AGENDA #2c

memorandum

to:	Mayor and Town Council
from:	Roger L. Stancil, Town Manager
subject:	Public Forum:  Revised Proposal for the Downtown Economic Development Initiative
date:	November 20, 2006

PURPOSE

The purpose of this report is to inform the public of revisions regarding the current proposed agreement between Ram Development Company and the Town of Chapel Hill to develop a Town-owned parking lot at the corner West Franklin, Church, and Rosemary Streets.  The Town Council is holding a public forum tonight to receive public comment on the proposal.

BACKGROUND

The Town Council has undertaken a planning process for the downtown sites based on the Town’s Comprehensive Plan and Downtown Small Area Plan.  The 2000 Comprehensive Plan’s goal for downtown is to “enhance the downtown’s role as the center of the community, with a pedestrian orientation and a human scale.”

The Council has made implementation of the Downtown Economic Development Initiative the number one priority in its annual goals.  In developing the Initiative, the Council has fully involved the public in an ongoing process as the project has evolved, including the process of concept plan review in the spring of 2006 (see Summary of Project History in Attachment 8).

On October 24, 2005, the Town Council authorized a Memorandum of Understanding with Ram Development Company, which outlined the basic terms and conditions of the relationship between the parties for the future development of two downtown sites owned by the Town of Chapel Hill.  The sites were Parking Lot 5 bounded by West Franklin, Church, and West Rosemary Streets, and the Wallace Deck site on East Rosemary Street, and adjacent corner lot at Rosemary and Henderson Streets.  The Council authorized the Town Manager with the participation of a Council Committee to negotiate a Development Agreement based on the concepts described in the Memorandum of Understanding for Council’s consideration by March 31, 2006 (please see Attachment 1).

Subsequently, the Town Council extended the negotiating period until December 5, 2006 to allow the developer to revise its proposal based on changing economic conditions caused by increases in construction prices and rising interest rates.

The Town Negotiating Team now brings forward a revised proposal for public comment and Town Council consideration.  The revised proposal focuses on the development of the Lot 5 site, and proposes to defer development of the Wallace Deck site until a later time.

COMPARISON OF ORIGINAL AND REVISED PROJECT PROPOSAL FOR LOT 5

Below we compare the provisions in the October 24, 2005 Memorandum of Understanding with the new revised Ram Development Program (please see Attachment 2).  Ram Development Company has also provided a summary comparison of key points (please see Attachment 3).  A draft Summary of Terms Sheet proposed by Ram Development Company and being put forward for public comment by the Town Negotiating Committee is contained in Attachment 4.

Plans of the Lot 5 project proposal provided by Ram Development Company are shown in Attachment 5.

Background – The Original Lot 5 and Wallace Deck Projects.

On May 2, 2005 Ram Development Company (the “Developer”) submitted a proposal (the “Proposal”) in response to a request for proposal (the “RFP”) from the Town of Chapel Hill (the “Town”) to develop an urban mixed use development on two downtown development sites, Lot 5 and the Wallace Deck Site.  On October 24, 2005, the Town and the Developer entered into a Memorandum of Understanding outlining the proposed business terms of an arrangement between the Town and the Developer respecting the development of such sites. 

Under the original October 24, 2005 Proposal, the Developer would construct on Lot 5:

• a 400 parking space garage of which 173 spaces would be public spaces controlled by the Town
• approximately 31,000 square of public open space
• three (3) separate buildings containing approximately 24,000 square feet of retail/commercial space and 124 for sale residential condominium units of which fifteen percent (15 percent) would be affordable housing

Under the original Proposal, additionally, the Developer would undertake to construct on the Wallace Deck site:

• two (2) buildings (one on top of and adjacent to the Wallace Deck and one at the corner of Rosemary Street and Henderson Street) that would contain collectively approximately 109 for sale residential units (fifteen percent (15%) of which would be affordable housing) and approximately 6,000 square feet of retail/commercial space
• the Town would be required to reserve 55 parking spaces in the Wallace Deck for lease to residents and patrons of the Wallace Deck residential condominiums and retail space

Terms of the original proposal in the Memorandum of Understanding included:

• The Town would lease to the Developer portions of the land at Lot 5 necessary to develop the improvements and the air rights over the Wallace Parking Deck and the adjacent lot at the corner of Rosemary and Henderson Streets.
• Each lease would be ninety-nine (99) years with the Tenant having the option to extend each lease for an additional twenty-five (25) years.
• The Tenant would have the option during lease year 70 through 72 to extend the lease at Lot 5 for $2,000,000 and the leased property at the Wallace Deck site for $1,500,000.  The Developer would pay to the Town a one time lease payment of $4,750,000 for the lease of the Lot 5 property and a one time lease payment of $3,150,000 for the lease of the air rights over the Wallace Deck and the Rosemary/Henderson street lot.
• Under the terms of the leases, the Town would be entitled to participate in the profits from the developments after the Developer had received a fifteen percent (15%) return on costs.

The Town would pay to the Developer an aggregate of $7,900,000 for the cost to design, permit and construct the Lot 5 Parking Garage and other Town improvements (such as the public space) which would be owned by the Town.  Additionally, the Town would be required to pay $500,000 to support parking for affordable housing units in the two projects.  The Town proposed to use the rent to be paid by the Developer with respect to the Lot 5 and Wallace Deck leases aggregating $7,900,000 in order to pay the Developer for the cost of the Lot 5 Parking Garage.

Economic Changes Since the Memorandum of Understanding

In the time that has elapsed since the Developer formulated the development plan for Lot 5 and the Wallace Deck sites and the Town negotiated the October 24, 2005 MOU with the Developer, construction costs have increased by as much as 30 percent and interest rates have increased significantly.  As a result of these material economic changes, the Town Negotiating Committee and the Developer have reevaluated the proposed Lot 5 and Wallace Deck projects.

The Town Negotiating Committee and the Developer have concluded that the redevelopment of the Wallace Deck is not feasible at this time.  However, the opportunity for redevelopment of the Wallace Deck property remains and the Wallace Deck will continue to be a part of the Town’s Downtown Economic Development Initiative.  Development of the Lot 5 site is proposed to go forward on the basis of the revised development plan described below.  We believe it would provide the Town with a quality urban mixed use project that will begin to set a standard and serve as a catalyst for economic development, revitalization and long term viability to the Town’s downtown area and move us forward in attaining the goals of the Comprehensive Plan.

Outline of the New Lot 5 Project

The Developer has, over the past several months, worked with the Town Negotiating Committee in an effort to formulate a development plan for Lot 5 that would meet the Town’s objectives and would be economically feasible from both the Developer’s and the Town’s standpoint.  After further negotiations with the Developer, a revised development proposal for Lot 5 is being brought forward which the Town Negotiating Committee believes will meet the Town Council’s objectives and is economically viable.

The revised proposal for the Lot 5 project will incorporate the main features of the original Lot 5 proposal contained in the October 24, 2005 Memorandum of Understanding with numerous enhancements and will consist of the following: 

• An approximately 345 underground space parking garage (the “Lot 5 Parking Garage”) of which not less than 161 spaces will be owned by the Town and available for the public use, plus 10 to 15 on-street parking spaces.
• Approximately 28,540 square feet of retail/commercial space.
• 137 for sale condominiums of which 21 will qualify as affordable housing.
• Approximately 27,000 square feet of public open space.
• The buildings will be LEED-certified.
• The developer would commit to invest not less than $12.5 million of equity in the project.

To achieve efficiencies and cost-savings, the Developer proposes a single connected building with the retail space and “for-sale” condominiums to be built on top of the Lot 5 Parking Garage. At the public plaza ground level, the building would still be differentiated into three sections, the design of which is essentially the same as proposed earlier in the process.  The Developer proposes to delete the alley which formerly was adjacent to the interior property line, and proposes a courtyard off West Rosemary Street (please see Attachment 5 for the plans).

Terms of a new Development Agreement would include (please see also Summary of Draft Terms Sheet in Attachment 4):

• The Developer will provide a minimum of $12.5 million of equity in the Lot 5 project.
• The Town will ground lease to the Developer the building pad for the residential/retail building to be constructed on Lot 5 for a lease term of 99 years. The use of the building pad will be permanently restricted and it will not be possible to materially change the nature of the project without the consent and approval of the Town.
• The ground lease will contain a provision giving the Developer, or subsequently the condominium association, the right to terminate the ground lease and acquire fee simple title to the air rights 50 years after the start of the ground lease.  The termination fee will be $2,000,000.
• The rental under the 99 year ground lease will consist of various tangible benefits to the Town that will be funded by the Developer, as well as, numerous intangible benefits.  The economic benefits to the Town projected by the Developer include:  the cost of having the improvements qualify for LEED certification, an over 27,000 square-foot public plaza that will be owned and controlled by the Town, approximately $671,000 expended for public art, the subsidizing of the cost of 21 affordable housing units and the cost to construct the approximately 169 Developer owned and controlled parking spaces underground in order to enhance the visual impact of the development.  The primary intangible benefit that the Town will realize will be the creation of a high quality mixed use development incorporating a large residential component that the Town believes will serve as a catalyst for future mixed use developments.  Additionally, the Town will realize substantially increased property and sales tax revenue as a result of the development of the Lot 5 site and a projected 43 percent increase in the revenues to be realized from the new parking facility.
•  The Town will continue to have significant control over the development as originally negotiated and included in the October 24, 2005 Memorandum of Understanding, including reasonable approval rights as to the architectural design, primary building material and other elements of the project and all plans, specifications, schedules, cost budgets and documents relating to improvements to be owned by the Town.  The Town would retain review rights for the retail mix.
• Following completion of the Lot 5 Parking Garage the Town will purchase from the Developer the 161 public parking spaces at a purchase price corresponding to the Developer’s cost for constructing the same but not to exceed $7,245,000 (approximately $45,000 per parking space, depending on the actual number of spaces that are fitted in the Town’s level of the Garage). The Town proposes to finance the purchase price of the 161 parking spaces through either traditional public finance mechanisms or possibly through owner financing provided by the Developer.  This financial commitment could be reduced in the event that the actual cost of development and construction of the Lot 5 Parking Garage is less than $7,245,000.
• The Developer will provide $200,000 for programming associated with the new public space.

Town Financial Commitment

Assuming that the Town finances the full purchase price of $7,245,000 using a tax-exempt borrowing at an interest of five percent (5%) per annum (a rate believed to be reasonable in light of present market conditions), the Town would incur an estimated annual debt service cost of $725,000 in the first year, decreasing annually by about $18,000.  The borrowing would require Local Government Commission approval.

We anticipate that cash flow from the project in Year 1 (project completion) would be negative but would be positive in the fourth year.  Please see Attachment 6 for our financial analysis.

Revenues to pay the debt service on the proposed borrowing would be property taxes, sales taxes, and parking revenues above those we are currently receiving.  We estimate the cash flow needs to be $341,000 in Year 1.  These funds are available in the Off-Street Parking Fund.

DISCUSSION

The proposal of Ram Development Company to develop Lot 5 in a mixed-use project of housing, retail, and parking would result in the following potential public benefits:

• Advances Council’s number one priority goal by placing a significant Town asset into a fully performing status.
• Adds families to Downtown, which increases:
  • vitality, street life
  • sense of community
  • public safety
  • patrons for businesses
• Stimulates development in Town Center with a mix of uses-residential, retail, and parking.
• Adds 21 units of affordable/workforce housing to the Land Trust (15 percent of total).
• Provides public plaza with space for regular daily use and for programming for community events.
• Developer assumes all risks of development.
• Reduces dependence on automobile, to extent some may also work downtown, or be retired.  Downtown households may have less auto trips per day than other households.  Supports transit system, pedestrian and bicycle objectives of Comprehensive Plan.
• Supports Council’s objectives to support green and sustainable building principles by being LEED certified.
• Encouraging local businesses and increases employment opportunities; provides jobs for area residents.  
• Replaces surface public parking with underground public parking.
• Includes one percent for public art incorporated into the project planning.
• Provides a commitment to high-quality design and materials reflecting Chapel Hill’s heritage and looking to the future as well.
• Makes better economic use of a Town-owned property.
• Retains Town ownership of the site long-term for potential future use.
• Increases the tax base.

Peer Review Process

The Council has had the benefit of a peer review process to examine the proposed design of the Lot 5 project.  Marvin Malecha, Dean of the College of Design at North Carolina State University, met recently with Ram Development Company and reviewed the potential revisions to the project now being brought forward tonight.  His report is contained in Attachment 7.  He concluded that the revised schematic design ideas are worthy of further development and are ready to move toward the next phase of design development.

NEXT STEPS

On December 4, 2006, the Town Council would consider the revised proposal and comments received tonight and consider whether to authorize the Manager and Attorney to prepare a formal Development Agreement between the Town and Developer.  If the Council on December 4, decides to move ahead, we recommend that the Council set a 60 day time period for completion and execution of a Development Agreement.

RECOMMENDATION

We recommend the Town Council receive public comment on the revised proposal and refer comments to the Manager and Town Negotiating Committee.

ATTACHMENTS

1. Memorandum to Council of October 24, 2005, Memorandum of Understanding for Downtown Economic Development Initiative (begin new page 1).
2. Revised Ram Development Program for Lot 5, November 15, 2006 (p. 2-1).
3. Summary Comparison of Request for Proposal, October 24, 2005 Memorandum of Understanding, and Revised Ram Proposal, November 15, 2006 (p. 3-1).
4. Summary of Draft Terms Sheet between Ram and the Town of Chapel Hill, November 14, 2006 (p. 4-1).
5. Plans of Lot 5 Project Proposal, November 20, 2006 [1.1 MB PDF] (p. 5-1).
   • Ground Floor plan
   • Levels 2-4 plan
   • Level 5 plan
   • Level 6 plan
   • Level 7 plan
   • Level 8 plan
   • Parking Level 1 plan
   • Parking Level 2 plan
   • Franklin Street Elevation
   • Church Street Elevation
   • Rosemary Street Elevation
   • Plaza Elevation
6. Cash Flow Estimates Related to Lot 5 Development (p. 6-1).
7. Dean Malecha Report, Peer Review Session Eight, November 6, 2006 (p. 7-1).
8. Summary of Project History (p. 8-1).