Block 9 tower project loses hotel partner as delays continue

FARGO - One of three partners in the development of downtown's new high-rise has parted ways with the others, Block 9 Partners said Tuesday, Aug. 29, the day after it received a fifth deadline extension from city leaders.

In a statement responding to questions from The Forum, the group thanked TMI Hospitality, which operates hotels around the nation, and said it's looking for a different hotel partner with a "strong food and beverage concept."

"TMI does not operate food and beverage, therefore we are working with other potential operators," the statement said.

That leaves the Kilbourne Group, which specializes in developing downtown properties, and RDO, which produces potatoes and sells farm equipment, as the remaining partners. RDO plans to move its corporate headquarters to several floors in the high-rise planned for the corner of Broadway and Third Avenue North. TMI was bought by another hotel operator in June, and its former CEO, Lauris Molbert, is now executive chairman at Kilbourne.

Originally, the Block 9 high-rise was scheduled to break ground in fall 2016, but Kilbourne pushed the schedule back several times. The firm has not said that TMI's departure was responsible for these delays, pointing instead to financing and construction planning taking longer than expected.

Kilbourne President Mike Allmendinger told city leaders Monday, Aug. 28, that Block 9 Partners have sank more than $5 million into the pre-construction phase so far and asked for more time to get financing and legal documents together for the city.

City Commissioners voted 3-2 to extend deadlines by a year, though Allmendinger indicated it may only need seven to 10 months. The city is involved in what is otherwise a private development because it's providing Block 9 Partners with several incentives, including $15 million in financing for an attached parking ramp and plaza.

Commission skeptics

The repeated delays have upset some city leaders.

Commissioners Tony Gehrig and Dave Piepkorn, long a supporter of the high-rise project, suggested at the commission's meeting Monday that changes to the project are serious enough to warrant renegotiating the development agreement between Block 9 Partners and the city.

"What are we getting in return for agreeing to this?" Piepkorn said. "We need to get something from them. This is a business deal. Those guys are expert businessmen, and if we're just going to do this unilaterally, we are fools."

After Allmendinger noted that estimated construction costs for developers have gone up from $95 million in 2016 to $117 million today, Gehrig complained that that meant the value of tax incentives have also increased.

Mayor Tim Mahoney and Commissioner Tony Grindberg said Monday that changes the developers wanted aren't a problem for the city.

Developers are asking for a deadline extension not new incentives, Grindberg said. "We're not changing anything from what the prior commission has agreed to."

The mayor said the city could even benefit because a more expensive building would pay more property taxes in the long run.

Three deadlines

A close reading of the development agreement and interviews with city staff suggest Mahoney and Grindberg might have a point.

There are three key deadlines in the agreement: the "contingencies" deadline for getting all the financial and legal paperwork done, the start of construction on the parking ramp and the completion of the project. The original agreement, approved by commissioners in May 2016, set the contingencies deadline at Nov. 15, 2016, the construction start at Jan. 1, 2019, and project completion at Dec. 31, 2019.

Kilbourne had, at the time, thought construction would start a lot earlier in fall 2016.

The city has now changed the contingencies deadline five times, but Monday was the first time the other deadlines were changed with construction being pushed back a year and completion pushed back 14 months.

If construction started in spring 2018 as Kilbourne now believes, that would be nine months before the original deadline.

It's possible that pushing back contingencies will affect the city's financing of public features of the project, but additional costs would be borne by developers not the city, according to City Planner Jim Gilmour.

The agreement requires that the city raise $15 million through bonds to pay for the ramp and plaza. In June, the city estimated the interest on that bond would total $2 million. As the city waits for developers to get their financing together, interest rates could increase.

But that wouldn't be an issue for the city. The agreement requires developers to repay all the money either directly or through tax-increment financing over 25 years in order to gain control of the parking ramp, according to City Attorney Erik Johnson.

Long exemptions

The city is also providing incentives that include a 20-year 100-percent property-tax exemption for the high-rise, with the exception of condo units in the top floors and a tax-increment financing, or TIF, district on the whole block. The TIF would lock in the amount of property taxes that local governments now collect for 25 years and use any new revenue generated by new buildings to pay off the bonds.

For 20 years, the TIF will collect new taxes only from the condos because of the tax exemptions on other parts of the high-rise. The parking ramp will be city-owned during that time and not yield taxes. In that time, developers will be responsible for paying off whatever is left of each year's bond payment. In the last five years, all exemptions will expire and a surge of tax dollars will help pay off the bonds, reducing the developer's direct share.

Gehrig noted that the exemptions will be more valuable to developers because of the higher cost of the project and tried to get Gilmour to agree at Monday's meeting.

Gilmour said that depends on the city assessor, who determines a building's value and therefore how much can be taxed. He told The Forum Tuesday that developers could spend more on a building but that it might not be saleable for that amount on the market, something the assessor has to determine.

Developers have estimated the tax exemptions would save them about $625,000 a year based on the assessed value of $40 million, less than half what they said they would spend on construction. City staff has reached a similar conclusion.

Currently, the land where the high-rise is to be built is a parking lot that yields less than $30,000 a year in property taxes.

Mahoney said Monday there aren't any other developers he knows of interested in investing $100 million or more there.

One of the goals of tax incentives is to encourage private developers to invest more in the city, and he said cost increases for developers aren't a bad thing for the city. "When they're paying taxes that actually increases the tax base for Fargo."

It will take 25 years to reach that point, maybe 26 if Kilbourne is delayed a year. But, then again, there hasn't been a building in that part of downtown since the mid-1970s.