Lakefront mirage - East Valley Tribune: Tempe

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Posted: Sunday, February 13, 2005 6:22 am | Updated: 8:41 am, Fri Oct 7, 2011.

February 13, 2005

There was a time when Arizona State University dreamed of a grand hotel, fancy restaurants, luxury apartments and high-end office space on prime waterfront property along the new Tempe Town Lake.

Nearly seven years later, there’s nothing but acres of asphalt parking lots on the school’s land on the south shore of the lake.

SunCor Development Co., a company with close ties to ASU through its parent Pinnacle West Capital Corp. and sister Arizona Public Service Co., was chosen by university officials to build their grand vision.

But SunCor has not turned a shovelful of dirt on ASU’s property even though it has put up its own headquarters tower and is building luxury condominiums on its own property next door.

ASU’s inability to develop the land has cost taxpayers about $5 million. Since the lake opened in November 1999, the public has had to pick up about $3 million in lake operations fees levied by Tempe on ASU’s property — money the city had hoped would come from developers, including SunCor. ASU has paid an additional $2 million to lawyers and consultants as it struggled to get development going.

Now SunCor wants to buy ASU’s property and put up condos, offices and some retail.

The company and university say the ASU project has fallen flat because of "extremely complicated" reasons. They put most of the blame on the recession that followed the Sept. 11, 2001, terrorist attacks, and a 2003 decision by ASU President Michael Crow to put the project on hold while consultants finished a long-range planning study for the entire campus.

"There have been so many moving parts over the years," said Peggy Kirch, SunCor’s vice president of commercial development. "I guess if you’re looking at it from the outside it’s easy to say, ‘Jeez, why has nothing happened?’ But there’s just been so much to it."

But a Tribune review suggests that the development stall has more to do with squabbling between ASU and SunCor over the kind of project each envisioned and which would succeed.

Documents obtained through public records requests and interviews with people close to the project show that more than three years went by before SunCor and ASU finally agreed on a plan — which just happened six months ago. That agreement appears designed to smooth the way for a sale of the property to SunCor, rather than to build something to benefit ASU.

From the beginning, ASU wanted SunCor to build a project that not only adhered to strict design guidelines and blended with other parts of the campus, but also generated maximum revenue. ASU’s College of Architecture had designed the plan around those goals — instead of clearly assessing whether there were enough potential customers in the area to support such a plan.

"There was a fundamental misunderstanding on the part of ASU about how development happens," said Chris Anaradian, Tempe’s Rio Salado project manager. "They had a beautiful plan crafted by students and academics that bordered on things very unrealistic."

SunCor, a cautious developer that has built its success on satisfying the market, told ASU its original vision was unworkable.

Mitch Rosen, SunCor’s project manager for ASU’s land, said his company knows better than anyone what it takes to build on the south shore of the lake, where others have tried and failed.

"We are the first to be able to do it," he said.

Now, Crow says he is considering selling some or all of the university’s 36 acres on the lake for as much money as he can get. His dream is to transform the aging Tempe campus into a leading research institution — and that requires lots of cash for equipment and infrastructure.

"I’m only interested in one thing," Crow said last month. "That is the most, the maximum possible dollars.

"Most of our buildings are substandard. Land is not our problem."

SunCor wants ASU’s property. The sale would give Sun-Cor control of one mile of the south shore between Mill Avenue and Rural Road. But company officials are worried they can’t pay Crow’s price. And, they say, they’ve already spent hundreds of thousands of dollars on plans for ASU’s land.

Tempe officials say they’d prefer that SunCor get the property, rather then seeing it sold at a public auction.

"I don’t want to have ASU continue to have the property," said Tempe Mayor Hugh Hallman. "I would like to see their property put in the hands of people who know what they’re doing."

The city just wants the land developed so someone else can start paying the lake operating fees and repay much of what it cost to build the lake.

The total cost of Tempe’s Rio Salado Project, including bridge construction, land purchases, road work and park development, is more than $202.8 million, of which the city has paid $137.6 million.

ASU’s parcel is "critically important, the central piece of developable real estate in this entire project. It’s right in the middle of Town Lake," Hallman said. "It is the most easily developable. And it’s the most visible.

"It’s the focus. We cannot demonstrate that the lake is viable if this property sits vacant."

Last month, the state Board of Regents was briefed, in a closed session, on just what has — or hasn’t — happened on ASU’s property and what should happen next. Crow told the Tribune he’s not quite ready to ask the regents to approve a sale because he’s still waiting for appraisals.

Tempe, ASU and SunCor once believed that the promising strip of lakefront property would bring them each millions of dollars. But so far, it’s proved too much for even this powerful trio — the country’s fourth largest university, the land development arm of a Fortune 500 company, and a scrappy city eager to improve its urban edge.

HIGH HOPES

ASU owns just over 36 acres on the south shore of Tempe Town Lake. Rural Road divides ASU’s land — 27 acres to the west and nine acres to the east. The property, which forms the northern boundary of the Tempe campus, was paved in the 1990s for overflow parking. It’s been that way ever since.

Since December, when ASU officials confirmed they might sell the property to SunCor, the Tribune has examined more than 10,000 pages of documents and interviewed dozens of people involved in the lakefront project. Besides ASU, SunCor and Tempe’s records, the Tribune also relied on documents on file with the U.S. Securities and Exchange Commission, the Internal Revenue Service, the state Real Estate Department, the Arizona Secretary of State’s Office and the Arizona Corporation Commission, which keeps a close eye on APS, Pinnacle West and Sun-Cor. The Tribune also examined Maricopa County Superior Court records and property and financial records kept by the Maricopa County recorder and assessor offices.

ASU, which lacked expertise and knowledge to oversee a project of this magnitude, brought in a capable developer, then resisted the company’s direction. Neither ASU nor SunCor moved to break a three-year stalemate nor end their business relationship. Other development proposals couldn’t go forward because SunCor held the exclusive right to develop the land. ASU and SunCor allowed rigid selfinterest to bog down progress at the public’s expense.

Although ASU and SunCor officials met regularly for more than three years, they couldn’t agree on a plan for the property. Yet six months ago, ASU and SunCor came together and drafted a plan after just two meetings.

That turnaround came shortly after ASU officials realized the full implications of a new planning study: A substantial portion of the Tempe campus will have to be rebuilt for it to become the top-tier research institution envisioned by Crow.

That’s when ASU saw the lakefront property as a potential source of cash. The study concluded the land wasn’t essential to ASU’s mission. But to sell it to SunCor, ASU needed a waiver from the Board of Regents to bypass a public auction. And the board needed a good reason to waive the rules, like having a development plan already in place.

So ASU dropped its strict building guidelines and Sun-Cor designed a plan that the company believes will appeal to the market — taller buildings that may block views of the lake from Sun Devil Stadium. The new plan includes a 12-story conference hotel and six condo towers ranging from 12 stories to 22 stories each.

Crow is adamant that what he needs is cash, not vacant property.

"We have to extract the maximum value for the university system," Crow said. "This land is not central to the university’s mission.

"We need capital now."

LACK OF EXPERIENCE HURT

The record also shows that ASU made decisions that ran contrary to professional advice university administrators had sought.

ASU doesn’t have a real estate department, so the university paid Ernst and Young, a national financial adviser, $1.6 million for real estate advice on the project. Then ASU ignored key findings by the company that advised against including too much retail space.

Former President Lattie Coor moved the project from the financial services department to the public affairs office. Steve Miller, a lobbyist who had studied urban planning in college, was put in charge. Important real estate decisions fell to him, other university administrators and professors. Later, Miller was replaced by Mernoy Harrison, ASU’s interim chief financial officer.

The property also proved to be more expensive to develop than ASU and Sun-Cor had bargained on. Highvoltage APS power lines above the parcel needed to be moved or buried, estimated to cost as much $9 million. SunCor now says it has worked out a deal with APS, its sister company, to move the lines for much less, perhaps as little as $1.5 million.

The land is under Phoenix Sky Harbor International Airport flight paths, and anything built on it needs special glass and other noise-reducing material.

SunCor also wasn’t used to the level of control ASU was exerting over the project. Tempe had given SunCor wide latitude in building its office tower next door to ASU’s land. The city gave SunCor $28 million in incentives, and sold the company land at prices far below market rates. The university was a much tougher taskmaster, yet Sun-Cor did not pull out, receiving six extensions of its deadline over the past four years.

ASU also insisted on a parking structure to replace the 881 spaces that would disappear when the land is developed. ASU initially wanted an underground garage. But studies showed that the water table is too high to build more than a few levels of underground parking.

And once development starts, SunCor would have to begin paying assessment fees to Tempe. The assessment on ASU’s land is $400,000 to $650,000 a year, plus a onetime $11 million charge for lake construction costs. ASU, which is exempt from the fees because it is a state agency, voluntarily pays Tempe about $100,000 a year.

ASU and SunCor officials insist a down economy, especially following Sept. 11, was the biggest reason nothing ever came to fruition on ASU’s property. University and company officials say there was simply no market for the kind of office space, retail and highend residential envisioned for the property.

But between 2000 and 2005, developers built at least 44 major projects in the Valley, creating millions of square feet of office space, hotels, executive suites, retail outlets, and luxury apartments and condos, according to the Phoenix Business Journal’s Book of Lists.

The projects include Chandler’s Wells Fargo Ocotillo Corporate Center in 2004, Gilbert’s Val Vista Towne Center in 2003, Phoenix’s JW Marriott Desert Ridge Resort and Spa in 2002, Scottsdale’s Westin Kierland Resort Spa and Villas in 2002, and Phoenix’s The Residences luxury condo project in 2005.

In 2002, SunCor completed a $21 million office tower on its own property next door to ASU’s land. The blue and silver eight-story glass and aluminum tower is shaped in a slender oval to resemble a sailboat from the air. The posh interior has dark-wood paneling and offers amazing views.

SunCor also is planning to build an 80-room hotel and two more office towers at the site, called Hayden Ferry Lakeside. The project remains the only significant office development on the south shore.

Last year, the company began building a condo tower on its lake property with 40 units that SunCor plans to sell at an average price of $657,000 each, according to records on file with the Arizona Real Estate Department.

YEARS OF FAILURE

In August 1991, Tempe and ASU were already envisioning a lake in the middle of the desert and the waterfront developments that would bring them millions of dollars from eager developers, tenants and customers. They sent out a joint solicitation to developers interested in planning and eventually building commercial projects on the future lakefront property.

The ASU-Tempe solicitation drew one response, a proposal by the joint-venture of Benton-Robb of Tempe and Bay State Milling Company of Quincy, Mass.

John Benton and Ross Robb, both ASU graduates, were very active in Tempe civic affairs and had played a role in several redevelopment projects.

Bay State Milling was a family-owned company that ran flour mills in several states, and owned the historic Hayden Flour Mill downtown.

The City Council approved their plan to build more than 3 million square feet of commercial space on 71 acres on the future lake and the flour mill site. The plan included restoring the mill’s silo tower, which remains a downtown landmark. The project called for two 16-story office towers and a 500-room hotel on ASU’s property, three eight-story buildings on Tempe’s parcel, niche shops and bistro-style restaurants built around the base of the hulking white silo on the flour mill site — and a life-size replica of the original mill that was destroyed by fire in the late 1800s.

But Benton-Robb attracted only a string of unsuccessful builders, and between 1992 and 2004, the company sold or gave up development rights to the entire 71 acres.

The much-touted Peabody Hotel was the first major project that failed to pan out on the ASU site. The Peabody plan called for a 1,000-room five-star hotel and about 850,000 square feet of additional commercial space on about 100 acres at the east end of the lake, including nine acres ASU owned east of Rural Road. The developer couldn’t get financing for the project.

Benton-Robb and Houstonbased JPI tried again in 1999.

They planned to build 500 to 600 luxury apartments on nine acres of ASU’s land on the lake. In 2000, soon after the Arizona Board of Regents signed a long-term lease with JPI and Benton-Robb, the partnership dissolved.

Almost immediately after the deal fell through, Benton-Robb and Camden Properties Trust formed a partnership to build 434 apartments on the same parcel. In March 2001, the Board of Regents signed a long-term lease with them, but that partnership also quickly unraveled.

Benton-Robb, JPI and Camden faced much the same reality that SunCor would also face: They couldn’t design a project that met ASU’s guidelines and still made a profit, according to a Dec. 15, 2004, report by ASU lawyer Hank Traeger. Ross Robb said falling interest rates were spurring people to buy homes, chilling the market for highrent luxury apartments.

While development was sputtering on ASU’s land, Benton-Robb was trying to put together another project for the Hayden Flour Mill site and city-owned lakefront property sandwiched between Mill Avenue and ASU’s parcel.

Benton-Robb and the firm MCW Holdings formed a partnership to work on the flour mill site, but later parted ways in disagreement. MCW filed a $43 million lawsuit against Tempe over development rights that still hasn’t been resolved.

In 2000, Benton-Robb and SunCor formed a partnership called Hayden Ferry Lakeside, the site of SunCor’s eightstory office tower. SunCor bought out Benton-Robb in 2003.

TOO MANY RESTRICTIONS

ASU has long had a grand vision for its lakefront property — some would say too grand.

The November 1998 Concept Plan for Rio Salado from the ASU College of Architecture set lofty goals.

Among the plan’s many restrictions was one on how tall buildings could be. It prohibited building heights of more than four stories on most of the property because officials were afraid anything taller would block the view from the football stadium. They also wanted people driving by on Loop 202 to have a commanding view of the stadium and Hayden Butte.

The plan called for 534,536 square feet of housing, 261,844 square feet of retail, and 475,804 square feet of office space on 17 acres on the lake, a total project of about 1.3 million square feet.

ASU hired Ernst and Young to analyze the plan and the financial advisers agreed the plan should work.

In fact, Ernst and Young concluded in May 1999 that there was enough demand in the area to significantly boost the amount of office space and residential, which would bring ASU even more revenue from leases.

In a later analysis, Ernst and Young projected ASU would collect about $11 million in lease revenue between 2000 and 2009.

In 2000, ASU revised the plan to include 2.4 million square feet overall. But, against Ernst and Young’s advice, the university had also added more retail space — bringing it to about 313,000 square feet. That proved to be a major sticking point between ASU and SunCor.

Rosen of SunCor said there simply hasn’t been enough business on the lake to support large-scale retail development.

Even a small coffee shop in SunCor’s office tower has gone under, closing last year when it couldn’t pay its rent, Rosen said.

Anaradian, Tempe’s Rio Salado Project manager, said too much retail was one of the main reasons the project stalled.

There’s about 313,000 square feet of retail in the entire downtown Tempe area, Anaradian said, and that evolved over 15 years.

By the time the revised plan hit potential bidders in 2000, ASU’s ideas had grown even grander.

Officials envisioned a conference hotel, two commercial office towers, a light-rail stop, a boat dock, courtyards, restaurants, stores, cafes, a sports arena, an amphitheater and many other amenities.

SUNCOR TAKES OVER

In March 2000, ASU solicited development firms around the country to become the master developer to build the broad vision outlined by the architecture school.

Only two responded: Sun-Cor and Pennsylvania-based LCOR.

LCOR was no stranger to big projects. Its accomplish- ments included a $1.2 billion terminal at New York’s JFK International Airport, a $760 million office and hotel complex in New York, and a $52 million student housing complex at Rutgers University in New Jersey.

LCOR said it could build a project that would bring ASU nearly $21 million in cash over 24 years, compared with Sun-Cor’s offer of $9.7 million in cash plus a student parking garage and a sports arena valued at $12 million.

Both companies had good résumés. But LCOR lacked a local presence and ties to ASU.

That wasn’t the case with SunCor.

SunCor is a local company and a branch of one of the major power players in Arizona business and political circles. Headquartered in Phoenix at the time — it has since moved to Tempe — SunCor is the development arm of Pinnacle West, a Fortune 500 company that also owns Arizona Public Service Co., the state’s largest electric utility.

ASU alumni abound in the ranks of Pinnacle West, Sun-Cor and APS executives and directors. The companies have established strong ties with the university over the years.

SunCor, a developer of large subdivisions, golf courses, and commercial and office projects in Arizona and several other states, told ASU it was the ideal choice because it was building its own commercial center on the lake, right next door.

And, at the time, SunCor had been involved at Tempe Town Lake for at least a year, through its Hayden Ferry Lakeside project with Benton-Robb.

Still, ASU officials worried even then that SunCor’s other commitments on the lake would mean the university project "could receive a divided focus," according to records relating to the bid process. They questioned SunCor on the point.

Kirch, SunCor’s vice president of commercial development, replied that the company is highly selective about what it builds and that no project receives divided focus.

"SunCor and our parent company, Pinnacle West, have a long history of friendship with the university," Kirch said. "We recognize the university’s unique importance in our community, and we are proud of being dependable and generous corporate citizens."

In March 2001, ASU chose SunCor for the project.

A full year had passed between the time the solicitation went out and a master developer was finally chosen.

YEARS GO BY

Anaradian went to the first few of what started out as weekly meetings between ASU and SunCor. But, he said, he soon realized he wouldn’t need to go back for a while because the two couldn’t agree on some of the basic elements, like how much retail would be built and how big the event plaza would be. Anaradian said neither side seemed to be ready to compromise.

Anaradian said he shared SunCor’s belief that ASU’s plan had too much retail.

"No project gets put in ground if it isn’t marketdriven, unless the developer is receiving heavy taxpayer subsidies," he said. "And highly subsidized projects are usually a clue that the market isn’t ready."

The March 31, 2001, memorandum of understanding between SunCor and ASU set a deadline of 180 days for the company to sign a long-term ground lease, submit a plan and fulfill other obligations. But ASU granted an extension less than 90 days later. All told, ASU granted six extensions on SunCor’s deadlines.

Over the years, several outside firms have approached ASU and SunCor with proposals for the property. All were rejected by SunCor.

One of the most promising was a proposal for a high-end 16-story conference hotel and athletic facilities on ASU’s land. The company, based in Honolulu, has developed a number of hotels in the United States and internationally.

Then-Tempe Mayor Neil Giuliano, also an ASU administrator, introduced the lead developer, Jim Salter, to Crow in 2003. Crow said he liked the proposal and told the group to pursue the idea with SunCor.

But SunCor was less than receptive. Rosen and Kirch say that’s because the Salter group wanted the public to finance the project for them, through the sale of bonds.

Salter thought the project was eminently workable and, in a letter to Crow, accused SunCor of stalling.

"The overall impression was SunCor has no desire to go to the trouble of working with ASU or Tempe to undertake development on ASU owned land until their own holdings at Tempe Town Lake were built out," Salter wrote.

"SunCor is responsible to protect the interests of ASU as the master developer of these holdings. Yet they do not appear to be fulfilling this responsibility. In fact, they appear to be working against the university."

Rosen said he doubted the financing model the Salter group proposed would work, and said he didn’t think they were good for the community.

Hallman said he also was against using city bonds to build the project.

Then, in February 2003, ASU put SunCor on hold while it conducted a long-range planning effort for the entire campus, a new master plan that Crow hoped would set the course for development of his world-class university.

ENTER: MICHAEL CROW

In June 2002, Crow gave up a top position in the Ivy League to become ASU’s president. Crow’s unusual capacity to exert influence quickly made him one of the most powerful policymakers in the state. He stunned people with his drive, tenacity and directness.

The former executive vice provost of Columbia University in New York was much different than his predecessor. Lattie Coor was low-key, noncontroversial. The Tempe campus saw little change during Coor’s 10-year administration.

Crow, on the other hand, openly sought change. His sweeping vision is to replace the traditional U.S. university with his own 21st century model — not build apartments and shops on the shores of Town Lake. Crow wants to transform ASU’s 120-year-old campus into a high-tech research university.

In 2003, he hired consultant Ayers/Saint/Gross to create a blueprint for his vision. Crow stopped the lakefront project so the land could be included in the planning study.

Ayers/Saint/Gross looked at whether student housing was right for the property. But the firm recommended against it because the lake is cut off from the rest of campus by a football stadium and a mountain, more than a 10-minute walk away.

Ayers/Saint/Gross took stock of the campus and concluded that most of the buildings, equipment and infrastructure were obsolete. A draft of the planning study recommends the demolition of about 100 buildings.

Now, Crow says, he needs to generate cash for equipment and faculty. And he thinks selling the lakefront property may be the best option.

Until a few weeks ago, all signs pointed to a quick sale of ASU’s land to SunCor.

But then, according to Anaradian, ASU surprised everyone by telling SunCor it wanted $30 per square foot for the land.

Anaradian said the market rate for ASU’s land is about $22 per square foot, which may even be too high because development costs on ASU’s land run $8 to $10 per square foot.

ASU stands to make about $25.9 million by selling the 27 acres west of Rural Road at $22 per square foot. The university would pull in $35.3 million by selling the land at $30 per square foot.

"ASU needs to get a little less greedy," Anaradian said. "They’re not acting in a manner that inspires confidence."

Crow said he’s only interested in getting the highest price possible.

"It’s purely an economic question," Crow said. "We have a need for cash right now."

Crow acknowledged last month that "there is tension right now" between the university and SunCor.

Selling the land to SunCor is an option, Crow said, but the Board of Regents would have to grant a waiver for ASU to bypass the public auction requirement.

Rosen of SunCor said the company has discussed purchasing some or all of the property, but declined to elaborate.

Still, Crow said he hasn’t committed to sell the land to anyone, and won’t make a decision until appraisals are finished. ASU officials won’t say when the appraisals are expected to be done.

Anaradian said a sale to SunCor would be the best because development would be more consistent on the shoreline. The sale also would eliminate the chance of ASU using the property for academic facilities, which would be exempt from city taxes and lake assessment fees, he said.

On the other hand, the sale would curtail competition on most of the south shore, and that could delay development by three to five years, putting more of a burden on Tempe taxpayers, he said.

And Tempe officials say development of the lake must move ahead — and quickly.

Since 1999, Tempe has transferred millions of dollars into the reserve fund that pays for lake operations. The fund is projected to run out by 2008, Hallman said.

Tempe’s whole reason for building the lake was to bring income to the city. "Instead," Hallman said, "it’s siphoning resources."

The best thing for the community, Hallman said, is for ASU to sell its property. Sun-Cor is the likeliest buyer to pay the highest dollar, he added.

"If ASU’s land remains in state hands, this project will not work," he said.

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