Posted: Friday, December 20, 2013
By CAROLYN DRYER
When Ernst & Young consultants Valentin Hernandez II and Steven Klett told council this past June that a mixed-use redevelopment at Peoria Sports Complex as envisioned by Peoria Sports Park LLC was not economically feasible, there were mixed reactions by councilmembers. The majority of council agreed to give PSP another chance to prove the consultants wrong. That second chance was a 90-day window to respond to questions surrounding the project’s feasibility.
PSP presented its alternatives and revised project plan at the Dec. 10 council study session. A major revision involves the role of the developer, which is now taking the role of master developer, not retail developer. PSP also re-evaluated and re-designed its proposed project to reduce cost, address site plan issues, increase the project’s internal rate of return and perhaps most important, address the feasibility of the proposed hotel.
Instead of placing the hotel along 83rd Avenue, the developer has proposed it be built as part of the internal structures.
PSP’s first proposal cost was set at $180.5 million with a project internal rate of return at 6.8 percent. Its second proposal lowered the cost to $90.5 million with an internal rate of return of 10.6 percent.
Peoria Economic Development Services Director Scott Whyte said PSP is also willing to go out and seek a developer that meets the retail development requirement. In addition, the development team now has market expertise. It includes CBRE and Velocity Retail, along with a restaurant broker.
Ernst & Young recommendations for a new development agreement included:
- Executed tenant leases for 60 percent of the space
- Signed agreement from a national/regional equity retail partner
- Debt and equity commitments in place for retail and hotel components
- City has 100 percent anchor tenant approval rights
- Developer finances garages and city reimburses from project tax revenues
Staff recommended the city enter into a one-year development agreement and amend the ground lease for one year with PSP to secure:
- National/regional retail partner (city approval)
- Tenant leases (80 percent) –20 percent more than Ernst and Young stipulation suggested
- Equity financing (100 percent)
- Debt financing (100 percent)
- City has anchor tenant approval rights
- No billboards until the city’s sign code allows for such
- Development agreement to have an automatic termination provision with the city’s option to extend upon developer performance
Councilmember Cathy Carlat asked what would happen if the 80-percent tenant lease stipulation was not reached, and Whyte said that would be a breach of the agreement.
Whyte said anchor tenants are of a caliber and performance and type for this “experience-based lifestyle center.”
“What we need to know is if they’ll sign a lease,” he said.
Councilmember Ron Aames asked if a year was enough time for PSP to comply with the terms of the agreement.
Whyte said, “I believe it’s reasonable. I think it’s important to set a strict framework.”
Klett of Ernst & Young said in general, the commercial real estate market is improving, and hopefully, the job market would continue to look up.
“Eighty percent is a hefty target,” Klett said. “But might as well shoot high.”
He said, “This is more art than formula. A lifestyle center is unique.”
Whyte pointed out that the Arrowhead area has an overall vacancy rate of 7 percent, and Arrowhead Towne Center has a 98-percent occupancy rate.
He said, “All the bread crumbs suggest we have a pretty good chance here.”
With little discussion following the presentation, council came to a consensus to have staff draw up an amended ground lease for consideration at a future regular meeting.
The entire PowerPoint presentation on the project proposal heard during the study session can be viewed online by visiting the city’s website at www.peoriaaz.gov, and clicking on the council agenda for Dec. 10.