City expected to advance 6-story office building plans – C&G Newspapers

By Victoria Mitchell

Commissioners were expected to take the next step toward finalizing development agreement documents for a new six-story office building in the existing City Hall parking lot June 26. (Rendering by Krieger Klatt Architects; provided by the city of Royal Oak)

Posted June 26, 2017

ROYAL OAK Commissioners are expected to give their go-ahead Monday night to lawyers tasked with finalizing development agreement documents for a new six-story office building in the existing Royal Oak City Hall parking lot.

The vote to finalize the negotiations for a $36.25 million, Class A 142,523-square-foot building is scheduled for the night of June 26.

The preliminary, agreed-upon document with the Central Park Development Group headed by Ron Boji and Sam Surnow would still have to go before city commissioners for final approval, which the commission estimated would happen in late July or early August.

Commissioners met June 21 inside City Hall for a special workshop to discuss the suggested terms between Royal Oak and the development group. The office building would be built on city-owned property.

Terms included selling the property valued at $900,000 to the Central Park Development Group for $1 and providing a $5.5 million financial ask of the city. The money would not be paid directly to the developer, but rather into an escrow account and accessed by contractors once the Central Park Development Group spends $8.5 million of its own money on the project.

City Manager Don Johnson said the $5.5 million would come from the general fund.

City of Royal Oak Economic Development Manager Todd Fenton said subsidies are a normal part of business in Michigan because the gap between construction prices and the rental market is so large.

The construction costs in Detroit are the same as they are in New York, Fenton said. The difference is, the rents are not the same as they are in New York, and so the scales are tipped.

Independent consultant and Plante Moran CRESA Partner Greg VanKirk said his firm analyzed the construction budget presented by the development group and deemed it reasonable by industry standards.

VanKirk said that after looking at all costs, he determined that $80 per square foot of rentable area would be a reasonable cost for the purposes of the citys negotiations.

VanKirk said rental rates for new, Class A Royal Oak office property is estimated at $30 per square foot. He said that by comparison, Birmingham and Detroit demand about $40 per square foot, and Southfield rates are in the mid to high 20s.

VanKirk explained that after deducting $9 per square foot for operating expenses, that leaves the developers to collect $21 per square foot for 128,353 square feet of rentable area, creating anywhere from a $5 million to $10 million gap in the project, based on a 10 percent rate of return, the per-square-foot cost estimation and other variable factors.

Essentially what we are saying is, the math comes out at roughly a $5 million to $10 million gap to get the appropriate rate of return, he said.

Fenton said another aspect of the project to be taken into consideration is that it is a speculative office building, meaning there is greater risk by the developer because the building has not been leased out prior to construction.

Independent consultant attorney Brandy Mathe, from the law firm of Kerr, Russell and Weber, said the city would be reimbursed for its investments through incremental tax revenue.

According to the term sheet, Central Park Development Group must pay the city back its initial investment in eight years, and if the taxes are not recaptured in that time frame, the group would have to pay the difference to the city. The total amount of all tax revenue generated by the office building must be at least $12.8 million over the first 20 years.

The office building was, at one time, a key component in the citys proposed civic center plan, which when originally envisioned in 2014 and presented in 2016, would have contained a new City Hall on two floors of the Class A building. Class A buildings are the highest-quality buildings.

Since that time, many iterations of the proposed civic center plan have emerged, most recently showing the footprint stretching from Main to Knowles streets and 11 Mile Road to Third Street and including a parking structure, new City Hall building, new Police Department headquarters and central park all of which would be owned and managed by the city.

The office building is also in the footprint and would be owned and managed by the Central Park Development Group.

The other city-managed components of the civic center plan have not been finalized or approved; however, the office building deal is contingent upon the parking deck construction, eventual current City Hall demolition and central park creation.

Fenton said the office building helps the city reach a goal recommended by the downtown task force in 2014 to bring 180,000 square feet of Class A office space into the downtown by 2020, along with creating 1,000 jobs to establish daytime foot traffic.

This would position Royal Oak for the future, he said.

Fenton said the Central Park Development Group office building would bring about 700 jobs to the building and produce an annual economic impact of $234 million. Fenton said the 18-month construction phase alone is anticipated to create more than 500 jobs with an economic impact of $74 million.

The rest of the region would be positively impacted by this project, he said.

On May 9, the Planning Commission unanimously approved a conditional site plan and a special use permit for the Central Park Development Groups office building.

During the June 21 workshop, commissioners said they hosted the special workshop prior to Mondays regular meeting so that residents could express their input beforehand or be better informed to comment with their support and/or concerns during the June 26 public comment. One resident attended the workshop.

About the author

Staff Writer Victoria Mitchell covers Royal Oak and Clawson along with Royal Oak and Clawson school districts. Mitchell has worked for C & G Newspapers since 2014 and attended the University of Michigan-Dearborn and Wayne State University. She is a Michigan Press Association award-winner for writing, design and general excellence and in her spare time enjoys volunteering with the Girl Scouts of America.

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City expected to advance 6-story office building plans - C&G Newspapers