Petoskey‘s Big Hole/Petoskey Pointe

Oct. 26, 2008

A gigantic hole in the heart of Petoskey was supposed to have turned into a city showpiece by now.
But the hole remains, and on November 3, the Petoskey City Council can opt out of its interest in the $60 million project.
Two men who are running for mayor have different views of how to deal with the hole and the developers of Petoskey Pointe, a project on hold that includes condos, a hotel, restaurant, and spa.
Mayor Dale Meyer would rather not focus on how the city dug itself into this hole, quite literally. He prefers to look forward, not backward. His challenger, Ted Pall, says he wants to examine “past mistakes,” to protect the citizens of Petoskey in the future. He believes the city can avoid a profound misstep by taking advantage of the contractual opening on November 3.

CITY INVESTMENT
In this story of frustration and setbacks are profound lessons for small towns throughout Northern Michigan that are being approached by developers with big plans that involve the investment of city taxpayers.
Such is the case of Petoskey Pointe. The city of Petoskey transferred a key piece of land worth $970,000 to the developers in October of 2006 for which it received credit instead of payment. The city also spent an additional $100,261 on the project—and that sum includes only bills paid up until 2006. The highest ticket items were attorneys, a downtown parking study, and an engineering review of the developer’s plans, according to a document prepared by Alan Terry, city treasurer. (Meyer points out that the scope of the $27,644 downtown parking study went far beyond the Petoskey Pointe project.)
Some believed the pay-off for the city was huge and still could be: a beautiful development at the gateway of the city, more jobs, a $60 million addition to its tax base, and an influx of new customers for the downtown. The project would also include a parking deck, part of it for public use.
But the developers—David Jankowski, a downstate anesthesiologist, and his partner James Wilson—failed to get the financing they needed, long before the plunge of the stock market. Their company, called Lake Street Petoskey Associates, is now thousands of dollars delinquent on its 2007 city taxes, according to Emmet County Treasurer documents.
Companies involved in digging the hole and erecting a retaining wall were only partially paid and have placed millions of dollars of liens on the Petoskey Pointe property (the true amount is hard to quantify since the claims are overlapping).

LEFT THE COUNTRY
Meanwhile, the head of the developer’s general contracting company—John Olson—appears to have left the country for the Bahamas under duress of lawsuits. He told a Crain’s Detroit Business reporter that his company, the J.M. Olson Corporation, couldn’t pay the $930,300 it owes to Schnabel Foundation Company for the work on Petoskey Pointe because the developers haven’t paid him.
Meanwhile, J.M. Olson Corp. closed its doors and a new company, Braun Construction Group, reopened with many of the same employees—minus John Olson, of course, the article said.
Jankowski is also mired in an $85 million hotel project in St. Pete Beach, Florida, which was foreclosed upon, according to a March 9, 2008 Tampa Bay Times article.
In Petoskey, the city council struck a deal with the developers in 2004 that it would contribute $6.2 million (minus the land value of $970,000) toward the project to pay for the public parking portion of the deck.
On November 2, the developer will have failed to meet a deadline to erect a building shell—a deadline which has rolled from one year to the next with promises that financing is just around the corner.
Theoretically, the broken deadline means the city could get its property back. But since there are multiple liens on the property, the city has no right to the land. The developers, however, promised to give the city $970,000 if it failed to abide by the terms of the agreement.
Now the City Council must decide on its options:
• Press the developers for payment of $970,000 and withdraw its interest in the project on November 3.
• Do nothing and hope the developer will get financing so it can avoid foreclosure in 2010. But, with this option, the city loses the ability to have a date certain to pull out, no questions asked.
• Or don’t ask for money, but impose conditions on the developer for an extension and the city’s continued financial involvement.
Here are the two views of Meyer and Pall.

CHALLENGER TED PALL
Ted Pall, an anesthesiologist like Jankowski, said his profession requires him to pay close attention to detail; even a tiny mistake could mean a patient’s life. And in the case of Petoskey Pointe, he believes inattention to details has made the city and its taxpayers vulnerable.
Case in point–most cities protect themselves by requiring that developers put up a performance bond before beginning construction. That means the developer buys insurance for the full amount needed to complete a project just in case the developer pulls out. The Petoskey zoning ordinance requires a developer to post a performance bond prior to any construction.
Interestingly, the original 2004 developer agreement redefined the beginning of construction as pouring the cement for the foundation. Petoskey City Council members were given the agreement to review on Christmas Eve and were asked to approve it just three days later. Pall said it’s not clear they knew the agreement had redefined commencement of construction, which made the hole mess possible. Certainly, it was not discussed and the public was not aware of it, he said.
Then in 2006, the performance bond requirement was weakened once again in the developer’s favor. That change came in a “Tri-Party Agreement signed by only one council member—Mayor Dale Meyer.

‘HE CREATED THIS PROBLEM’
The document said that the developer no longer had to put up a single $30 million performance bond. That requirement was parceled out to the project’s major subcontractors to equal an aggregate of $30 million. Pall believes the new language isn’t strong enough and departed from the Developer’s Agreement.
“It’s not the same thing. If it were the same thing, then why change it?” Pall said.
The new agreement also stated the developer had either satisfied all of its obligations and/or they were deemed waived. Yet Pall said the developer had not obtained the required permits.
Why is that significant? Because the conditions had to be met in order for the city to transfer its property to the developer the very next day on October 6, 2006.
“Dale Meyer sat in the unique position in October of 2006, when the conditions were not met, to pull out—or at least let the City Council discuss it. He turned over the land. He publicly said the lawyers said everything was fine, when unbeknownst to no one, he changed the conditions. He created this problem. He’s hugely part of it, and it’s really offensive to me.”

NO PUBLIC DISCUSSION
Pall alleges that Meyer exceeded his authority in signing the document, without involving any other City Council members.
Pall said the watered-down agreement was never discussed publicly, and it took him months to receive the true copy of the Tri-Party Agreement. He showed up at meetings to repeatedly ask if the city attorney had reviewed all the conditions in the Developer Agreement prior to the land transfer.
“The mayor and city manager said all the conditions were met, everything was scrutinized. Yet there was only one permit granted at that point, and it was for the foundation. I’m not an attorney, but it seemed so strikingly not right.”
In a subsequent Freedom of Information Act request, Pall found this email from Tony Mavrinac of Miller, Canfield, Paddock and Stone, the international law firm which provides legal counsel to the city.
Mavrinac wrote that his firm had on occasion advised the city with respect to the developer’s obligations.
“... as you are aware, we have no independent responsibility under the Development Agreement or otherwise to review the performance of the Developer and its compliance with its obligations under the Development Agreement, but rather we respond to questions specifically asked by the City,” the email said.
Pall said he does not believe that Meyer or City Manager George Korthauer are “bad people.”
“They just felt that the ends justified the means. They thought it was a good thing, but they were so careless with the contracts and agreements and loose with the law… It was a big mistake.”

HARD CHOICES
Now the city is in a difficult place. Although the developers guaranteed to pay the city $970,000 for its land in case of failure, the Developer Agreement does not state how or when the money will be paid.
Pall’s proposal—if the developers are able to move forward—is to consider giving the developer a limited extension to complete the project with the following conditions:
• Pay off its back taxes and liens. That way, the city could get its land back and area companies could get paid for the millions of dollars of work they’ve completed.
• The developers must personally come before the City Council to explain why they merit an extension. The developer, to date, has not attended City Council meetings to ask for an extension.
• On the City Council’s side, he wants Mavrinac to personally meet with the City Council and fully discuss all the options. The attorney, to date, has not attended meetings, but has communicated by letter. (More on that below.)
• Ensure the retainer wall is acceptable in terms of aesthetics and safety.
• Put $1 million in escrow to protect the citizens of Petoskey in case the project fails and the former city property goes to lien holders.
• Return to the original terms of the agreement and require that the developer put down the full amount of the performance bond at the project start. Hire an independent source to calculate the true amount required to construct the project.
As for Meyer’s complaints of focusing on the past, Pall takes issue with that.
“Be wary of politicians who don’t want to talk about the past, i.e. their record. That is a bad sign.”

MAYOR DALE MEYER
Dale Meyer is the third generation owner of the Meyer Ace Hardware Store, which has three stores in the Petoskey region.
Meyer sat in his downtown store for the interview, his two phones ringing constantly. He’s a busy man, but said he’s seeking a fourth term as mayor because he believes in the community.
“My business background has helped me get involved in positive type of projects.”
Meyer said Petoskey Pointe is one such positive development, but hastens to add it’s privately owned. “We don’t have a lot of say in what happens there. They run it. We’d like to see it go forward, but with the current economic climate, that will make it difficult.”
At last week’s City Council meeting, however, Meyer heard some good news from the developer.
“It appears the developers are moving forward with the credit requirement. We’ll see. I haven’t seen anything in writing, but it was a positive deal what happened last night. It is moving forward.”
The City Council will meet in a special session on Monday, October 27, with attorney Mavrinac, who will personally attend or confer by phone.
Meyer doesn’t believe the city needs to take specific action on November 3 when the city is released from its obligation to buy the parking deck–a point that Pall strongly disputes.
“It doesn’t mean we are in and it doesn’t mean we are out. The city has to look at its options. Lots of citizens want an open forum, which we have refused to do and will continue to refuse to do. The reason is that our attorney has explained that the developer has rights too.”

POTENTIAL LAWSUIT
The city of Petoskey could open itself up to a lawsuit if negative comments by council members cause the developer problems with financing.
“It’s my fiduciary responsibility to make sure people treat everyone fairly,” he said.
Meyer said there are pros and cons with pulling out or staying in the deal, but doesn’t want to disclose his strategy prior to the November 3 meeting. “I won’t show you the cards before I show my hand,” he said.
But Meyer said the community voted for the project in a referendum, and he wants to serve the will of the community.
Meyer said that although the law firm of Miller, Canfield did not “monitor” the Developer Agreement, it has answered all specific questions asked by the City Council. “They are called on daily or weekly because of different things that are happening on the development.”
He declined to respond to criticisms regarding legal documents, adding that Pall is not an attorney. He said that he signed the Tri-Party agreement with the attorney’s approval.
“Ted Pall makes accusations about things, but where is he getting this? What law firm is questioning this? I’ve got legal counsel behind me to support me. I didn’t act without their blessings.”

MOVING FORWARD
Meyer said he doesn’t want to rehash the past.
“The real issue is how do we get this project moving forward? That’s what the community wants.”
He suggested that Northern Express direct its legal questions be directed to attorney Tony Mavrinac, who referred all questions to City Manager George Korthauer, who said he also can’t respond because he’s not an attorney.
“I guess they’re Ted Pall’s opinions, and we’ll leave it at that.”
Korthauer said that Mavrinac can’t respond to the legal issues because of client confidentiality. He must also have permission from city officials to speak to the press.
Meyer said there are some positives to consider in the current scenario of Petoskey Pointe. Namely, the price of the city parcel reflects land values of 2004, which have since gone down. The city will also get the parking structure at a bargain price because construction prices have gone up since the agreement was signed in 2004.
“I think the city is in a good position. We’ve got time. If these guys don’t develop it, it can move onto someone else who will. … By the way, Traverse City has two holes on Front Street. … When you look at other communities, every one of them has a hole. Boyne City has an area of waterfront all boarded up. Grand Haven spent money on a brownfield redevelopment that’s costing the city a considerable amount because the condos and retail stores haven’t sold. They haven’t recognized the property taxes they were supposed to get, but they still have to make the payments.”
In reference to the $100,000 the city has spent on Petoskey Pointe, Meyer—who previously said the city spent no money on the project—said that the fees were an investment and ensured the project’s integrity.
Meyer said there’s much more to Petoskey than Petoskey Pointe. Unlike Traverse City, Petoskey has no industry, so tourism is especially significant. His plan is to build on his work of extending bike paths from downtown to Bay Harbor and Harbor Springs, enhance the river for kayakers, and to beautify downtown areas.
“That’s the difference between me and Ted. I’m trying to create, while he’s always looking back.”

(Full disclosure: Northern Express
is currently in litigation with Petoskey Pointe over past due bills.)