1/16/09 - Letter to CMPA Board regarding Draft Development Agreement

January 16, 2009

CMPA Board of Directors

PO Box 12910

Pensacola, FL 32521

RE: DRAFT DEVELOPMENT AGREEMENT

CMPA Board Members:

I appreciate your decision to delay the vote on this development agreement. It seems clear that more changes need to be made to this agreement and I think we can agree it is more important to do this project right than to do it fast.

In order to evaluate this draft agreement properly, I believe you have to look back at this Board's original intent as to how this project should be developed. As you are probably aware, two approaches can be used while utilizing a developer to help create this park. Option one is the Master Developer approach, which requires the developer to take on the risk and obligation to develop the private parcels. Option two is the Fee Developer approach, which allows the developer to manage the development of the public portion of the project for a fee without taking on the risk and responsibility of developing the private portion. This Board's own memorandum to City Council, dated November 27, 2007, under Project Delivery, states "After being briefed on multiple models, the board selected the ‘Master Developer' Model, in which one development company would be engaged to develop the entire project, both public and private aspects."

The RFP for the Master Developer stated "CMPA expects that the Developer will perform all tasks and discharge all responsibilities and obligations to develop, at its risk and on a timely, obligated basis, with the approval of the CMPA, private commercial, mixed use and/or residential developments to build out the project."

Unfortunately, this requirement to act as a Master Developer was too risky, so Carter and Hammes dropped out, while Land Capital Group and Trinity Capital Advisors chose to ignore the requirements of the RFP and submit proposals as fee developers. If this Board wanted to change course and proceed with the fee development model, it should have rejected both responses and put the project back out for RFP as a fee development. The Board instead chose to begin negotiations with Land Capital.

The problem is the current developer candidate, Maritime Development Partners, wants to act as a fee developer but be compensated like a Master Developer, even though they are not taking on the risk of a Master Developer.

I was curious what Hammes and Carter thought of the draft agreement, since they were familiar with this project, so I contacted them a couple of weeks ago. Neither one of them had read the agreement, so I briefly went over the terms. Bruce Morrison with Carter was very disappointed. Carter is working on several large fee development projects now and handled over $600 million in fee development last year. He said a 4% development fee is out of line in this market. He assured me that Carter could handle this project for a development fee of 2%, with no control of the private development parcels, no acting as the General Contractor, just a flat 2%. He said they are doing a slightly larger project in Cincinnati, OH right now for 1.8%. He went on to add that Carter would have proposed doing this project as a fee development, but they were told their response to the RFP must include development of the private parcels. Both of them found the condition that the full development fee should be paid regardless of the project moving forward to be very unreasonable.

I am not recommending we go with another developer, I am simply asking this Board to negotiate customary compensation for a fee developer. I stated before, that under the current agreement, if we agree to lease the private parcels to the developer for $14 per square foot, and they end up being worth $50 per square foot upon completion of the public improvements, the City will lose over $650,000 annually or a total of over $65,000,000 over the next 99 years. The net present value of this at 6% interest is approximately $10,800,000, which would be equivalent to an additional development fee of 27%. This results in an effective development fee of 31%, which is over 1,000% higher than what is customary.

I also must mention that if the developer controls the private development parcels, this removes the City's ability to negotiate reduced land lease rates with companies that could create quality jobs by locating on the site. In addition, if the developer mortgages its interest in the private parcels or sells their development rights, this could create real problems.

I respectfully recommend this Board agree to make the following compromise:

1.) Pay a 4% development fee with approximately 1% (25% of the developer fee) going to the contractor academy.

2.) Allow a five year management contract with the possibility to renew with CMPA Board/City approval.

3.) Provide a reasonable amount of free office space in City Hall to the developer until the public portions of the project are completed.

That should be it. There should be no option for the developer to act as contractor, no developer control of the private parcels and no full fee earned regardless of whether the project moves forward. This recommendation is actually substantially higher than what is customary for a fee developer in this market. I discussed this recommendation with Bill Morrison and his opinion was this would be a "lucrative fee" for the developer. If the current developer candidate does not want to agree to these terms, we should begin negotiations with the next developer.

Thank you for your commitment to moving this project forward. With the constant clamor to "Build the park!", I hope you will have the courage to demand a development agreement that is fair and customary.

Sincerely,

Fred Gunther, CCIM

cc: Dr. Owen Beitsch

Mr. Ed Spears