Dear OurJax Members:
Thursday, a majority of the City Council not only turned a deaf ear to the overwhelming opposition from the community to the current Lot J deal, they also ignored expert advice on what it would take to make the proposal fair to taxpayers.
By an overwhelming margin, the council voted down efforts to remove or alter the $65 million bread box, no interest loan and provide financial claw backs in the event the Jaguars leave Jacksonville.
Tarik Bateh is a Senior Director with JLL Capital Markets where he focuses on joint venture equity, debt placement, investment sales, and advisory projects throughout Florida and nationally.
A Jacksonville native and resident, Bateh has over 15 years of experience in real estate transactions, development, operations, and law as an intermediary, principal, and attorney encompassing over $2 billion in capital investment across all major property types including multifamily, retail, hospitality, office, industrial, land and mixed-use.
OurJax suggested to Council member Michael Boylan that Bateh be given an opportunity to address the council. Council President Tommy Hazouri agreed.
Bateh said there are four major Red Flags with the current deal, and he proposed solutions to protect taxpayers.
Bateh addressed each of the four Red Flags in further detail. The following is a transcript of his remarks.
- Council and the Public have been Deprived of the Opportunity to Review Due Diligence Information and make an informed decision.
- Developer’s Own Cash Equity MUST go in First.
- COJ should give a Pre-Determined $ amount to Developer upon completion, based on a Gap Analysis with Due Diligence Information, to allow the Developer the Opportunity to make a reasonable profit.
- COJ must retain long term ownership of the land via a Ground Lease with a Termination Option should the Jaguars, as the Anchor tenant, leave for any reason.
Bateh addressed each of the four Red Flags in further detail.
We need to understand specifically and EXACTLY what will get built, what it will cost, and what it will be worth. We need design plans, construction budgets, financial projections, and market studies, among other basic items. This is called Due Diligence. You can’t get a mortgage on your house without this most basic information. This is standard, established practice. There are no exceptions. It has not yet occurred with respect to Lot J.
To date, and despite numerous requests, this information has not been provided to the Council Auditor, the DIA, City Council members or the Public. This information is always studied carefully on every deal, everywhere, always – with no exceptions.
Without this basic information, we and you have no way to verify whether or not the $395M public investment is appropriate.
Without this basic information, you as City Council Members have been DEPRIVED of the opportunity to fulfill your fiduciary duty to consider relevant facts in making a policy decision. You, and the people of Jacksonville, deserve that opportunity.
The solution is very simple: Developer should be able to share this information with the push of a button, and it should be verified by qualified experts.
Today the Developer confirmed that they REFUSE to share this information.
DEVELOPER CASH EQUITY GOES IN FIRST SO THE DEVELOPER HAS SKIN IN THE GAME
As currently structured, the interests of the City and the Developer are severely misaligned. To fix this, the Developer needs to invest it’s $225M of Cash Equity into the Project FIRST. Before COJ funds are used.
In any Partnership, BOTH parties need both something to Gain and something to Lose. A Partnership involves a SHARING of both Reward and Risk. The current deal has NEITHER. The Developer has practically All of the Reward and None of the Risk. The City has practically All of the Risk and None of the Reward. This is NOT a partnership.
The current deal does not require the Developer to invest any of its own money – ZERO.
Similarly, the long-term management agreement for the Live! Component lacks adequate performance standards. If the Manager of Live! is not doing a good job, COJ should be able to remove and replace a poorly performing Manager without penalty. This is an established, standard provision contained in all similar projects.
COJ PAYMENT AT COMPLETION
Along these lines, COJ is not a Construction Lender and should not be in the construction lending business. Being a construction lender is complicated, is expensive from a time and money perspective, and carries great risks to the city during the process.
What COJ can do instead is give the Developer a pre-determined amount of money upon completion of the Project. That’s the most common form of public incentive used, and it has proven successful in cities like San Diego, Los Angeles, Philadelphia, Detroit and others. It has proven far more simple and far more effective than other more complicated methods.
The BIG QUESTION is, how much money should COJ give Developer? We can answer that question ONLY by doing what is called a GAP ANALYSIS.
A Gap Analysis looks at a Project’s Cost, a Project’s Value at Completion, and what the Developer’s Profit is likely to be. Historically, the rents downtown have not been sufficient to justify a project’s cost, so the City has to “FILL THE GAP” between Cost and Value with Incentives to allow the Developer the OPPORTUNITY to make a reasonable profit. Not GUARANTEE the Developer a profit.
We are seeing this occur RIGHT NOW with the Doro Apartment project LITERALLY right across the street from Lot J where a $60M apartment project received a $5M incentive from the DIA. Those incentives are less than 10% of the Project Cost. My math on the apartments at Lot J is that COJ will pay for ~70% of what the Apartments should cost.
That means we as a City are telling 2 developers in identical locations that one of them is entitled to less than a 10% incentive while the other is entitled to a roughly 70% incentive. We are we telling one developer it must provide complete due diligence to get less than a 10% incentive while we are telling another developer it need not provide any due diligence information and can still get a 70% incentive. That raises a Red Flag.
The Doro Apartments got those incentives after providing full due diligence and working with the DIA to conduct a Gap Analysis. But we can only do the Gap Analysis for Lot J once we have the opportunity to review and verify the due diligence information. The DIA, with the help of independent experts, are well positioned to conduct this Gap Analysis. If adequate due diligence information is provided, this can be done quickly and easily.
In fact, in the DIA’s report on Lot J, the DIA attempted to sketch out a conceptual Gap Analysis but was unable to do so properly because the DIA was not afforded access to any Due Diligence information. So, the DIA’s exercise was, unfortunately, just an abstract academic exercise.
As has been pointed out many times, we don’t need more academic studies. We need hard facts so that we can make hard decisions and move our city forward in a responsible manner that looks out for the taxpayers by doing our homework in advance.
Lot J’s location in the middle of the City Owned Sports & Entertainment District makes it a long term, strategic property to the City. The City should not permanently give up ownership over such a strategic property, particularly given the City’s massive property holdings in all directions surrounding Lot J. To protect the taxpayers, the City needs to retain ownership of ALL OF the land under Lot J.
Instead of giving fee simple ownership of the land to the Developer in perpetuity, the City should Lease Lot J for $1 / Year to the Developer for the expected useful life of the Project, which should be approximately 60 years. This is known as a Ground Lease. It does not cost the Developer anything. It does not change the economics of the Developer. And it is used every day by COJ and other government entities all across the country who want to spur development but need to retain long term ownership and control of key pieces of land. This is an established, standard business and governance practice.
Given that the City would not consider incentives of this magnitude in this location without the Jaguars playing at the adjacent stadium, the City should have a Springing Termination Option such that if the Jaguars were to leave, then the City would have the option to terminate the Ground Lease and related agreements and regain control of its Property.
It’s a simple, elegant, and FAIR trade off: a Ground Lease does NOT change the economics to the Developer but it DOES protect the taxpayers. A Ground Lease is a win-win for both the City and the Developer.
The City Council will vote Tuesday on final approval of the Lot J deal. It will take a super majority, 13 votes, to pass. OurJax urges our members and the community to continue contacting council members and urge them to scrap this bad deal and start over.
Michael J. Ward