (Ward 1)

Sabra Briere (Ward 1).

Briere reported she’d talked to the most fiscally conservative people she knows – who have advised her to exercise the right of first refusal if given a choice. That surprised her, because those are people who she would have called “risk averse” and people who look askance at government spending. Yet those people have uniformly asked her to exercise the right of first refusal. She had also spoken with University of Michigan representatives about the mutual relationship and about the development the university has engaged in and the university’s expectations of support from the city. Of particular interest to her was a conversation that made it clear that if the city exercised its right of first refusal, then the university would have a reason to talk with the city.

The only reason the university  was even considering thinking about the city’s South State Street corridor plan or how the property could be used to benefit both the city and the university is because city was considering exercising the right of first refusal, Briere said.

So Briere said she’d join Petersen in thinking it could be an opportunity to engage in a productive discussion with the university. It might benefit the city’s fiscal situation as well as benefiting the university’s ambition. And for those who urged her to exercise the right of first refusal not because they were conservative but because they were aggressive, she felt that many people would like the UM to understand its impact on the community.

Margie Teall (Ward 4)

Margie Teall (Ward 4).

Margie Teall (Ward 4) thanked Briere and Petersen for their comments about collaborating with University of Michigan. She saw it as a positive opportunity for the city as well – something that could be very beneficial to the city. She thanked the city staff who had done a very thorough job of reviewing the information and “looking under every rock,” she said. The due diligence has been great, and the information that’s been shared has been very valuable, Teall said. She’d be joining Briere and Petersen in supporting the resolution.

Jane Lumm (Ward 4) was the fourth voice of support out of the first four councilmembers to speak. She called it a difficult decision. She said she could understand how councilmembers could end up in different places on this issue. As a general rule, the city should not be in the real estate business, she said. But as councilmembers, they should decide when it’s appropriate and should not just avoid any and all risk.

She had reached out to UM, but it became clear that it the university was not interested in talking to the city before now. Even though she’d tried to see if the city and university could have a conversation about what could be mutually beneficial, there was not much interest on the university’s side – unless the city exercised the right of first refusal.

Lumm saw this as an opportunity to work with the university. As Teall pointed out, she said, the city staff has conducted a lot of analysis and due diligence. And that’s helped guide the council. The city would be taking on financial risk, she said, with outcomes ranging from a potential $2.2 million loss to a $1.2 million gain. If the city retained control, that would best serve the city’s long term financial interest, Lumm said. When you consider the value of taxes retained for other taxing jurisdiction – if the city exercised its right of first refusal – the financial equation tilts to the positive side, she said. She allowed that she works for the city – not the other taxing jurisdictions – but retaining taxes for the other jurisdictions is a significant interest, too. Risking tax dollars now, in order to protect the tax base for the city and other jurisdictions, would ultimately serve the taxpayers. On balance, Lumm concluded the benefits of the city purchasing the property warranted the risk.

Jack Eaton (Ward 4) offered the first sentiments against exercising the city’s right of first refusal. At the beginning of the process, he said, he wanted nothing more than to keep the property on the tax rolls. It’s a unique parcel in that if the city purchased it, the University of Michigan can’t just go out and buy another 17 acres that serves the same purpose. As he looked at the numbers, however, he’d become more skeptical. Everything has to go absolutely right, he said, in order for the city to come out on the positive side.

In the meantime, Eaton said, the city would be spending about $218,000 a year on an interest-only loan, which would “dwarf” the city’s general fund reserves. The city would also need to try to obtain a $1.5 million brownfield grant. Every aspect of the acquisition of the property by the city is full of potential, but also full of risk. He couldn’t see “gambling with taxpayers’ money,” when the potential for disaster seems to be equal to that of coming out ahead. So he’d vote against the resolution.

From left: Sumi Kailasapathy (Ward 1) and Sabra Briere (Ward 1)

From left: Sumi Kailasapathy (Ward 1) and Sabra Briere (Ward 1).

Sumi Kailasapathy (Ward 1) picked up on Eaton’s thoughts, saying that for her it’s a risk-reward calculus. Everything we do in life is full of risks, she said, but we should weigh that against benefits and rewards.

Her main concerns included the fact that the valuation of the property had come out at about $8 million. The city would be purchasing the property for about $12.8 million. Based on the information the council had been provided, the downside could realize capital loss of up to $4 million. She allowed that would be a worst-case scenario. If the property remains on the tax rolls, 28% of the benefit would accrue to the city. But the city would be taking 100% of the risk. She might have felt differently if all the taxing jurisdictions split the risk.

A third issue was the holding cost of $218,000. That would come out of the general fund, and she wondered what would have to be cut as a result – because nothing is certain. What if the city needed to hold the land for three or four years? That would add up to another $1 million. She did not feel confident enough that there’s a market for commercial development. She hasn’t seen a market study that says an additional mall or apartment complex is needed. The downside could be devastating, she said.

Christopher Taylor (Ward 3) led off his remarks by echoing the thanks that had been expressed to staff. At each and every turn, when he’d had questions, the staff had come through with answers that were as clear as possible in a shifting environment. Along the way he had felt well supported.

City of Ann Arbor chief financial officer Tom Crawford.

City of Ann Arbor chief financial officer Tom Crawford. City staff received praise around the table from councilmembers in connection with the due diligence process.

Like Eaton, when this first came up, Taylor said, he was enthusiastic and quite willing to explore the possibility, because the loss of land and tax base is an important long-term challenge with respect to the university. Great benefits accrue to the city due to UM, Taylor said, but one downside is that when the university expands, it does draw land off the rolls. And that’s a long-term challenge to the city: to maintain services to residents and to improve quality of life for residents. So when this issue first came before the council, he felt it was an exciting opportunity to have some agency over that long-term challenge.

Taylor would have liked the university to have engaged in a conversation with the city before an offer had been made to Edwards Brothers. That would have been a fruitful and collaborative effort, he felt. It didn’t turn out that way, and he understood that the interests of the city and the university are not necessarily at odds, but they are not entirely congruent.

So it comes to the city council to decide whether to exercise the right of first refusal, Taylor said. As others had already said, it could go either way: There could be gain or loss. The city has had conversations with people who are interested in purchasing the property – and the city knew that the university is interested in purchasing the property. All those things suggest there is some market opportunity, he said.

Taylor addressed the issue of asymmetric risk: The city stands to get 28% of the benefit in exchange for bearing 100% of the risk. “That’s pretty big for me,” he said. If he were in the business of purchasing real estate, and selling it to developers, he felt it was a deal that could easily work. “There is plainly demand here,” he said, and he thought that the risk is not as great as other councilmembers had indicated. But there is plainly risk, he allowed.

Jane Lumm (Ward 2) and Christopher Taylor (Ward 3)

Jane Lumm (Ward 2) and Christopher Taylor (Ward 3).

So he stepped back and asked: “What is mission here?” For Taylor, the mission is to provide quality of life for residents, and to maintain and improve that quality of life with residents, to provide services and to do “the things that residents demand of us.” That requires money, he noted, and so those things are somewhat at odds.

As Taylor approached his conclusion, he set himself up to express the position opposite to the one he wanted to take: “In the end, however, I don’t think that the risk here is – I framed that wrong. I think that the risk here is greater than the reward, in light of our mission.” The city’s mission is municipal, it’s not economic, he said. “We’re not in the real estate business. We’re in the business of providing services and creating a city where people can live and thrive.” So he said he’d “regretfully vote no.”

“We could have pulled it off; we had a reasonable shot at pulling it off,” Taylor said. “In light of our mission, I think a reasonable shot is not good enough.”

Stephen Kunselman (Ward 3) led off his remarks thanking Taylor, saying, “That was well said,” and adding “actually, I’m surprised.” Kunselman then laid out his own position by saying: “I am risk averse.” [At this point, four votes against the resolution were clear.] He’s consistently been opposed to speculative development using taxpayer dollars, he said, noting that he was one of the first to “jump off the bus” on the former Y lot project.

Stephen Kunselman (Ward 3)

Stephen Kunselman (Ward 3).

At one of the first council meetings after Kunselman was elected, the city was partnering on the Broadway Village, he said – and that’s still vacant land. He thought the city was going to get a parking structure out of it. In considering what other communities have done with speculative development, he looked at Sylvan Township and the added tax cost to that community. None of the Sylvan elected officials are still there, he said, but the community is paying for it.

Kunselman looked at Ypsilanti and the Water Street project. He could only imagine the conversations that officials were having when that project was proposed – but he ventured that they were similar to those the Ann Arbor city council had just had in closed session. “How great it would be, how unique, how thoughtful and foresighted … that the community would spend lots and lots of money for future development that nobody had any idea of what they were doing.”

He looked at the city of Troy, which had partnered with a developer. They got a new train station but can’t figure out who owns the land, so that’s going to end up in court, Kunselman ventured. He also pointed out that the city of Ann Arbor borrowed millions of dollars in connection with the Library Lane underground parking structure, to put in infrastructure [stronger foundations, among other elements] to support future development, but “we have no idea what we’re doing there.”

“No, I’m not into speculative development,” Kunselman continued. That’s out of the realm of health, safety and welfare, he said. About the holding cost for the land, he characterized $218,000 annually as three FTEs [full-time equivalent employees]. If the city has that much money to put toward interest-only payments, then the city had money it could put toward three beat cops downtown, he ventured. “What’s our priority? Beat cops or speculative development?” he asked.

As far as working with the university, “that bus left the station a while ago,” Kunselman said. What is being talked about now is “holding the property hostage and putting a gun to the university’s head” and saying, “come talk to us now.” That’s not a great way to start a relationship, Kunselman said. But he agreed with Taylor: If UM keeps buying property, Ann Arbor’s quality of life is going to go down. He hoped UM at some point understands, that at some point it’s going to “kill the goose that lays the golden egg” that provides quality of life for students.

All the students who come from around the world to this community will be isolated downtown, “while the rest of us are trying to fill potholes out in our neighborhoods,” Kunselman said. Speculative development is always based on assumptions, and as Eaton had pointed out, every piece has to work, and if one piece misses, then it fails, Kunselman said. If it winds up in court, the city would lose, he ventured. Local government doesn’t have governmental immunity when it comes to speculative development, he said. So he would not be supporting this.

Petersen took a second turn to reiterate something Kunselman had said: If UM continues to buy up property, the quality of life is going to go down. That’s what would be prevented by exercising the city’s right of first refusal, she contended. When she heard Eaton say that everything has to go right, and when Kunselman says that he doesn’t support speculative development, she wanted to stress that the council was not voting on speculative development that night. The council was not voting on a purchase agreement with a developer. So not everything has to go right, she said.

The council would be buying itself an opportunity to “make things more right,” Petersen said. The downside of not exercising the right of first refusal is a $6 million net present value hit to all the taxing authorities over 25 years, she noted. That was significant to her. She allowed that the city is not in the business of speculative development, but the city is in the business of protecting revenue streams for the city. If the right of first refusal is not exercised, then there will be a significant loss to the city’s revenue stream. If the city does exercise that right, the city has a better chance of increased revenue, Petersen concluded.

Mike Anglin (Ward 5) thanked other councilmembers and staff. He said that when the property on State Street came on the market, the right of first refusal looked like a great opportunity. But when you think about it, he said, it seems speculative. It might be a way to have a conversation with the university, he said, nothing that there’s going to be a new administration at UM. [UM president Mary Sue Coleman is retiring this year, to be replaced by Mark Schlissel.]

Purchasing land and holding it as a “gift” to the university would distract the city from its focus on serving the citizens, Anglin said. There are many things that are not being done that should be done, he noted, and this purchase would make the city potentially vulnerable. About the idea that the land could be used to leverage a conversation with the university, Anglin said, “That’s too high a price to sit at the table with the university.”

Chuck Warpehoski (Ward 5)

Chuck Warpehoski (Ward 5).

Chuck Warpehoski (Ward 5) began by saying that for him, the process has been a see saw: He’s been for it, then against it, for it, then against it. Counting the votes expressed in the deliberations up to that point, Warpehoski ventured that it doesn’t matter what he thinks, so that gave him some freedom to “do whatever I want! I think we should open up a Chuck E. Cheese’s there! ”

He rejected Kunselman’s comparison that acquiring the property was a way to put a gun to the head of the university. That’s just not accurate, Warpehoski said. There’s a lot of detailed collaboration between the city and the university on issues of infrastructure, he said. But sometimes on larger issues it’s difficult to get traction for an agreement. The only way to have a successful negotiation is when you have something the negotiating partner wants or fears. When it comes to the university, he said, the city typically has neither.

Some of the council’s conversation up to that point had been about risk and reward, Warpehoski noted. And that is a big question as the council has looked at the issue from the financial side of things. If the city declines to exercise its option, the city would have a guaranteed loss to the general fund of $50,000 over 25 years. If the city does exercise its right of first refusal, there’s a possible loss or possible gain – but it’s a roll of the dice, he said.

Warpehoski felt the odds were better than even, but it’s still a roll of the dice. Another element is the quality of life piece. The city had been approached by people who develop housing and by people who develop retail. When he thinks of that stretch of South State Street, he doesn’t “get warm fuzzies.” It’s not his favorite part of the city. He was not confident that if UM bought it or the city bought, that his attitude toward that stretch would change. But that quality of life component is a part of the risk-reward calculation.

The conversations at the table reminded Warpehoski of the three questions of Rabbi Hillel. The first question is: “If I am not for myself, who will be for me?” That cuts both ways, Warpehoski said: If the city is for itself, there’s the risk of losing tax revenues or incurring a loss to the general fund. But there’s a potential gain of taxable value. Rabbi Hillel’s second question was: “If I am only for myself, what am I?” There are other people this conversation affects, Warpehoski said. Hillel’s third question: “If not now, when?” On the third question, Warpehoski said, “Well, we’re out of time so that one is easy.” He thought the city’s odds are better than even, he said, but it’s public funds he’d be gambling with, so he wondered if better than even is good enough. “Right now, I’m thinking maybe not,” he concluded.

Lumm allowed that it was an academic argument at this point [given the nose count of councilmembers who'd expressed opposition]. But she followed up on a point Petersen had made: that the other taxing jurisdictions stood to lose $6 million in tax revenue over the next 25 years, if the city did not exercise its right of first refusal.

Jane Lumm (Ward 2) and city attorney Stephen Postema.

Jane Lumm (Ward 2) and city attorney Stephen Postema.

She called protecting the tax base a “share responsibility,” allowing that it was unfortunate that the city would be bearing all the risk. There’s an upside to controlling a major parcel, she said. It’s a once-in-a-lifetime opportunity on one of the city’s busiest corridors, she said. It could be a potential catalyst to redevelopment of the corridor and realizing master plan goals. It would not only protect the tax base, it would increase it. She’d done her best to reach out to the university. She commended city administrator Steve Powers for extending an olive branch many times to the university.

It’s unfortunate when she heard from the university that if the city exercised its right of first refusal, it would have a chilling effect on the city-university relationship: “What does that say?” Lumm asked. That’s not something that partners say to each other, she said. Powers has put forth a superb effort and tried “valiantly” to reach out to the university, Lumm said. The city needs the university to understand that the city is serious about protecting its tax base. Because of the lack of interest up to now, the city didn’t have negotiating leverage, she said.

Kunselman followed up on some of the commentary about the city-university relationship. “Everyone knows I work for the university,” he said. He pointed out that this was the first year that the council has not had an invitation to a regent-council dinner or cocktail hour. “So our relationship is obviously not doing very well,” he ventured. Last year, the event was canceled because of the UM basketball team made the Final Four. In prior years, the council and regents had some social interaction around this time of year, Kunselman noted. He didn’t think that purchasing the property would be a nice way to say that the city wants to restore its relationship.

Ann Arbor city administrator Steve Powers.

Ann Arbor city administrator Steve Powers.

Everything has unintended consequences, Kunselman said, and that why it’s called speculative. It’s an admirable goal to try to protect the tax base. But the city could not be able to outbid the university on every piece of land it wants over the coming years. And the city knows which property the university wants: It’s next to the land they already own. That’s strategic planning on their part, he said. The university has an “institutional patience” that the city council does not have, Kunselman said. The university can plan ahead for decades.

The question is whether the city can establish a better relationship with UM and encourage the university to start building “up instead of out.” Kunselman ventured that when UM bought the Pfizer property, “none of us were complaining then. We looked at it as a good thing.” [Across the table from Kunselman, Teall was visibly exasperated at Kunselman's remarks about Pfizer, expressing some incredulity.] Kunselman responded to Teall, saying he remembered being happy about it. There were people talking about how good it was that the property was being “backfilled with people,” Kunselman said. At least, he said, the city was not trying to outbid the university. He didn’t think it was the greatest thing either, because the acquisition of the Pfizer property by UM resulted in the city losing 4% of its tax base. But the buildings were at least not sitting empty. [The former Pfizer campus is now the UM North Campus Research Complex (NCRC).]

As a real estate deal, the city would be buying high so it was priced at a premium, Kunselman said. That’s not good real estate business sense to flip this and think you’re going to make some money, Kunselman said: He’d learned in that in Peter Allen’s real estate class. The idea that the city will protect the tax base by buying high, hoping to sell at a greater profit, doesn’t make a great argument, he said. Public health, safety and welfare – that is the city’s mission, Kunselman said. When the city’s quality of life is higher than other communities, that creates a strong tax base.

About the zoning in the area, Kunselman said that the master plan for South State Street doesn’t call for C3 (commercial) zoning. So he was not about to throw all the master planning documents out just to speculate. The planning documents reflect what the community wants in that part of the city, he said. He urged councilmembers to vote down the resolution, encouraging those who’d expressed support to change their minds.

Briere responded to Kunselman. The city didn’t exercise a right of first refusal on the Pfizer property, she said, because the city didn’t have one. And to suggest that the might have had such a right she found “a little distracting.” She recalled how many residents suggest that when someone proposes a use for a piece of property they oppose, that the city should simply purchase the land. She allowed there are no arguments to say that exercising the right of first refusal on the Edwards Brothers property is a safe risk.

But the question the council was considering was land acquisition, not zoning or a particular project, Briere stressed. The discussion was about being in control of how a piece of property was used in the future. She called that a rare situation for the city. Making the conversation about the University of Michigan is the “lowest hanging fruit” argument, she said. She didn’t look at it as being about the university. She ventured that the council would have had some of the same discussions about the land, if Edwards Brothers had chosen to sell it to a different party. In some cases, the university is a distraction. She understood both sides of the risk argument. “To me this is an acceptable risk,” she said, because she believed it was short-term.

Kailasapathy reiterated the fact that the $8 million appraisal compared to the $12 million purchase price reflected a 50% premium. The city would be paying a premium, and the clock was ticking. That 50% premium made the city vulnerable, she said. The city’s options would be narrowed by agreeing to pay that premium.

Taylor used his second turn to “defend the yes voters,” even though he was voting no. The argument based on the premium purchase price was not as strong as it was portrayed, because the terms of the deal include a rental payment and cell tower revenue. The city is also in a position that is distinct from an ordinary purchaser, Taylor said. The city’s economic return is influenced by the purchase price, but is not solely dependent on it. It’s not required that the city buy the property at $X and sell it as $(X + Y) – because the city can make it up on the back end. So the case for voting yes is stronger than what some councilmembers had portrayed, he said.

Taylor also thought that the council’s decision on this matter was not an “existential question” on the university-city relationship. Generally, the city and the university get along, he said. The university’s mission is distinct from the city’s, he said. He characterized the existing relationship as “cordial.” He said that an initial conversation between the university and the city would have been good at the point when the university was thinking about buying the property. But that didn’t happen and that was a disappointment.

Responding to a point Petersen had made that the loss was guaranteed, if the city did not exercise its right of first refusal, Taylor allowed that if the city did act, there was a chance to eliminate the loss and to achieve a benefit. But he concluded that the chance was not sufficient and the risk was off-mission.

From left: city attorney Stephen Postema and mayor John Hieftje

From left: city attorney Stephen Postema and mayor John Hieftje.

Mayor John Hieftje ventured that the outcome was pretty clear at this point. He got clarification that some of the tax abatement granted by the city would be coming back to the other taxing jurisdictions. That’s because by selling the property, Edwards Brothers would not be living up to the terms of the tax abatement. City CFO Tom Crawford explained that there’s a clawback provision in that case. It returns taxes to jurisdictions amounting to a total of $200,000. The city’s portion of that is $90,000.

Hieftje called the opportunity to exercise the city’s right of first refusal as a very good thing to investigate. It was something that needed to be investigated thoroughly. He commended city staff for making that happen. Due diligence was indeed performed, he said. That had been necessary to satisfy the council and the public that everything had been looked into.

Hieftje ventured that the city-university relationship is as good now as it has ever been, adding: It’s a good relationship as long as things happen the way the university wants them to. He continued by saying that when university representatives produce their standard list of benefits that the university brings to the community, it’s as if UM is pretty much responsible for anything good that happens. But the items on the list are just what a state-financed university should be doing, he said.

Hieftje wished the university had reached out to the city before it got to this point. He’d made a call, and the city administrator had made efforts. It would have been be a perfect time to say: Let’s talk about this. But that didn’t happen, he said. At some point, Hieftje added, the university’s continued expansion will severely impact the quality of life in the city. He also pointed out the impact on other taxing jurisdictions, saying at some point, “They’re [UM] going to wear us all out.”

Hieftje responded to Kunselman’s earlier comments about the Library Lane parking structure as including speculative development. That had opened up the ability of downtown to have high tech jobs, Hieftje said, and the only way to build it smartly was to put it underground, with extra strong foundations.

Hieftje felt like the exercise of the right of first refusal would be going out on a little bit of a limb, not a big limb. He ventured that it could go either way – plus or minus $1 million.

Teall concluded by expressing disappointment about how the vote was going to turn out. She was also disappointed in the “over the top language” and the “posturing” that she’d heard around the table. She responded to Warpehoski’s remarks about the State Street corridor not being his favorite part of town: “I like it – it’s my neighborhood.” Lots of wonderful businesses are located along there, she said.

She ventured somewhat sardonically that perhaps the University of Michigan would put up a giant electronic billboard on the Edwards Brothers property. She expressed disappointment that the university would likely not extend Oakbrook to connect State Street and South Main, as it’s envisioned in the city’s corridor plan. She indicated that the university probably did not plan on making it a public road.

Teall concluded that it was a disappointing decision for her.

Outcome: On a 5-6 vote, the council rejected a resolution to exercise its right of first refusal to buy the Edwards Brothers property. Voting to support exercising the right of first refusal were: Sabra Briere (Ward 1), Sally Petersen (Ward 2), Jane Lumm (Ward 2), Margie Teall (Ward 4), and mayor John Hieftje. Voting against the resolution were: Sumi Kailasapathy (Ward 1), Christopher Taylor (Ward 3), Stephen Kunselman (Ward 3), Jack Eaton (Ward 4), Chuck Warpehoski (Ward 5) and Mike Anglin (Ward 5).

Present: Jane Lumm, Mike Anglin, Margie Teall, Sabra Briere, Sumi Kailasapathy, Sally Petersen, Stephen Kunselman, Jack Eaton, John Hieftje, Christopher Taylor, Chuck Warpehoski.

Next regular council meeting: March 3, 2014 at 7 p.m. in the council chambers at 301 E. Huron. [Check Chronicle event listings to confirm date.]

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  1. February 26, 2014 at 10:06 am | permalink

    It’s interesting that Chuck Warpehoski teetered on the edge of voting for exercising the Council’s right. I didn’t lobby anyone for my view, including my council members, though I had a couple of discussions. I could probably be described as fiscally conservative, but I think this is a leap the Council should have taken. Too sad. The Council will look short-sighted in the future.

  2. By Jack Eaton
    February 26, 2014 at 11:38 am | permalink

    I don’t think it should be a surprise that any Council member struggled with this decision. Losing another 16 acres from our taxable property was a significant concern to every Council member.

    That property currently generates about $27,000 in general fund taxes or about $50,000 in total City taxes (including various millages such as streets and solid waste). If the property were re-zoned to allow dense commercial (C-3), it would generate perhaps twice as much tax revenue.

    Borrowing $5.8 million would cost the City $218,000 per year in just interest. The City would hold the property until all contingencies (re-zoning, site plan and Brownfield tax breaks) were fulfilled. That could take 6 to 10 month, if everything went right. The needed Brownfield tax break would cost another $1.5 million over 15 to 20 years. We were told that if everything went well, we might break even over a 25 year period (plus or minus $1 million).

    To make that site viable, the City would need to re-zone the property. The kind of commercial project that would make this viable for a developer is dense commercial. In other words, we would be getting a strip mall on State Street. There is no evidence that we lack sufficient strip mall development or that we need even more retail space.

    If everything did not go well, we would own the property and carry $12.8 million in debt. The old Y lot is a good example of land speculation that resulted in the City owning land for many years, paying interest only on a pretty big debt. That property was purchased by the City at market value, not the inflated price of the Edwards Brothers property. In the end, selling the Y lot for $1.5 million more than we borrowed covered all the costs incurred (demolition, loan interest, etc.).

    Dense commercial development projects do not have a good record in Ann Arbor. The lowertown project failed. The various Georgetown Mall site projects have failed. If the City purchased the Edwards Brothers property and the plan for development failed, we would be stuck with $218,000 in interest liability each year that we owned the property.

    Council first was advised that it should only borrow the actual value of the property ($7.1 million) and use our reserves for the remainder. That advice was modified, because using our general fund reserves would bring that account down to the lower end of the range of reserves we should have. Borrowing the full $12.8 million would mean that we would owe about $4 million more than the property was worth before we started paying the $218,000 per year in interest on the loan.

    Losing $50,000 in tax revenues per year versus the risk of losing $4 million while paying $218,000 per year in interest gave some of us pause. I respect the effort every Council member put into reaching his or her own conclusion on this. Some future regret over the failure to exercise our option would have to be based on the kind of speculation that many of us were unwilling to engage in.

  3. By Steve Bean
    February 26, 2014 at 3:19 pm | permalink

    This drama began years ago with the granting of a tax abatement that arguably was a poor choice by the city. The due diligence demonstrated in the report above was all misplaced. The city had no “business” interfering with the market in the first place with its tax abatement (at least not for economic development reasons), and it doesn’t today.

    The property clearly hasn’t been of sufficient value to EBM or else it would not be selling it and paying the clawback-provision property taxes.

    Was it a speculative purchase on their part from the beginning? That doesn’t seem likely; they’ve been operating there for years and made significant investments in their building(s). Today, the land is clearly more valuable to the U (or so the regents believe), so much so, in fact, that they’re paying a premium.

    Was EBM’s original choice to purchase the property influenced by the city’s tax abatement? Apparently, but we can’t know for sure. (If the answer is no, then granting the abatement was a bad idea.)

    Assuming that it was (as the city presumably did at the time), other private enterprises were prevented from establishing operations on the property as a result of that incentive from the city. What would the value of the land be today in the alternative scenario?

    Would the university possibly be purchasing that land if there were a different and/or multiple owners today? If yes, then the value of the land to those owners would be—like for EBM today—insufficient to retain ownership. If no, then the city made the wrong choice in granting the tax abatement to EBM.

    Secondarily, the clawback clause provision was of no value to the city unless it was planning to make a speculative purchase in the future or it had a public use designated for that area in its master plan, neither of which appears to be the case.

    Here’s the realistic prognosis: the U will either develop the property, thereby raising (or reducing the decline in value of) the nearby properties, or it will abandon its plans and sell the property (likely at a loss), at which time it would go back on the tax rolls. (“You can’t always get what you want…”)

    The city’s attention would be better focused on the possibility of a large, near-term drop in *all* property values in the city, because that bubble isn’t done deflating.

  4. February 26, 2014 at 5:08 pm | permalink

    My cry of despair was not based on an investment, dollars-denominated argument, but rather on a concern for the future development pattern of the city and the large bite out of its heart that this purchase is taking. It will create another UM dead zone on the other side of State Street that will influence the future course of that entire area. When the UM takes over another piece of Ann Arbor’s limited land base, it also makes that area lost to our planning and environmental regulation and imposes more unpaid costs (such as fire protection) on our city’s taxpayers. Loss of free passage across the parcel, more impervious surface, noise and traffic impacts – it goes on and on.

  5. By Steve Bean
    February 26, 2014 at 5:49 pm | permalink

    @4: Which of those things would not be true of a privately owned property, Vivienne? You’re not thinking that the city would have retained ownership, are you?

  6. February 26, 2014 at 6:19 pm | permalink

    No, but it could have managed the direction of development. (And of course, under private development, Ann Arbor’s laws and regs would obtain, and taxes would have paid for services.) All hypothetical, now. We’ll just move on to the next slice of history.

  7. By John Floyd
    February 26, 2014 at 11:06 pm | permalink

    There are not many times that I disagree with Jack Eaton, Sumi K., or Mike Anglin. This is one of them.

    The point, as several others have mentioned, is not for the city to make $$ by flipping the property: the point was to exercise even modest control what happens to the land, and particular to keep it from the U. Buying the land was a defensive move, not a speculative move.

    I pay property taxes like other home owners, and I’m seldom in favor of the city being in the real estate business; this is one time that I think it would have made strategic sense to buy a piece of land it did not intend for its own use. Short of establishing a toxic waste dump, expanding the athletic campus would be about the least-good thing that could happen to this land, from the city’s point of view.

    The city ignores the master plan for downtown at will. This stretch of State hardly seems more sacred than downtown. This would have been a great place for mixed use development.

    No mention seems to be made of the response of other Washtenaw governments to the idea of sharing a proportionate share of the risk of purchase. Was any government approached to help buy the land?

  8. By Larry Baird
    February 27, 2014 at 7:42 pm | permalink

    If I recall correctly, the adjacent Lake Village apartment complex on S. Main (which sold in recent years) is one of the largest taxpayers, if not the largest within the city. I think council underestimated the potential and importance of this parcel, especially with the loss of the Oakbrook connection and future impact on traffic flow and congestion.

  9. February 27, 2014 at 9:26 pm | permalink

    Re: [8]

    Larry, Lake Village is #9 on the list of largest taxpayers in the FY 2013 CAFR:

    Owner                           TV         R  Precent of Tax Base
    Briarwood Shopping Complex    $ 38,639,614 1  0.83%
    DTE Electric Company Utility    32,786,122 2  0.70%
    Campus Investors 601 Forest     30,502,800 3  0.65%
    AMCAP Arborland                 29,971,966 4  0.64%
    Ann Arbor Campus Housing        27,682,406 5  0.59%
    HUB Eisenhower Property         27,165,184 6  0.58%
    McKinley Associates             19,549,657 7  0.42%
    THC Ann Arbor WP LLC Apartments 19,443,700 8  0.42%
    THC Ann Arbor LV LLC Apartments 17,154,764 9  0.37%
    DTE Gas Company Utility         17,057,300 10 0.36%
  10. By John Floyd
    February 27, 2014 at 11:21 pm | permalink

    Mr. Baird’s point is well made, even if the complex in question is the 9th biggest rather than the largest taxpayer.

  11. By Larry Baird
    February 28, 2014 at 9:08 am | permalink

    Dave, thanks for the clarification. I was confusing one of the largest recent real estate transactions with largest taxpayer.

    Hopefully city council and city residents will continue to “attempt” to communicate with the university to incorporate at a minimum some sort of pedestrian connection between S. Main and S. State and preferably the Oakbrook street connection. The walkability of this neighborhood depends on such a connection and some sort of adherence to the master plan.

    Given the amount of housing, office and retail in this area (including grocery stores – unlike downtown), one could argue this newer neighborhood could have a rather high walkability score with just a little bit more accessibility east-west.

  12. By Fuzzbollah
    March 1, 2014 at 1:22 am | permalink

    If the University of Michigan is willing to pay double+ market value for a huge parcel of land, they must want it really badly – whatever their reasons. As demonstrated by the exorbitant amount of money the U paid for Blimpy Burger, the City of Ann Arbor could likely have extracted numerous concessions from the U, such as infrastructure improvements, coverage for loss of taxes for a number of years, commitment to pay for transit improvements through the State St corridor, in return for the Edwards Bros property. Once again, certain council members are “missing the boat”, not seeing the bigger picture, have no real vision for the future, are afraid of taking small risks for potential big gains, and steering Ann Arbor in the wrong direction.

  13. March 16, 2014 at 8:57 am | permalink

    I was pleased to see on the new Planning Commission agenda (March 18) a thoughtful resolution directing the City to work with the UM on several issues surrounding the State Street area. I hope that this can be implemented and that the UM will in fact act in partnership with the city rather than simply acting like an occupying force.

  14. By Glacial Erratic
    March 16, 2014 at 5:10 pm | permalink

    Vivienne, I really value your dedication to making certain that every reader of the Chron knows your views on every issue of any kind without having to go to your own blog.