Chattanooga: Walnut Hill investment adds 22 luxury condos, but critics question sale of property

During their 2005 campaigns for mayor, Ron Littlefield and Dan Johnson questioned the way some of Chattanooga's premiere waterfront property was sold by the city for projects associated with former City Hall and River-City Co. officials.

Now some are questioning the way Mr. Littlefield, who was elected mayor, and Mr. Johnson, who became the mayor's chief of staff, handled the city's sale of a downtown block to a development group that includes one of the mayor's former campaign managers.

Last year, Mr. Johnson negotiated and the mayor ultimately approved a sales contract to former Littlefield campaign manager Dale Mabee and others that turned out to be more favorable for the developers than what was initially advertised.

Unlike previous property sales offered by RiverCity for the city's Chattanooga Downtown Redevelopment Corp., Mr. Mabee's real estate group is getting an interest-free loan from the city to finance much of its $1.07 million land purchase for 22 luxury condominiums being built on the block bounded by Cherry, Walnut, Second and Third streets.

According to the sales contract signed by Mr. Mabee, the city also gave the developers an option to buy more land in the block even though such property wasn't included in the original sale offer and wasn't initially sought by the developers. Although not included in the original request for proposal, or RFP, the city also is providing an alley for access to the luxury condominiums at no initial cost to the developer even though the property is valued at $96,000.

Former RiverCity President Ken Hays said terms of the sale changed significantly from what RiverCity and the Chattanooga Downtown Redevelopment Corp. initially presented to would-be developers in their requests for proposal in 2006.

"If the city had said they were willing to make the terms of this contract upfront, I think you would have gotten a lot more interest," Mr. Hays said. "The fact that they gave an option at no cost to buy more property years in the future outside of the original RFP is ludicrous."

Mr. Hays said he was particularly concerned that the contract changes made from the original sales offer were not noted in a recently released audit of waterfront projects by the mayor's internal auditor. The 6-month audit identified problems in the way that RiverCity Co. bid some properties and maintained records. But there was no specific mention of the way the city changed the terms of its sale on Mr. Mabee's property.

"It is amazing that these highly questionable transactions are not mentioned at all in this audit, which I think shows the auditors' lack of professionalism," said Mr. Hays, who previously took exception to criticisms of RiverCity's performance by the auditors.

Highest & best use

Mr. Littlefield defended the sales process, which he said selected the highest offer and the best project for the block.

Mr. Mabee's group, Urban Renaissance LLC, offered $195,000 more than a competing offer from Chattanooga Land Co., which includes former RiverCity officials Bill Sudderth and Chris Crimmins. Chattanooga Land built the Cherry Street Townhomes two years ago across Cherry Street from Urban Renaissance's property.

"I know all of these individuals, but in this instance the winning proposal (from Urban Renaissance) that was selected offered the most for the project, and they offered the highest per unit investment," Mr. Littlefield said.

The sale was approved by the Chattanooga Downtown Redevelopment Corp., which was created by the city to help oversee downtown projects. City Finance Director Daisy Madison, chairwoman of the downtown panel, estimated the Urban Renaissance development also would produce $100,000 more in annual tax revenues to the city over the rival proposal from Chattanooga Land Co.

Although RiverCity officials wanted to keep part of the block for public parking, Mr. Littlefield said he prefers the site be developed with more condominiums, and the sales option granted to Mr. Mabee's group helps encourage such development.

Paying over time

The city took a promissory note from Urban Renaissance, rather than the full purchase price, after other developers trying to build apartments on other downtown sites made similar proposals amid the slowing housing market, officials said.

"Promissory notes and purchase options are not that unusual," Mr. Littlefield said.

But what was unusual is the city's granting an interest-free promissory note for $735,992 and giving the option on the additional land without any initial cost, Mr. Hays said.

The property option, which appears to continue for one year after the last of the first 22 condominiums are built, set a property price 5 percent above the rest of the block, plus a 2 percent annual increase after 2010. But there was no property appraisal or rival bids taken to determine the price of such a sale.

The city's internal audit questioned other land sales that didn't have property appraisals, but it didn't specifically mention the Urban Renaissance project.

Mr. Littlefield requested the audit of RiverCity and the Chattanooga Downtown Redevelopment Corp., after raising questions during his mayoral campaign. The other major candidate for mayor in 2005, Ann Coulter, was previously an executive for The RiverCity Co.

Mr. Littlefield said the audit "didn't raise any surprising or major concerns" and that he is satisfied with the answers provided in the audit.

Development timetable

The contract negotiated between Mr. Johnson for the city and Mr. Mabee for Urban Renaissance provides for a 22-unit development to be built in phases over the next five or more years. So far, the developers have bought land for six units.

Urban Renaissance, which includes Mr. Mabee and builders Don and Mike Moon as partners, expects the first units to be ready by Nov. 15, according to Mike Moon, Don Moon's son.

In a brochure outlining the Walnut Hill project, the developers list the condos from $599,000 up to $1.1 million. The three-level project -- the only townhomes of their type south of the river downtown -- will have an option of elevators for residents as well as lifts that will give two-car garages room to hold four vehicles.

So far, three of the initial six condos being built have sold, Mike Moon said.

Giving Urban Renaissance an option to buy the rest of the block at a later date was necessary, Mr. Johnson said, since any developer would want the rest of the block and would be concerned about developing their portion of the site without knowing the future of the balance of the block.

"If you don't have some say-so over the rest of the block (not acquired through the city sales offer), you would be rather stupid to even go into the deal because that one-fourth (of the block) can kill the other three-fourths," he said. "That was the reason for the option."

Parking debate

But RiverCity Co. President Paul Brock said downtown boosters wanted to keep some of the Walnut Street block available for surface parking for guests of nearby apartments and for public parking near the waterfront.

"There was an honest difference of opinion, but we thought some surface parking should be maintained," he said.

Mr. Littlefield said keeping part of the block as surface parking would have created problems in the area.

"I've never been interested in having a surface parking lot be part of that block," the mayor said. "I think that is an invitation to problems because surface parking lots wouldn't matter whoever was the developer of the project."

Mr. Johnson said the fact that Mr. Mabee was one of Mr. Littlefield's campaign managers in 2005 made no difference. Mr. Moon said the city "got a good deal," especially considering that market conditions "changed dramatically" after the purchase agreement was signed.

In its purchase agreement, Urban Renaissance could take up to a decade to buy and develop the rest of the downtown block, which Mr. Moon estimates could add 11 or 12 more condos to the 22 already planned.

Mr. Johnson said the slowdown in demand for condos may limit how the developer uses the purchase option. But the site is being developed, so another developer readily could build on the parking lot, he said.

Despite the slowing market, Mr. Moon said the developers remain committed to building all 22 of the Walnut Hill condominiums, "and we still hope and plan to eventually build on the rest of the block."