Loan, Incentive, Or Giveaway? City Politicians Vote $5.5 Million For Developer

A Detroit suburb has become ensnared in a lawsuit after elected officials agreed to give a group of private developers a city-owned parcel said to be worth $900,000, as well as $5.5 million to build a new office building. The group includes well-known developer Ron Boji.

The deal is part of a Royal Oak downtown development plan that also includes having the city borrow $18 million to build a 565-space parking deck next to the office building. The city would own the parking structure, but the developer negotiated a deal that reserves up to 300 spots for the office building’s tenants.

The city-owned parcel at the center of the project is currently a parking lot with space for 250 cars. It would be sold to the developers for $1.

The $5.5 million subsidy is unusual for several reasons. At various times, it’s been called an investment, loan or incentive on the part of the city. But it actually involves elected Royal Oak commissioners voting to transfer $5.5 million taxpayer dollars into an escrow account for the project’s private developers, with no direct repayment provision.

Instead, the city’s agreement with the developers represents that the additional tax dollars generated by the project in future years will amply repay the amount. If that doesn’t happen, the agreement says, the project’s owners will write a check for the difference.

The maneuver is also unusual because elected members of the Royal Oak city commission voted to directly transfer the $5.5 million to the developers’ escrow account at a financial institution. The state and Michigan local governments usually run economic development agreements through existing programs that have rules and administrative procedures intended to avoid the appearance of special dealing by politicians.

The process used here instead is the basis of a lawsuit filed by owners of nearby businesses who benefit from the current surface lot. The case is now before the Michigan Court of Appeals. The plaintiffs claim that what the city has called an incentive is really a government loan. The Michigan Constitution prohibits the use of public funds for purely private purposes.

Royal Oak has so far persuaded judges to dismiss the suit on grounds that the plaintiffs lack legal standing to sue. According to Ethan Holtz, one of the plaintiff attorneys in the case, the city is playing word games by calling its $5.5 million loan to the developer an incentive.

“If this were truly an ‘incentive,’ the developer and the city would be able to point to a specific Michigan statue that authorizes it,” Holtz said, “In this case, they have not and they cannot do that and instead are just calling this an ‘incentive’ to give it the air of legitimacy.”

Royal Oak attorney David Gillam is confident that the city’s legal position is sound. He said awarding the $5.5 million subsidy was a policy decision.

“Ultimately the transaction we’re talking about is a policy decision that needs to be made by the elected commission in Royal Oak and ultimately, they decided that the development would provide public benefit,” Gillam said.

When asked why the city’s economic development authority didn’t provide the funds for the project, Gillam said the authority was concerned about the amount of funds it had available, while the city’s general fund balance was high enough that it could afford to transfer $5.5 million dollars to help the developer secure its loan.

The current plan also includes the city eventually taking on another $40 million in long-term debt to build a park and new municipal buildings on adjacent public land.

A $5.5 million diversion of taxpayer dollars is a significant amount for Royal Oak. The city’s total spending in fiscal year 2016 was $13.8 million, so a $5.5 million set-aside represents 40 percent of its annual budget.

Furthermore, in fiscal year 2016, the city owed $85.7 million to its retiree pension system, which was only 59 percent funded. That year, the city paid nearly $12 million in post-retirement health care benefits. Even so, it underfunded these benefits by $31.2 million.

According to Chris Douglas, associate professor of economics at the University of Michigan-Flint, these types of development deals present more risk for the municipality than they do for the developer.

Douglas also said that Royal Oak could have spent $5.5 million to fix roads or to do a better job of prefunding its post-retirement health care costs.

“It seems like Royal Oak has a really thriving downtown,” Douglas said. “It’s hard to justify public subsidies for a downtown doing well.”

Douglas later added: “You kind of wonder with deals like this, if there’s really a demand for Class A office space in Royal Oak.”