When Bad Things Happen to Good Plans

By Joseph McElroy

Planning magazine, November 2009

There it sits, impossible to ignore, at a major entryway to downtown Petoskey: a big, abandoned construction site diverting attention from Little Traverse Bay, one of northern Michigan’s jewels.

Called Petoskey Pointe because of its location between two major roads, including U.S. 31, the aborted redevelopment exemplifies the fallout when bad things happen to good plans.

With the economy in what Nobel Prize-winning economist Gary Becker calls “the most severe financial crisis since the Great Depression,” (WSJ, 10-7-08), city officials from coast to coast are grappling with ambitious projects that never got off the ground or—worse, perhaps—developments that stalled partially built.

Petoskey citizens are not amused. One irate blogger from the city of around 6,000, wrote, “They destroyed a bunch of nice buildings and gave us a dirt hole.  Petoskey is the laughing stock of Michigan.”

But that’s too harsh, because Petoskey Pointe is just one example of an increasingly common planners’ problem: high-profile public-private economic development partnerships gone sour.

“It’s everywhere,” says consultant John LaMotte of the Lakota Group, a planning and design firm based in Chicago.  Before the recession deepened, he says, numerous projects were getting underway in both large and small cities as municipal officials became more highly skilled at public-private partnerships.

Just as they love ribbon-cutting ceremonies, politicians hate being embarrassed, and big holes in highly visible locations can hurt re-election chances, as happened in Petoskey when the incumbent mayor and two council members were defeated in Nov. 2008.  The next day the city manager announced his retirement after 25 years on the job.

In  2005 a referendum upheld the PUD rezoning needed to redevelop the downtown gateway, then marred by an empty movie theater. The $60 million development was supposed to include condos, hotel rooms, a restaurant, an indoor pool, retail and two levels of underground parking, with one level open to the public.

The city sold its portion of the site—a parking lot then worth an estimated $970,000—for the development.  A tax increment financing district was established for the planned $6 million parking deck.

 Additional support came from the Emmet County Brownfield Authority, as did state grants and tax credits, according to Amy Tweeten, AICP, the Petoskey city planner. But local opposition, largely about the scale of a seven-story building relating to its smaller, Victorian-era neighbors, helped cause the city’s planning commission to take months to review the proposal.

Acquiring property from seven different owners also was time consuming. And another challenge emerged when the general contractor in the deal apparently fled the country, moving to the Bahamas, according to a local news media report.

Also, after the City Council approved the project, soil borings showed that a small portion of the site was contaminated.  The developers applied for $4.5 million from a state brownfield program, but inadvertently submitted inaccurate information based on a consultant’s report.  As it turned out, there was little contamination.

Some proponents blame the delays for the project’s ensuing problems.  “The delay caused a domino effect,” downtown retailer B.J. Shawn told the Northern Express Weekly.

”The repercussions are amazing and misunderstood and pushed the project to a time when the economy plunged. The mortgage rate went up, the trades people got other jobs. To have to put it back together when it was moving along—that disruption was a big challenge.”

Earlier this year the City Council ran out of patience and terminated its business relationship with the developer, Lake Street Petoskey Associates, which had not been able to line up financing.  The city also is suing the developer to get its $970,000 back.

The city still has the land use issue, since there is an approved PUD development agreement in place.  Since the developers or their lenders own all the property, Lake Street Petoskey Associates or other developers will have to develop the project as approved or ask the City to modify the PUD.

That PUD included a performance bond of $30 million or half the value of the project.  However, the agreement said the developer did not have to submit the bonds until construction—meaning foundation work—began.  The project never got that far, so the bonds had not been submitted.

So now what?  “The current economic circumstances will certainly make any redevelopment projects difficult for some time,” said Tweeten, who says Petoskey Pointe presents the kind of Catch 22 problem common in financing condo developments.

“You need a certain amount of pre-sales to get the (construction) financing,” she said, “but it’s difficult to sell something without showing progress,” such as clearing the site or digging the hole.”

 

North Carolina—From Towels to Technology

            Back in the day, the Cannon Mills Company was the biggest textile manufacturer in the world, producing an average of 300,000 towels per day.   The company was based in the North Carolina city of Kannapolis, population 42,500. The town’s name comes from the Greek word for looms—“kanna.”  At one point almost 25,000 people worked for Cannon Mills.

James W. Cannon established the town in 1909, providing housing and retail establishments for his employees, much as railroad car tycoon George Pullman did on the South Side of Chicago.  For decades, the town and its leading employer were barely distinguishable from each other.

That ended in July of 2003 when the company, by then bought and sold several times and renamed Pillotex, finally closed. Kannopolis and the surrounding community saw 4,340 jobs suddenly disappear, the largest one-day layoff in the history of the state. City leaders had to decide what to do with more than 6 million square feet of abandoned industrial space.

Then a miracle happened, or so it seemed at first.  In 2004, David Murdock, who owned the company from 1982-86, purchased the factory site and announced plans for the North Carolina Research Campus, a $1.8 billion redevelopment effort to establish partnerships between biotech firms and eight universities, including Duke, University of North Carolina at Chapel Hill and North Carolina State.

The research center focuses on nutrition, health and agriculture.  If successful, it will help Kannapolis make the difficult transition from textile town to scientific hub.  Even with the support of eight universities–not to mention the generosity of Murdock, the Dole Foods owner who has donated more than $150 million—it has not been easy.

As was the case in Petoskey, problems began to surface as the economy slowed.  Even though it pales compared to Murdock’s  contribution, the $47 million in public funding has raised concerns, partially because most of the laid-off factory workers are not qualified for the new high-tech jobs.  Indeed, in the first quarter of 2006, almost three years after the mill closed, only 60 percent of the former workers reported wages, and almost half of them earned less than $5,000 during that time.

Initial plans also called for 700 homes—including a golf course development–now on hold because of the real estate market collapse. The campus is also slated to include:

  • More than one million square feet of laboratory space
  • 360,000 square feet of office and medical space
  • 700,000 square feet of educational space
  • a private science and math high school for girls
  • a hotel with 125 rooms
  • a conference facility with 1,000 seat auditorium

The key facility, a 311,000-square-foot laboratory, is open, and a groundbreaking ceremony was held in May for a $26 million biotechnology facility for a local community college.  The 62,000-square-foot building had been delayed because of the financial system crisis, which delayed financing.

Also complete are two other buildings; one houses North Carolina State’s Plants for Human Health Institute, while the other is home to UNC-Chapel Hill’s Nutrition Research Institute. A 460,000-square foot center for retraining former textile workers is also under construction.

In June a major tenant, PPD Inc., pulled out of the project because of construction delays and an overall slump in business.  As in Petoskey, the developer’s inability to obtain financing slowed the project. Local officials say that PPD, which has laid off hundreds of workers world-wide, hopes to come to the research campus when economic conditions improve.

The recession is also cutting into support from the State of North Carolina, which has an unemployment rate of 11.1 percent, fifth worst in the country.  Research campus officials had been seeking $29.5 million from the state for fiscal year 2010, but probably will receive closer to $22.5 million.

Another problem: the credit crunch and high interest rates have hindered the tax increment financing fund established to provide campus infrastructure.

In mid-July the Kannapolis City Council approved an alternative TIF strategy.  “Late last year, the TIF market evaporated,” said Irene Sacks, the city’s economic development chief.  “Because they are unrated real estate backed bonds, it does not matter how good the project is – investors are simply risk averse.

 

 

 

 

“The alternatives include different forms of finance tools that are easier to implement because we have a proven $3 million revenue stream to rely on to repay the debt.”

The previous plan was more speculative.  The revised plan is for a $25-$30 million dollar package – a small portion of the ultimate $168 million local government investment planned.  The full amount will occur as the development progresses based on future economic conditions.

As was the case in Petoskey, planners in North Carolina did their homework, but the recession has played havoc with earlier assumptions. A 2006 economic analysis estimated that the North Carolina campus could create 37,450 jobs in the region by 2032.  But consultants also warned that those estimates were based on implementation of another study, a SWOT analysis that called for better schools, infrastructure, recreation facilities and diversity efforts in order to attract and keep high-tech employees.

The consultant, Atlanta-based Market Street Services, warned that Kannapolis—perhaps best known as the hometown of legendary NASCAR driver Dale “The Intimidator” Earnhardt–will be competing with other cities that are “ranked very highly in quality of life, educational opportunities and other typical municipal rankings.”

Although the development is off to a slower start than expected, J. Mac Holladay, the head of Market Street Services, remains optimistic, long term.  “It’s been difficult, but nobody could have predicted what would happen to the economy,” he said.           

As if to prove his point, in June Kannapolis received an Excellence in Economic Development Award from the U.S. Department of Commerce for its diversification category, which recognizes strategies responding to plant closures.

Even though construction has been slower than expected, “The job creation numbers are ahead of the schedule we put together,” Holladay said.

 

Now What?

            For decades, economic development experts have stressed that partnerships between private developers and government are the best way to make economic redevelopment happen.  But in light of the problems like those discussed above, public sector planners might reconsider this conventional wisdom; after all, what good is a public-private partnership if the developer goes under or financing dries up?

But consultants LaMotte and Holladay say city officials need be more creative, not more cautious, when facing these issues.  Helping elected officials find solutions is where planners can really shine, LaMotte said, “because we planner types are comprehensive thinkers and resourceful.  We also have thick skin.”

Holladay urges planners to think big, especially when working on a project like the NC tech campus, which he describes as “transformational.  To a large extent, they’re creating a new city.

“It’s about having a different level of anticipation,” he said.  “It’s about thinking big and asking what we need to do to get there.  What will the demands be?”

 

 

 

 

Tips:

 

  • Keep it clean: When strapped for cash, some property owners will let the site become an eyesore.  If they won’t cut the grass or do other needed maintenance, do it for them under the auspices of your anti-weed ordinance.  “Clean up and green up should not only address the public domain, but all vacant sites waiting for development,” said LaMotte. “A graded site with sod and maybe some temporary public art is better than a `big dig hole’ at the 100 percent intersection.”
  • Try to retain momentum:  When work started on the North Carolina Research Campus, there was a big push to get the first three buildings up and operating, but then there was a  lull. The recent groundbreaking of the community college building is helping keep the energy of the project up, according to Kannapolis economic development planner Irene Sacks. ”With any major development project, there are always lots of irons in the fire, but progress isn’t always visible,” she said.  Getting to the groundbreaking took a lot of background work, and it took longer than originally planned. “Seeing construction activity and a building go up gives people confidence that the ultimate vision of the project is still very much alive,” she said.
  • Show me the money: For many developers, their favorite financing method is “OPM,” short for “other people’s money.”  If the developers have not made a significant investment, it’s too easy for them to walk away.  But different parties can disagree on what counts as developer financing and what doesn’t. The developer of the World Trade Center says that the insurance money he received after the 9/11 attack count as his contribution to rebuilding the World Trade Center, but the New York port authority sees it differently.
  • Performance bonds: Have them in hand before construction begins, and clearly define what is meant by “before construction.”
  • Do no evil: It’s getting ugly out there.  In recent years, negotiations between communities and developers have gotten “meaner and nastier,” according to LaMotte, who says the recession provides “a good time to reset every community’s development processes to ensure goals and plans—especially regarding density and building height–are up to date and clearly written. “
  • Track Record:  Is the developer taking on something much larger than anything else it has attempted? That was the case in Petoskey, where the developer ran out of money.
  • Get help: All three projects mentioned above will affect people and places beyond the jurisdiction of the lead agency.  The New York port authority is a powerful agency, but the World Trade Center has worldwide implications.  The research campus in Kannapolis will affect the entire region, as does the incomplete development in downtown Petoskey—the biggest city within at least three counties.  That means county, regional and state government could all be enlisted as partners in revitalization efforts.  In North Carolina the County provided a landfill fee break to remove the 6 million square feet of debris. (Happily, up to 75 percent was recycled.) The City also lobbied to change state law to allow faster partnerships with private developer for infrastructure projects.
  • Keep the public informed, quickly: Projects like this are easy targets for the news media and political opponents.  If a newspaper or television distorts the truth, respond quickly, as the Village of Glenview, IL did after an article implied that a large redevelopment project was in financial trouble.  The Village quickly issued a press release clarifying that, despite a few vacancies in the retail portion of the development, the other components—a hotel, movie theaters and housing—were doing just fine.
  • Timing is everything: Projects being planned today won’t be ready to go until 2011 or 2012, when the economy probably will be in better shape.  Remember, things change.  Until then…
  • Expect the unexpected:  Especially when considering financial projections.  Heed the words of economist John Kenneth Galbraith, who once said, “The only function of economic forecasting is to make astrology look respectable.”

 

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