In downtown Detroit, the Hudson's site could transform into a crown jewel for billionaire developer Dan Gilbert but construction has slowed, raising concerns. Kimberly P. Mitchell, Detroit Free Press

Businessman Dan Gilbert’s organization persuaded Detroit and state officials to give his development companies free land and hundreds of millions of dollars in tax incentives by promising to turn downtown into a walkable urban center with public plazas and a skyscraper that would be a “landmark destination.”

Bedrock chairman Dan Gilbert Junfu Han

But the city’s Downtown Development Authority and the Michigan Economic Development Corp. didn’t demand that Gilbert’s real estate and development company, Bedrock Detroit, document how it intended to finance construction of the skyscraper at the site of the former J.L. Hudson flagship store, and a 35-story office tower and four other buildings on the Monroe block.

Good governance experts say requiring a developer to disclose financing plans is basic due diligence for a project using public money to build millions of square feet of office, residential, retail, hotel and event space.

Accepting the word of an ambitious billionaire was a gamble by officials who should have insisted on the kind of proof usually required for a typical real estate deal, a Free Press analysis concludes.

Experts interviewed by the Free Press agreed.

The board of the Michigan Strategic Fund was assured that the Hudson and Monroe projects were financially and economically sound and approved $618 million in tax credits for the projects last year.

Stephen Ross Kathleen Galligan

But in an interview Wednesday, Jared Fleisher, an executive of the development group, conceded that the projects needed to be "smarter and more cost-effective. ... To be successful, to be sustainable, to get the financing, we have to be smart, cost-effective. We're working day in and day out on that."

Fleisher, vice president of government affairs for Gilbert's Quicken Loans and Family of Companies, also confirmed that Gilbert has been in conversations about the Detroit market with another billionaire developer, Stephen Ross and his Related Companies.

"I'm sure Stephen gave Dan advice," Fleisher said. But, "Dan Gilbert keeps his own counsel, has his own vision."

Two real estate experts said Ross gave Gilbert advice about the Monroe Block, Hudson's and a third site.

Jared Fleisher, vice president of government affairs for Quicken Loans Family of Companies Dan (Gilbert) has a certain vision, somewhat atypical. He sees the longer term, the bigger picture. Dan is willing to accept less return … with more risk, to do something transformative for the community. Quote icon

Fleisher said that while Ross has a perspective from doing development around the country, "Dan has a certain vision, somewhat atypical. He sees the longer term, the bigger picture. That's kind of been our lodestar ...

"Dan is willing to accept less return, later in the future, with more risk, to do something transformative for the community."

Economy softens, work slows

The softening of the Detroit economy in recent months, illustrated by a slowdown in construction and commercial leasing, as well as Gilbert’s health issues (a stroke over the Memorial Day weekend followed by ongoing rehab) raises the question of whether state and city officials backed his vision for downtown without doing their homework.

The significantly slower-than-expected pace of development has some observers watching closely, with some concerned that officials might have put too much trust in Gilbert's ambitions for a revitalized Detroit.

Today, the Monroe block sits empty, with the exception of the derelict former National Theater. The Hudson’s site is a hole in the ground where the general contractor, Southfield-based Barton Malow, is building a foundation. Cranes are parked in the hole and workers in hard hats can be seen on duty.

Hudson’s and the Monroe block have stalled and Bedrock conceded as much Aug. 7, when it announced that it is dropping plans for a sky deck at the Hudson's site and looking for a hotel to occupy some of the space that had been designated as residential. The project is now scheduled for completion in 2023, a year later than planned.

Bedrock plans on keeping the facade, restoring, and using the National Theatre designed by Albert Kahn within the development at the Monroe Block in downtown Detroit. Photographed on Tuesday, June 11, 2019. Kimberly P. Mitchell, Detroit Free Press

Bedrock also announced that it was extending the design phase of the Monroe block and talking with real estate brokers about pre-leasing office and retail space. Developers typically need to show lenders that they’ve pre-leased a portion of the space in that kind of project to obtain financing.

Plans for the Monroe block in downtown Detroit included construction of a public plaza, the 35-story office tower fronting Campus Martius, a 27-story residential tower, and three mid-rise buildings with ground-floor retail. The Hudson’s site was to include a skyscraper that rose to 912 feet, the tallest building in the city, and a mid-rise podium separated by landscaped public space.

Too expensive? Too grand?

Real estate experts told the Free Press the two developments, as promised to the state and city, were too expensive, speculative and grandiose, and that Bedrock has been unable to pre-lease significant amounts of space in either.

Without signed lease agreements with credit-worthy retailers and office tenants for a portion of the space, experts say lenders will not bankroll such projects. Records obtained by the Free Press show one of Gilbert’s companies, Bedrock Management, intended to finance construction in part with conventional debt, which Fleisher confirmed.

“Without an anchor tenant, what bank is going to finance a project like that? If you build it and they will come, it doesn’t work that way anymore,” said Cindy Ciura, principal of CC Consulting, a real estate and retail consulting company in Bloomfield Hills.

“When it comes to large developments, one of the most key elements to a project’s success is finding companies that are going to commit” to move in, she said. “In today’s world with the high cost of development, there has to be … guaranteed significant partners in the project that have committed financially,” she said. “Banks seem particularly stringent on their funding.”

Lenders, she said, want to be sure “these are projects that are moving forward; they want guarantees that potential tenants are in place.”

The David Stott building in downtown Detroit is owned by a Bedrock company. Kimberly P. Mitchell, Detroit Free Press

While Bedrock has a track record of renovating existing buildings, new construction is more expensive, and persuading tenants to lease property that hasn’t been built can be a challenge, Ciura said.

“It’s easier to sell an existing building to a tenant, they can walk in, see it,” said William Watch, president and CEO of First Commercial Realty & Development in Southfield. “For new construction, it’s a lot harder to get tenants. It could be two years, four years, before the building is completed, and that’s the anxiety with tenants.”

Steve Morris, managing principal of Axis Advisors, a Farmington Hills real estate firm and an adjunct professor of finance at the University of Michigan’s Ross School of Business, said developing new offices and high-rise residential space takes time, is complicated and risky.

“The first and foremost quality of a developer is a vision,” said Morris, who teaches real estate finance. “Clearly Dan Gilbert and the Bedrock team are visionaries and will continue to improve the City of Detroit’s architectural and business environment.”

More: Hudson's site tower may not be the city's tallest after all, Bedrock says

More: Sources: Gilbert's Bedrock lectured inspectors on how to do their jobs

More: Bedrock just named new CEO: What we know about Matt Cullen

Bringing back downtown Detroit

Gilbert is credited with leading the revival of downtown since moving Quicken Loans to Detroit from Livonia in 2010, and investing more $3 billion to acquire, renovate and develop a hundred properties. His companies employ 17,000 people in the city, making those companies the largest private employer in Detroit, and he has another $2.6 billion in development in the works.

Before Bedrock’s recent announcement that it was considering scaling back the height of the Hudson building and redesigning the Monroe block, Wayne State University law professor John Mogk, who specializes in urban development issues, said it’s possible there wasn’t sufficient market demand to support those developments.

“If there were, there would be leases that had been signed, financing available to proceed, and the developer would want to complete the project as soon as possible to begin to receive a return on investment and to avoid carrying costs associated with a delay in finishing the project,” Mogk said.

Several experts said nothing kills a development more than time.

“When you announce a project, you should be ready to hit the ground running or that momentum wanes,” Ciura said.

Construction has not begun at the Monroe Block in downtown Detroit, photographed on Tuesday, June 11, 2019. Kimberly P. Mitchell, Detroit Free Press

Bedrock follows its own path on development projects.

Fleisher said Bedrock typically puts its own money into its projects at the start. Once a building is well under construction, "it's easier to attract tenants who can touch it, see it, believe it" and to "get financing at much better terms."

Fleisher said Bedrock, which has already spent $91 million on the Hudson's site, will continue to float the project "until the capital markets are willing to come on board."

"We are going to continue to support that project with our equity, to continue to make the case to lenders to come on board with an iconic project ... that's how we've had to do business. It's unique to this market," which lenders still consider to be risky.

"In this market, for these projects, you have to get the ball down the road through our courage and conviction, before the lenders are going to come on board," he said, calling it a "hardscrabble way to make progress."

He said financing for the Monroe block will be sorted out once the design is done.

Land for cheap, tax breaks, too

At various times over the last decade or so, the City of Detroit, the state Legislature and the Michigan Economic Development Corp. blessed Gilbert’s ambitions for the Hudson’s site and the Monroe block. And to make the deals happen, the city’s Downtown Development Authority sold Bedrock a key parcel for $1, while the board of the Michigan Strategic Fund approved millions in incentives.

But experts said the DDA and the MEDC, which is supposed to conduct due diligence for the board of the strategic fund, fell short when they vetted the projects for two of downtown’s most desirable sites for development.

Gilbert has had dibs on the Hudson site since 2007, when he first approached the city about moving Quicken Loans downtown. In 2010, another Gilbert company named Rosko Development signed its first development agreement with the Downtown Development Authority for the property.

The DDA said in that 2010 agreement that it wanted to see a “commitment for financing issued by a qualified financial institution of recognized responsibility …” But the DDA never got those records, the DDA’s general counsel, Rebecca Navin, told the Free Press in an email.

The DDA did not include similar language in its January 2019 deal with Rosko for the Monroe block.

The DDA provided the Free Press with a one-page financial summary for the Hudson site that listed various costs and potential sources of financing.

The agency then declined to answer additional questions from the Free Press, including whether the DDA asked Rosko about pre-leases and construction financing, and whether it had requested an update from Rosko about the status of the projects.

“The DDA staff was satisfied to proceed to closing on the financing plan that was provided. We have no further information to provide at this point,” Charlotte Fisher, vice president of marketing and communications for the Detroit Economic Growth Corp., said in an email. The DEGC provides administrative services to a variety of public authorities, like the DDA, that have a role in economic development in Detroit.

The Free Press sent an open records request for documents that Bedrock submitted to support any pitches for economic incentives, such as an application form or financial records. In response, the DDA produced a November 2016 presentation and renderings for the Monroe block, along with a timeline for development.

The DDA’s contributions to the projects include the sale of a surface parking lot for the Monroe block for $1 and the sale of the air rights — the right to develop or build in the air space above a property — above Hudson’s for $1.

The state is contributing to the projects with transformational brownfield credits. The credits required legislation — the bill was passed by the Michigan Legislature in 2017, and the board of the Michigan Strategic Fund approved the deal in 2018.

The tax breaks come largely from capturing property taxes, state income taxes and withholding taxes from the businesses, workers and residents who would occupy the new buildings. In other words, the developer doesn’t get those captured taxes until the project is built. Bedrock can also seek reimbursement from the state for sales taxes paid on construction supplies.

Defending the process

MEDC spokesman Otie McKinley defended the agency’s due diligence, saying it hired outside consultants to study the economic and fiscal impact of the project, and to do a financial analysis.

That financial analysis relied in part on the developer’s assumptions about the project’s income and expenses, and a letter from its CEO “indicating they have the financial capacity to undertake the project as proposed using a combination of conventional financing and equity.”

“This project would not have received approval of the MSF board if it had not been effectively vetted and verified by these entities,” McKinley said in an email.

While most of the tax breaks will go toward Hudson’s and the Monroe block, two other Bedrock projects will also benefit: the renovation of the 38-story Book tower and 13-story Book building, and expansion of the Quicken Loans’ headquarters building, One Campus Martius.

The historic Book Tower and Book building in downtown Detroit, undergoing rehabilitation by Bedrock on Tuesday, June 11, 2019. Kimberly P. Mitchell, Detroit Free Press

In seeking those tax breaks, Bedrock told the Michigan Economic Development Corp. that the Quicken Loans family of companies would be the "primary" office tenant in the projects, according to state records. But the MEDC never obtained copies of any signed leases “as there were no active leases,” McKinley said.

McKinley said MEDC staff and its outside consultants were provided information from Bedrock regarding the growth of its staff downtown as well as information “on future anticipated staff growth based on the growth of its group of companies.”

A consultant hired by the MEDC to review the finances of the Hudson's, Monroe block and the two other construction projects said the Quicken family would occupy about half the office space created.

That consultant also found that while the developer identified preliminary financing sources for each component of the project, “no documentation from potential lenders has been provided.”

The May 2018 report by SB Friedman Development Advisors of Chicago said the developer planned to finance the projects in part with conventional debt and equity.

According to that report, SB Friedman asked Bedrock to provide at least three references related to financial relationships and public-private partnerships. It got a single letter, from JP Morgan Chase, indicating it had provided banking services to Bedrock and the Quicken Loans family of companies since 2005 and that Bedrock had a track record of undertaking a range of high-quality projects downtown.

The obligations of government

Bernard Weinstein, an economist in the Cox School of Business at Southern Methodist University in Dallas, said the city and state agencies had an obligation to ask Bedrock to show evidence of financing and future tenants.

“It’s absolutely good government to ask for this information,” he said. “Absolutely.”

Bernard Weinstein, an economist at Southern Methodist University The information should have been provided by a date certain. It’s absolutely good government to ask for this information. Absolutely. Quote icon

“The information should have been provided by a date certain,” Weinstein said. Absent that information, he said, the deals should have been tossed out.

Greg LeRoy, executive director of Good Jobs First, a nonprofit, nonpartisan research organization in Washington, D.C., that is focused on economic development and incentives, said government agencies have the same obligation to vet a deal as any lender.

“The lender is trying to protect the bank … in the same way a public official wants to not put taxpayer dollars at unnecessary risk,” LeRoy said.

He said the city and state should have asked Bedrock “to show how it intended to finance these projects. It’s standard operating procedure for a big project asking for a lot of money.”

One example of municipal due diligence is Dayton, Ohio.

Brian Heitkamp, president of CityWide Development (the economic development agency for Dayton and the surrounding area), insists that developers disclose evidence of their financing.

He said CityWide discusses the terms and conditions of each financial contribution to a project with the bankers or government agencies providing loans, tax credits or other incentives to ensure all of the pieces work together.

“There has to be communication on the financial structure, and everyone has to be on the same page, that everyone is aware of the rights of the other parties,” Heitkamp said.

The Hudson's site in downtown Detroit on Aug. 7, 2019. Kimberly P. Mitchell, Detroit Free Press

He likened CityWide’s due diligence to that of a bank lender and said the goal is to make sure a project is viable. The reputation and track record of the developer are part of that, but CityWide also wants to be certain the project is “sustainable and makes sense.”

Earlier this year, CityWide closed on a complicated $90 million deal that used a variety of tax credits and other financing to redevelop seven buildings on a city block in Dayton, a city of about 140,000 in southwest Ohio.

Ellen Harpel, founder of Smart Incentives, an organization that helps economic developers use incentives effectively and responsibly, said it is important that economic development agencies vet requests for incentives so they have “some confidence the project will proceed as planned and can accomplish the objectives everyone has agreed to.”

Harpel, also president of Business Development Advisors, a consulting company in Arlington, Virginia, said Smart Incentives grew out of that practice. She said proper due diligence includes making sure the applicant has “the experience and resources to follow through … and is likely to keep their commitments.”

In her experience, she said, economic development agencies routinely ask about the financing, “sources of financing, sources and uses of funds.”

Despite the lack of documentation on the sources of financing for the Bedrock projects, the staff of the Michigan Economic Development Corp. assured the board of the Michigan Strategic Fund in a May 2018 memo that “the project has been thoroughly analyzed and is believed to be financially and economically sound.”

The four projects receiving the incentives were expected to cost $2.15 billion, according to that 2018 memo.

The tax incentives were necessary, the memo said, because “market rents in the city are insufficient to support the cost of complex, high-quality, large-scale, high-rise construction.

“Construction costs in Detroit have increased substantially in recent years as demand for construction labor and materials has increased at a faster rate than supply. In addition to this market value gap, the dedication of extensive space to public and civic uses and architectural excellence (while critical to local economic development and overall community quality of life) furthers the financial challenge and in turn, the need for the transformational brownfield incentives to make the project possible.”

What was promised, what will be delivered

The four projects covered by the incentives were expected to create 900 new housing units, and more than 3 million square feet of residential, office, retail and hotel space.

According to the 2018 memo from the MEDC staff to the board of the Michigan Strategic Fund, the Hudson’s site “will be a landmark destination and visitor attraction and is anticipated to include the tallest tower in the city, that will rise to an estimated 800 feet next to a mid-rise podium which will be separated by landscaped public space. The project will also include a public marketplace, a public sky deck and flexible space for exhibitions and events.”

“The Hudson’s site is widely regarded as one of the most important redevelopment priorities in the City of Detroit and the proposed development is intended to create a landmark economic and cultural asset for the city, region and state,” according to the 2018 memo. “It is intended to be a destination that will attract visitors and drive ancillary economic impact further enhancing Detroit’s comeback story.”

The price tag, as of 2018: $909 million.

Plans for the site shifted after that memo was written as new renderings, released in late 2018, showed the tower rising to 912 feet. Plans for Hudson’s shifted again in August 2019, when a Bedrock executive told reporters at a media briefing that the height of the tower may change depending on the needs of the hotel operator to be chosen. According to real estate experts, it is easier to get financing for a hotel than a speculative residential or office tower.

Gilbert, left, and Detroit Mayor Mike Duggan at the December 2017 ground-breaking for the skyscraper that will be built on the site of the former Hudson's. Mandi Wright, Detroit Free Press

Gilbert and Mayor Mike Duggan broke ground on the Hudson’s site in December 2017.

The beloved flagship Hudson’s department store on the site closed in 1982 and the building was imploded in 1998. The store was a destination for shoppers, as many as 100,000 a day at its height, and was known for its Christmas displays and its fleet of green trucks that would deliver anything, down to a spool of thread.

“We’re standing on a site that has been a source of heartache for Detroiters for 35 years,” Duggan said at the groundbreaking, referring to the years since the department store closed.

The original plans for the nearby Monroe Block included construction of a 35-story office tower, a 10-story development containing residential and retail space, a 27-story residential tower with retail on the first two floors and a public plaza. The price tag for that project as of 2018 was $830 million.

Gilbert said at the groundbreaking last December that the project was needed because many of downtown’s office buildings were full or nearly full, and market demand for housing was strong.

“We have to build to continue to grow,” Gilbert said, according to an article in the Free Press. “There’s no other way to grow, but to build.”

But the project didn’t materialize in the months that followed and New York developer Stephen Ross advised Gilbert to scale it back, according to a person familiar with the situation who insisted on anonymity because of the sensitivity of the discussions. This person said the redesigned project would still be “incredible,” but not “Disneyland.”

In its Aug. 7 announcement, Bedrock promised a “landmark mixed-use development designed to attract the world’s top businesses and talent to Detroit.”

Ross also advised Gilbert to scale back the Hudson’s site as well, the source said. A second real estate expert said Gilbert had consulted with Ross about the Hudson's site, the Monroe block and a site on Gratiot Avenue.

Ross and Gilbert, longtime friends, have talked about the Detroit market, Fleisher said.

"We're excited to be in conversations with them about this market. It's great to have one of the biggest real estate developers interested in this market."

Ross is the chairman and founder of Related Companies, one of the most prolific developers in the United States with more than $60 billion in real estate assets owned or under development, according to its website. Ross is also owner of the Miami Dolphins and graduated from the University of Michigan and Wayne State. He is the largest single donor to the University of Michigan, which in 2004 named its business school after him.

Dennis Bernard, president of the Bernard Financial Group of Southfield and Detroit, said that even if Hudson’s and the Monroe block are smaller than originally planned, they still can’t be done without tax credits.

“This couldn’t have happened without the state,” said Bernard, whose company has arranged more than $22 billion in commercial real estate financing. “Construction costs are so high and our rents are not there yet.”