By Ming Zeng
The following is a letter sent to the mayor of Chapel Hill and Town Council members before they voted to authorize an agreement for the East Rosemary Downtown Deck and Redevelopment Project.
I am writing this letter to express my concern about the development of the new, consolidated parking deck on East Rosemary Street. I believe that it will end up being a great burden to the residents of Chapel Hill in the coming years.
Here is a breakdown of the costs involved:
- The exchange of the parking deck with Grubb Properties: Pay the $1.7 million of appraisal value difference (is it based on three different appraisals?), pay off the $1.4 million of existing loan and pay $30,000 per month renting back fee for five years ($1.8 million). So, a total of $4.9 million is needed for the exchange.
- Construction of the new deck will cost $32.9 million. With 2 percent interest (fixed or revenue bond?) over a 20-year period, that figure rises to $39.94 million. (In the case of a 25 percent cost overrun, that figure becomes a staggering $54.9 million after factoring in the total debt and cost of the exchange.)
Here is the breakdown of the expected revenue from the deck’s construction:
- The current 309 parking spaces generated, on average, $300,000–$500,000 in income prior to COVID-19 restrictions. The new deck will have 1,100 parking spaces, 100 of which are to be reserved for UNC. If we use the pre-pandemic rate, the 1,000 parking spaces will generate $0.98–$1.63 million of income, which falls far short of a 6-percent opportunity cost of $3.29 million.
Evidently, this is an unsound investment. Even if demand returns to pre-COVID levels, the town would have to raise rates at least 400 percent to generate that much revenue, more if the deck construction goes over budget, which is unrealistic.
The construction of the new parking deck is a precondition for Grubb Properties to build an office complex (it remains unclear as to whether this is a firm commitment). The rental cost is expected to be $45 per square foot. For reference, the cost of grade A office space in RTP ranges from $20-$25 per square foot. This astronomical rate will make it nearly impossible to rent out the space, and consequently, Grubb Properties may never build this office complex after the exchange. If the town does not buy it back, Grubb Properties can use this better location (closer to business center) and a better building site (with no rock shelf under it) for any other purposes.
The contingency plan: If Grubb Properties does not build the proposed office complex, the town will be able to buy its parking deck back at 6 percent annual appreciation (a much higher than normal property appreciation rate). At the current price of $6.3 million, after five years, the town will have to pay an astounding $8.43 million to buy it back, in addition to the money borrowed and spent to build the deck in the first place.
Chapel Hill has about $110 million in annual revenue, $68 million of which comprises the general fund budget. To use $54.9 million dollars of the allocated budget to build a high-risk, low-reward development requires far more scrutiny and deliberation. Should the project fail, the burden will fall squarely upon the shoulders of the home owners.
I urge you to delay any action on the project and consider the input of the people of Chapel Hill before making any decisions.
Since that vote, I also have received some new information about the project.
A 100-percent capacity usage and 10-percent annual rent growth rate were used for the revenue projection, are both are very aggressive. That means a 6.7 times rent increase in 20 years, which is much higher than the 3-percent average inflation could be, and I doubt any tenant will accept this kind of offer!
The appraisal value of the town’s current parking deck actually is higher than the Grubb Properties’, but the town will need to pay a $1.7 million concession just simply because the investors wanted it! So, the town is exchanging a higher-valued property with a better location (closer to business center) and a better building lot (no rock shelf under it) plus an extra $1.7 million to the aggressive investors with a worse one.
Who will do this kind of exchange?
Ming Zeng is a resident of Chapel Hill.