Swap Realities: Risk, Return, and Judgment

November 18, 2011

I received the following message from Winter Park City Commissioner Steve Leary today and thought many citizens would welcome his detailed view of the facts and circumstances surrounding the city’s recent approval of a land swap of the State Office Building property at the corner of Morse and Denning (SOB) for the Progress Point property (PP) located on Orange Avenue.

As with many city decisions, this one has its share of disagreements and controversy. While some seek to exploit controversy to engender resentment and foment discord, others are focused on serving our long term interests with respect for the facts and without need for attention.

Regards, Pete Weldon

From: “Steven Leary” <[email protected]>
Date: November 18, 2011 1:34:29 PM EST
To: “Steven Leary” <[email protected]>
Subject: To answer some questions

Friends,

What started out as a quick note to answer questions we discussed during the last Commission meeting, has quickly grown.  Feel free to share the details of the deal specifics below with friends and neighbors.  I know it is long, but hopefully it answers many questions.  If I do not see you before, have a wonderful and safe Thanksgiving.

On Monday evening the City Commission voted to move forward with the deal between Progress Point LLC (PP LLC) and the City of Winter Park to develop the State Office Building (SOB)property.  Before I go into some of the relevant aspects of the deal, I wanted to offer my perspective on the state of our great city.

Our city is strong.  Just over two years ago, our general fund reserves were hovering around 6%.  Since then without ever raising taxes under Mayor Bradley and during an absolutely abysmal economy, we project to have 26% of our annual operating budget in reserve at the end of this fiscal year.  I attended a League of Cities event earlier this year with representatives from cities across the entire state.  Winter Park was the only city with a reserve goal of 30%, the only city with over 20% already in reserve and one of a very few cities with reserves over 10%.  We have addressed a near term issue with our Emergency Services Pension and are working towards a long-term solution so as to not burden future generations.  The Electric Utility actually refunded money to Winter Park tax payers this year and will be paying back their loan to the General Fund a year early.  The Alfond Inn is expected to break ground soon and Wawa, a world class, family owned, $7 billion company has chosen to open one of their first Florida locations in Winter Park.  Vacancies on Park Avenue are estimated to be at 4%, businesses are opening on Orange Avenue and Hannibal Square and we are seeing greater activity in our residential real estate market.  Our parks look wonderful, infrastructure repairs are underway and we are proactively addressing our major corridors.  People and businesses are once again seeking out Winter Park and our city staff is working hard to accommodate all within our framework.  We are strong due to the stewardship of our staff, our residents, our businesses and guests to our city.

Now the State Office Building (SOB) / Progress Point (PP) deal:

Yes, we are extremely fortunate.  And while we do not need to sell anything it is the Commission’s responsibility to make decisions based on the best short and long term interest of the citizens of Winter Park, regardless of the name of the party making the proposal.  I can tell you that the majority of the Commission did just that.  We voted for a good deal for the city, which I will break down below.  No deal is perfect and with most every transaction both parties walk away feeling as though they could have done better.  Some aspects of the deal that are seemingly receiving much attention due to the dissemination of partial truths to fit a particular narrative should be answered and I hope to do just that here.

Does the Progress Point site have arsenic contamination?  Yes, but PP LLC has publicly accepted responsibility for the complete remediation of the contamination in accordance with state requirements.  As well, the State Office Building has asbestos contamination.  PP LLC has also accepted responsibility for the complete remediation of this contamination as well even though it is on OUR property.  In most transactions each party is responsible for their own remediation.

Can we guarantee that the proposed Class A Office building will be built or occupied?  No.  From the outset of the negotiations with PP LLC the Commission has pushed for a strict ‘reverter’ clause wherein if the building is not built in a timely manner, the SOB property would revert back to the city’s ownership.  PP LLC has insisted that they would be unable to secure financing if we included a too stringent reversion clause in the contract.  So, our attorney and staff have worked to include language in the Exchange Agreement between the city and PP LLC, to allow for the city and PP LLC to essentially ‘swap back” properties within a specific timeframe if conditions are not met.  It is a softer reversion clause than many would prefer, but it provides some assurance and keeps us moving forward.  It is not that I did not want the most strict reverter clause possible, it is that it would have killed what is overall a good deal for the city.  PP LLC will also put up a letter of credit that the city can draw on as a penalty if certain deadlines are not met.

People have complained we have no use in mind for the Progress Point site, so why would we want it?  Following that line of logic, then why would we want the State Office Building site?  We have no plans for the SOB either nor I would argue does the public have much of an appetite to finance a new municipal project.  Now we have a respected development partnership, offering to build Class A Office space, have it 60% occupied upon completion with world class tenants, contributing hundreds of thousands of dollars to the city AND we maintain a valuable piece of property along a rapidly redeveloping corridor.   The alternative is to have two sites undeveloped with buildings that are eyesores contributing ZERO dollars to the city.  This makes no sense.

The State Office Building is worth much more than Progress Point.  Yes, and no.  Much more is relative.  The latest appraisal, performed by one of the most experienced and respected appraisers in the region, who was jointly engaged by the city and PP LLC, has the SOB and PP values at $4,575,000 and $4,400,000 respectively.  You can argue this valuation if you choose, but read it first.  I too would have been suspect of this valuation initially but I spent many hours with it and listened objectively to the presentation from the appraiser.  I do not want to get caught up in the appraisal as there will be no way to convince some.  To their credit, even with the new appraisal closing the valuation gap to just $175,000, PP LLC did not pull any additional consideration from the table.

The SOB is 5.0 acres while the PP site is 3.733.  However, if we abandon a piece of city owned land currently bisecting PP, we pick up 0.8 acres to increase the total acreage to 4.533 acres.  The SOB comes with a conservation easement on the site which is approximately 0.5 acres.  So their useable acreage is actually 4.5 acres.  This evens the acreage.   

On a square foot basis the Progress Point site carries a higher valuation ($27/ sq ft vs. $21/sq ft for the SOB).  If we pick up the aforementioned 0.8 acres on the PP site, and as confirmed last evening with the appraiser it would be valued at the same $27/sq ft as the rest of the site, we add $940,896 in value to PP.  Which would increase the total value of PP to $5,340,896 (versus $4,575,000 for the SOB).  Again, argue the valuation all that you want, but read the appraisal first.  Appraising is not a solely quantitative exercise.  On Monday evening, one of our residents who is a highly respected developer with projects all over the country conveyed that appraising is science AND art.

Doesn’t the County Appraiser value the SOB higher than the PP property?  Yes, absolutely.  Because we are a municipality we do not pay taxes on the SOB.  If we did we would be in the Property Appraiser’s office arguing the inflated valuation of the SOB.  I would rather have staff spend time running the city than arguing over assessed value when it has no affect on our city finances.  If the Property Appraiser’s valuations were actual reflections of the market, we would all use them to negotiate transactions, and put the entire property appraising profession out of business.  The PA office’s rationale is for tax assessment purposes.  These assessed values are not commonly used in transactional appraisals.

If PP is so great, why don’t they just build their office space there?  Simple, the tenants they are in discussions with do not want to relocate to that site.  The SOB site is more appropriate for Commercial/Office which the CNL/PP partnership and brokerage team have greater interest and experience in developing.  PP is much more suitable for a mixed-use development.  Fortunately for the city, mixed-use is currently and seemingly for the near future, in greater demand than office space and is reflected in the square footage price, again as confirmed Monday night.

Why do we want to own PP?  Drive up and down Orange Avenue with an objective eye.  The entire section from Einstein Bagels to Fiddler’s Green is experiencing a re-birth.  The street and sidewalks look great.  Trees are filling in.  Businesses are opening and/or renovating.  It is a key gateway to our city for our friends and neighbors to the South.   Now that we have the SOB property planned for a Class A office project, we can control another major piece of property for development.

Isn’t it too close to the railroad track for development?  We have an entire city surrounding railroad tracks!  I have not heard a single property owner along Park Avenue complain that no one is interested in buying their property due to the proximity to the rail line.  As well, we were told on Monday that many properties in the region that sit adjacent to rail tracks are being acquired lately. 

Isn’t the SOB better situated to the SunRail station than PP?  No.  Each is 0.7 miles to the soon to be built station.   I leave it to each of you to judge which is a better walk to and from each property, through Rollins Campus or along Morse/Symonds Avenues.

Shouldn’t we wait until the market picks-up?  Maybe, got a crystal ball?  We have a developer willing to accept the risk to develop a piece of property during an extremely difficult economic environment.  They will be relocating hundreds of high-paying jobs.  They will be building a Class A project.   Already we have heard others are again interested in moving forward with other projects along Denning due to this activity.  Look what successful projects have done for their neighbors: Dexter’s, Hannibal’s, Chez Vincent are major reasons other restaurants have/are opening in Hannibal Square.  The Ravenous Pig has transformed their block.  The MeatHouse, Woof Gang Bakery, Floyds and others on the Northern end of Orange have spurred other interest.  There is reason to believe that a new building on the site of the SOB property can do just that.

If we wait, we may pick up more dollars from the sale of the property in the future.  Most professionals that I have spoken to do not believe the Commercial Office market will surge back anytime soon.  We will also most likely miss the opportunity to retain another major piece of real estate the size of PP so close to downtown.  And if we wait 10 years to have the valuation on the SOB rise from $4,575,000 to $5,575,000, will that have been worth it?  And will someone even come forward to offer that much?  All of the tax revenue, utility revenue, job creation, additional projects spurred by this I would argue would be much more valuable over that 10 year period.

Weren’t there other offers or the site?  Yes.  We had $1 million, $1.5 million and $6 million dollar offers.  The other offers were for residential projects which would have more heavily impacted city services, and the first two were for much less money.  The higher valued offer would have required a significant density increase on the site as well as a change to the Comprehensive Plan.  The deal that we have approved is for the highest value, with the least impact on city services and requires no change to the Comprehensive Plan.

What about the deal last year to lease the property and have RLF remain in the city?  I was not on the Commission last year during what is commonly referred to as the RLF deal, but I believe that these two deals need to stand on their own.  However, because many have asked, the Progress Point deal is much stronger.  The current deal is for roughly twice the dollar value, with additional consideration AND transfers a piece of valuable, developable land to the city.  Some would argue that the PP deal is a sale versus a lease and the city would have still owned the State Office Building under the RLF deal. Rubbish.  A 70 year lease (50 year lease with two, 10 year options) is a sale.  I would have liked to retain RLF as a tenant in our city, but agreeing to a sub-par deal based on the emotional equity of a long-term business was never in the best interest of the city.  Supporters of the earlier deal will also claim that the SOB was the only Winter park office space available for their tenancy.  Again, rubbish.  This ignores the FACT that there are vacancies and approved plans which could easily have accommodated their needs; e.g., Adventist building on 1792, Northrop Grumman on 1792, expansion of their current office space, etc…

What are some of the other deal highlights?  Glad you asked:

One time building permit, water and sewer fees are estimated at $378,587.  As well, Progress Point LLC has agreed to contribute an additional estimated $300,000 in net present value, to the CRA over the course of the next 14 years.  We also expect annual tax and fee revenues to total $141,242 and annual net utility revenues to conservatively total $20,000.   

This is more than a simple land swap.  This is a transaction in which the city of Winter Park trades a piece of property valued at $4,575,000 for another piece of property valued at $4,400,000 and upon the road abandonment, the one-time fees, the additional contribution to the CRA and annual tax, fee and utility revenues increase the value of the deal by $1,780,725 in favor of the city.  There are other considerations such as the expense to demo the State Office Building ($100,000 net value) and the environmental easement ($343,000 value) that I have not even factored in.   

As well, the counter party to the transaction is prepared to build a Class A Office building for two well respected companies that will bring hundreds of high wage jobs to our city.  We remove a major eyesore from our city and we hopefully help to jump start development along Denning Avenue.  Some may not like this deal, and I do appreciate that perspective.  But to claim it is a bad deal, to suggest that there is some grand conspiracy at work, to misinform is disingenuous at best.  The rumors will start and the whisper campaign will proceed, after all it is campaign season.  But challenge the rumors by asking for full facts, not half truths.  

In conclusion, to my friends and neighbors that disagree with me on the deal, thank you for at least taking the time to read through this note.  I sincerely hope that you look at the deal objectively, look at the Progress Point site objectively, look at the revenue that a new project will bring into the city, look at the new jobs created from the development as well as by the new tenants and continue to look not just on our past, but on our future as well. 

Some will continue to tilt at windmills. Some will attempt to convince you that the sky is falling. Some will focus on the minutiae rather than the big picture. I believe that the majority of this Commission will maintain focus and will continue to work to build on our great past and create the future Winter Park in its image.

Best — Steve


14 Responses to Swap Realities: Risk, Return, and Judgment

  1. Now it makes sense……………thanks.

  2. Don Thompson says:

    “Now that we have the SOB property planned for a Class A office project, we can control another major piece of property for development.” That statement, alone, provides reasonable justification. However, most of our citizens are not sufficiently informed to make a judgement. What Steve has written helps. Thanks

  3. martin kessler says:

    Oh,well. I always envisioned the SOB as a place for a new ,grand, elegant city hall. That would have been something that is done for the sake of the city–to make a statement of who we are, to make us proud. Forget the “business talk” of jobs, revenue, taxes, the talk of money changers–we are not a business organization doing flashy money-making deals –we’re not desparate for money. We are a government and Winter Park is a special City. That would be the leadership I would have liked to admire.

  4. Martin, I respect your sentiment but offer that a new city hall will cost about $12 million without land cost, and a new library will cost about $12 million without land cost, and a city funded arts and performance center will cost about $12 million without land cost. Shall we have a referendum to tax our citizens to build any of these now? (Serious question, any takers?)

    The “business talk” you refer to, not sentiment, is exactly what drives the reality of what we can and cannot do as a city.

    With this swap deal the city ends up with the same acreage in an area of equal zoning limitations along with the opportunity to add quality redevelopment in the near term that fits Winter Park at the SOB location. There is nothing “flashy” about it.

  5. The fact that very high end paying jobs / employees
    Are going to be occupying a lot of new
    space in down town has a very long tremendous positive
    impact on our city ?it’s like turning on an extra cash pump
    to benefit the city , this deal is a no brainer , this will
    be a catalyst for positive economic flow
    into out city

  6. Roland Lee says:

    From what I have read in the newspaper and what you have explained so thoroughly here, the Winter Park City Commission has pulled off a very good deal for the city. Congratulations!

  7. Roland, to be clear …. Commissioner Steve Leary explained it.

  8. Suzanne Musashe says:

    Thank you for your detailed explanation. Hopefully all the expectations of the new owner will be fulfilled. High paying jobs would benefit many aspects of our city for all businesses.

  9. Richard delater says:

    Several observations/remaining questions:
    I understand and concur this is a reasonable and maybe a good deal for the city;
    If a new library is approved, it may very well be the last brick and mortar public library
    built in the US … going Kindel these days;
    A grand new City Hall would look just fine on the PP site … if we actually need a new
    City hall;
    Why are the new professional non-guaranteed jobs better than the actual RLF
    professional jobs we are sending to Baldwin park??

  10. Dick, Read this post: http://www.winterparkperspective.org/2011/02/04/whose-money-is-it/.

    The city isn’t sending RLF jobs to Baldwin Park. RLF made that decision for themselves as there was other suitable office space available for them in Winter Park (for example, the Crosby Quality College/Adventist building on the lake at 17/92 and Morse). Also, there is nothing that says RLF won’t be back in Winter Park in the future.

    There were no assurances that the previous proposed lease of the SOB property would have retained RLF, only an agreement to sign a lease the city could not see. There is also no assurance any building will be built and occupied in the near term on the SOB property. The only sure thing is that there is no sure thing. Moving on….

  11. Tom Lawton says:

    Thanks, Steve, for your complete explanation, and Pete, for forwarding it to many of us “Winter Parkers.” It makes me proud to live in a city where so many citizens care about our future.

  12. Pitt Warner says:

    If I were a commissioner, I’d recommend putting a sign on the SOB property for 4 months and sell it for cash. $1, $100,000, $1,000,000 or $10,000,000. Whatever it brings in today’s market. There would be no whispers or rumors, The development would succeed or fail on it’s own. City would receive impact fees and utilities. The Progress Point property would not be a city issue, like the SOB has become. Then the commission can focus on delivering services to residents.

  13. This is the most detailed overview I’ve seen yet regarding this deal, I wish it had been explained this well prior to the final vote. I just have 1 questions, who are the ” two well respected companies that will bring hundreds of high wage jobs to our city” mentioned in Steve’s letter?

  14. Heather,

    A couple notes of clarification…

    Steve Leary’s letter above was sent by him and a link to the letter sent by me to many people on November 18th. So, it was available before the final vote on November 28th. Also, many points made in support of Commissioner Leary’s judgment and opposed to it were discussed at the November 28th commission meeting prior to the final vote.

    The representative of CNL mentioned Brasfield and Gorrie (http://www.brasfieldgorrie.com/) and CNL Bank (https://cnlbank.com/) as the likely tenants at the city commission meeting of October 10, 2011. There is no guarantee these companies will commit to a lease.