Evergreen Properties Talks Extended, as Developer Reveals Anchor Tenant Backed Out

East Lansing’s Downtown Development Authority voted 8-2 today to extend an exclusive contract with River Caddis Development on the DDA’s Evergreen Avenue properties. River Caddis has been pitching the idea of building an 8-story office complex at the site, and first signed an exclusive agreement for talks on this project back in April 2020.

Those voting in the majority at today’s meeting felt the prospect of having a reputable developer construct big office space downtown is too important to give up on now. Those in the minority believe it’s time to look to other options.

The meeting came with a number of revelations from the developers – including that the lack of progress over the last six months was because City staff had not moved the draft sale agreement forward and that an anchor tenant for the imagined office project had been landed but backed out due to the pandemic shut-downs.

Curiously, the developers also referred numerous times to wanting or even needing Michigan State University to be a partner in the project. What that partnership would look like is unclear. An off-campus real estate partnership with the university has long-eluded other developers building downtown.

Kevin McGraw of River Caddis spoke at length before the DDA voted. He began by apologizing for not being at the meeting of the DDA’s Project & Infrastructure Committee last week, where the deal was discussed at length, but said they did not expect what happened last week. He said that, as expected, River Caddis had submitted a proposed Purchase and Sale Agreement last July, but that the City sat on it and did not return it until just before last week’s meeting.

City staff alluded to the delays being caused by the change in Council resulting from Ruth Beier’s and Mark Meadow’s resignation and the change in attorneys for the City and the DDA. But the result of this information about the timing was a very different picture being painted about who bore responsibility for lack of movement on an agreement for the sale of the land.

McGraw told the DDA that, when City staff finally sent the revised proposed agreement to River Caddis last week, staff had made big and unexpected changes. McGraw said that, reading it, he realized “how far apart we are” on terms.

McGraw also spoke to the fact that it can take a long time to line up a lot of parts for a deal as complex as this one, which involves properties seriously “under water” in terms of market value. The properties have a debt of about $5.3 million and would be worth much, much less on the open market.

The site comprised of the DDA’s properties is also challenging because it is a narrow, small lot with limited access to main roads.

McGraw alluded to projects his company is working on in places like Grand Haven and Kalamazoo, where lining up state support for environmental clean-up and doing affordable housing with support from the state has taken years.

The original pitch from River Caddis included the developers building interior parking for about 250 cars. Since last July, the developers have indicated they want the City to build a new publicly-owned parking garage for the project.

McGraw explained today why this is: the original estimates for office space were coming in at about $40 per square foot triple-net – a price point, McGraw said, to be expected in New York or Chicago, not East Lansing. He said that reengineering the project without on-site parking took months but got the price down to about $20 per square foot triple-net.

McGraw said that, before Covid-19 hit, his company had lined up an anchor tenant that was going to commit to rent around 150,000-200,000 square feet of the new building. “That was huge,” he said. He said his son John McGraw had secured several other smaller tenants, dependent on that anchor tenant.

But then the anchor tenant “went on hold” because of the pandemic. Only about five percent of the potential tenant’s workforce has been going to the office during the shut-down, and McGraw told DDA members he honestly doesn’t know where the deal is going to go because the project needs a big anchor tenant.

Asked about what the odds are the big prospective tenant would still commit, McGraw said that he thinks there’s still a chance, but probably not better than 50 percent.

If the DDA wants to go with student housing to deal with the debt problem, McGraw said, that would be an easier way out. But, he said, he thinks the opportunity for office space downtown at this location is too important to not try.

McGraw told the DDA that in other cities around the country, his team is hired under a Professional Service Agreement and has their costs compensated for things like engineering, architectural work, and real estate brokerage for seeking tenants.

In East Lansing, he said, River Caddis has been expected to spend hundreds of thousands of dollars to figure out feasibility. He suggested that one option is for the DDA to grant his company a Professional Service Agreement.

But if not that, he said, “we have to have some kind of control” of the opportunity, and that meant a third extension of the Memorandum of Understanding that grants six more months of exclusivity.

McGraw made clear, if the City Council or DDA doesn’t want this project, he’d rather know now and stop spending money.

“I don’t want to paddle up river anymore,” he said. “This is too hard.”

He also talked about wanting to have meetings outside the public eye, to protect valuable information (like prospective tenants’ identities), but the DDA was warned by City Attorney Mike Homier to follow the Open Meetings Act and Freedom of Information Act.

City Manager George Lahanas continued to suggest he is all-in on this idea, and Mayor Aaron Stephens also said he’d prefer office space to student housing. They both were in favor of giving the deal six months more time.

DDA member Jeff Smith said that if no other developer is interested in the land, he sees no point in not continuing with the exclusive agreement. Smith asked about carrying cost and was told the DDA is facing a growing net expense on the properties, now exceeding over $100,000 per year.

In fact, the DDA is likely to have the net expense on the properties grow, as they cannot rent one building that is now in bad disrepair and are talking about potentially not renting others to typical student renters in order to use more of the Evergreen Ave. properties to help the MSUFCU project. City staff did not clearly explain what they’re thinking about in terms of using the Evergreen properties to help MSUFCU deal with the problem of the owners of Dublin Square challenging their construction plans.

In the end, Lahanas, Stephens, and Smith were joined in support by DDA members Mike Krueger, Kristin Clark, Reuben Levinsohn, DDA Chair Peter Dewan, and DDA Vice Chair Jim Croom.

DDA member Luke Hackney voted against the extension, as he voted against the original deal, because he believes the Request for Proposals (RFP) that resulted in this proposal was too restrictive in the first place.

Hackney referred to this long-running criticism of the process as it was also leveled by local commercial real estate expert Van Martin in November 2019, after the Royal Vlahakis deal fell apart. Hackney said he wanted to see a viable project that is fully funded, and that he thinks one way to get there is to issue an RFP that is more welcoming to diverse ideas.

DDA member Greg Ballein also voted against the extension. Ballein praised the McGraws as developers and people, but said he doesn’t think the community “has an appetite” for funding this project, particularly given how the pandemic has shifted office work habits. He suggested the fact that the anchor tenant had backed out was a sign of the fundamental problem with the plan.

The Memorandum of Understanding first signed in April 2020 will now be extended through July 2021.

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