As summarized at the commission’s June 21, 2017 public work session, CPDG’s involvement with what has become known as the Royal Oak Civic Center (ROCC) project has drastically changed since the first public special meeting dedicated to the ROCC proposal was held on April 18, 2016. The city is no longer contemplating contracting with CPDG to perform the master development obligations for the city-owned projects in the ROCC (a new city hall, a new police department, a new parking deck and a new downtown park), nor is the city contemplating placing its operations into CPDG’s proposed private office building. As it stands today, CPDG’s sole responsibility would be construction of its proposed $37.8 million, 128,000 sf (rentable) office building, and the city would be responsible for the construction of the new police station, city hall, parking deck and downtown park. This structure is reflected in the proposed term sheet.
A term sheet was provided and presented to the public on June 26, 2017. The term sheet seeks financial assistance from the city and outlines a schedule by which the city and/or Downtown Development Authority (DDA) would recoup this investment. Given that a significant gap exists between the cost of construction of new office buildings in Southeast Michigan and the market rental rates the region commands, the request was expected. It is anticipated that the market rental rate for CPDG’s proposed building is approximately $30/sf, a rate has been verified by numerous commercial real estate firms in Southeast Michigan, as well as the city’s real estate consultants on this project, Plante Moran CRESA (PMC).
PMC analyzed CPDG’s design development package and verified to the extent possible the accuracy of the assumptions represented therein to determine the financial gap between what the building would cost and what rents the building could reasonably command. That gap was identified between $5 million and $10 million.
The chief difficulty with constructing a speculative office building is financing, and city discussions with CPDG and its lender focused upon the minimum amount the city could provide that, in addition to CPDG’s equity, would secure financing. That figure was identified at $5.5 million, the low end of CPDG’s financial gap and the request made in the proposed term sheet.
A summary of the financial investment being asked of the city is as follows:
- The city shall deposit $5.5 million in escrow with the lender simultaneous with CPDG’s equity of $8.5 million. All of CPDG’s funds are to be used first, the city funds shall be used second, and the funds from CPDG’s lender shall be used last.
- The city-owned land will be conveyed to CPDG for $1.00 at the time of closing (approximate value estimated at $900,000).
- Potential tenants may request incentives from the DDA, but this is not part of the development agreement
In return, CPDG has agreed to the following in return for the city’s investment:
- A reconciliation of the DDA portion of the taxes at year 8 for 50% ($2.75 million) of the city’s cash investment and year 15 at 100%, so that the DDA itself is guaranteed to receive at least $5.5 million in tax revenues over 15 years. If there are any shortfalls at year 8 or year 15, CPDG shall pay the difference to the city.
- A reconciliation at year 10 for the total city contribution (cash and land) and year 20 on the total taxes paid by the office building inclusive of local and state schools. At the end of year 20, if the total taxes paid by the office building are not a minimum of $12,800,000, CPDG shall pay the shortfall and any such shortfall in the total tax amount would only be paid to the city.
- CPDG shall provide financing for the total cost of its project simultaneous with closing on city bond financing
- Personal Guaranty for completion of construction of the office building would be provided by Ron Boji and Sam Surnow
On June 26, 2017, the commission released outside counsel to draft a development agreement that memorializes these terms into a development agreement. Upon completion of this development agreement, the commission will be asked to provide the final vote in the affirmative or negative for the project. It is anticipated this agreement will be before the commission in late August or early September 2017.