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Wednesday, Sept. 7, 2011

Breakthrough on Stalled Harley-Davidson Development?

Will city release Harley from its obligation to build offices?

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Looks like the city will let Harley-Davidson off the hook for its obligation to build 100,000 square feet of office or commercial space in the Menomonee Valley.

As part of its 2005 museum complex development deal, Harley had agreed to build the office space by June 2011 to spur job creation in the east end of the valley. At the time of the deal, Harley had estimated that 280 to 400 jobs would be created in those offices.

But the area's representative on the Milwaukee Common Council, Alderman Jim Witkowiak—also the chair of the city's Zoning, Neighborhood and Development Committee—said the city plans to release Harley from its requirement to build the office space, which comprises Phase III of the development plan.

"At some point in the future Harley would like to build that building," Witkowiak said. "The city is going to allow them to forestall that. In this economic climate, it's not reasonable to force someone to build a building that will likely sit empty for a while."

But East Side Alderman Robert Bauman said that he "wasn't inclined to support" allowing Harley to back out of its agreement because the move doesn't foster job creation in the Menomonee Valley.

"The whole point of the development was to create jobs," Bauman said.

In the past decade, the Menomonee Valley has transformed from an underused, polluted section of the city to a vibrant area with large entertainment venues such as the Harley-Davidson Museum and the Potawatomi Bingo Casino on the east end as well as thriving industrial sites, the Hank Aaron State Trail and newly built roadways. Credit for revitalizing and cleaning up the valley goes to local elected officials and business owners, the Menomonee Valley Partners, and a coalition of community leaders who sponsored a national design competition to revision the valley.

The Harley-owned site has had extensive investment from all levels of government. In addition to $7 million in city financing for the Harley museum complex, the city also spent $25 million to move a Department of Public Works facility that had been on the site to a new, expanded facility on North 35th Street.

Peter McAvoy, vice president of the Sixteenth Street Community Health Center's Department of Environmental Health and a leader of the effort to revitalize the valley, said that the government made heavy investments to clean up Canal Street and build the Sixth Street bridge—key investments to induce businesses to build in a once-blighted area.

"It was expected, given the governmental investments, that there would be significant jobs created there as well—good family-supporting jobs," McAvoy said.

Payments and Parking Lots

According to the original agreement, if the motorcycle maker didn't build the office space by June 2011, the city could either sue Harley for damages or buy back Harley-owned parking lots west of the museum complex. Repurchasing the lots was said to cost $535,000. The city could then lease the land back to Harley and collect rent, or sell the land or develop it with another partner.

In September 2010, prior to the deadline, the zoning committee had attempted to act on the stalled Phase III development. Phases I and II of the development deal consisted of Harley's main museum, archive facility, conference/reception facility and restaurant. Those phases are complete, and the museum opened in July 2008.

Last September, Department of City Development Commissioner Rocky Marcoux had drafted a deal that would drop the June 2011 deadline while Harley would pay the city $550,000 and the city would reduce the amount of financing for the development from $7 million to $5.77 million.

But just as the committee was scheduled to vote on the proposed agreement, Harley requested that it delay acting on it.

The currently-in-the-works amendment to the agreement would drop Phase III altogether, the portion that requires Harley to build the office space, Witkowiak told the Shepherd.

Witkowiak said that under the proposed amendment the city would not purchase the lots outright. Instead, it will allow Harley to continue to own the land and develop it or sell it in the future. The city isn't giving Harley a deadline for future development.

If Harley does find a purchaser for the parking lots, the city would have the first right of refusal for the land for five years, Witkowiak said.

Witkowiak said he expected the new agreement to come before the zoning committee at its Sept. 13 meeting.

Harley spokesman Bob Klein said on Friday that details of the deal were still being finalized but that the company wanted to retain the parking lots, which are mostly used for overflow when there's a big event at the museum. He said that making a payment to the city for not going through with Phase III was still being discussed.

Klein said Harley wants to back out of the deal because the city has no need for the additional office space right now or in the near future.

"Obviously the commercial real estate market and the economy have changed significantly," Klein said. "It's a very different climate today than when we entered into the agreement in 2005. Our focus as a company is on our core business operations and our transformation."

Harley has also gone through a period of restructuring, during which it laid off workers and renegotiated labor contracts. The company has since rebounded and reported earning $146.5 million in net income in fiscal year 2010.

Fulfilling Obligations

Witkowiak said he was involved in a year's worth of discussions with Harley and was "fine" with the proposed agreement. He said that including the parking lot parcel had been controversial at the time of the 2005 deal, since critics charged that it wouldn't spur job growth and wasn't the best use of the land on the east end of the valley.

But he said that given the real estate market he was hard-pressed to come up with a better use of the corner of Sixth and Canal.

However, Bauman was critical of Harley's failure to fulfill its obligations to build the office spaces—especially since the motorcycle maker has been expanding its Harley-Davidson Financial Services (HDFS) facilities elsewhere. HDFS is a subsidiary of Harley-Davidson that provides wholesale and retail financing and insurance to its dealers and customers.

According to a 2010 financial report, Harley-Davidson Financial Services rents 26,000 square feet of office space in Chicago for its corporate headquarters, with the lease expiring in 2022; rents 61,500 square feet of office space in Plano, Tex., with the lease expiring in 2014; and owns 100,000 square feet of office space in Carson City, Nev. HDFS also leases a 1,600-square-foot storage space in Carson City.

Harley's Klein said that HDFS has been headquartered in Chicago since its inception in the 1990s, while Harley's customer care call center remains in Milwaukee. He said the HDFS call centers have been in Texas and Nevada for years.

Bauman said the city was letting Harley off the hook too easily and should require Harley to fulfill its promise to develop jobs in the valley.

"My sense is, if they felt that they had an obligation to develop that they couldn't get out of, without costing them some money, they'd say, 'We may as well put the [HDFS] call center in Milwaukee. We've got to put something in there anyway,'" Bauman said.

He said there's a bigger issue at play regarding the relationship between the public and private sectors.

"The principle at stake for me is how can the public sector ever trust a promise—even a contractual obligation—of a private corporation?" Bauman said.

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