Joseph McElroy is the author of the lead article in the November 2009 issue of Planning Magazine. "When Bad Things Happen to Good Plans," reviews how the some public-private partnerships were blindsided by the economy.

Planning Magazine — November 2009

When Bad Things Happen to Good Plans

Delays plague even the best public-private partnerships

By Joseph McElroy

There it sits, impossible to ignore, at a major entryway to downtown Petoskey: a vacant city block diverting attention from Little Traverse Bay, one of northern Michigan's jewels. Called Petoskey Pointe because of its location between two major roads, including U.S. 31, the stalled redevelopment project exemplifies the fallout when bad things happen to good plans.

With the economy in what Nobel Prize-winning economist Gary Becker has called "the most severe financial crisis since the Great Depression," city officials from coast to coast are grappling with ambitious projects that never got off the ground or — worse, perhaps — that stalled when they were partially built.

Petoskey's 6,000 citizens are not amused. One irate blogger wrote to a local newspaper, "They destroyed a bunch of nice buildings and gave us a dirt hole. Petoskey is the laughingstock of Michigan."

Petoskey Pointe is just one example of an increasingly common phenomenon: high-profile, public-private economic development partnerships gone sour, victims of the recession. "It's everywhere," says consultant John LaMotte of the Lakota Group, a planning and design firm based in Chicago. Before the recession deepened, he says, numerous projects were getting under way in both large and small cities as municipal officials became skilled at creating partnerships with private entities.

Real estate deals often go bad, especially in a slow economy. When private buyers or sellers lose their shirts, it's of little concern to anyone except their creditors and lenders. That's the free enterprise system's "creative destruction" at work. But when taxpayer money is part of a deal, everybody is an owner and potential critic. This puts more pressure on the public officials, often planners, who brokered the deals.

Politicians love ribbon-cutting ceremonies, but they detest being embarrassed, and big holes in highly visible locations can hurt reelection chances. The ground breaking for Petoskey Pointe took place in May 2006. In November 2008, the mayor and two council members were voted out of office. Soon after, the city manager retired after 25 years on the job.

What happened? City leaders had their eyes on the property for years, knowing it was underused. So when a team of developers with a good track record approached the city in early 2003 with a proposal for a site occupied by a vacant movie theater, the local officials encouraged them to redevelop the entire block. The block, measuring 300 feet by 280 feet and zoned B-2 (Central Business District), consisted of seven parcels, including the theater and surface parking that was once the site of a car dealership and a garage.

The developers, Lake Street Petoskey Associates, based in the Detroit suburb of Farmington Hills, submitted an initial concept plan for a seven-story building. The proposal was reviewed by an ad hoc committee representing various downtown interests. Some objectors worried that the building would overpower its smaller, Victorian-era neighbors. After revisions and several meetings, in January 2004 the planning commission recommended rezoning the block as a planned unit development.

Almost a year later, in December 2004, with the national economy still doing well, the city council approved the rezoning needed for a PUD on the downtown site. Plans for the $50 million "downtown gateway" development called for 67 condos, 102 hotel rooms, a restaurant, an indoor pool, shops, and two levels of parking, with 193 spaces open to the public and 226 reserved for private use.

But Michigan land-use law allows voters to approve or reject rezonings via referendum. In May 2005, voters narrowly approved the rezoning, but the process delayed the project for several months.

"The delay caused a domino effect," B. J. Shawn, owner of Bearcub Outfitters in downtown Petoskey, told the Northern Express Weekly. "The repercussions ... pushed the project to a time when the economy plunged. The mortgage rate went up, the trade people got other jobs. To have to put it back together when it was moving along — that disruption was a big challenge."

Going downhill

Meanwhile, the city sold its portion of the site — a parking lot with about 50 spaces then worth an estimated $970,000 — to the developer. The city also established a tax increment financing district to help pay for parking for the new development, and the Emmet County Brownfield Authority created another TIF to cover the cost of an environmental cleanup on the former garage property. The site also qualified under a Michigan law that enables developers to receive $4.5 million in business tax credits from the state, according to Amy Tweeten, AICP, the Petoskey city planner. Acquiring the property from seven different owners further slowed the project.

Things finally started to happen in May 2006. The site was cleared and excavated for the two levels of underground parking. But just as the developers were trying to secure the second phase of construction financing, the real estate market was beginning to soften. Construction came to a halt in 2008 after the earth retention system was installed and the developers could not come up with the money to pay the contractors.

Earlier this year, the Petoskey city council ran out of patience and terminated its business relationship with the developers. The city then sued Lake Street Petoskey Associates for breach of contract. On September 21, an Emmet County judge ruled in the city's favor, saying the developer is responsible for paying Petoskey a total of $1.1 million.

Now, with the PUD agreement still in place, it's up to the property owners or their lenders to live up to the terms of the agreement. The PUD included a requirement for a performance bond of half the value of the project or at least $30 million. The developers did not have to submit the bond until foundation work began, but the project never got that far.

Now what? "The current economic circumstances will certainly make any redevelopment projects difficult for some time," says Tweeten. She notes that Petoskey Pointe presents the kind of catch-22 problem common in financing condo developments. "You need a certain amount of pre-sales to get the financing, but it's difficult to sell something without showing progress" — a cleared site, for instance.

Slow start in North Carolina

Think of towels, and chances are you think of Cannon. In the 1960s and 1970s, the world's biggest textile manufacturer was the Cannon Mills Company in Kannapolis, North Carolina, a city of just 42,500, which produced an average of 300,000 towels per day and employed almost 25,000 people. So dominant was the local textile industry that the town took its name from the Greek word for looms — kanna.

James W. Cannon established Kannapolis in 1906, providing housing and retail establishments for his employees, much as railroad car tycoon George Pullman did on the far south side of Chicago. For decades, the town and its leading employer were barely distinguishable from each other.

That tie broke in July 2003 when the company, by then bought and sold several times and renamed Pillotex, finally closed. Kannopolis and the surrounding community saw 4,340 jobs suddenly disappear, the largest one-day layoff in the history of the state. City leaders had to decide what to do with more than six million square feet of abandoned industrial space in the core of its downtown.

Then a miracle happened, or so it seemed at first. In 2004, David Murdock, chairman and CEO of Dole Foods, who owned the textile factory from 1982 to 1986, reacquired the site and announced plans for the North Carolina Research Campus, a $1.8 billion redevelopment effort involving partnerships between Murdoch's companies — Dole Foods and Castle & Cook — and eight universities, including the University of North Carolina system, North Carolina State, and Duke. The center, with a focus on food science, was seen as a way to help Kannapolis make the difficult transition from textile town to scientific hub.

But even with a $150 million contribution from Murdock and approximately $25 million a year from the state, the stagnant economy has made progress difficult. In September, the state slashed the budget of the Nutrition Research Institute, a major component of the research campus, from $7.9 million to $6.8 million, and few of the laid-off factory workers are qualified for the new high-tech jobs.

The research campus's key facility, a 311,000-square-foot laboratory, is open, and a ground-breaking ceremony was held in May for a $26 million biotechnology facility for a local community college. The 62,000-square-foot building had been delayed because of the financial crisis, which slowed financing.

Also complete are the buildings housing North Carolina State's Plants for Human Health Institute and UNC–Chapel Hill's Nutrition Research Institute.

Plans for a 700-home golf course development on the site are now on hold because of the real estate market collapse. In June a major tenant, biotechnical giant PPD, pulled out of the project because of construction delays and an overall slump in business. Local officials say that the company, which has laid off hundreds of workers worldwide, hopes to come to the research campus when economic conditions improve.

The recession is also cutting into support from the state, which has an unemployment rate of 11.1 percent, fifth worst in the country. Research campus officials had been seeking $29.5 million from the state for fiscal year 2010, but probably will receive closer to $22.5 million. Also, the credit crunch and high interest rates have cut into the tax increment financing fund established to provide local infrastructure for the research campus.

In mid-July the Kannapolis City Council approved an alternative TIF strategy. The revised plan would provide $25 million to $35 million in local government investment, says Irene Sacks, the city's economic development chief. That's far less than the original $168 million, although the figure could rise as future economic conditions produce more development. The smaller TIF will probably fund a new building for Cabarrus County's public health authority as well as some infrastructure, she says.

Like their counterparts in Michigan, the North Carolina planners did their homework, but the recession has played havoc with earlier assumptions. A 2006 economic analysis estimated that the North Carolina research campus could create 37,450 jobs in the region by 2032. But the consultant warned that this estimate was based on the community meeting the goals of an earlier companion analysis, which pointed out the need for better schools, infrastructure, recreation facilities, and diversity efforts in order to attract and keep high-tech businesses and employees.

The consultant, Atlanta-based Market Street Services, warned that Kannapolis — perhaps best known as the hometown of legendary NASCAR driver Dale Earnhardt — would be competing with other cities that are "ranked very highly in quality of life, educational opportunities, and other typical municipal rankings."

Although the development is off to a slower start than expected, Market Street CEO J. Mac Holladay remains optimistic. "It's been difficult, but nobody could have predicted what would happen to the economy," he says. As if to prove his point, in June Kannapolis received an Excellence in Economic Development Award from the U.S. Department of Commerce for its response to the plant closure. And, even though construction has been slower than expected, "the job creation numbers are ahead of the schedule we put together," Holladay notes.

Now what?

For decades, economic development experts have stressed that partnerships between private developers and public agencies are the best way to stimulate economic redevelopment. But in light of problems like those discussed above, public-sector planners might be more cautious about committing to such relationships.

Still, LaMotte and Holladay say city officials shouldn't be afraid to think outside the box in looking for solutions. Helping elected officials find solutions is where planners can really shine, LaMotte says, "because we planner types are comprehensive thinkers and resourceful. We also have thick skin."

Holladay also urges planners to think big, especially when working on projects like the North Carolina research campus, which he describes as "transformational." To a large extent, local officials are creating a new city, he says. "It's about having a different level of anticipation. It's about thinking big and asking what we need to do to get there. What will the demands be?"

Joe McElroy is the principal of McElroy Associates, a consulting firm based in Naperville, Illinois. He is also the vice chair of the city's planning commission.

Resources

Images: Top — A fenced-off, weed-strewn hole in Petoskey, Michigan, is a constant reminder of a failed redevelopment. Photo M. Chris Leese.

Bottom — The North Carolina State's Plants for Human Health Institute is one of the several facilities that make up the new North Carolina Research Campus in Kannapolis.

Photo courtesy N.C. State University