Developers Says Both Or None

September 8, 2006
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GRAND RAPIDS — When the Downtown Development Authority meets this week, members could get an update on negotiations concerning the possible sale of the board’s Area 4 parking lot and also get updated on a new proposal for the neighboring city-owned Area 5 parking lot.

Both offers come from the same firm, KG Development of metro Detroit, and the second proposal is dependent on the first.

KG Development is a joint venture between Gershenson Realty and Development of Farmington Hills and Kirco Development of Troy. Last spring, the company offered the DDA $3 million for 87,000 square feet of the 122,000-square-foot Area 4 lot just south of Van Andel Arena on Oakes Street SW, and entered into an exclusive negotiating contract with the DDA for the lot. The agreement ends in less than three weeks.

KG Development would like to build a movie theater with retail space on the lot with parking above the complex. The theater would have from 12 to 14 screens, and retail would occupy 12,500 square feet in the building. The developer has offered to build 860 parking spaces on four levels, including the roof.

“We’re working on it, but we’re not ready to do anything on it. We really don’t have a deal yet,” said DDA Executive Director Jay Fowler recently.

“We are hoping to bring something to the DDA by October,” he added.

KG Development was the only firm to reply to an RFP for the Area 5 lot, which is immediately east of the DDA’s Area 4 lot. The company proposed to build 37,000 square feet of retail space, 86 condominiums, a boutique hotel with 114 rooms, and 445 parking spaces in a nine-story structure on the nearly 69,000-square-foot lot. Of those spaces, 295 would be for public parking and 150 would be reserved for the condo owners.

The firm has offered the city a “net” deal of $1.5 million in cash and the 295 parking spaces for the lot. But the proposal didn’t list a per-space cost for the parking, and the city didn’t include its asking price for the lot in the RFP given to the media. Nor would the city reveal the price when the Business Journal asked. In addition, parking commissioners were firm in requesting 460 public parking spaces for the site.

The development would have its front door on Ionia Avenue SW, the street on the lot’s east side. Parking for the condo owners would be in the basement and on levels two and three for the public. Retail shops and the hotel’s lobby would be on the ground floor. Hotel rooms would be on the fourth and fifth floors. Most of the condos would be built on floors six, seven and eight. Eight penthouse condos would top off the project on the ninth floor.

But the difficulty for the city is that the Area 5 lot doesn’t get the retail, condos or hotel unless the DDA’s Area 4 gets a theater. So, it’s either both or nothing. At least, sort of.

“Our vision for Area 5 contains three elements: retail, single-family condominiums and a boutique hotel. All three of these items represent long-term planning goals for the city. At the same time, all three elements are unproven in this location. A movie theater on Area 4 would be a substantial draw to all three uses,” wrote Richard Gershenson, principal of Gershenson Realty and Investment, in response to the RFP.

“Without the movie theater, we seriously question the viability of these uses at this location,” he added.

But even if the DDA comes to terms with KG Development on Area 4, and even if the developer finds someone to operate the theater, the Area 5 deal still may not get done.

“Even with the movie theater, we do not believe that the uses we envision [for Area 5] will support the land price requested by the city unless the price is reduced or a substantial portion of the price is attributed to public parking,” wrote Gershenson.

KG Development would build the parking at an agreed-to price and then hand the spaces over to the city, which would own and operate the public parking on the second and third levels.

“We propose a ‘net’ purchase price of $1,500,000 for the site. Under such a ‘net’ proposal, there would be no obligation for the city to repurchase the land rights associated with the parking spaces,” wrote Gershenson.

The going rate for downtown property runs from $50 to $55 per square foot. At that rate, the Area 5 lot should carry a price tag between $3.4 million and $3.8 million. If the price falls within that range, then the 295 spaces would be worth from $1.9 million to $2.3 million (minus the $1.5 million in cash) to the city — or from $6,440 to $7,796 per space.

Either per-space figure would be a cost well under the $27,000 the city has projected for each space in the new ramp it will begin building this year at Commerce Avenue and Cherry Street. That price tag, though, includes the $950,000 the city is paying for the site. Still, the acquisition cost only adds about $3,000 to the cost of each space, leaving a price of $24,000. Spaces on surface lots normally cost $5,000 each to build.

There currently are 565 public spaces in the two lots, and the developer proposes to double those spaces to 1,155.

Should KG Development reach agreements with both the DDA and the city, the firm would develop the Area 4 lot first and get work started only after the city opens the ramp at Commerce and Cherry, which is set for the end of next year. Gershenson said it would take 18 months to build the movie complex, and the Area 5 development would get started a few months after the Area 4 project is done.

Two years is the construction timeline for the Area 4 mixed-use building, estimated to cost from $45 million to $50 million. Fishbeck, Thompson, Carr & Huber and Commerce Realty, two Grand Rapids firms, are working with KG Development on the projects.

“In summary, we do not believe Area 5 is ready for the type of development envisioned without a synergistic development on Area 4, such as a movie theater proposal we have worked so hard to achieve,” Gershenson wrote.

“Accordingly, the offer set forth in this letter is contingent upon us moving forward with the Area 4 development for a multi-screen theater.”    

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