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HomeMy WebLinkAboutArticle Downtown developer... From the City Manager Downtown developer faces criticism over stalled projects Metro Lofts, 100 Second Ave. in Des Moines, is one of four housing projects George Sherman has developed south of Court Avenue. He is credited with helping kick-start downtown's recent housing revival,but he has more recently faced growing criticism about stalled projects, delinquent property taxes and possible construction flaws. George Sherman is often credited with helping kick-start downtown's recent housing revival. But now the Minneapolis developer faces growing criticism about stalled projects, delinquent property taxes and possible construction flaws. His company, Sherman Associates,plans to renovate the Hotel Randolph into apartments and to break ground on new apartment, office and hotel projects south of Martin Luther King Jr. Parkway in a development called River Point West. But Sherman has been trying to develop River Point West since before the recession. The project has seen false starts before, and now city officials question whether Sherman has bitten off more than he can chew. "He did some great things and got off on the right foot when he came to town,but my personal opinion is that he is spread too thin," said City Council member Christine Hensley. "I think he will have to figure out where he has the best opportunities to get his projects finished and get his house in order," Hensley said. "Otherwise, we will need to look for an exit clause for him." Sherman,though, says his company is financially sound and ready to begin work in coming months on several projects around downtown. "We're very positive about Des Moines; we're very positive about our future," he said. "We're financially committed to it, and we have the equity and manpower to do it." In recent weeks, City Council members and residents have voiced complaints against Sherman over several issues: • Subsidiaries of Sherman Associates owed nearly $200,000 in back taxes on 11 downtown properties before paying the bill in August. • The Hotel Randolph renovation is nearly a year behind schedule. Sherman says the delay stems from changes in laws concerning historic tax credits. • Residents of Water Street Brownstones, a condo development built by Sherman, are threatening to sue over what they describe as a leaky foundation. Sherman says mediation is in progress. • The owner of a business at 315 S.W. 14th St. says Sherman has defaulted on a development deal with the city by not demolishing an adjacent building. City officials,though, say Sherman has not violated the agreement. Official: Sherman has 'good team' Assistant City Manager Matt Anderson said he thinks Sherman can handle all the projects on his plate. The delays,he said, are a result of slow recovery from the recession, not a lack of effort. "I'm not going to defend him not paying his taxes,but as a developer, I think he is very shrewd," Anderson said. "I think he has a good team around him." Rick Tollakson,president and CEO of Hubbell Realty Co., said his company lost money on a deal with Sherman Associates on a project south of MLK Jr. Parkway. He said Sherman seems to be taking on projects before he can finish others. "He has a pretty lean staff from what I understand, so he gets spread pretty thin," Tollakson said. Asked about the contention that Sherman Associates is spread too thin, a company spokesman said: "The status and timeline for the River Point West development is a result of factors and conditions caused by the economic downturn,not Sherman's capacity to develop." Sherman viewed as downtown catalyst While Sherman faces criticism now, city officials say the work he has done to improve downtown can't be ignored. Sherman was one of the first developers to invest around Court Avenue during the entertainment district's revival. In the early 2000s, city leaders went to Minneapolis and Kansas City looking for developers with experience in financially complicated downtown projects. They found Sherman. In the following years, Sherman built four housing developments south of Court Avenue: Vine Street Lofts, Water Street Brownstones, Metro Lofts and Rumley Lofts. Anderson called him a catalyst for downtown's housing boom. When a fire gutted the half-finished Vine Street Lofts in 2003, Sherman decided to rebuild. "Before the insurance was even settled, George stepped up with his own cash and restarted the project," Anderson said. "He really proved his worth to us there." Later, Sherman turned his focus south to River Point West. His company acquired the property, leveled old industrial buildings and cleared the area for new development, with plans to build a sprawling office park. Then the economy crashed. The development has sat idle for several years, which has been a cause of frustration for city leaders like Hensley. But Sherman said his company is ready to break ground on several new developments in River Point West. Construction is scheduled to begin this fall on a Holiday Inn Express and a three-story office building in a development called Gray's Lake Office Park.Next spring, Sherman plans to start construction on the first phase of an apartment development called Gray's Landing. • "We made it through the recession when a lot of developers didn't," Sherman said. "There are great days when you have ribbon cuttings, and then there are tough days when you have to plug through and continue on." Four criticisms raised about Sherman Associates' work in Des Moines: Late payment of taxes Minneapolis developer George Sherman recently drew the ire of Des Moines officials for not paying a year's worth of taxes on 11 downtown properties until just before seeking the council's support for a federal grant application. Subsidiaries of his company paid off the back taxes and interest totaling $196,963.77 on Aug. 21, according to records the city provided. That was four days before Sherman's company brought a proposal for a 90-unit apartment project before the City Council, seeking a recommendation for a federal grant. Ultimately,the City Council voted to recommend the project,but council members Joe Gatto and Christine Hensley voted against the measure. Gatto questioned whether Sherman would have paid the taxes if not for the carrot of more grant funding. "I cannot award bad behavior with money, and that's what we're doing," Gatto said. Sherman said his company is financially sound. He said his company didn't pay the taxes because of delays to projects to renovate the Hotel Randolph and develop the River Point West area south of Martin Luther King Jr. Parkway. "The taxes are current now, and we're moving forward," he said. "Clearly, we wish the projects would have moved along quicker." Jim Conlin, a developer who manages about 6,500 apartments around the metro area, said it was "very unusual" for a developer to be financially sound and not pay property taxes. Back property taxes are charged 24 percent annual interest in Iowa. Paying taxes late can be a sign that a developer can't get a loan at a better rate from a lender,he said. "Normally if you're paying 24 percent interest for development funds, you've exhausted your access to reasonable or normal funding sources," Conlin said. "If I had to borrow money at 24 percent, it would certainly indicate to me that I had a cash-flow problem." Assistant City Manager Matt Anderson said delays can be costly, forcing developers to choose which bills to pay. The recession stalled Sherman's plans to develop River Point West, allowing taxes and interest to accrue. The recession was "a tough time for everybody," Anderson said. "You had a lot of big names go out of business around the country. (Sherman) definitely showed his staying power to even make it out of the recession,but I'm sure it stung. It stung a lot of developers." Hotel Randolph delays City officials say they're frustrated that the Hotel Randolph has sat empty for nearly a year after the city helped find new homes for its residents. Sherman Associates plans to turn the historic hotel and two adjacent buildings at Fourth Street and Court Avenue into 55 apartments. Construction was supposed to start in early 2014,but company officials say changes to federal historic tax credit rules scared off investors and stalled the $16.5 million project. City Council member Christine Hensley, a retired banker, said she doesn't believe the argument that developers can't find lenders to buy their historic tax credits. "That may have been a reason early in the year,but it's not the situation anymore," she said. "I know financial institutions are eager to purchase historic tax credits." The issue stems from a 2012 federal court ruling that required investors in historic tax credit projects to shoulder more of the risk, in case the development flops. George Sherman said investors are just now starting to return to the historic tax credit market. The company hopes to start the project before year-end. "Clearly,during the last two years, we assumed the projects would be moving forward with development sooner than they were," he said. "There was a substantial change in the historic tax laws, which delayed the projects." The hotel had become a permanent home for people with very little income, many of whom had mental or physical disabilities. The city spent about$225,000 to hire health care providers to help residents find housing and social services. "We went through an extensive process to get the residents relocated," Hensley said. "We went through that 11 months ago, and housing of that kind is very difficult to find. The fact that we haven't had any movement on that project is problematic for me. It should be moving faster." Assistant City Manager Matt Anderson said he remains confident Sherman can finish the project. "If I thought the project was stalled simply because of the inaction of the developer I would be concerned,but I know George's team is working on it every day," he said. "I have every confidence that George has done everything he can to get it financed." Claim of foundation leaks Developer George Sherman also faces criticism that the foundation leaks at Water Street Brownstones, a condo development his company built in 2002. Residents say rainwater pours into their parking garage. The problem stems from the water-proofing material used to seal the foundation, said Jonathan Wilson, an attorney for the Water Street Brownstone Homeowners Association. Fixing the leaks would require digging up dirt around the base of the two condo buildings to replace the water-proofing material, Wilson said. The cost would likely top $1 million,he said. Water Street resident Isobel Osius spoke recently at a city meeting,urging officials not to approve Sherman's new developments until the company fixes the leaks at her condo building. "This man does not stand behind his work and is a do-it-and-dump-it developer," she said. The homeowners association and Sherman are in mediation. Osius said residents have already spent tens of thousands of dollars on attorneys and engineers and are ready to sue if needed. Sherman said he could not comment specifically about Water Street Brownstones because of the ongoing mediation. "I think our reputation is to stick through things and honor things, but there is mediation in progress and we respect that," he said. Assistant City Manager Matt Anderson said he doesn't see the issue at Water Street Brownstones as indicative of Sherman's work. While the developer is ultimately responsible, a project like the Brownstones involves dozens of engineers and contractors,he said. "One isolated incident with a workmanship or material issue doesn't make me think any less of Sherman or their ability to complete a hotel or office building," he said, referring to Sherman's other projects under development. "They have actually built some top-notch buildings." Awaiting building demolition Doug Siedenburg, a commercial real estate broker, says George Sherman has defaulted on an agreement with the city by not demolishing an industrial building at 301 S.W. 14th St. and leveling the ground around it. City officials,though, say Sherman has honored the agreement. Siedenburg owns Capstone Ventures LLC, a granite countertop company at 315 S.W. 14th St.,just south of Sherman's building. Siedenburg wants to redevelop his property into an office or mixed-use residential building. But he said Sherman's building and the piles of earth and overgrown brush around it devalue his property. "If you've driven around there, you've noticed the building is not being kept up," he said. "You've noticed mounds of dirt west of 14th Street." Siedenburg said a 2007 development agreement between the city and Sherman's subsidiary River Point West LLC requires Sherman to demolish the building and grade the land around it. He appeared before the City Council last month and wrote a letter to council members asking city legal staff to look into the issue. -- 5- • Assistant city attorney Roger Brown, in a response letter, said Sherman was not in default. While the agreement says the property acquired by Sherman "shall be cleared of any structures, graded to eliminate any unstable slopes, and protected from erosion," there is no deadline for work to be done, Brown said. The city has,however,reached an informal deal with Sherman to amend the development agreement to require the building at 301 S.W. 14th Street to be demolished before fall 2015. The City Council is expected to consider the amendment in the next 90 days, Brown wrote. Proposed Sherman developments Hotel Randolph,204 Fourth St.: Sherman plans to renovate the historic hotel and two adjacent buildings into 55 apartments, with street-level commercial space. The $16.5 million project, slated to begin in early 2014, is stalled due to issues with historic tax credits. Gray's Lake Office Park, south of Martin Luther King Jr. Parkway between S.W. Ninth and S.W. 11th streets: Sherman plans to build a$15 million, 72,000-square-foot office building and a $12.5 million, 102-room Holiday Inn Express. Construction is scheduled to start in late 2014 and wrap in late 2015. Gray's Landing,south of Tuttle Street between S.W. Ninth and S.W. 11th streets: Sherman plans to start construction in May on Nexus at Gray's Landing, an apartment complex with about 150 units. If awarded a federal disaster grant,the company plans to begin construction in April on The Edge at Gray's Landing, a$14.5 million, 90-unit apartment complex.