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State officials grill New Hanover County on Project Grace: A conversation with the GWBJ's Johanna Still

Project Grace Schematics
New Hanover County
/
WHQR
Architectural Firm LS3P revealed schematics and floor plans for Project Grace on Oct. 5, 2021. The building will house the county library and Cape Fear Museum, once completed.

New Hanover County officials recently sat down in front of the Local Government Commission, part of the state treasurer’s office, to make the case for a public-private partnership called Project Grace. WHQR news director Ben Schachtman sat down with Johanna Still from the Great Wilmington Business Journal to talk about it.

On Tuesday, August 2, the Local Government Commission (LGC) held a meeting to discuss Project Grace with New Hanover County staff and Commissioner Deb Hays (find archived video of the meeting here).

The public-private partnership (or p3) with Zimmer Development Company would redevelop the entire downtown Wilmington block that is currently home to the county’s main library and parking deck. The public side of the project would include a new downtown library and a relocated Cape Fear Museum. The private side of the investment would be a mixed-use development, including a hotel and apartments. The deal involves a lease-to-own option for the county, which would spend roughly $80 million over 20 years. That’s significantly more costly than if the county directly funded a new museum and library but county officials argue it would generate guaranteed revenue from the private side, including property tax, sales tax, and room occupancy tax from the hotel — so much so that the county argues it’s a better deal than going it alone.

The deal requires LGC approval. However, the most recent Memorandum of Understanding [MOU] includes a clause that stipulates, if the LGC won’t greenlight the project, the county will pay Zimmer up to $2.5 million – for the planning and design work they’ve already done – and be able to directly fund the project itself.

Still, while the county can build Project Grace on its own, it wants to go the p3 route. In fact, on Friday afternoon, the county released an ‘op-ed’ from the full Board of Commissioners, unanimously requesting the LGC to approve the project.

But this week’s LGC meeting came with tough questions from State Treasurer Dale Folwell, State Auditor Beth Wood, and others. And while the county has asked the LGC to calendar the project for a September meeting — it’s unclear how the LGC will ultimately vote, or if they’ll need more time to come to that decision.

To help break down the recent LGC ‘discussion’ meeting, Johanna Still from the Greater Wilmington Business Journal joins us. You can find Still’s reporting on the LGC meeting here: County Faces Questions From LGC About Project Grace

Benjamin Schachtman: My guest now is Johanna Still, reporter for the Greater Wilmington Business Journal. Johanna, thanks for being here.

Johanna Still: Of course.

BS: So we're talking about the local government commission, kind of grilling a team from New Hanover County over the proposed Project Grace project.

JS: Yeah, the county sent in a bunch of representatives to come and represent on this proposal. This is something that they've been working on for four years now. And so definitely a high-pressure moment. There was a lot of, you know, scrutiny and questions, and the LGC members did want to make sure that they repeatedly said that they were asking these questions respectfully, and just to protect the interest of taxpayers, of course, but definitely there were times when it was a little heated.

BS: Yeah, and this is the LGC, part of the state's Treasury Department under Dale Folwell who conducted a lot of this meeting. But I think it was actually LGC member Paul Butler, who kind of cut right to the chase about the issue, which is this is a public-private partnership, or a p3, which will cost more than if we, the county, just built it directly. And so here's Paul Butler asking, why not just sell it?

Paul Butler: Why wouldn’t you just sell the land that the developer wants to buy, just sell it, put it up for public auction, sell it, take the money, and build your library and museum on the parcel of land you want to do it – [and if] you don't get enough money, borrow the rest.

BS: So how did the county field this because this was pretty right to the chase?

Related: New Hanover commissioners to consider tweaks, next steps for Project Grace

JS: I think that the county's main counterpoint is that, even though it might be a little bit more in financing, that this is controlling an entire block of downtown. So the ability for us to introduce provisions for the private developer on that roughly 1/3 of the block, on that private portion, is something that we wouldn't have in the case of a normal disposition of land. And so because this p3 model allows them to introduce, you know, things like the amount of time it takes them to construct the property, or the amount of affordable housing included, which in this case is 5%, the county saying for us, it ends up being worth it because we are allowed to control this entire block versus not knowing what would happen if they just sold it to any anyone who could buy as the highest bidder.

BS: Part of the county's analysis — and I've watched them work on this for the better part of a year at least — is that if they get this project approved, the way they want it, Zimmer will build a hotel, and some apartments. And the hotel in particular generates a number of revenue streams, you've got room occupancy tax, you've got sales tax at the hotel. But basically, they're taking all of these different revenue streams that will be generated by all of the private development and saying you’ve got to factor that in. Because, yes, we would pay more with this p3 project than if we just build it ourselves. But we get all this revenue back. But in their analysis, they're comparing this to the ‘go-it-alone’ model, so just building it themselves. And in that case, they're kind of putting zero for private development revenue. And the members of the LGC weren't totally sold on that. So here's State Auditor Beth Wood, who's part of the LGC, in a back and forth with the county.

Beth Woods: But the revenue, the other estimated revenue, your benefits, is not zero, you just don't know what it is.

Lisa Wurtzbacher, assistant county manager: We don't and if there is no hotel, there would be no room occupancy tax and no sales tax, there would be property tax if and when somebody else developed on that property. 

Woods:  So again, it's not zero.

JS: State Auditor Beth Wood, in particular, latched on to this and just said it was plain inaccurate to have that projection at zero, [just] because you wouldn't know what would happen. So if the public portion of the block is redeveloped, that's likely going to increase, you know, foot traffic and tax value in the area. So she's basically saying it's possible something else could come in, and you just wouldn't know what that would be. So, you know, it might be a question mark, but it's certainly not zero. And so that zero was put next to, you know, the county estimate of the tax value that the new tax value that's going to be created, which of course, is enticing, to create new tax value for the private development. And they're using that to offset the costs that they're going to be paying that might be in excess of what they could get from borrowing for the project themselves, which is a difference of roughly 8%, which is what Zimmer is seeking. And roughly two 3.25% which they could receive for borrowing this traditionally.

BS: Right, so 8% is what the Zimmer Development Corporation, based here in Wilmington, that'd be kind of be their profit margin.

JS: Right. Right. That's what they're seeking.

BS: Gotcha. Okay, so another issue here was the MOU [memorandum of understanding], which basically says, we can only do this if the LGC approves it. Otherwise, we would have to pay Zimmer, I think it's up to $2.5 million. And then we could do it ourselves. And Dale Folwell, the state treasurer, he wasn't overly thrilled about that language.

Folwell: The MOU is a gun to my head – saying that if I don't approve this, then the taxpayers of New Hanover County got to pay the Zimmer organization $2.5 million. That's the message that’s out there … I just didn't see the necessity of this, I’m just being personal here, of putting this in an MOU. I still don’t know why it was necessary.

BS: So what was what was Falwell's sort of approach to this?

JS: What Dale [Folwell] is essentially saying when he says, you're putting a gun to my head, he's basically saying, because you've already approved this element of the MOU, and you've put this conditional on my board's approval, you're hamstringing me. And so now I'm going to be the bad guy, if I deny this project, and now all of a sudden, you have taxpayers have to pay a $2.5 million fee. So he was uncomfortable with that element. And this is a new provision that [the county] had approved in June. It wasn't part of the initial MOU back in last year. And the difference was interesting. It grew, of course, because costs are rising everywhere. But Zimmer had initially put in their $800,000 as their planning fees, versus now it's $2.5 million, up to $2.5 million. And the county representative essentially explained that we are really committed to making this happen. And so even if this p3 model doesn't work out, we still want to pursue these plans. We're, you know, we're really far down the line, we don't want to have to start over, we want to build this and we think it will provide tremendous value to the block and to the county.

BS: And as you reported for the Business Journal, the Zimmer Corporation has no appetite for removing this clause.

JS: Yeah, very, very plainly said no, no, sir. And that we need to have assurances to make sure we continue down because we just keep spending money. And he said it's in the hundreds of thousands [of dollars] at this point, and costs are just continuing to rise.

BS: So speaking of costs rising, this is an issue that's kind of been under the surface for a while, but it's been in the air, we certainly saw the Wilmington Metropolitan Planning organization's headquarters, the costs for that have gone up. We see it in the housing market, right? Houses that, you know, were $225,000 are now $275,000 because of materials and labor. We've heard from some people, on background, that it's almost inevitable, given labor conditions, supply chain issues, inflation, a possible recession, that the cost of building will go up. And so whatever the original agreed upon cost of this could change. And Dale Folwell asked, you know, pretty pointedly, is this a thing that could change? What did they – what was the county's approach to that question?

JS: I believe that they said it's possible. But, of course, their counterpoint is that the economic conditions of today, which is rising interest rates, of course, and rising construction costs, favor the p3 model. So their point is that it's going to cost us more to borrow down the line. We know that pretty much for a fact. And it's possible that construction costs are going to continue to rise. And so the deal that they have worked out with Zimmer is that they're going to have these fixed lease costs. So they're kind of saying the more thing keeps going, the better our deal continues to look. So that's their point. But as you pointed out, you know, there are risks, of course, with the costs rising, Zimmer did say he believes that they'll end up spending more than $30 million, which is what the amount that they have committed to under the new provision for private investment.

BS: One of the things Dale Folwell brought up was the Forsyth County main library. And this is something I think some of the local opposition to the project has brought up is that there are other projects around the state that are either much larger, or larger and less costly, that there just seems to have been other options to this. And this group, the Save Our Main library group, spearheaded by Diane Hill, has pushed pretty publicly to pump the brakes on this. And this actually came up, Diana Hill’s group came up at the end of the meeting. This was I believe, Cindy Aiken, who's the Assistant General Counsel, who brought up opposition — and county commissioner Deb Hayes, who was part of the county's team that went to go meet with the LGC, had this to say about opposition to the project:

Commissioner Hays: Yes, there is some opposition. It is small and it has continued to dwindle… especially after the project was presented and announced and all the renderings and everything from the architects were presented. People were just completely blown away.

BS: So what was your take on sort of the quote-unquote, opposition to this project?

JS: So I reached out to Diana Hill, right after this happened, just to ask, you know, because I think that she was watching and just to see if she agreed — she disagreed with the characterization that the group was dwindling. She points out that the petition to go against this project had garnered over 1300 signatures, they have over 800 active Facebook members. So, she certainly disagrees that there's a small amount of opposition. You know, Commissioner Hays did point out that they had garnered a lot of public support from downtown organizations, letters of support, and so the county clearly wants to make this happen. Deb Hays called this a game-changing project in what it can create downtown and that really comparable counties are not doing things like this, and that this would bring the county to, you know, a new echelon of downtown presence.

BS: And I think that, from my conversations with the county, is what they see as different between this and the government complex deal, which had a similar funding arrangement, where initially the county attempted to enter into a p3 where they would basically give the property to a private developer and then lease-to-own it back. And the LDC, Dale Folwell specifically, shot that down and made them sort of directly fund it. But to be fair, the government complex is surrounded by a strip club and a bowling alley. So the opportunities for broader economic development aren't the same as the downtown block. You know, say what you will about this project but it's definitely a different environment. So I think that is part of what Hays was getting at.

So I'm wondering, you know, the LGC needs time to think about this. So what is, you know, what is next for this?

JS: They had actually originally anticipated having some sort of potential vote or review last month, but that didn't end up happening because the LGC, a spokesperson told me, they saw it as being complex, and they just needed a little bit more time to review for the members of the board. And they are likely going to review it again next month. Now, they could take action or you know, they could choose to continue not to take action, as we've seen in Bald Head Island Ferry sale.

BS: That's true. These things are very complicated. And you got to say at least it's nice to see that they're not rushing it, they're taking their time, they're really looking at it.

JS: They're definitely digging into this for sure. And we'll see if they come back with more questions. But at the end of the meeting, they didn't leave it as ‘we need these questions answered.’ It was more of ‘we're gonna think about what we've just experienced.’

BS: All right, well, Johanna Still, reporter for the Greater Wilmington Business Journal. Thank you so much for being here.

JS: Thanks, Ben.

Updated: August 6, 2022 at 8:16 PM EDT
Ben Schachtman is a journalist and editor with a focus on local government accountability. He began reporting for Port City Daily in the Wilmington area in 2016 and took over as managing editor there in 2018. He’s a graduate of Rutgers College and later received his MA from NYU and his PhD from SUNY-Stony Brook, both in English Literature. He loves spending time with his wife and playing rock'n'roll very loudly. You can reach him at BSchachtman@whqr.org and find him on Twitter @Ben_Schachtman.