Updated, 2:41 p.m.: Minor revision.
Mall developer GGP says it has a big problem. In June 2016, GGP won permission to build a mall and hotel in Norwalk, on the County’s most desirable parcel of open land. GGP’s preference at the time was to build a mall without a hotel, but Norwalk’s leaders insisted on the hotel as a condition of approval, believing that a mixed-use project was far better for the city. GGP added the hotel, obtained their approvals, and recently announced that they can’t build the promised hotel because it is “economically unfeasible” for them.
Now GGP wants special permission to revise its plans to omit the hotel. Norwalk’s leaders already compromised tremendously to grant the June 2016 approval. Therefore, any further compromises should require a hard look at GGP’s definition of “unfeasible” economics. To their credit, GGP team members Doug Adams and Larry Cafero were forthcoming at last week’s information session held at their SoNo storefront. Doug was also forthcoming when I contacted him afterwards by phone.
Please bear with me for a few sentences worth of numbers — they’re important. GGP expects a return of about 8% on the entire project. The cost to build the mall without a hotel is roughly $475 million, which would achieve GGP’s desired 8% return. Building the hotel costs an extra $56 million, and the projected rate of return on the hotel portion is 4.4%. Using math that I learned in public schools, and GGP’s own figures, I calculate that building the mall plus the hotel would reduce GGP’s rate of return from 8% to 7.63%.
What do these rates of return translate to in dollars? At 7.63%, the mall plus hotel would earn $40.5 million per year for GGP. At 8%, the mall plus hotel would earn $42.5 million per year. Therefore, if GGP fulfills its obligation to build a hotel along with the mall, it will be $2 million per year short of their profit target. GGP’s “big problem” is that it doesn’t wish to proceed with building under these conditions.
GGP’s elegant solution is a “deal in principle” negotiated with Mayor Harry Rilling, the RDA, and Council leadership to remove the requirement to build a hotel. Norwalk’s Common Council can approve or reject the proposal, and will consider moving it along at their meeting on Tuesday at 7:30 p.m.; if they do, Council would vote again once specifics are ironed out.
Under the revised deal, Norwalk would grant GGP permission to omit the hotel, which solves GGP’s alleged $2 million per year shortfall. In exchange, Norwalk will receive a lump sum payment which is the equivalent of $200,000 per year for 17.5 years. Is this a balanced deal, or should Norwalk and GGP split the $2 million yearly benefit to GGP from omitting the hotel?
If the Common Council rejects the deal, GGPs says the next step is to pursue arbitration or a lawsuit against the city.
I’m of two minds on this deal. As a businessman, I empathize and root for anyone seeking to (ethically) earn a profit by taking risk and creating value for customers. As a citizen, I’m concerned that the city could be outmaneuvered by a savvy developer with an impressive lobbying team.
Norwalk did not create the alleged shortfall in GGP’s yearly profits, yet Norwalk is on the verge of handing the developer a concession worth $2 million per year in exchange for a payment that is only 10% of that sum. In other words, the deal is 90% in the developer’s favor. Moreover, under the new deal GGP gains what it wanted in the first place, but couldn’t obtain — namely permission to develop the entire property as a mall only, with no significant mixed use.
The deal’s supporters note that once the mall is built, GGP will pay property taxes of $2.5 million per year, which will double after five years. New tax revenue would be welcome, as would the temporary and permanent jobs the mall would bring. This is why Norwalk’s leaders agreed in late 2015 that GGP could substitute a hotel for residential or office space, which would have been more desirable. Norwalk also agreed to count “public realm” space within the mall as a mixed use, even though it’s likely to be a place where shoppers rest their weary feet and enjoy some frozen yogurt.
The key point here is that Norwalk already made major concessions to GGP so the mall would be built. Now GGP doesn’t like the deal and wants a new one. GGP’s solution is to pay Norwalk the equivalent of $200,000 per year for changes that appear to benefit the developer to the tune of $2 million per year in perpetuity. Is this reasonable?
Our Council members put in long hours for lousy pay and lots of abuse. They thought they were done with the Mall the last time they made major concessions. Unfortunately, they aren’t. The stakes are high here. The Common Council could achieve major and lasting community benefit by insisting on a more equitable agreement with GGP. Therefore, I respectfully request that the Council:
- Check my math with an independent expert and with GGP, and have the expert audit and verify GGP’s numbers. I’m not a real estate analyst and the Common Council should be guided by numbers from an independent person who is.
- If the numbers are anywhere near what I calculated, reject the deal and invite GGP back to the negotiating table.
- Stand firm. Norwalk has already made major concessions to GGP. As a condition of revising the LDA yet again, insist that Norwalk gains at least half of GGP’s monetary benefit from doing so.
By all appearances, GGP is doing an excellent job of looking out for its shareholders. My hope is that our Common Council will stand up for Norwalk’s 87,000+ shareholders and demand a more balanced deal.
Bob Welsh is a Board member of Chapman Hyperlocal Media, Inc., the 501(c)3 nonprofit supporting NancyOnNorwalk.