$65M deal raises questions

The plan calls for a private developer to acquire the former Bank One operations center,
surface parking lots and an adjacent parking garage from a private owner for $18.5 million, then sell the 1,680-space garage
to the city for $18.5 million.

The developer, Tadd M. Miller, would spend as much as $65 million
to convert the former office building into apartments and develop retail and residential on the adjacent surface lots. He
also would buy back 600 spaces in the garage over 20 years by repaying $6.6 million in tax abatements for the former operations
center and pitching in additional payments totaling $2 million.

City officials say the deal provides a boost to a run-down area and gives the city control of enough parking to support the future redevelopment of the Market
Square Arena site-all without any upfront cash, no issuance of bonds, and an automatic tenant for the garage. The developer
would take out a loan to buy the property, and the city would make the payments over 20 years using revenue from the garage.

But some observers question whether
the city, which would take control of the entire property if the deal doesn’t materialize within 18 months, is taking on too much risk
and overpaying. Sales disclosures show the properties most recently sold in July 2004 for a total of $13.5 million-$3 million
for the former operations center and $10.5 million for the parking garage. Some also wonder whether waiting for a stronger
real estate market would have yielded a more ambitious project at a smaller cost to taxpayers.

Fair market value

City officials would not release two appraisal documents they
relied on for the $18.5 million garage purchase agreement, citing a state law that calls for confidentiality. But they acknowledged
the appraisers used

a “prospective value approach” that assumes successful completion of the operations center
redevelopment. The valuations also assume surface parking lots on the former MSA site will close after a variance allowing
gravel instead of pavement expires.

They
say the appraisals, which estimated values of $18.6 million and $18.9 million, comply with a state law that requires cities
appraise land acquired for redevelopment at “fair market value.”

The private owner selling the garage and office building is an affiliate of Columbus, Ohio-based
Smoot Construction, which had partnered on a failed 2004 plan for two high-rise condo towers on the MSA site. Smoot bought
the properties from Bank One in July 2004, and would realize a roughly 6-percent annual return from its purchase price if
the deal closes with Miller and the city.

“At
least on paper, it seems there’s a component in here that’s incentive to get the site developed,” said John C. Snell of Fishers-based
Snell Real Estate Evaluation Co., of the city-ordered appraisals. “The question is whether the garage carries more value because
of the development being brought.”

He
said the city likely asked the appraisers to consider factors such as the revenue from the developer’s purchase of 600 spaces
in the garage in the valuations. He said such requests are normal.

“An appraiser can’t be concerned with politics or economic development,” Snell said. “They must
respond to financial criteria.”

But
the future-value approach does carry risk:
If the appraised value of a property is tied to certain assumptions and those assumptions don’t materialize, the appraisal
won’t mean much.

Subsidizing
development

That’s part of
what has flummoxed Pat Andrews, vice president of the Marion County Alliance of Neighborhood Associations.

She’s upset that the public was told about the deal only 48 hours
before the Metropolitan Development Commission approved the arrangement June 3, and that the plan includes few details on
how the city will repay the loan.

She
also questions city incentives for apartments, one of the most robust portions of the downtown real estate market. Downtown
apartments are roughly 95-percent occupied.

“Why
on Earth are we giving a deal to a market segment that should be able to stand on its own?” Andrews said. “When can the taxpayers
in this county expect downtown to bring in money to support itself? With attitudes like this from the 25th floor, it’s going
to be difficult to ever stop subsidizing downtown.”

Andrews said her reading of state law is that appraisals must be at current value, not potential future value,
to protect taxpayer investments. As it stands, the developer is getting an “extraordinary” deal, she said.

“Obviously, the owner is willing to sell [the properties] for
a total of $18.5 million, which happens to be the right amount the appraisals came up for the garage alone,” Andrews said.

City officials say the deal has protections
for taxpayers. If the development falls through, the city will take control of all of the property at no additional cost other than the loan payments and seek proposals from other
developers.

The city also plans to
seek ideas for a small retail development on a narrow slice of land between the garage and Market Street that could bring
additional revenue to the garage. The project would be designed to create a more pedestrian-friendly environment.

Policy shift

Veteran developers privately question whether the awarding of incentives to the apartment
project signals a change in policy for the Ballard administration. For the last two years, economic development officials
in the mayor’s office have consistently told applicants that projects must create a substantial number of jobs to win incentives.

The mayor’s communications director,
Robert Vane, said in an e-mail that job creation continues to be a priority.

“However, every situation is unique, and in this case, the development of the near-east
side is important to the strength of downtown,” Vane said. “We believe that this development will spur additional work in
the area, which in the long term will create jobs and a stronger tax base.”

Miller, the developer, said he’s been trying for about eight years to find a way to
fix up the blighted building between New Jersey, East, Washington and Market streets. The principal in locally based Kosene
& Kosene Residential said he hopes to enlist investors, including possibly Kosene, to finance the project but will do it on
his own “if that’s what it takes.”

Miller,
whose company TM Miller Enterprises Inc. gave $1,000 to the mayor’s reelection campaign in September 2008, has sold city officials on the deal. Now he must get lenders
on board.

Finding a way to jump-start
the redevelopment of such an eyesore building makes sense, said Colliers Turley Martin Tucker principal Abbe Hohmann.

“We need to have some things happen over there,” she said. “To
get anything going in this market is a positive.”

Demand
strong enough?

Even if the
developer can land financing and build the apartment project, there is no certainty downtown can absorb another 600 units,
said George Tikijian, a leading local apartment broker.

Downtown’s roughly 3,000 apartment units are close to fully occupied today, but several new projects in the
works including the Cosmopolitan on the Canal will add to the supply. Add to that several condo projects, including the 105-unit
Maxwell, that are being converted to apartments because of sluggish sales.

“Six-hundred new units is an awful lot for a market of about 3,000 units,” Tikijian
said. “Even for the strongest housing market, that’s a big increase in supply.”

David Flaherty, the CEO of locally based Flaherty & Collins Properties, thinks the
market will support the project. Flaherty is developing the 200-unit Cosmopolitan, which won a 10-year tax abatement from
the previous mayor, Bart Peterson.

He
said the project is worthy of city incentives, in part because development downtown is more costly than in the suburbs. The
biggest reason is parking.

“Everything
in the financing world is hard to get done today, but with city assistance the easiest to get done is downtown apartments,”
Flaherty said. “And it does make sense for the city to own that garage since it owns Market Square; it secures their value
in the whole MSA site.”

The deal gives
the city an option for 18 months to buy the surface parking lots on the western half of the former bank property for a new
transit center. If the city lets the option expire, Miller hopes to build a second phase of apartments with a retail anchor,
possibly a grocery store.

Downtown
residential real estate agent Kurt Flock would’ve liked to see more owner-occupied homes in the plans, since owners often
have more discretionary income to support local businesses.

“But the fact is, you just need more people,” said Flock, who owns Flock Real Estate Group with his wife,
Kate. “Renters and owners are both good for downtown.” •