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SOUTH ELM REDEVELOPMENT STALLS OVER LAND TRANSFER AND COMPENSATION

(Last Updated On: January 3, 2017)

by Jeff Sykes

jeff@yesweekly.com | @jeffreysykes

A review of electronic communication and documents from the City of Greensboro shows frustration with the progress of the South Elm redevelopment, so much so that city staffers have examined ways to cancel the agreement in place with the project’s master developer.

South Elm Development Group, the private company contracted by the city to oversee the process of turning six acres of brownfields into 21st century mixed-use splendor, in turn has requested to be paid for more than $400,000 in project expenses.

The negotiations are revealed in more than 450 emails and documents reviewed by YES! Weekly as part of a recent public information request. The request covered the time period Nov. 1 to Dec. 4, and ends just after a significant land transfer related to the Union Square Campus component of the South Elm project was to come before city council.

That vote has twice been delayed, according to city executive staff, because “the necessary agreements between the parties were not complete.”

As was first reported by YES! Weekly, the proponents of the Union Square Campus were forced to pivot from their preferred plans to develop a four-story, 110,000 square foot facility at the South Elm site’s prime parcel at the corner of South Elm and Lee streets when they were unable to secure enough leases to finance the debt service on construction costs. This move forced Union Square Campus Inc., the corporate entity behind the unified nursing campus concept, to downsize to a three-story, 85,000 square foot facility at the corner of Lee and Arlington streets.

Part of USCI’s financing of their project includes a request that the City of Greensboro provide two acres of land, and significant parking space, at no cost. City council expressed support for the move, but because of previous contracts with SEDG, things were more complicated than many expected.

Art of the Deal

In an Aug. 18 memo from Senior Planner Dyan Arkin to City of Greensboro Planning Director Sue Schwartz, staff explained the hard figures at issue.

SEDG had entered into a much celebrated relationship with the city’s Redevelopment Commission to oversee the South Elm project expecting to profit $6.7 million by buying land from the city and selling it at a profit to component developers.

With Union Square Campus the only component developer signed on to the project, giving away two acres of that land would cut deep into SEDG’s profit potential.

SEDG estimated the no-cost land deal would cut $1.86 million out of their profit. City staff calculated the loss to be much less than that. A consultant compared land sales in the vicinity and found an average range of $600,000 to $1 million per acre, resulting in a potential profit loss of $166,000 to $554,000.

The wild disparity between expectations is symptomatic of larger differences between SEDG’s view of the pace and scope of the project, and city staff’s determination to safe-guard the public interest.

By late summer, as revealed in Arkin’s Aug. 18 memo, SEDG had asked the city to alter their arrangement in light of diminished profitability. Instead of making money from land brokerage, SEDG asked the commission to consider a developer fee of 3 percent of total development costs. Staff estimated the fee could reach $4.2 million.

“For this development fee, SEDG will provide the same services required by the (Master Development Agreement) and act as the Commission’s broker to negotiate the sales price with each component developer,” Arkin wrote. “This change results in less certainty that the Commission will receive the agreed upon per acre price.”

The Redevelopment Commission had expected to sell land in the South Elm project site at $428,694 per acre. This money was to be used to pay back a $3 million federal loan the city used to compile the land from previous owners. Gifting two acres to USCI would scuttle those plans as well.

Staff was not in favor of the proposed 3 percent developer’s fee, but instead proposed to reimburse SEDG $500,000 for lost revenue. Staff also proposed discounting future land sales to SEDG from the $428,000 per acre to $263,678, even though this would cut into the money available to the Redevelopment Commission to pay back the federal loan.

Something for Nothing

City staff seemed hemmed in by US- CI’s claims to potential investors that they would get two acres of land and ample parking for their project at no cost. Even though USCI only had the capacity to build one of two proposed buildings, they were adamant in protecting options for a second parcel. As staff rushed in early November to meet council’s expressed interest in voting on Dec. 2 to approve the land transfer, negotiations focused on the option for the additional parcel.

Staff had agreed with SEDG’s position that USCI should not be gifted two acres of land if they only had the money to build on one parcel. Keeping the prime location of Elm and Lee streets open to any potential developers that might come along was paramount.

In a Nov. 10 memo summing up the state of negotiations, city staff said that USCI “believes they were promised two acres of land at no cost.”

They were not promised, the memo reads, “but supported when it looked like they were building two buildings in a row.”

“City/RCG/staff/SEDG don’t want to pre-commit to a no-cost sale without there actually being a deal to review,” the memo states. “(USCI) sold their project to board, funders, donors, lenders with no cost land and they don’t want to have to go back and say the terms are different.”

SEDG had wanted USCI to pay them a $500,000 developer’s fee, but because of lack of capital for construction costs, this was not going to happen.

As staff prepared the sales and development agreement for the USCI land transfer, the scope narrowed to a one-acre transfer, with USCI pushing to hold on to rights to a second .97-acre parcel. The sales agreement early on contained a right of first refusal clause that would give USCI control over the prime parcel at Lee and Elm streets.

“The commission shall not sell or agree to sell the Additional property without first offering it to the Component Developer,” the clause stated.

Staff took issue with this from the beginning.

“What other developer would be interested in a piece of property that first has to be offered to someone else,” staff wrote in the comments section of the sales agreement document. “At what point does RCG offer it to USCI? No developer is going to spend money or time to analyze a deal that is dependent on another entity saying they don’t want the land.”

Staff felt as if USCI was “holding us hostage again” and pushed to disconnect the attachment to the prime Lee and Elm parcel, substituting language that gave them an option on any parcel in the site. The parties eventually agreed, and the Redevelopment Commission approved the document on Nov. 19, forwarding it to city council in time for the pending vote on Dec. 2.

Exit Strategy

Once it became clear that SEDG’s profit from land sales wouldn’t quite meet their expectations, partners Bob Chapman and Bob Isner began looking for an alternate compensation method. Having the available acreage for sale reduced from 6.9 acres to three acres was just one of their challenges.

Railroad right of way was cutting into the west side of the South Elm site, causing planners to consider adding the former St. James Homes site to the project to increase available acreage. But more land for sale might not be the biggest problem.

“Market conditions have stayed stagnant for commercial property, rendering this component less viable,” staff wrote in an email to the city’s management team in early November.

Days later, staff looked to an outside consultant for advice on moving forward. The city hired Teska Associates Inc., an Evanston, Illinois-based planning consulting firm, to provide guidance on the agreement with SEDG.

Teska responded on Nov. 11 with a five-page memo that summed up the city’s legal position and challenges in changing or terminating the master development agreement with SEDG. The city had offered three alternative compensation methods to SEDG, and held “extended negotiations … with SEDG regarding these alternative approaches.

“Legal review is needed to determine whether the City can proceed with disposition of land based on the current MDA or a new, terminated, or amended MDA is required. SEDG has informed the City of Greensboro of its interest in changing its role from Master Developer to consultant. It is unclear whether they desire to terminate or amend the MDA and what type of fee structure and deliverables they propose.”

The memo laid out a set of a dozen questions to be answered, providing options regarding “terminating or amending the MDA.”

SEDG partner Bob Chapman submitted the first proposed amendment on Nov. 18. It called for the city to reimburse SEDG for any revenue lost when the city gives component developers land free of charge.

A week later, on Nov. 26, SEDG’s attorney Mike Fox of Tuggle Duggins reached out to USCI’s Ed Kitchen.

“(Greensboro city attorney) Tom Carruthers and I are discussing ideas about moving forward on the Union Square campus land issue and thought it would be good to brainstorm a little with you about some difficulties we were facing,” Fox wrote.

Kitchen deferred to USCI’s attorney, Lee Lloyd, who asked Carruthers for the background details.

“The city and (SEDG) are at present unable to agree on how to proceed and I think it would be helpful to have your input on these matters,” Carruthers responded.

That same day, staff removed the land transfer item from the city council’s Dec. 2 meeting. Staff prepared a memo that laid out the terms under which the MDA with South Elm Development Group could be terminated.

Late that afternoon the city received a letter from SEDG attorney Fox spelling out their negotiating position.

Fox reiterated the work SEDG has performed under the agreement and how the land transfer to USCI “further diminishes SEDG’s ability to market the property …”

Fox estimated that SEDG’s expected compensation for the two USCI parcels amounted to $2.9 million. The partners had incurred more than $436,000 in expenses, Fox said, and would be willing to settle for the $500,000 staff recommended in August. But SEDG wanted two additional considerations.

First, they asked that all land options and service contracts be transferred from SEDG to the Redevelopment Commission. Second, they wanted, moving forward, to perform their role as Master Developer on a fee for service basis. If the city wanted SEDG to continue overseeing existing service contracts “” items related to design and infrastructure development “” SEDG wanted a fee for that as well.

Carruthers, Fox and Kitchen planned to meet the week after Thanksgiving. In the meantime, the Redevelopment Commission cancelled its scheduled Dec. 3 meeting. All eyes shifted to the next city council meeting, scheduled for Dec. 16.

The land conveyance was ultimately postponed then as well. It is currently scheduled to appear on the city council’s Jan. 6 agenda, if the parties have reached a settlement.

In the meantime, work proceeds on streetscape and utility design, in addition to technical review of USCI’s first education facility. With so many moving parts, the complications seem to come one after the other.

SEDG asked for a transportation planner to be reimbursed more than $9,000 for drawings of the future Lee and Elm street intersection. Staff felt this fee was “out of proportion with the value of the work product received” and asked SEDG to justify the payment amount.

On Dec. 4, Juhann Waller, a Greensboro-based engineer working on the site’s utility plan, informed staff of Duke Energy’s view of what it would take to install underground utilities at the site. Duke was concerned about having its crews dig in the previously polluted dirt in the site, itself designated as a brownfield. Duke would require the city to remove the dirt before its crews installed a duct bank.

The work would cost $1.3 million and take six months to complete. With USCI set to begin construction in March, it was unclear how this could alter their timeline.

Waller informed one staffer of the costs, which came in about $500,000 higher than expected.

“Ugh,” was the reply. !

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