to: Mayor and Town Council
from: Roger L. Stancil, Town Manager
subject: Development Agreement with Ram Development Company for Downtown Economic Development Initiative
date: December 4, 2006
The purpose of this report is to request Council authorization for the Manager and Attorney, with the continuing participation of the Council Committee (Council Members Strom, Greene, and Hill), to complete a proposed Development Agreement with Ram Development Company for Lot 5, for Council consideration by February 12, 2007.
The Development Agreement would be based generally on the approved Memorandum of Understanding approved by the Town Council on October 24, 2005, as modified by the revisions presented at the November 20, 2006 public forum.
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.
The Downtown Small Area Plan adopted in 2000 identifies key “opportunity areas” for development downtown, including Town Parking Lot 2 at East Rosemary and South Columbia Streets, and Town Parking Lot 5, bounded by West Franklin, Church and West Rosemary Streets.
In 2001, and 2002, the Council undertook an extensive citizen participation process to involve citizens in planning for the downtown sites. In May 2002, the Council received a report on the results of workshops held. Subsequently, the Council formed a Council Committee to plan for next steps, including the hiring of an economic development consultant to advise the Town Council.
In 2003, and 2004, the Council and the Council Committee worked on a process to develop Town-owned parking lot sites, including the Wallace Parking Deck and the adjacent property at Henderson and Rosemary Streets. The Town’s consultant, Stainback Public/Private Real Estate of Houston, Texas, developed a financial feasibility analysis with input from the Council, the Council Committee and the public.
On December 6, 2004, the Council authorized the distribution of a Request for Qualifications document to solicit statements of qualifications from development teams interested in submitting proposals for development of Town Parking Lot 5 and the Wallace Parking Deck and adjacent property. Six developers responded to the Request for Qualifications.
On February 28, 2005, the Council approved issuance of a Request for Proposals to five of the six developers. On March 7, 2005, the Council authorized issuance of the Request for Proposals document. Two developers, Ram Development Company of Palm Beach Gardens, Florida, and the team of Grubb Properties of Charlotte and LeylandAlliance of Tuxedo, New York, responded by the May 2, 2005 deadline.
On June 15, 2005, the Council authorized the Manager to conduct negotiations with Ram Development Company. The Council resolution authorized Council Members Strom, Greene, and Hill to be on the Town Negotiating Team. On June 27, 2005, the Council authorized an Exclusive Right to Negotiate with Ram Development Company until October 24, 2005. On June 20, June 29, August 18, and September 19, the Council also held work sessions with Ram Development Company on key project design issues.
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.
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.
In the spring of 2006, Ram Development Company also submitted the plans for Concept Plan review to the Town Council, required prior to submitting a special use permit application.
On November 20, 2006, the Town Council held a public forum on a revised proposal from Ram Development Company (please see Attachment 1). The revised proposal focuses on the development of the Lot 5 site. Development of the Wallace Deck site would be deferred until a later time.
Comments received at the November 20, 2006 public forum included discussion of the potential benefits of the project to the Town, concerns about the economics of the Town’s proposed investment, questions whether the proposed design would fit into the context of Chapel Hill, questions about the affordable housing component, and discussion about the terms of the Town’s continued ownership of the property. For a summary listing of comments received at the forum, please see Attachment 2. For correspondence received, please see Attachment 3.
Several speakers highlighted the potential public benefits to the Town from having additional residents living downtown, including increased vitality, enhanced public safety, and additional patrons for local businesses. The mixed use project would promote the Town’s Comprehensive Plan objectives to achieve a walkable community, to lessen dependence on the automobile, and to enhance downtown’s role as the center of the community. It would help achieve community by providing residents downtown year-round, and by providing significant public plaza spaces. Some speakers referred to the impact of the Town’s rural buffer, and the appropriateness of concentrating density in the downtown.
Some speakers felt the Town’s proposed investment of $7.245 million was too risky.
Staff Comment: The Ram Development Company has put forth its “best and final offer” to the Town. Rising construction costs and increases in interest rates have resulted in Ram proposing changes to the design of the project to make it economically feasible. The Council’s role is to weigh the public benefits gained from the project in relation to the proposed public investment as it decides whether to authorize a Development Agreement to be negotiated based on this proposal for Council consideration.
The Town Negotiating Team has sought to negotiate an approach with Ram Development Company that minimizes the Town’s risk. Please see also the section below, Summary of Town’s Role in Financing Lot 5 Improvements (p. 6).
While many citizens liked the general design and approach, others expressed concerns about the scale and height of the project, and whether the project would fit into the context of Chapel Hill.
Staff Comment: Marvin Malecha, Dean of the College of Design at North Carolina State University, has undertaken eight peer review sessions with Ram, and made reports to the Council. He has stated that he would be available to continue his efforts as the project moves from schematic to detailed design, with the intent of paying attention to scale, compatibility with surrounding development, quality of design, quality and choice of materials, and how design fits into the Chapel Hill context. This continuing review would help address concerns raised by citizens.
1. At the public forum, a representative of the Orange Community Housing and Land Trust asked how condominium association fees could be made affordable for the owners of the affordable housing units in an equitable manner.
Staff Comment: This is an issue that will be addressed in consultation with the Land Trust in the preparation of the Development Agreement for the Council’s consideration.
2. After the public forum, questions have been raised about the parking for the affordable units.
Staff Comment: The revised proposal is for the Town to provide parking for the affordable housing units at the Wallace Deck or other Town-owned property. The Ram Development Company’s proposal does not include parking for the affordable units. It would be a decision for the Town Council to determine potential alternate locations. In addition to spaces at the Wallace Deck, the Town owns rental parking lots on West Rosemary Street with approximately 12 leased spaces at Lot 6 and 17 spaces at Lot 4. There may be other options as well for providing parking for residents of these units. We envision this work would proceed concurrently with the preparation of a Development Agreement.
Questions were raised about the appropriateness of the Town agreeing to give the Developer or its successor condominium association the right to purchase “air rights’ in 50 years.
Staff Comment: The Principles and Priorities for Use of Parking Lots 2 and 5, adopted by the Council on February 24, 2003 stated that the Town desired to “keep the properties in the Town’s ownership as a basic principle. However, in order to achieve the desired development, council may consider selling some or part of either property” (please see Attachment 4). In the Request for Qualifications of December 15, 2004, the Town stated it “will only accept proposals for a long-term unsubordinated ground lease of the properties.”
In the Memorandum of Understanding of October 24, 2005, Ram agreed to lease the land for a 99 year term with the option to extend the lease for an additional 25 years, exercisable between years 70 and 72 of the lease and upon payment of an extension payment of $2 million for the Lot 5 lease. In the revised proposal, the Developer would lease the land for a 99 year term; there would also be an option that the Developer, or subsequently the condominium association, would have to terminate the ground lease and acquire fee simple title to the air rights 50 years after the start of the ground lease. The air rights would be for the portion of the lot upon which the building pad would sit; the Town would continue to maintain ownership of the underlying ground of the total site.
We recommend that the Council continue to consider these comments as it moves forward with the next steps in the process of coming to formal agreement with the Ram Development Company. These steps are: preparation of a Development Agreement for Council’s consideration; preparation of a financial plan for financing of the public parking with the involvement of the North Carolina Local Government Commission; and continuation of the peer review process with Dean Marvin Malecha. The Council has a separate role as “regulator” to review the project, in a quasi-judicial capacity, once Ram Development Company submits an application for a Special Use Permit.
The Town Council agreed to general terms in the Memorandum of Understanding of October 24, 2005, and now has a revised proposal from the Developer under consideration. The Negotiating Team developed several drafts of a proposed Development Agreement with Ram Development Company based on the earlier Ram proposal. Tonight we request the Council consider authorizing the Manager and Attorney, with the continuing participation of the Council Committee and the Town’s consultants, to complete the drafting of a Development Agreement for the Council’s formal consideration.
We would return to the Council with a request for formal authorization of a Development Agreement by February 12, 2007.
The Town’s proposed investment in the project of a $7.245 million borrowing to construct the public parking spaces will require the approval of the North Carolina Local Government Commission. The involvement of the Local Government Commission provides public oversight of the financial proposal, and helps guarantee that the Town’s investment is prudent and fiscally sound.
We have sought advice from the Local Government Commission on financing this project and have received preliminary confirmation that our funding approach is reasonable. We would plan to continue work on the financing plan concurrently with preparation of the Development Agreement.
The Council would be required to hold a public hearing before the Town could get approval to borrow. The Council would need to pass a resolution determining that the borrowing was for an essential Town purpose and the Local Government Commission would need to approve the borrowing. We envision this step would need to occur before the Development Agreement is signed.
Dean Marvin Malecha has undertaken eight peer review sessions with Ram, and made reports to the Council. We plan to seek his continued involvement as the project moves from schematic to detailed design. The focus of his review includes attention to scale, compatibility with surrounding development, quality of design, quality and choice of materials, and how the design fits into the Chapel Hill context.
Following authorization of a Development Agreement, the Town in its capacity as Owner would enter into the agreement with Ram Development Company.
The Town has a separate role as regulator of the development under the Town’s Land Use Management Ordinance. In the spring of 2006, Ram Development Company undertook the Town’s Concept Plan review process, including a public hearing before the Town Council, and advisory review by the Community Design Commission. From a regulatory standpoint, Ram Development Company is now ready to submit a Special Use Permit application. We anticipate that Ram Development Company would apply for a Special Use Permit from the Town shortly after the signing of the Development Agreement.
The Special Use Permit process of the Town includes a full array of public participation opportunities, including a public information meeting, meetings with advisory boards and the Planning Board, a formal public hearing before the Town Council, and Council consideration of the project plans. This process will provide the formal opportunity for citizens to provide evidence regarding the proposed design and scale of development and the project’s compliance with the standards established by the Land Use Management Ordinance.
Early in the development review process and continuing throughout the special use permit review, the proposal also receives critical scrutiny from Town Departments. In the spring of 2006, the Town staff formed an interdisciplinary capital projects team to work with the developer during the Concept Plan review process. We anticipate reactivating this team to again work with Ram during the Special Use Permit application phase.
We anticipate that Ram Development Company would request expedited processing for the development. If Council were to grant expedited processing, we estimate that the Special Use Permit process could take from nine to 12 months to complete after submittal. In order for the project to be built, a Special Use Permit is necessary.
During negotiations since June 2006 with Ram Development, the Town Negotiating Team worked to simplify the structure of the agreement with the developer and to minimize the Town’s risk. The Team saw this as important as the costs of construction, specifically steel and concrete, rose 30 percent over the life of the negotiations, jeopardizing the project in total and exposing the Town to great risk if it remained a development partner in the project. The Team accomplished both of these objectives by separating the parking from the development of new retail and residential space.
From the beginning of the project, the Town maintained that there would be no loss of public parking. If Lot 5 is to be the footprint for new construction to stimulate redevelopment of the downtown, the Town must replace the current parking in a different manner. The Team considered surface parking on another site or development of an above-ground parking structure on another site with other potential partners. The Team rejected these options because of the time, difficulty and cost of acquiring another site for that purpose and the time required to identify new partners in a parking project. Rising construction costs underline the fact that time is money and taking more time might render the project impossible. Clearing new land for parking is also contrary to the Town’s stated goals of development.
The Town’s sole new role in the development project is to be responsible for the cost of replacing the current surface parking underground on the same site. The Town will own that parking and agree to pay a maximum of $7.245 million (approximately $45,000/space) for the underground parking, based on the cost of construction. Payment for the parking is not due until the Town issues a Certificate of Occupancy, meaning the parking construction is complete and the garage is ready for operation. The Town reserves the right to audit Ram’s costs at the end of the project. If the audit shows cost of the parking is less than $7.245 million, the Town will pay the actual cost as audited and the developer will pay the cost of the audit. If the cost is greater than $7.245 million, the Town will pay no more than $7.245 million but will pay the cost of the audit. As an example, it has been reported that Raleigh’s underground parking at the new convention center is currently costing about $46,000 per space.
The Town will borrow the money to pay for the parking, in effect mortgaging the parking garage, and will pay it back from the parking revenues and increased property tax and sales tax receipts from the project. The financing and the Town’s obligation to make payments will begin at the end of the project construction when the deck is available for use, approximately two to three years from now. The NC Local Government Commission must approve the financing. Considering the parking revenues from the garage and the property taxes and sales taxes generated by the project, Town staff projects a positive cash flow after three years. The negative cash flow in the first years could be made up from the Parking Fund.
The development project itself is being built using the air rights over the land currently owned by the Town and leased to the developer for 99 years. The developer will develop condominium space for retail and residential and sell the total project to individual owners. In 50 years, the owners will be able to buy the air rights for $2,000,000 so condominium ownership will continue in perpetuity. Effectively, those rights have no value to anyone else. Details regarding the owner’s obligations to maintain the building on the site in order for the air rights to continue will be spelled out in the Development Agreement.
The Town Manager and Town Attorney, with the continuing participation of the Council Committee, will complete a development agreement to be considered by the Council in 60 days if the Council approves going forward with the project. This agreement will specify a $12.5 million equity investment by the developer and include performance and payment bonds that will protect the Town’s interests.
The Negotiating Team recommended that the other projects originally included in the Initiative can be accomplished in the best interests of the Town after the Lot 5 project is successful and changes the climate for development of the downtown.
Tonight the Council has under consideration whether to proceed with a revised Ram proposal for the development of Parking Lot 5. As noted by citizens at the forum, the project has the potential to provide substantial public benefits in exchange for the Town’s proposed payment of $7.245 million for the replacement of the public surface parking with public underground parking. The project would advance Council’s number one priority goal by placing a significant Town asset into a more fully performing status.
The project would add residents to Downtown, which would add to the vitality and street life of downtown, promote a sense of community, increase public safety, and increase retail patrons for downtown businesses. The proposal would add a mixed use development downtown and potentially stimulate other development in the Town Center. The mixed use nature of the project and its location would reduce dependence on the automobile, thereby supporting the objectives of the Comprehensive Plan to achieve a walkable and transit-oriented Town.
It would provide 21 units of affordable/workforce housing to the Land Trust (15 percent of the total number of units). In accordance with Council’s principles, it will provide a significant public plaza space for regular daily use and for programming for community events.
The project would be designed in accordance with Council’s principles to support green and sustainable building principles by being LEED-certified, would provide one percent for public art, and would provide a high quality of design and materials reflecting Chapel Hill’s heritage as well as looking to the future.
The Developer would assume all the risks of development, and the Town’s risk would be limited to the provision of a $7.245 million borrowing, to be repaid from the revenues of the project and increased property tax and sales tax receipts from the project. Over time, the project will generate substantial tax revenues for the Town and increase the tax base.
The economic and design questions raised will continue to be addressed in the process as it unfolds through preparation of a Development Agreement, review of financial proposal by Local Government Commission, and continued scrutiny of the design through the Special Use Permit process, as well as by the Dean Malecha peer review process.
We recommend that the Council authorize the Manager and Attorney, with the continuing participation of Council Members Strom, Greene, and Hill, to complete a proposed Development Agreement with Ram Development Company for Lot 5 based on revised plans as described in the Manager’s Memorandum to the Council of November 20, 2006 and based generally on the approved Memorandum of Understanding of October 24, 2005, except as modified by the revisions proposed, for Council’s formal consideration by its February 12, 2007 meeting.