The Heights: A tale of logic vs. hope
Lansing Township OK'd the plan in 2010; today, the commercial space is more than 70% empty.
LANSING TWP. – A plan to develop an upscale shopping-and-dining venue to help break the iron grip of recession divided township leaders in 2010.
For proponents, The Heights at Eastwood would build on the undisputed success and popularity of Eastwood Towne Center, the township’s biggest taxpayer. Others worried about the financial projections, construction hurdles and leasing challenges facing a publicly owned development.
The decision to proceed came on a 5-4 vote.
“It’s as if ‘we’ have pushed logic out the door and replaced it with hope,” Keith Granger, the CEO of a waste management and renewable energy company, said in an email to fellow members of the Downtown Development Authority Board after voting “no.”
“If you are moving ahead, you better start getting (tenant) leases," warned DDA member Nick Uppal.
Six years later, The Heights has not developed according to plan. Even Steve Hayward, involved at every step as executive director of the township’s DDA, has concerns.
In interviews with the LSJ, Hayward wondered when a leasing strategy targeting high-quality tenants will shift to one of aggressively filling space.
Now working as a consultant for both the DDA and for Mike Eyde and Eastwood LLC in a public-private partnership at The Heights, Hayward also wonders whether others may see him as part of the problem.
“That question is coming,” he told the LSJ. Moments earlier, he’d spoken enthusiastically about tenant prospects.
Such give and take between optimism and doubts, between hard facts and hope, is central to the story of The Heights.
► Related: The Heights: As Eastwood grew, Lansing Twp. debt spiraled
Why hasn’t it worked?
Two questions swirl around The Heights:
- Was it realistic for community leaders to believe the project would work and to burden the township with a 99-year lease and financial obligations that grew beyond $270 million?
- Why has some 88,000 square feet of commercial space in The Heights never achieved even 30% occupancy, meaning the cash flow doesn’t meet the project’s obligations?
The first question requires a review of recent history. The second is a business puzzle. Both offer fascinating studies in human nature.
By late September 2010, township leaders and the DDA Board had been talking about expanding development around the Towne Center for five years.
► Related:Timeline of the Heights at Eastwood
The township’s two GM plants had closed and been demolished. Property values were in free fall. The tax base would lose one-third of its value between 2006 and 2013.
Drafts of the township’s 2011 budget projected a deficit approaching $600,000 – a daunting gap for a community of 8,100 people.
Everyone who had looked at the budget draft “knows that Lansing Township is in financial trouble,” then Supervisor John Daher told the Township Board on Sept. 28. “There should be serious discussions about Lansing Township’s financial future.”
At the next morning’s DDA Board meeting, he voted to use almost every dollar of long-term debt available to the township under state law to launch the project.
“We needed to do something,” Daher said this summer. “If we didn’t do this what would have happened? Nothing.
“Anytime government gets involved in development it’s scary. It’s still scary. But we thought it was our best option at the time.”
The Heights was a “go,” but Granger and fellow DDA Board members Steve Wickens and Jim Sohn were gone – resigning after casting their dissenting votes.
Along with Uppal, co-founder of DTN Management Co., and the fourth “no” vote, they represented the DDA Board’s greatest depth of business experience.
► Related: The Heights: Lansing Twp. finances drew state restrictions
They understood that once bonds were sold, the obligation to make regular payments to buyers — with interest — would begin and that cash flow from the project wouldn’t start until construction ended and tenants moved in.
“The township was so desperate for a deal they made a bad deal,” Wickens said a recent interview.
Mired in difficulties
The bonds were sold in November 2010. Construction began after the New Year. Before 2011 ended, parts of the project were behind schedule. By 2012 — the year The Heights was planned to open — it was mired in difficulties.
Construction of a privately owned hotel and luxury apartments that would attach to opposite ends of the DDA’s 720-vehicle parking ramp continued to be delayed because developers were unable to obtain financing without owning the property on which they sought to build.
In response, Eyde created a condominium and donated units to the DDA, which transferred them to the developers — CSM Corp. of Minneapolis for a Hyatt Place hotel and DTN of Lansing Township for the Vista Apartments.
Also that year, the ground lease between Eastwood LLC and the DDA was amended to defer the 2012 and 2013 payments to 2014. The updated lease significantly increased the total 99-year payout — to more than $242 million — and the township replaced the DDA, its subsidiary unit, as Eyde’s tenant.
Some DDA Board members grumbled about the lack of progress and the need to focus on getting tenants. The call went out for real estate professionals – specifically CBRE Martin of East Lansing – to be hired to deliver rent-paying tenants.
“The township was wanting to own, develop and lease up on their own,” said Trish Foster, chief operating officer of CBRE. “That was not working out.”
Township officials and CBRE had several conversations about contracting for broker services in 2013, “but unfortunately we weren’t able to come to an actual contract,” she said.
Even though township officials acknowledged that their two-person planning staff was too busy to recruit tenants, no broker was hired.
Chasing tenants
The high vacancy rate has been written off by Hayward and others as a byproduct of recession, bad weather, legal nitpicking, construction-worker shortages, engineering issues, financing issues, developers’ lies, limiting leases to high quality tenants and a lack of visual attractiveness during construction.
If it wasn’t clear in real time, hindsight reveals a steady stream of fish-on-the-hook promises about tenants who were never landed.
The prospects recorded in years of DDA meeting minutes included at least seven restaurants or bars with various themes, a “notable” national retailer, a “luxury bowling” venue and an operator for a 12,000-square-foot performance venue. Prospects for office space included a nonprofit institute and TechSmith, the Okemos-based software developer that reportedly sought 75,000 square feet.
In 2010, Hayward’s list of prospective tenants numbered six and included Bar 30, which eventually opened but lasted less than a year, and Tony Sacco’s, a restaurant that is The Heights’ longest-tenured tenant. The other four never opened.
In early 2011, Hayward told DDA Board members he had five letters of intent from prospective tenants whose rent would cover 100% of project costs. That didn’t happen.
In 2014 he told a graduate student at Michigan State University the project had taught him that verbal commitments from developers are insufficient.
“People lie,” Hayward said when interviewed for the student’s master’s thesis in urban planning. “If someone is … not willing to write it in a contract — they’re lying.”
‘Not meant to be elitist’
Asked this spring how much of the commercial space is leased, Hayward replied:
“Right now there’s about 21,000 square feet leased.”
In an email exchange, he was asked how much money tenant rents and assessments are producing. “Existing, approximately $1.2M, at full build out in excess of $4M (approximately),” he replied.
The project’s 2010 pro forma had designated 29,000 square feet for a fitness facility, for which Hayward delivered recruitment updates until June 2012. The fitness tenant would have produced $500,000 to $600,000 a year in revenue, he said recently.
A dental office courted space at The Heights and offered to pay up to $60 per square foot, but, “I just said, ‘No, we’re not interested in putting a dental place in,’” Hayward said.
“If we wanted to lease the property, we’d be full,” he said. “It sounds elitist and it’s not meant to be elitist. Part of the vision is we want to be proud of every tenant that comes in.”
Hayward said at the outset of development there was a “handshake agreement” with Eyde, The Heights’ landlord, to uphold “a certain quality of project.”
Hayward said that he’d taken lucrative offers to the DDA Board or the joint-venture board and those leases were refused “because once you take a tenant that doesn’t meet your standards, getting a tenant in next to them that does meet your standards becomes increasingly harder.”
In addition to Tony Sacco’s, The Heights commercial tenants include Capital Prime steakhouse; Capital Vine wine bar, Scottrade discount brokerage, a State Farm Insurance office, Chapelure bakery and Mimi’s Sweet Shop. Their leases call for starting rents of $20- to $38-per-square-foot plus 2% annual increases or percentages of sales if they reach various thresholds.
INTERACTIVE: The Heights at Eastwood
Hyatt Place’s agreement calls for it to pay 8% of gross revenue from room sales.
DTN’s Vista Apartments opened late last year. Its base payment is $75,000 per year. Uppal recently said all 124 units are leased. Commercial space located beneath the apartments — most of it held in the joint venture partnership — has never had a tenant.
‘Best for him is best for us’
The partnership that now owns The Heights’ consists of two new companies, Towneast and Towneast Parking. The DDA, Eyde and Eastwood moved their equity into the new LLCs. Hayward has been president of the partnership’s three-member board since July 2015 and the operating agreement specifies he cannot be replaced without Eyde’s permission.
In August 2015, after serving as the township’s planning director and DDA’s executive director since 2003, Hayward “decided it would be best for all concerned if he left full-time employment with the township and worked as a consultant-independent contractor,” according to DDA meeting minutes.
Hayward said his dual roles would not conflict because the township, the DDA and the partnership “are aligned in their purpose.” He said he would work only on those Eyde projects that did not conflict with his DDA and township responsibilities.
“In our mind, what’s best for him (Eyde) is best for us and vice versa,” said Hayward.
Hayward concedes The Heights hasn’t rolled out as envisioned, but he defends the results.
“Our goal was to jumpstart Eastwood and get people talking,” he said.
Even though The Heights has never generated enough tenant income to pay every obligation, “the township is not exposed on this development any longer because we formed this partnership” and capped the Eyde-Eastwood ownership stake at 20%, Hayward said.
Nevertheless, Hayward speculated about a change in direction.
“There’s concerns about at what point do we just start filling” the project, he said. “We have to stabilize the project to sell it in 2020, so if we need to, sometime in 2017 we’re just going to open the floodgates and say, ‘All right, we did our best.’"
He’s confident in his ability to continue to lead the project — "I'm very good at what I do" — up to a point.
During a May meeting of the joint-venture board, he said he reminded his partners that six years had passed since the project was approved and, “At some point you guys have to look at me and say, ‘What the hell are you doing,’” and consider whether he is earning his money.
“Because I have to make this happen,” Hayward said. “They looked at me like, ‘Are we having this conversation and is a guy who is not performing raising the question?’
“And I am. Eventually, everything else falls away and you say, ‘OK what’s the problem here? Nothing’s working. So something’s got to change.’”
Contact Steven R. Reed at (517) 377-1015 or srreed@lsj.com. Follow him on Twitter @StevenReed_LSJ
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The Heights: As Eastwood grew, Lansing Twp. debt spiraled