The City of East Lansing is refinancing a 13-year-old property development bond worth about $5 million for the third time. Since the bond was approved in 2009, multiple construction projects for the property space have fallen through. And the city’s Downtown Development Authority hasn’t made much progress in paying off its debt.
Alice Dreger is the publisher of East Lansing Info, a non-profit news outlet, and has extensively covered the city’s finances. She joined WKAR politics reporter Arjun Thakkar to explain why the city still has this bond.
Interview Highlights
On why the city took on this bond
The DDA decided to take on this debt in 2009 because they wanted to buy these properties as part of a major redevelopment area. As folks familiar with the area know, since then, there has been redevelopment along Grand River Avenue. But the development that was supposed to happen along Evergreen Avenue never occurred.
On the city's progress in paying off the bond
When they took out this $5.4 million debt, which today is stands not much less, somewhere around $5.1 million, they had the idea that it would soon be paid off through a big redevelopment project. The idea was to use tax capture plans and other kinds of financing schemes to pay off that debt. But it didn't happen...they really haven't paid it down, because they keep thinking that a developer will come along and solve their problem. And that hasn't happened, obviously.
On how the debt affects East Lansing residents
$2 million in public money that could have gone to something else has gone to paying interest on this. And basically, what that ends up meaning is that you've got a situation where $2 million that could have gone to, say, pay for the pension debt that East Lansing has, or go to pay for public infrastructure, or go to pay for policing, or go to pay for something else, in the big system got redirected.
Interview Transcript
Megan Schellong: The City of East Lansing is refinancing a 13-year-old property development bond worth about $5 million dollars for the third time. Since the bond was approved in 2009, multiple construction projects for the property space have fallen through. And the city’s Downtown Development Authority hasn’t made much progress in paying off its debt. Alice Dreger is the publisher of East Lansing Info, a non-profit news outlet, and has extensively covered the city’s finances. She spoke with WKAR politics reporter Arjun Thakkar about why the city still has this bond.
Arjun Thakkar: So Alice, can you tell me where in East Lansing is the set of properties that we're talking about?
Alice Dreger: Sure, if you're familiar with where People's Church is, or where Crunchy's is, or where Dublin Square is, it's kind of tucked behind all of those. So, if you were standing at the back of People's Church, looking north, it would be a series of properties running north from there. You can also think about it as being just west of the MSUFCU project, the big building that's being built downtown right now at the corner of Albert and Abbott.
Thakkar: And put in simple terms, What was the city's purpose in taking on this bond?
Dreger: The bond is basically a loan, and it was taken, this debt was taken out in 2009. The Downtown Development Authority—which is not technically the city of East Lansing, but it's an agency authorized by the city of East Lansing— the DDA decided to take on this debt in 2009, because they wanted to buy these properties as part of a major redevelopment area. As folks familiar with the area know, since then, there has been redevelopment along Grand River Avenue. But the development that was supposed to happen along Evergreen Avenue never occurred.
Thakkar: So the city has been dealing with this bond for over a decade. Why is it still in this place?
Dreger: The DDA and the city had been hoping for a long time that redevelopment would occur on these properties and pay off the debt. The problem is that the DDA paid more than the properties were worth, and now the properties are worth even less. And so when they took out this $5.4 million debt, which today is stands not much less, somewhere around $5.1 million, they had the idea that it would soon be paid off through a big redevelopment project. The idea was to use tax capture plans and other kinds of financing schemes to pay off that debt. But it didn't happen.
And instead of the DDA going and doing a long term debt refinance—taking a long term, what we would think of as a mortgage, but it's not secured by the land—a long term loan, and paying it off slowly over time, with a low interest rate, they decided to just be paying the interest on it at any given time. And actually, at the beginning of it, they didn't even pay the interest, so the amount ballooned. So, the amount actually went up that was owed. And that's why over the years, they really haven't paid it down, because they keep thinking that a developer will come along and solve their problem. And that hasn't happened, obviously.
They keep thinking that a developer will come along and solve their problem. And that hasn't happened, obviously.
Thakkar: Can you explain how refinancing this bond helps the city?
Dreger: Yeah, the city really has to see a refinancing of this bond. And the reason is a couple of reasons. Well, first of all, the amount of payments that are going to be required of the DDA is going to skyrocket in the next few years. That's because there was a sort of penalty interest built in, that if the DDA didn't pay it off, then the interest rate would go up quite a lot. So, the interest rate is going to go up about three points. It's also a variable rate. So, when the rates are high, which they are right now compared to where they were, then that makes the payments a lot bigger, and you're paying a lot more in interest. But a major reason they have to pay it off is because they have this outstanding debt. And it has to be managed in some way and managed in a predictable way. And with that variable rate, it's not predictable.
Thakkar: And the city has gone through refinancing this bond in the past. Can you explain how this refinancing differs from previous attempts?
Dreger: In the past, when they refinanced it, they kept using a variable rate and in some circumstances, just an interest rate-only payment. The way this will work is that there'll be a plan for actually paying off the debt, although it will take until 2035 to pay it off. What's really kind of surprising is that this debt, which was originally for $5.4 million, has now resulted in the public, essentially through taxes, paying about $2 million in interest in fees, and the principal has gone down almost not at all. So that's $2 million that, you know, could have been used for something else.
But instead of paying down the debt, the DDA has opted to simply for many years make interest-only payments. And we should point out the DDA could have been paying this debt off. The DDA actually had the funds to do so. And the reason is, the DDA had income coming from the Evergreen properties when (there) were buildings there and the buildings were producing rental income. But the DDA also has income off of a special millage, which is a property tax that occurs in the downtown with the permission of council. So, the DDA actually could have been using its money to pay down this debt. But the DDA kept waiting for a developer to solve the debt and spending its money on other projects instead.
Thakkar: How do city officials feel about the bond and how long it's taken to pay off this debt?
They're not happy with what's happened. They feel, at least several of them made pretty clear, that they felt the DDA should have been paying off the debt a long time ago, and that the debt should be smaller than it is now.
Dreger: It became clear that the current city council when they got this question before them, they had to vote on this, that they're not happy with what's happened. They feel, at least several of them made pretty clear that they felt the DDA should have been paying off the debt a long time ago, and that the debt should be smaller than it is now. In fact, the DDA could actually sell off the properties now. They're probably not worth more than a million or two dollars. But $1 or $2 million would make a big dent in terms of that debt, and would reduce the amount of interest being paid.
But the DDA so far has elected to continue to hold on to the properties in the hope of making a deal with a developer.
Thakkar: The Downtown Development Authority met last month and approved an exclusive contract for the property space with developer River Caddis. Could you explain what that means?
Dreger: River Caddis had a special deal with the DDA to do an office building project on these properties. And that dates back several years. But that has totally fallen through. Even before the pandemic occurred, office space was a tough sell, especially for a place like downtown East Lansing with very little parking in that particular area. So now the DDA has decided to give River Caddis an exclusive deal to look into the question of building mixed-use, which means basically more housing downtown with maybe some retail on the bottom.
That's kind of controversial, because some people feel that the possibility of doing that kind of redevelopment should be open to all developers and all should be able to bid on it. But for now, River Caddis has an exclusive that'll last another six months.
Thakkar: Could you tell us what impact this debt has on East Lansing residents?
Dreger: Basically, what it means is that $2 million in public money that could have gone to something else has gone to paying interest on this. And basically, what that ends up meaning is that you've got a situation where $2 million that could have gone to, say, pay for the pension debt that East Lansing has, or go to pay for public infrastructure, or go to pay for policing, or go to pay for something else, in the big system got redirected.
Now the DDA is restricted on the money it has coming in and how it can use the money. So it's not as if the money is exactly fungible in terms of where it would end up. But basically, it means that $2 million got spent on interest for a project that never happened for the last 13 years. And I think that's making some city council members really question whether or not the DDA is doing stuff that is fiscally responsible. And the DDA is feeling that pressure. I think there's no question the DDA is currently feeling that pressure on the question of what to do about this debt and what to do about these properties.
$2 million got spent on interest for a project that never happened for the last 13 years.
Thakkar: And in these last few seconds we have, what should we expect to be the outcome for the property space on Evergreen Avenue?
Dreger: It's really up in the air. I don't think we know where it's going to go. I mean, one of the things that's going to happen is the DDA's income is about to skyrocket up. And that's because they have a huge tax capture plan downtown, and the new buildings coming online are going to produce a lot more taxes that get captured and given to the DDA.
One big question is, will the DDA use that to pay down the debt, or will they use it on other projects?
Thakkar: Alice Dreger is the publisher of East Lansing info. Thanks for your time.
Dreger: Thank you.
This conversation has been edited for clarity and conciseness.
