By CP Staff
By Ed Huyck
By Ed Huyck
By Ed Huyck
By Ed Huyck
By Ed Huyck
By Ed Huyck
But by the time the matter came up for discussion before a joint meeting of three council committees this week--attended by 11 of 13 council members--there didn't seem to be much concern about who might or might not be putting up the cash. The block's would-be developers and their new angel, local advertising exec Lee Lynch, told the council that a fresh group of investors (including Lynch), was being cobbled together to fill the funding gap. Although many members appeared skeptical, Council President Jackie Cherryhomes told her colleagues, "Bottom line, it's a fluid project right now.... If we can't do it now, when can we do it?"
At the end of three hours of discussion Monday afternoon, council members voted to forward consideration of the deal's proposed financing package to the full council this Friday, March 3, setting the stage for what most observers expect to be a very close vote on a deal whose official public price tag stands at nearly $40 million.
Before the $10 million shuffle began, city hall handicappers suggested that the council was ready to narrowly pass the plan being proposed by Chicago-based McCaffery Interests, along with Brookfield Properties US LLC (a subsidiary of Toronto-based Brookfield Properties Corp.) and St. Cloud-based Graves Hospitality Corp. Minneapolis Community Development Agency (MCDA) executive director Steve Cramer is recommending approval of the proposal, which also has the support of Mayor Sharon Sayles Belton.
But last week one city official offered a striking counterpoint to the Block E boosting, cautioning that glitzing up the property will come at a steep public cost. On February 22, City Finance Officer John Moir sent a strongly worded memo to city council members, suggesting that even if Lynch and his allies can raise the $10 million, the deal might spell trouble for taxpayers. "It's very unique, unusual financing that's being proposed," Moir tells City Pages. "I'm not recommending it from a finance perspective."
In a nutshell, the latest Block E blueprint involves a $134 million complex including a 17-screen movie theater, a 256-room Marriott Renaissance Hotel, and 128,000 square feet of entertainment/retail space that ostensibly will be anchored by an ESPN Zone sports bar and might also include a brew pub, a bookstore, and a steak house. Washington, D.C.-based Union Labor Life Insurance Company would provide $56.8 million in financing; Binger's investment was to have leveraged another $23.5 million loan. The developers propose pitching in an additional $3.15 million, (a little more than two percent of the total tab). The rest--$39.1 million, or close to 30 percent--is to be supplied by the public.
Like many city-assisted projects, the Block E plan calls for using tax-increment financing (TIF), a tool that allows the city to subsidize development via the increased property taxes to be generated by the project itself. In most such deals, Moir says, public costs are limited to the amount of TIF a deal can support, almost $20.3 million in the case of Block E. But under the current deal, the finance officer's memo notes, the city proposes to add another $19 million in subsidies through a variety of what he calls "precedent-setting" methods. Among the finance chief's top concerns:
* The city still owes $14.2 million for loans taken out to buy the land and demolish the buildings that once stood on the block, including a $7 million balance on a federal Community Development Block Grant. Moir says the money "must be repaid," and that the current plan provides no mechanism for doing so.
* Minneapolis collects a three percent tax on tickets, food, drink, and merchandise "sold in public places during live performances," as well as on short-term lodging. Normally, Moir's memo points out, that money goes straight into the city's general fund; but the MCDA and McCaffery have hammered out a deal to earmark more than $4.6 million in projected taxes from Block E's entertainment venues to pay for the development. The memo warns that the diversion would result in "lost revenue to the City General Fund every year for 25 years."
* Moir's memo also sounds a note of caution for city taxpayers: "The proposed finance plan puts further stress on balancing the [city] budget and increases pressure to raise general property taxes higher than they would otherwise be." Taxes for residential taxpayers are likely to increase anyway, Moir adds, as a predicted office-space glut drives commercial property values down.
* Finally, according to Moir, the Block E plan could make it more expensive for Minneapolis to borrow money in the future. "By increasing the City's overall level of indebtedness without growing an off-setting amount of general tax base," his memo states, "at some point in the future the City's AAA rating will be downgraded."
McCaffery Interests president Dan McCaffery dismisses the city finance officer's warnings. "For most of those points I can't really argue, because they're internal city finance," he concedes, but adds, "this is written by someone who wants to see the cup as half empty." Says Harold Brandt, Midwest US Group president for Brookfield Properties: "It's John Moir's job to be as conservative as he possibly can. I think John Moir's a brilliant finance guy; I'm not so sure that he's a brilliant retailer."
Two days after Moir sent his memo, the MCDA's Cramer issued a five-page rebuttal, calling the finance officer's analysis "flawed." Cramer's missive argues that there are ways to cover the city's existing Block E-related debt and also claims that "the CDBG loan does not have to be repaid." The entertainment taxes Moir calls "lost," he notes, would not exist without the development's new bars and restaurants. In the long run, the letter states, the project would produce a net benefit to the city's tax base and general fund.
Cramer also points out that the deal calls for the MCDA to receive some of the profits from retail and parking operations on Block E, after the lead investors get their share and debt service is paid; he estimates that the city's take could come to between $5 million and $10 million over the next ten years (including a share of proceeds if the project is sold).
"Steve can spin it the way he wants to spin it," Moir says when asked about Cramer's rebuttal. "But that doesn't change facts. We can manage debt as long as we have ways to pay for it."
If city policymakers can take any comfort from the latest near-meltdown, it's that they've been here before. The driving force behind trying to develop Block E has always been the city council rather than the real estate market: As even Cramer's rebuttal to Moir puts it, "Block E has never been a developer-driven project." In the 12 years since the bars, porn shops, and newsstands that once dotted the block were razed, a variety of proposals have been floated, dissected, and ultimately killed.
Calhoun Square creator Ray Harris once had exclusive development rights, but he lost them when he couldn't put together financing amid the real estate doldrums of the early Nineties. When Brookfield was first awarded development rights to the block in the fall of 1996, it proposed a $143 million project including a retail and entertainment complex topped by an office tower for the burgeoning Target Corp. headquarters staff. But as negotiations dragged on, Target found a new corporate home at the south end of Nicollet Mall instead. The city then encouraged Brandt to work with DDRM Entertainment of Anaheim, California, a fruitless effort Brandt now says only served to slow him down.
In 1997 a restructured $101 million package from Brookfield--sans office tower, but with a hotel added--called for $38.1 million in public money; that proposal was derailed in June 1998, when Brandt's then-financial partner, San Diego-based Excel Legacy Corp., bailed out. McCaffery signed on in October of that year, and last fall the Chicago-based firm took on the role of lead developer. Brookfield, McCaffery notes, has a large portfolio of office properties in the United States and Canada (its local projects include City Center and Gaviidae Common in downtown Minneapolis). But the firm is "not necessarily a player in the retail community, and it's particularly not involved in retail entertainment projects. I am."
Brookfield's Brandt says that in his view, the project has made tremendous progress with McCaffery at the helm. He argues that the current proposal should be considered without regard to the deal's troubled history and dubs the latest snag "one small hiccup."
"What the city has told us repeatedly is that they want an entertainment project," Brandt says. "We've got that. It would be a sad day for the city if this project should be allowed to die." To council critics who have attacked the proposed complex as unimaginative, Brandt responds: "The city spent tens of millions of dollars to produce a Target store. They're not exactly unique."
Steve Dombrovski, president of Suntide88 Commercial Realty, a local retail leasing agent, says it's not hard to guess what has gone wrong on Block E. "Time kills deals," he says. "That's an age-old saying in the real estate business." Other challenges, he adds, include a lack of residential property downtown: "You can't pay rent seven days a week and only have business five days." The latest twist, Dombrovski says, could ultimately help lead to a better solution for the troubled block. "I still think at some point somebody is going to figure out what really makes the most sense."
Meanwhile, the man who set off the current scramble is in no mood for postmortems. Reached for comment on his exit from the Block E project, James Binger says, "It became quite clear to me that it didn't suit me, okay?" And with that he hangs up the phone.