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The Price of Patience

The delayed condo-retail portion of the Harrison project could be costing Fort Wayne more than just revenue

By Michael Summers

michael_summers@fortwaynereader.com

Fort Wayne Reader

2009-11-09

The Fort Wayne City Council’s meeting on October 27 was the Biggie.

That was the session where council was expected to pass — or not — the city budget; it was also the session where city council members offered up their recommendations to trim the budget.

To make an involved story simple, the night wasn’t without its drama, most noticeably in the debate over a possible salary increase for some city employees (to simplify once again, a 1.5% raise was eventually cut to 1%, the budget was passed, etc.).

But another bit of drama came earlier in the evening, when the frustration felt by some members of city council towards the delayed condo-retail phase of the Harrison Square project seemed to reach a critical point.

Councilmember John Shoaff (D-at large) proposed cutting the budget of the City’s Redevelopment Office from the $550,000 they were asking for down to $200,000. Also, Shoaff proposed that the city go after Barry Real Estate and Hardball Capital for what’s called “liquidated damages” — basically, the money that Barry Real Estate and Hardball Capital (owners of the TinCaps) agreed to pay in the contract with the City of Fort Wayne if the project was not completed in time.

Shoaff says collecting those liquidated damages would make up the difference in the budget for the Redevelopment Office; help the city recoup some lost revenue; and light a fire under the developers to get the project done.

And if a fire were lit under the developers, it could be quite a conflagration: up to $5,000 per day, according to the contract between the City and Barry Real Estate/Hardball Capital. “As I read the contract, there’s a string of grace periods which add up to as much as 180 days but no more,” Shoaff says. “So they (Barry Real Estate) were in default as of June 1st, and six months later they start to owe the city $5k/day until they have performed.”

The proposal was defeated by a 5-3 vote; Shoaff, Mitch Harper (R-4), and Tom Smith (R-1) voted for it, while Tim Pape (D-5) abstained. But Shoaff says he didn’t really expect the proposal to go through. “I know what the voting patterns have been in the past,” he says. “I would have pleasantly surprised if it had passed.” Rather, he was trying to make a point: the failure of the developers to follow through on what they promised in the contract they signed with the City is a very serious issue, and no one seems to be giving it the proper consideration.

“It’s a real serious matter, because the City poured so much of their available financial resources into this project,” Shoaff explains. “For 28 years (the City is) going to take half the income from the TIFF district at Jefferson Pointe, and we are not going to see a TIFF of that magnitude for a long time. Also, all of the Creed money for downtown is going to be absorbed by paying the interest on that project for 15 years.”

Shoaff adds that the City also used — without consulting city council — a $5 million bond that was intended for the never-realized Ray and Joan Kroc Corps Community Center project. “This is many millions of dollars that we could have spent in other useful ways to revitalize downtown,” Shoaff says. “Because of what it has cost us, because of the losses we’re suffering, I feel it’s important that the City honor that contract.”

These “liquidated damages” that are in the contract are very common, and are basically an agreed upon estimate of what (in this case) it would cost the City financially if the project were not completed in time. Shoaff points out that the contract does not call the stipulated $5,000 per day a penalty or fine, but if you’re thinking that it sure sounds like a penalty or fine… well, you’re not alone. Greg Leatherman, Executive Director of Redevelopment, argued during the city council session that imposing those “liquidated damages” on Barry Real Estate would be tantamount to firing the developers. “I think it’s counterintuitive to think that while you’re fining them on one hand, they’re going to work harder on the other,” Leatherman told FWR. “If Barry Real Estate stopped working, and Hardball said ‘we’re not going to do this project; we can’t’ then we would have that as a hammer with which to hammer them. It would be used by us if we knew that they were doing nothing, that they’ve walked away from their responsibilities.”

And they haven’t walked away from their responsibilities, insists Leatherman. The developers are working hard to secure tenants, and he’s seen a great deal of progress in the past six months. “Clearly we’d like success, but part of the success is a function of the economy and our economic requirement,” he says. The economy has obviously taken a major downturn since the project was officially launched. “We had the worst banking meltdown in the history of our country since the great depression,” Leatherman says. “Lending stopped. Leasing stopped. People stopped looking at buying condos and certainly banks stopped thinking about lending to them. That has been, at the core, the reason for the delay with the project. It’s been a failure of our economy, and a failure of banks to make loans available.”

Yet recently, Leatherman says he has seen some positive changes. “In the last six months, there have been some significant developments with potential tenants — both retail as well as office — where when they sit down and look at the numbers, they don’t run away. They say ‘this looks good. This is a price I’d be willing to pay.’ Six months ago, (the developers) were having a hard time getting anyone to say ‘we can do this.’”

“I know who these conversations are with, I know what their reputation is in the community, and if they’re really — and I know they are — seriously considering the opportunity to spend that kind of money to rent space in the buildings, we’re making real progress.”

Leatherman seems to have become the City’s default flak-catcher when it comes to the delays in the retail/condominium phase of the Harrison square project — though for the record, he doesn’t like the description and says it’s not accurate. Still, it’s primarily been Leatherman who has appeared at city council meetings and fielded questions from media and an impatient citizenry. “I know people say that there’s always a lot of happy talk from the Redevelopment Director, but I know that it’s going to happen,” he says.

Leatherman isn’t permitted to give the specifics on the deals he knows are in the works, but says that the fundamentals of the original vision of The Harrison are still in place. “We’ve held fast to three different facts. First, the first floor has to have occupants that have hours that extend beyond normal business hours. Second the property must be built with the same or better quality that already exists out there with the hotel, parking garage, and ballpark. And finally, we’d like to see at least a three-story building go there. That essentially assures us of the $14 – $15 million investment we were looking for.”

He adds that the second floor might be office space, but that they’re still looking at the third floor as being residential, though he’s not sure if it’ll turn out to be rental or condo units.

Councilman Shoaff readily acknowledges that he has been an opponent of the Harrison Square project almost from the beginning, and says he is seeing some of his specific fears realized. “I did a lot of homework on this issue,” he says. “Economists have studied the impact of stadiums on cities, and they’ve warned that you can actually decrease the affluence of a community, because they say the dollars citizens set aside for entertainment is more-or-less a fixed amount. They spend their money going to a ball game, they won’t spend it at a local restaurant or a bowling alley or whatever. If the money goes into the stadium and then from there the money goes out of town to the team owners, then you’ve got a drain on your city’s resources. We have a double drain here. We have people paying good money to go to the games and buy food there. All profit goes to the team owners and their concessionaires, who are out of town people.”

He continues: “The contract is very badly written in my opinion. Any money the city earns, and it’s limited, has to stay in a capitol maintenance fund for the stadium. So not a single dollar can come out of that stadium for the benefit of the city, but considerable dollars leave the stadium to the benefit of the team owners and concessionaires. So you not only have city money going south — literally — but you have local suppliers and vendors losing business. It’s a bad deal, and I’ve said that at the council table, and they just sit there and kind of smile.”

Leatherman emphasizes that even though he disagreed with Shoaff’s proposal, that doesn’t mean “liquidated damages” might not need to be imposed at some point. He is also willing to consider adjusting the management agreement. He just thinks it’s too powerful a tool to be brought out now, especially considering the progress he’s seen. “We can go to the table, and because of that $5,000/day hammer, they have to talk to us,” he says. “But we don’t want to ruin a great relationship with a great stadium, a successful baseball team, and so we’ve got to very careful there. That doesn’t mean we won’t do it; that doesn’t mean we won’t do it even when they start the construction. Once we identify what it is we’ve lost because the project wasn’t built until a year later, maybe we can make that part of the adjustment if we choose to, if we think that’s the right thing to do.”

“What I’ve tried to say all along is that we’re not without power and control over the situation, but we choose to take a more patient view, knowing that part of the reason we don’t have this building built is not the developers failure to act, it’s the failure of the market to sustain commercial investment right now.”

Mitch Harper (R4) was one of three council members who voted for Shoaff’s proposal. He didn’t expect it to pass, and says his vote wasn’t an enthusiastic embrace of the idea, but that like Shoaff, he felt it was important to send a message. He points out that, all talk of “current economic conditions” aside, Barry Real Estate and Hardball initially said they had enough liquidity to self-finance the project. “What they told us is, they’re going to do it like a regular real estate project and they have to have a certain number of leases in their back pocket before they’ll begin construction,” says Harper. “But part of this discussion was that they’re going to take this great lease because they had enough liquidity in either Barry Real Estate or the other principal that they could go ahead and self-finance it. That is, they wouldn’t have to get a lender to agree.”

But more to the point, Harper believes that by not imposing liquidated damages, Fort Wayne is sending mixed signals. “I don’t think liquidated damages are unreasonable, and I know that there are a couple redevelopment commission members who don’t think so either,” he says.

Maybe $5,000 a day is a little onerous in this economy, but as Harper explains, our patience in not collecting for liquidated damages is itself something of value, and at least that forbearance should be negotiated. “The City could agree to forego that $5,000/day in liquidated damages from this period until built, but as a price for that forbearance, we’re going to collect… $250/day, whatever it is,” Harper says.

“Grown-ups would negotiate a price for forbearance,” he adds. “We’re sending a signal to every developer that we may do business with in the future that our contract terms are something we won’t follow because we’re too hungry not to offend any developer. At the end of the day, you have to have city government that’s taken seriously, not by these folks, but anyone in the future who is dealing with us, and I think Fort Wayne looks a little too much like someone desperate for a date.”

John Shoaff adds that the city government needs to be taken seriously not just by any future business partners it may work with, but by the populace. “That’s the other issue here, the credibility with the citizens,” he says. “Of course, not many citizens bought into that project anyway; I heard that while I was campaigning. But nonetheless, the City was saying to them, ‘this is the contract, we think it’s fair because the other side will have to make good one way or another.’ Now the City is saying ‘you don’t have to pay us’.”

“I have been disturbed that people see this issue all in black-and-white,” Shoaff continues. “As opposed to it as I have been, I think we should make the best of it now that it’s here, but the people who promoted it should be saying ‘okay, we have to acknowledge we have a problem’.”