Master Development Agreements: Evaluate Contingencies

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blog2Five years ago, excitement was building over the prospect of a new downtown vision. Local officials had just signed a long-term development agreement with an experienced master developer known for successful downtown redevelopment projects. The town and the developer worked hard to create a downtown “vision plan” that would revitalize a large portion of the downtown area. The large tract of land along Main St had been underutilized for years and was holding back potential downtown growth. Furthermore, the location was a gateway to the town, overlooking a beautiful river.

Visions of King St in Charleston, Front St in Wilmington and other Southern historic riverfront cities were being discussed in anticipation of the new, riverfront, town center. The town’s recent surge in population would be a positive contributor to the mixed-use plans for the residential, commercial, retail and dining proposed. No longer would the town be viewed as simply a service hub for neighboring beach communities. Town officials were eager to begin work on the ambitious, 20-year vision that would finally put their location on the map.

Today, the downtown vision remains stalled and the designated redevelopment area sits idle due to legal problems encumbered by the developer and concern on the part of the town that the county might veto the developer’s proposal for tax increment financing. The developer, who currently maintains site control over the redevelopment area, refuses to break ground until the town-sponsored infrastructure improvements are in place. Because of the significant amounts of money already spent by the developer towards land acquisition, they seem intent on holding out. The town is currently fighting to nullify the development agreement in order to form a new partnership with an alternate developer.

Due to the financial crisis and future uncertainty of both public and private access to capital, the above situation is not uncommon. How can city officials avoid the unfortunate circumstances of a stalemate between themselves and private developers?

First, town officials must assess their capabilities and institutional capacity to act as a partner in large-scale redevelopment projects. Often, this requires obtaining reliable financing options upfront. However, officials should avoid pledging significant pre-development initiatives until firm financing strategies are in place to avoid the possibility of becoming “stuck” as in the above example.

In addition, adopting a phased financing timeline based on private development progress can help maintain the mutuality of effort, risk and investment needed for a successful public/private partnership.

Finally, securing site control before entering into an agreement and maintaining it during the development process is crucial. There are several ways to obtain control over a site – purchase, option, joint venture with landowner, or ground lease – all of which provide a safeguard against speculation, owner holdouts, and relinquishing control of the development process. Setting these parameters from the beginning should help create a collaborative process that ensures the most efficient use of public and private resources in the pursuit of an effective public/private, master development agreement.

Rory Dowling, a dual MBA/MCRP candidate at UNC’s Kenan-Flagler Business School and the Department of City and Regional Planning, is a Community Revitalization Fellow at the School of Government.

 

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