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Early review of project ground lease begins

Birmingham city commissioners, at a July 1 special meeting, conducted an early review of the preliminary draft of the ground lease for site two of the Birmingham North Old Woodward project, potentially to be a five-story RH (Restoration Hardware) gallery store with a fifth-floor restaurant, and sent it back to attorneys for more fine-tuning.

City manager Joe Valentine prefaced the discussion by stating the document is preliminary, for form and structure as well as detail, and that economic terms of the site were still being finalized. The building is to front N. Old Woodward right in front of the proposed new parking garage.

The draft of the ground lease was only for this building, and not for potential future buildings on the site.

Mayor Patty Bordman said she had to emphasize “that it is not the city who is engaged with RH – it is Woodward Bates (development group), who has found a tenant for a building. It's not our tenant.”

Joe Fazio of Miller Canfield, development counsel, said he had presented commissioners with a preliminary working draft. “We don't have the economics. They're still a tenant being debated, figured out, and time lines are being worked out.”

Fazio said a ground lease is a unique document because “there is a legal fiction that you can separate the land from the building atop it. The city will own the land – we are not at risk for any financial risks. The developers (Woodward Bates) will own the building atop, and any vertical improvements they add during construction.

“Upon termination of the ground lease, the city becomes owner of the building and all vertical improvements,” he said. “Ground leases have been used for centuries.”

By Birmingham city charter, the city cannot sell any public land without a vote of its residents.

“So we're not giving away the land,” Bordman clarified for some members of the public.

“You're not giving away the land,” Fazio emphasized. “If they are not paying the rent, you can kick them off and take possession.”

He said that lease hold financing assures the city will get its rent, and that rents are payable no matter what – “if the building burns down, they pay you rent. If there's only dirt, it's called 'hell or high water rent.' It is not secured by the city's ownership of the land.

Permissible uses on the property are reserved for what is in compliance with the city's zoning.

Fazio said the lease protects the city. “Once they start construction, there will be assurance they complete the project, so you're not left with a partially-constructed building,” he said.

Because the property is currently zoned public property and has never been on Oakland County's assessment rolls, an agent from Jones Lang LaSalle said they are currently looking at comparables for 100-year leases, in Detroit, and in Columbus, Ohio. She recommended the city have the site appraised.

“If the sub-tenant at some point vacates the building, is there a requirement the tenant find another subtenant?” Bordman asked.

Fazio said no, but there was enough debt that they would want to.

“That's how you get a Kmart building (on Big Beaver in Troy), when the rent is getting paid,” Bordman responded. “But we're a city.”

She was also concerned if, once the property is substantially completed, to make sure the developer could not assign their interest to another third party.

Fazio said he was taking the input and concerns back for further drafts.

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