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Commuinity Development Authority MINUTES - 10/25/2004 CITY OF MUSKEGO Approved 11/18/04 COMMUNITY DEVELOPMENT AUTHORITY (CDA) Audio recording of meeting MINUTES is also available. Monday, October 25, 2004 CDA Chairman Frank Waltz called the meeting of the Community Development Authority to order at 7:01 p.m. Those in attendance recited the Pledge of Allegiance. The meeting was posted in accordance with the Open Meeting Law. PRESENT: Commissioners Rob Glazier, David Lidbury, Suzi Link, Gail Miles (7:15 p.m.) Frank Waltz, Ald. Schroeder and Ald. Nancy Salentine Also in attendance were Mayor Slocomb, Finance Director Dawn Gunderson, Interim Plan Director Jeff Muenkel, Ald. Neil Borgman and Attorney Dick Frederick GUESTS: 5 APPROVAL OF MINUTES October 4, 2004 Ald. Salentine moved to accept the minutes for the October 4, 2004 meeting of the CDA. Ald. Schroeder seconded. Upon a voice vote, the motion carried unanimously. OLD BUSINESS Motion regarding Staff contacting Beacon Square Dev. Team Chairman Waltz summarized that at the last meeting one of the motions directed city staff to go back and work with the developers, following up on the motions that were passed at the last meeting regarding the Beacon Square proposal. City staff did make contact with the managing member, Mr. Jorgenson, on what future plans he had given the circumstances at the last meeting. Mr. Jorgenson responded with a letter stating it was not economically feasible for them to further pursue the development. In addition, Attorney Frederick, attorney for the landowner, contacted the city and last week, presented proposals and those proposals were documented on Friday and distributed to the CDA commissioners. NEW BUSINESS Contacts with the Attorney for the Beacon Square Development Landowner CDA Minutes October 25, 2004 - page 2 Attorney Frederick reviewed for the commissioners the information provided last Friday on the developer and landowner’s position in regard to the Beacon Square development. At the last meeting, the commissioners asked if the property was for sale to the city and if so, at what price? He met with the owners of Parkland Mall and his letter, dated October 22, 2004, reflects their response to the inquiry. He made reference to the letter from Mr. Jorgensen and VJS Development Group’s decision not to pursue the development. Attorney Frederick believed that if the city would accept their plan, with the financial incentive they had requested, they would reconsider their decision. Attorney Frederick was present to convey an offer to sell the property to the city for $5,709,000. He explained how they arrived at this figure. This explanation is outlined in his letter to Mr. Frank Waltz dated October 22, 2004. Commissioners received a copy of this letter and a copy is also attached to these minutes. There were several challenges to the Nicholson appraisal. A significant challenge was the appraisal did not break the development down into residential and into commercial components. It didn’t make sense to value the property as commercial when it has a three-acre component that is residential. They also took exception to the lack of a statistical analysis of floor area ratio. Further, they disagreed with some of the comparables used by the appraisal—Kohl’s which he believed was not a frontage lot, lesser zoning and had no residential component; Target store site comparable is too old as values of commercial properties have increased dramatically in the last few years; Menard’s store site in Northridge which is in a depressed area and has a significant crime rate. Attorney Frederick summarized three challenges to the Nicholson appraisal: 1. The appraiser did not take into account any increment in value due to the much larger floor area ratio which is essentially the density factor of the development; 2. The appraiser did not take into account the specific residential component; 3. The appraiser did not take into account time adjusting the comparables and bringing them forward at a reasonable appreciation rate. He added that the developer had retained the services of Jerome Chucka to review the Nicholson appraisal. Mr. Chucka had preliminarily opined that the property was worth no less than $5,709,000 based on the comparables provided in the Nicholson appraisal. Attorney Frederick further stated that the offer to sell to the City of Muskego and the price is available now with a closing date no later than December 31, 2004. Commissioner Link inquired if the numbers included or excluded the north residential house and the St. Francis property? Attorney Frederick said they did not include those properties. They just compared the parcels they control. In reference to the Kohl’s issue, she believed that the plan that Beacon Square presented to the CDA members had a maximum of two ingress and egress points as developed. She deferred to Interim Director Muenkel and he confirmed it, one from Janesville and one from Lannon. Therefore, she did not think that the Kohl’s property could be discounted as readily as a comparable. Attorney Frederick said his presentation was based on information provided to him. The Kohl’s property sits way back and is not a frontage parcel and frontage parcels bring in more money than not. Chairman Waltz recapped briefly the items before the CDA--Mr. Jorgensen’s letter and Attorney Frederick’s letter. He asked for comments from the members. Commissioner Link stated they needed to have their appraiser take a look at the document from Attorney Frederick, analyze it and give feedback on the contents of the merits or factual corrections that need to be addressed in that letter. She continued, that she was extremely frustrated to find themselves in the same place they were last November. The CDA needs to be going forward, however they want to do it, to approach CDA Minutes October 25, 2004 - page 3 it on multiple fronts because the CDA has spent too much time accomplishing nothing. Commissioner Glazer agreed with Commissioner Link. He would like to hear some comment from the Nicholson group as far as point by point how they would rebut this as he was not qualified to rebut Attorney Frederick’s comments. He was not surprised that the CDA was looking at the gap and he would like to hear from the CDA’s appraiser. He would like to move things forward as quickly as possible. Ald. Salentine commented that she would like the CDA to meet more often especially with the timeline presented. Further, in order to do a condemnation process, which would be a friendly condemnation with the sale, the CDA needs to bring forward a resolution of necessity to at least say the CDA is interested. For Commissioner Link, Ald. Salentine clarified that a resolution of necessity is the first step in obtaining property by a governmental body. Chairman Waltz surmised that the selling price for the property exceeds the amount of the present value of the incremental tax that is proposed for the development that had been proposed by Beacon Square LLC. If the CDA were to purchase the property, then with a different development, obviously the value of the incremental tax would be a different number. The present development would not support this money so other alternatives would have to be considered if this were to be the purchase price. Commissioner Link moved to have city staff follow up on both the appraisal and to come forward with suggestions and alternatives that exist for the city including the resolution of necessity as one of the alternatives. Commissioner Rob Glazier seconded. Commissioner Link said the CDA could only direct staff to give feedback on what the CDA can do. Should we include a component that the resolution suggesting that comparable analysis be provided to the city, or be initiated for the city? It should not be to assume that the CDA is the only entity that can be a player because that might be limiting the options. Chairman Waltz said that for clarity, he assumed that whatever city staff and consultants involved might bring into this is that that information is available to everyone. Commissioner Link stated that the CDA could do things that the city can’t and vice versa. Chairman Waltz agreed that all options should be identified. Upon a voice vote, the motion carried. PUBLIC INPUT--None NEXT MEETING: The next meeting was scheduled for Thursday, November 18, 7:00 p.m. ADJOURNMENT: There being no further business, Commissioner Link moved for adjournment, seconded by Ald. Salentine. Upon a voice vote, the motion carried. Meeting adjourned at 7:38 p.m. Stella Dunahee, CPS Recording Secretary CDA Minutes October 25, 2004 - page 4 RICHARD A. FREDERICK A ttorney at L aw A DMITTED IN WI AND IL 1840 NORTH FARWELL AVENUE - SUITE 301 MILWAUKEE, WISCONSIN 53202 TELEPHONE (414) 271-7779 FACSIMILE (414) 226-9985 EMAIL richardafrederick@sbcglobal.net October 22, 2004 Mr. Frank Waltz, Chairman Community Development Authority C ITY OF M USKEGO W182 S8200 Racine Avenue Muskego, WI 53150-0749 Re: Parkland Venture LLC / Beacon Square Parkland Mall Dear Mr. Waltz: At the October 4, 2004 Community Development Authority meeting, certain members of the Committee requested a proposal from the owner of the Parkland Mall property as to the price at which it would sell the property to the City of Muskego. Currently the property is not being marketed for sale. As you know, the Parkland Mall property is a “target acquisition essential to the 1 implementation of the Redevelopment Plan”. Accordingly, Parkland Venture LLC submits the proposal hereinafter set forth. Attached is a letter from David Jorgensen providing written confirmation that they are withdrawing as a prospective participant in the Parkland development at this time. Parkland Venture, on the other hand, expresses that it is still willing to go forward with the development in the unlikely circumstances that the City agrees to the developer terms and conditions previously presented to the CDA. The starting point of the valuation process is the June 7, 2004 appraisal by The Nicholson Group LLC. commissioned by the CDA The appraisal sets forth a value of the parcel owned by 2 Parkland Venture LLC at $3,965,000. The Nicholson appraisal is a comparable property appraisal and, thus, the only analysis 1 City of Muskego Redevelopment District #2 Project Plan. page 52. 2 The appraiser uses a range of $8 - $9 per square foot. Using $9 at the upper end of this range yields a value of $4,218,350. Note that the appraiser on page three indicated that the current development included 104 residential units rather than the 108 units the property has been approved for. This would increase the value by $20,000 times four units or $80,000. Thus, correcting this error indicates a value of $4,045,000. CDA Minutes October 25, 2004 - page 5 made was comparing the Parkland parcel to other comparable commercial property sales. It is with the analysis of these comparable property sales to which Parkland takes exception. The Nicholson appraiser set out nine comparable parcels in his analysis which Parkland will address: 1. Walgreens site assemblage: The Nicholson appraiser sets forth a May, 2003 sale of this 4.42 parcel at $8.57 per square foot (“PSF”). The Nicholson appraiser then adjusts the price forward with a 5% appreciation factor yielding a $9.04 PSF time adjusted price. However, the appreciation rate in Muskego during calendar year 2003 was 18%. Even averaging the two prior years’ appreciation rates of 18% and 3% 3 yields a conservative average appreciation rate of 10.5%. Thus, carrying the price forward at 10.5% through December 31, 2004 (20 months) yields a time adjusted price PSF of $10.07. 2. Jetz Convenience Store site: This comparable property sale, which took place in August of 2003, is set forth by the Nicholson appraiser at $10.13 PSF. Using the prior two years’ average appreciation rate of 10.5% to adjust this price for 17 months through December 31, 2004 yields a price per square foot of $11.64. 3. Aldi’s Grocery Store site: This comparable property sale, which took place in February of 2003, is set forth by the Nicholson appraiser at $10.08 PSF. Using the prior two years’ average appreciation rate of 10.5% to adjust this price for 23 months through December 31, 2004 yields a price per square foot of $12.11. 4. M&I Bank site: This comparable property sale, which took place in February of 2003, is set forth by the Nicholson appraiser at $10.85 PSF. Using the prior two years’ average appreciation rate of 10.5% to adjust this price for 23 months through December 31, 2004 yields a price per square foot of $13.03. 5. Kohl’s Department Store site: This comparable property sale, which took place in March of 2002, is set forth by the Nicholson appraiser at $4.03 PSF. This parcel is not a good comparable since it has no directly accessed frontage and is only accessed by two roads, one of which is 250 feet long and the other is 270 feet long. It has lesser zoning and has no high density residential component. The Parkland parcel has four direct and one indirect access points. The Nicholson appraiser did not adjust this PSF for its location in his calculations. 6. Village Square Shopping Center site: Parkland believes the Nicholson appraiser’s analysis of this site at a time adjusted square foot price of $10.57 to be appropriate. 7. Target Store site: Parkland believes that this sale is too old to be of any comparable values considering the great increase in real estate values in the last several years. In addition, this site has lesser zoning and no residential component. Thus, this is not an appropriate comparable. 3 See Wisconsin Department of Revenue Statement of Changes in Equalized Values by Class and Item for Muskego, Wisconsin for 2003 and 2004 which is attached. CDA Minutes October 25, 2004 - page 6 8. Menards Store site: Parkland believes this site not to be an adequate comparable since the Brown Deer location is one which has had significant economic declines. This site is on the Northridge Mall property. Northridge Mall suffered significant reverses in the last several years, as did other business on Brown Deer Road. Northridge Mall was closed and partially demolished and many existing businesses left the market. Brown Deer Road has a very high commercial vacancy rate and is near one of the highest crime areas in the metropolitan Milwaukee area. The entire 104 acre parcel, excluding only anchor tenants, was purchased for 3.5 million dollars in 2001. ($33,654 per acre versus approximately $376,000 per acre for Parkland’s parcel according to the Nicholson appraisal). Thus, a lower price in this depressed area would be expected. It is not comparable to the location of the highly desirable area in which the subject property is located. Muskego is one of the fastest growing areas in the State of Wisconsin. Therefore, this is not an appropriate comparable. 9. Germantown Plaza site: This site, according to the developer of this site, is a secondary market parcel. It is not a prime location like the Parkland property. Therefore, this is not an appropriate comparable. With respect to the comparables numbered 1, 2, 3, 4 and 6 to which Parkland agrees are appropriate comparables, the time adjusted price used in The Nicholson appraisal is compared with the more appropriate appreciation rate of 10.5% for Muskego below: Comparable Appraiser Appraiser’s Price Number Time Adjusted PSF @ 5% PSF using 10% Appre ciation to 6/04 through 12/31/04 1. $ 9.04 $10.07 2. $10.53 $11.64 3. $10.74 $12.11 4. $11.56 $13.03 6. $10.57 $10.57 Totals: $52.44 $57.42 Average PSF $10.49 $11.48 There is an 9.4% difference between $10.49 and $11.48. Thus, even using the appraiser’s 4 PSF should yield at least an 9.4% higher value of $4,425,230. Using the appraiser’s comparables to which Parkland agrees and adjusting them for the more appropriate 10% appreciation factor as demonstrated above yields $11.48 average PSF. This demonstrates a value of $5,380,740. A separate and more appropriate approach to this appraisal process not explored by the Nicholson appraisal is to analyze the two components of the approved development separately. The first is the residential component of 108 units and the second is the commercial development. The Nicholson appraiser simply used comparable property sales which are 100% commercial. No 4 The starting point for the 9.4% adjustment is the $3,965,000 appraisal amount plus the $80,000 increase to account for 108 versus 104 residential units. CDA Minutes October 25, 2004 - page 7 comparable was provided for the residential component of the development. This failure is a serious flaw in the analysis. Using comparable sales of residential properties yields a PSF value of $16.50, double that provided in the Nicholson appraisal. These components should be appraised separately. The residential component occupies approximately three acres. That leaves 7.76 acres of commercial property. Properties for comparable residential projects are priced at in excess of $20,000 per unit. Taking a lower $20,000 per unit number yields a value for the residential component of $2,160,000. The commercial component utilizing the appraiser’s square foot value of $8.46 yields a value to the commercial component of $2,859,696. Utilizing the developer’s view of the appropriate price PSF based upon the developer’s analysis of comparable commercial properties of $11.48 PSF above yields a value of $3,880,534. Thus, using this approach valuing the apartment development at $2,160,000 and applying the Nicholson appraiser’s square footage value for the commercial portion yields a total value of $5,019,695. Utilizing the developer’s version of the square footage value for the commercial parcel and then adding the residential component yields a value of $6,040,534. Parkland also takes exception to the lack of a statistical analysis of floor area ratio (“FAR”). The appraiser failed to develop an increment in value due to the approved greatly higher FAR for the Parkland parcel. The FAR of the eight comparable properties submitted by the appraiser having a FAR calculation average of .19. The Parkland site’s FAR for the currently approved Developer’s plan is .64, 340% greater than the average comparable provided in the Nicholson appraisal. The appraiser added no value for this fact. The main analytical component of the Nicholson appraisal to which Parkland takes exception is the process by which the appraiser picked a value of Parkland at $8.46 PSF. This number was picked notwithstanding an average of the true comparables of $11.48 for commercial property and notwithstanding the 340% greater FAR value above. Using Parkland’s PSF value of $11.48 for the commercial component and $20,000 per unit for the residential component would indicate a value of $6,040,534 as demonstrated above. The Common Council of the City of Muskego on August 22, 2000 adopted City of Muskego TID No. 8. It appears that no consideration was given in the Nicholson appraisal for any increase in value for a total over $1,500,000 for the existing developer incentives in the amount of $856,000 or other infrastructure improvements of $666,000 totaling $1,500,000. My client spent a considerable amount of time and money in securing this in place grant / funding for the project. The developer has retained the services of Jerome Chucka to review the Nicholson appraisal. Mr. Chucka was the appraiser who originally appraised the Parkland Mall for the City of Muskego. After reviewing the Nicholson appraisal as well as the information provided herein, Mr. Chucka has preliminarily opined that the property is worth no less than $5,709,000 based on the comparables provided in the Nicholson appraisal. Mr. Chucka also indicated that there are recent comparables of greater value which have not been taken into consideration in the Nicholson appraisal. Mr. Chucka’s valuation is based upon $20,000 per unit for the residential component for a total of $2,160,000 and $10.50 PSF for the commercial portion of the property yielding $3,549,000. Mr. Chucka related that his $10.50 PSF commercial valuation does not include any consideration of add on value for existing TID #8. He further opined that there may exist such an CDA Minutes October 25, 2004 - page 8 add on value over and above the $10.50 per square foot valuation. However, he has not defined the added value at this time. The foregoing range of values is from $4,045,000 to $6,013,492. The owner hereby offers to sell the property to the City of Muskego for $5,709,000, the value suggested by the reviewing appraiser, Jerome Chucka. This offer to sell at this price is contingent upon a closing no later than December 31, 2004. Sincerely yours, RICHARD A. FREDERICK RAF/ss Attachments cc w/attachments: Mr. David Jorgensen Mayor Mark Slocomb James Baxter Esq. Mr. Jerome Chucka