Pencil Factory development secures funding after high court struck down TAD financing
Daily Report
March 25, 2008
Andy Peters
Next to the King Memorial MARTA rail station, construction is taking place on a project that got past not only the downtown tornado but also what a lawyer calls “a perfect storm” of legal and financial challenges.
The Pencil Factory Flats & Shops survived the tornado by sheer luck; just blocks away, the Fulton Bag & Cotton Mill lofts was left partially demolished from the reported 130 mile-per-hour winds.
Funding from Wachovia saved the Pencil Factory project, a combined retail and residential space, from the Supreme Court of Georgia ruling that struck down a key financing mechanism.
The search for last-minute money for the Pencil Factory was the latest wrinkle in an already-complex deal that involved working around two huge billboards.
It was also emblematic of problems facing developers who based their plans on tax-allocation districts, or TADs, the use of which was severely cut back by the high court last month.
“All these projects were teed up and ready to go,” said McKenna Long & Aldridge partner Sharon A. Gay, who had been slated to serve as TAD counsel on the Pencil Factory project to its developer, Perennial Properties Inc.
“The perfect storm,” said Gay, was the global credit crisis and the court's ruling in two cases called Woodham v. City of Atlanta, Nos. S07A1309 and S07A1566.
The case, brought by Atlanta lawyer John F. Woodham, addressed the 1985 Redevelopment Powers Act, O.C.G.A. § 36-44-8. The law says that local governments can issue TAD bonds to finance the development of economically distressed areas. When these areas are developed, property values in the neighborhoods rise and a portion of the higher tax revenue is used to pay debt service on the bonds.
Woodham challenged the TAD for the BeltLine, a proposed 22-mile loop along abandoned railroad rights-of-way and active freight-rail corridors that would contain a trolley, bike paths and greenspace.
Although Atlanta Public Schools agreed to participate in the BeltLine TAD, the Supreme Court ruled that property taxes generated inside a TAD couldn't be used for other projects located in the TAD that aren't directly related to education.
The ruling eliminated about $900 million in school taxes from the BeltLine's total revenue stream. Mayor Shirley Franklin said last month the city will seek other forms of financing for the BeltLine, but also would likely slow down the project's timetable.
A legislative fix
Some state lawmakers are trying to correct the situation, although their chances for success in this year's legislative session are far from certain. A bipartisan group of senators, with the support of Lt. Gov. Casey Cagle, has introduced Senate Resolution 996, which would allow schools to participate in TADs. The measure passed the Senate on March 4.
“The recent decision by the Supreme Court of Georgia has threatened a critical infrastructure and economic development tool for Georgia,” Cagle said.
A subcommittee of the House Judiciary Committee has scheduled a hearing on S.R. 996 for this morning.
One potential problem for the legislative fix is that House and Senate leaders are locked in a fight over comprehensive tax reform. House leaders want to axe the state's car-tag tax, while the Senate wants to decrease the state income tax. In response, Gov. Sonny Perdue chided both House and Senate leaders for threatening the health of the state's budget.
With the state's leadership deadlocked on the issue of tax reform, the road for other proposals, even ones unrelated to taxes, has been made that much more difficult, said Gay, former executive counsel to then-Atlanta Mayor Bill Campbell.
“It's a complicated year and there are a lot of big issues yet to be resolved,” Gay said.
Further hurting the cause of TAD supporters is the fact that the Supreme Court issued its ruling Feb. 11. By that point, the General Assembly had completed more than a third of this year's session. The General Assembly is forbidden by law to conduct more than 40 official days of business each year unless the governor convenes a special session.
“You don't want to start working on legislation that late” in the session, Gay said. “This is the kind of thing you'd lay the groundwork for months in advance.”
Another factor creating a sense of urgency among TAD supporters is that 2008 is an election year and S.R. 996 would require approval by voters in a ballot referendum. If the Legislature doesn't approve S.R. 996 this year, the soonest a TAD referendum can be placed on ballots is 2010.
While the Pencil Factory's construction is under way, many other projects across the state are now in a state of limbo because of the Supreme Court's ruling on TADs. The city of Woodstock had planned to validate its TAD bonds the day after the court's ruling, Gay said. The city of Smyrna was in the process of validating its TAD bonds when the ruling was issued. Six projects were planned for the city of Atlanta's Perry-Bolton TAD.
“I can't tell you today where these projects are going to end up,” Gay said. “The city is now looking at half the bond proceeds they had counted on.”
While they wait for a possible legislative fix, cities, counties and private developers are pursuing other means of financing. In the case of the Pencil Factory, Perennial principal Aaron Goldman said his company was able to secure alternate financing through Wachovia. But Perennial was nevertheless forced to push back the start date of the Pencil Factory's construction.
“We were fortunate enough to be able to get started but there is no doubt that entire neighborhood [developments] will sort of stall out until that gets resolved,” Goldman said. “[The court's ruling] was devastating to the economics of projects.”
Perennial, which has developed numerous in-town projects, such as Highland Walk Apartments and The Grinnell Lofts, had planned on using TAD funding for some other projects in the city. But the high court's ruling forced Perennial to scrap those plans, Goldman said. He declined to identify which development projects were dropped.
The development of the Pencil Factory, which will include 188 “luxury” rental apartments and about 30,000 square feet of retail space, according to Goldman, already involved a host of unusual legal issues. For one, the building is being constructed around two large billboards that are visible to motorists on the Interstate 75/Interstate 85 Downtown Connector. When Perennial acquired the 3.8-acre parcel in October 2005 from Billy Corey, the company also acquired one of the billboards, while Clear Channel retained ownership of the second billboard, Goldman said. Perennial collects lease fees from Clear Channel on both billboards.
Perennial also had to work out several legal issues with MARTA. The Pencil Factory occupies an entire city block, with MARTA bordering the parcel on two sides—the King Memorial MARTA rail station to the east and a MARTA rail line to the south. MARTA issued a release from a construction easement that ran into the Pencil Factory site, said Darryl Connelly, MARTA's director of transit-oriented development. MARTA and Perennial also negotiated a new boundary line separating the site from the rail line, Connelly said.
Powell Goldstein partner Joan B. Sasine advised Perennial on environmental issues. Nelson Mullins Riley & Scarborough partner Bradley E. Wahl advised Wachovia on its role financing the project. Billy Corey was advised on the sale of his property to Perennial by Kenneth W. Rickert, the general counsel of U.S. Enterprises Inc., the holding company for Corey's businesses.
Atlanta solo practitioner George F. Maynard IV advised Perennial on real-estate legal issues related to the Pencil Factory project. Maynard said that he occasionally volunteers as a hearing officer for the City of Atlanta. In 2004, Maynard heard a grievance by Corey over losing an advertising contract at Hartsfield-Jackson Atlanta International Airport. Since Maynard represented Perennial when it bought the Pencil Factory site from Corey, Maynard said he obtained a conflict waiver before working on the Pencil Factory transaction.