Rough Pro Forma for Lot 1 (because someone has to do it, urgently)

The BRA has now approved a $55 million tax diversion plan for the Lot 1 (no RFP, no prior public input, fast-track) project. The approval was despite no pro forma to show the proposed uses can turn a profit.

This is, of course, the same DDA/BRA (still many of the same people) that in its great fiscal stewardship for East Lansing taxpayers pledged $30 million it didn’t have for bonds for CC II and actually spent nearly $6 million to buy the Evergreen properties for three times market value when the economy was in free fall and the developer’s house of cards was collapsing like a bombed hospital.

So, although I still hope to get a professional pro forma, here are some calculations that should serve as a reality check. There are other important issues of which the community needs to be informed, notably trying to understand how the bond is supposed to work and what we now have learned is a $75,000 per year sweetheart ground lease on Lot 1, which could have sold for $10-$20 million on the open market if they had been willing to go the RFP route and had the guts to let voters decide. The reason they could have sold for that much isn’t because a developer could then turn a profit. It is because there is a bubble in the high cost student rental market, and folks like EDR will pay through the nose, even if in a few years, after the bubble bursts, they lose money. I don’t think city government is any smarter about the reality of financial shenanigans than it was when Staton was saying the Great Recession was a just a blip on the economic cycle and “what me worry.”

There has also been no discussion of all the other projects underway or on the drawing board—I just heard Sears-Frandor is well into a planning stage.

Anyway, for now, at least I can share some elementary arithmetic.

I am assuming, for an $125 million project (price on brownfield plan): $25 million for parking structure, $20 million equity, $80 million mortgage. That would be a very high equity figure. If the bond works by the developer buying the bond for parking structure as a private placement to keep the interest rate low enough for brownfield plan to work on paper (on the open market this would be a junk bond) that would mean tax increment revenue would go to developer as bond holder, but the developer would then need to come up with another $25 million in financing.

Per a basic mortgage calculator: 25 years at 4% interest on $100,000 = $6,366 annual mortgage payment.

Generous current multiple of net operating income for a commercial mortgage would be 1.2 (I’ve mostly been seeing 1.3). That would mean NOI of $7603 for $100,000.

$80 million mortgage would need $6,082,560 NOI.

Project will be paying over $2 million in taxes from pre-redevelopment taxable value, school and city debt mils, and DDA mils, plus about $1,750,000 of the tax increment to taxing jurisdictions and bond for parking structure.

Sweetheart ground lease is $75,000, so say $2.1 million in property taxes and ground lease.

Development needs to produce about $8.2 million in net operating income before property taxes and ground lease. Typically net revenue is about 65% gross revenue. So project needs $12.6 million gross revenue

Crude estimate per square foot, combining all residential and commercial, and assuming no vacancies (no lender would accept more than 90% occupancy assumption), with 403,315 square feet = $31.25 per square foot (to reach gross revenue target).

I am going to focus on the senior apartment use, since that is how they are justifying the project politically, along with the grocery.

136,731 square feet for senior apartments, 50 one bedroom, 46 two bedroom. Average per bed 1008 square feet, but more realistic would be 1150 square feet one bedroom, 1722 two-bedroom.

$31.25 per square foot for senior apartments = ~$3000 per month, ~$36,000 annual for one bedroom.
$31.25 per square foot for senior apartments = ~$4500 per month, ~$54,000 annual for two-bedroom.

To achieve same NOI, lower rents on senior apartments would need to be compensated for by much higher rents on student (a.k.a., market-rate) apartments and commercial. An anchor commercial tenant grocery will not be paying $31.25 per square foot. The student apartments would already average about $1400-$1500 per bed monthly rent at $31.25 per square foot.

To look at this another way, between the market rate apartments and the designated senior apartments, there are ~360,000 square feet for residential. At $31.25 per square foot, this would bring in $11.27 million. At $1500 per month per bed, or $18,000 per year, there would need to be ~700 beds not 550, as in the current plan. At $1200 per month (still higher than anything currently on market), there would need to be over 780 beds.

I’m ignoring finding tenants for 42,000 square feet of retail at $31.25, which would price any local businesses out of the market, and the kind of Urban Outfitter retailers are closing down.

Elliot Singer

Protocol & Disclaimer:
"Work submitted and published in Public Response is the sole responsibility of the work's author(s)." "Any editorial statements made by the editor of Public Response do not necessarily reflect those of the subscribers, list members, or sponsors. Likewise, the assertions and opinions set forth by contributors whose works are published are not endorsed by Public Response."

Please Indicate "for publication" and add your name!


Read Here