Tension between two development companies working together on $200 million worth of projects in downtown Lincoln — including all the private development planned next to Lincoln’s future arena — recently culminated in a heated argument in which one partner says he was thrown out of the other’s office, a parting of the two companies, division of assets and the future of the arena project hinging on a new developer team with much less experience.

This month, the two development companies announced they were going their separate ways – dividing up some $200 million worth of projects in Lincoln, including a downtown high-rise under construction, a Haymarket hotel and all of the private development that will be built near Lincoln’s arena now under construction west of the Haymarket.

When the news came out, neither the developers nor city officials would say what led to the breakup, but public records obtained by Nebraska Watchdog show the developers’ relationship became strained over how big of an ownership stake each company would have in the arena project. The bigger partner was Woodbury Corp., a 90-year-old Utah firm that first dipped its toe in Lincoln when it teamed up with a relative newcomer to the Lincoln development scene, WRK of Lincoln. The companies were selected by the city to develop 100,000 square feet of commercial space, 100,000 square feet of retail space, 100 condos and a 250-room hotel near Lincoln’s new arena, scheduled to open in 2013. The developers planned to turn shovels next year and slowly phase in restaurants, shops and offices through 2018.

But over the past year, the relationship between the two companies deteriorated as they tried to work out an operating agreement. Originally, the companies planned to partner on the $100 million arena project 50-50. But then WRK said it wanted to bring in an outside investor to help put up their stake. Woodbury wouldn’t agree to that.

Walker Kennedy III, vice president and general counsel for Woodbury, said in an interview that Woodbury had a philosophical difference with WRK.

“We want our partners to put up the same amount as we do,” Kennedy said. “We don’t want to bring in third parties that we don’t know.”

Woodbury offered to let WRK reduce its stake in the project, but WRK didn’t want to go that route, Kennedy said.

“We couldn’t come to a financial agreement,” he said. “The Scotts are good developers. I’m sad that there were any hard feelings between the parties.”

At stake are three marquee projects that have cranes swinging from one end of Lincoln’s downtown to the other: the Urban 38 high-rise now under construction at 13th and P streets, the Courtyard by Marriott hotel under construction in the Haymarket and the private developments planned near the arena.

Also hanging in the balance are the jobs promised to voters when they approved the $340 million arena project: Most of those jobs were to be created by the Woodbury-WRK development near the arena, not the arena itself. And now that the two developers have split up, the question is whether WRK can pull it off without Woodbury’s experience, expertise and money.

Robert Scott of WRK would not comment on the issues that caused the division with Woodbury, saying, “We resolved our issues; we’ve agreed to move forward. We did some wonderful projects together.”

WRK is headed up by twin brothers Will and Robert Scott, Colorado natives who went to college at the University of Nebraska-Lincoln and started a real estate company and their families in Lincoln. Woodbury is a Salt Lake City company that has developed nine hotels, 9 million square feet of retail space and 1.5 million square feet of offices.

Woodbury’s local connection is Zach Wiegert, the 6-foot-5, 300-pound former Husker lineman voted the best college lineman in 1994. He was buddies with the Scott brothers during college and that connection brought the two companies together on the arena project, which ultimately drove them apart.

Wiegert said the problems began about a year ago, when the two companies tried to work out an operating agreement. WRK pressed Woodbury to formalize a 50-50 split in writing and Woodbury resisted because of WRK’s intent to bring in another partner to come up with their $50 million in financing.

Woodbury offered to take on a greater percentage of ownership, but WRK didn’t want to do that. WRK documents indicate at one point Woodbury offered to do an 80-20 split, but Kennedy said that was just one of about a dozen proposals.

Kennedy said there’s a significant difference between the net worth of Woodbury and WRK, so the risk is greater for Woodbury.

The tension culminated in an April 5 meeting between Will Scott and Devon Seacrest of WRK and Wiegert and Josh Berger of Woodbury Corp. to discuss a formal operating agreement. According to a WRK document, Will Scott was “verbally, profanely and physically intimidated and thrown out of the office by Wiegert, told profanely never to come back.”

Wiegert said in an interview that it was about the 20th meeting they’d had to try to figure out how to continue to work together and things got heated. He was offended by some “disparaging things” that were said about Woodbury, which is not only his employer but also owned by family friends. He said nobody was thrown out of the meeting.

“Basically it was a heated argument,” Wiegert said, acknowledging, “I said a profane word.”

In the spring, the two sides got together with attorney Kent Seacrest to try to work things out. Seacrest (whose son works for WRK and who has done work for both companies) was hired to try to mediate the dispute.

“At that point, nobody had even thought of not continuing to work together,” Wiegert said of the meeting. “No one wanted to walk away from this project — least of all us. It’s a great project.”

In late June, the two companies agreed to a three-week-long “intervention process” to try to resolve their differences by a set deadline.

Meanwhile, the city was pressing the two companies to come to the table to resume negotiations on a redevelopment agreement after suspending talks in 2009. Much of the deal had already been worked out, but they still needed to figure out timing, phasing, height limits on buildings and how tax increment financing would be used. One city document indicates the city has considered selling the land to the developers for $1, with a “full payment” to come in 10 years.

But WRK officials were unhappy to learn in June that Woodbury had removed WRK from any involvement on UNL’s Innovation Campus and another project and that “they would have to sue Woodbury for any involvement in the projects,” according to city documents.

On June 28, the Scotts sent the mayor a letter asking permission to continue negotiations on a redevelopment agreement without Woodbury.

“We have spent the last eight months trying to find a way to co-manage the project with Woodbury and have continually been disappointed by their lack of cooperation,” the Scotts wrote in a letter to the mayor, noting that they didn’t intend to be reduced to a silent partner or limited partner.

The letter said WRK had teamed up with Woodbury due to the company’s experience as a hotel developer, but since then Woodbury said it was not interested in building a hotel in the West Haymarket. Both Wiegert and Kennedy denied that.

Wiegert said Woodbury was willing to build a hotel if the market demands one and “we get a flag of Marriott or Hilton.”

The mayor asked the two companies to take two more weeks to try to work out their differences.

But the situation only worsened when, on July 6, WRK was informed that Sampson Construction Co. was selected as general contractor for the Haymarket hotel, even though WRK had not received copies of the request for proposals, the construction budget or bids for the project. That despite the fact that their operating agreement said those decisions required unanimous consent of the members.

On Sept. 1, WRK notified the city of its intent to split up. City records indicate there was some question as to whether WRK would be allowed to move forward without Woodbury. But the company has since found a new partner, Chief Industries of Grand Island.

Mayor has concerns
City records indicate Mayor Chris Beutler has some doubts about WRK’s ability to finance the development without Woodbury. After representatives of the companies met with the mayor June 29, WRK sent a letter to Woodbury addressing the fact that after the meeting Seacrest “expressed that our ability to satisfy financial obligations” under the arena redevelopment agreement “was a matter of some concern for the mayor.”

WRK went on to explain that it is “well capitalized” and has “the financial ability to perform on all current and future commitments.” In another memo, WRK said it has never defaulted on a loan, failed a capital call or defaulted on a development obligation.

“We are confident that when called upon, we can provide the equity needed to fund the West Haymarket Redevelopment,” the letter said.

WRK said it set up an equity fund and was reaching out to “several accredited local investors that have a long history of doing great things for our community.” WRK also said if necessary, it could “pull significant amounts of equity out of our existing projects to satisfy future financial obligations.”

The mayor agreed to let WRK proceed without Woodbury, but gave the company a long list of conditions.

The mayor warned the developers that the “timely commencement and vigorous prosecution” of the first phase of development – expected to require a minimum $20 million investment — would be necessary if they were to stay on as developers.

The mayor is requiring WRK to:
• Have schematic drawings for the exterior of buildings by Dec. 31
• Finalize a redevelopment agreement by April 30
• Begin construction by Sept. 15, 2012
• Give the city a nonrefundable cash deposit of $100,000 by Sept. 1 (WRK did so). The city will keep the deposit if a redevelopment agreement isn’t reached.
• Give the city a bond, letter of credit or other security worth $3 million to guarantee payment of the cost of initial work.
• Give the city a bond, letter of credit or other security agreement worth $20 million to guarantee construction of phase one work before the redevelopment agreement goes to the City Council for approval next year.
• Preserve, restore and maintain historic elements in the development area, including canopies, train engines and the Lincoln Station building.

WRK was originally asked to give the city letters of credit from banks by mid-November, but WRK requested alternative guarantees. The mayor verbally waived WRK’s deadline to produce a letter of credit to allow the city finance director to visit Chief Industries and gauge its financial strength. But the mayor’s office reserved the right to require the letter of credit.

WRK’s new partner is more known for building metal buildings. Chief Industries of Grand Island started out as a small construction company and has grown to one of the largest corporations in the state, with more than 1,400 employees, most of them in Nebraska.

Founded in 1954, the company designs and manufactures buildings, does steel fabrication, builds grain storage systems and feed bins, is a general contractor, builds prefabricated homes, manufactures windows and doors for prisons, makes renewable fuels and manufactures railroad accessories –- among other things.

In a letter to the city, Chief Industries’ President DJ Eihusen said the company helped build Haymarket Park and built structural steel framing systems for the Kawasaki railcar facility, Husker Village and Husker Court and a UNL indoor practice facility.

“In partnering with WRK LLC, Chief brings with it corporate financial strength, our experience in the construction industry and a sincere desire to build and invest in what is best for Lincoln,” Eihusen said in his letter.

Robert Scott of WRK said he has no doubt WRK will deliver on its promises to bring jobs and vitality to what was a dusty railyard west of the Haymarket. Eihusen, by the way, also went to school with the Scotts.

“It’s a wonderful team that we’ve assembled,” Robert Scott said.

Asked whether he thinks WRK can pull off the arena project without his company, Woodbury’s Kennedy said, “I would never bet against them. They’re good at what they do.”

Reported by Deena Winter, deena@nebraskawatchdog.org

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