R.I. to terminate development contract with company that accused state officials of inappropriate behavior

A consulting firm hired by the state determined the Cranston Street Armory project as proposed by Philadelphia-based Scout Ltd. would not be “in the financial interest of the state taxpayers”

The Cranston Street Armory in Providence, R.I.Jonathan Wiggs/Globe Staff

PROVIDENCE — Governor Dan McKee’s administration is terminating its contract with Scout Ltd., the Philadelphia-based developer that submitted plans to redevelop the historic Cranston Street Armory. The move comes after a consulting firm hired by the state determined the project would not be “in the financial interest of the state taxpayers” — and just months after the developer accused two Rhode Island state officials of inappropriate conduct during a business trip to visit a Scout property in Philadelphia.

“The Cranston Street Armory is really an amazing property. Unfortunately, the aspects that make it amazing are also very difficult to develop effectively,” said Jonathan Womer, the director of the Department of Administration, during a press briefing on Monday. “The fee structure is pretty high. There’s very little private investment and risk taking. And there’s a lot of optimistic assumptions.”

The administration is pointing to a newly released 42-page analysis by the JLL consulting firm, which determined “the project as currently proposed does not appear to be in the financial interest of the state taxpayers.” The state paid JLL $84,000 for the report, which was obtained by The Boston Globe.

In a statement, McKee spokesman Matt Sheaff said Scout’s proposal “put too much risk on the state and not enough on other sources.”

”While the state is being asked to invest $60.9 million in taxpayer funds to make the project viable, the developer itself is investing zero dollars in the development, which is not in line with the industry standard,” said Sheaff. As for next steps, Sheaff said “all viable options” are being considered.

Scout, which specializes in reviving urban buildings with a special focus on community engagement, proposed to transform the armory into a mixed-use space that would include a small business hub; a workforce development program; state offices; an outdoor promenade; and an indoor soccer complex, as well as event, retail, and restaurant spaces. In Philadelphia, the firm won awards for a similar redevelopment of the much-larger Bok building, which was transformed into a space for small businesses and artisans.

During a press conference at the State House on Monday afternoon, McKee said the state has been in “ongoing discussions” with the city for “the three weeks” regarding a potential transition in ownership of the armory. But if the city of Providence was to take it over, it would also need significant state funds to redevelop the property.

“Any transaction would necessitate a provision for adequate capital improvement funding to ensure effective rehabilitation of the facility, which is critical to future development of the site,” said city spokesman Josh Estrella.

Scout was notified of the termination in a letter sent Monday after the administration met with reporters.

By 4:45 p.m. on Tuesday, Scout executives had not responded to McKee’s letter, R.I. Department of Administration spokeswoman Laura Hart confirmed.

The news comes after months of issues between current and former members of McKee’s administration and Scout executives that stemmed from a series of racist and sexist comments that now-former state property director David Patten made on an official state trip in March to visit the Bok building. Patten resigned in mid-June after his comments to Scout executives were made public when Attorney General Peter Neronha ordered the McKee administration to release an complaint emailed to McKee’s office by Scout officials — a document the administration attempted to keep secret for nearly three months.

The email alleged Patten acted “blatantly sexist, racist, and unprofessional” on the trip while his former boss, James E. Thorsen, did not intervene. Thorsen resigned in late April to return to the U.S. Department of the Treasury. Their trip has spurred ongoing investigations by state police and the Rhode Island Ethics Commission.

Scout executives previously told members of the press that the Philadelphia trip was just one of many issues related to the armory project.

James E. Thorsen, left, the former director of the state Department of Administration, and David Patten, the former director of the state Division of Capital Asset Management and Maintenance.Courtesy of Capitol TV

In January, McKee and his campaign fundraising chairman had lunch at The Capital Grille with Scout executives. It was paid for by Jeff Britt, Scout’s lobbyist. The state’s Code of Ethics bars the governor from receiving a gift worth more than $25 from an interested person, such as certain executives or lobbyists. (McKee’s campaign told The Providence Journal in June that it sent a check to Britt — five months after the lunch took place.)

Scout officials also told the Globe in June that Rhode Island state officials pushed them to include a “Heritage Museum” in their armory redevelopment plans. Earlier this year, they were pressured to give up the $25,000 monthly fee that McKee’s administration agreed to in June 2022; when Scout declined to do so, the payments stopped. (Scout has since been paid their owed fees. The state is expected to have paid Scout approximately $697,000 through August in monthly fees and pre-development work, said Brian Daniels, the director of the state’s Office of Management and Budget.)

On Monday, Daniels said he would not call the relationship between Scout and McKee’s administration “broken,” and said the administration’s decision to terminate the contract was based on changing economic conditions and JLL’s cost analysis.

Daniels said JLL found that the cost to implement Scout’s plan would result in “a net negative of around $10.5 million over 15 years.” That was their “best case scenario,” Daniels said.

But the state itself estimates that ongoing maintenance and operations of the armory property, which has been vacant since the Rhode Island National Guard moved out in 1996, will cost the state $28.5 million over the next 15 years.

The Scout proposal — which would require a $60.9 million investment from the state as well as additional funding from the City of Providence, tax credits, and others — was also lower than a 2016 study that estimated redevelopment would cost about $100 million, or about $150 million with today’s prices.

“We understand that we don’t have a better solution here,” said Laura Hart, a spokesperson for the R.I. Department of Administration. “We are looking at all options.”

Womer said the state was “not concerned” over legal ramifications of terminating its contract with Scout, even though the contract says the state cannot use another developer for the armory project. Brian Hodge, a Neronha spokesman, told the Globe on Tuesday that the attorney general was not briefed ahead of the administration’s decision to terminate the contract.

Workers from the Rhode Island Emergency Management Agency unloaded tables, chairs, KN95 masks, hand disinfectant and equipment inside the Cranston Street Armory in early December 2022 to open a "warming center" for homeless individuals.John Tlumacki/Globe Staff

Mayor Brett P. Smiley’s 2023 legislative priorities for Providence included some public funding for the armory project, which he called necessary for the “blighted” building. But funding for the project was not included in this year’s state budget.

“This is a community project” as currently proposed, said McKee. “This is not a state-wide project.”

JLL’s report noted that the construction phase of the project as proposed by Scout would create more than 400 full-time jobs and, after construction is complete, 175 permanent jobs. But the report also flagged Scout’s plans to include office space — which was in response to the state’s request for proposals — as problematic. Since the pandemic began, the local office market is “weak,” plagued by high vacancy rates and nominal rent growth; the high development costs and high vacancy rates may “continue to challenge the feasibility of the proposed office space,” the report read.

When repeatedly asked why the state was not working with Scout to adjust the RFP due to unforeseen economic conditions, Daniels said the “landscape has changed” since Scout first applied for the state contract.

“If we wanted to change the scope [of work], we would want to make it more available” so other developers could respond with a proposal, Daniels said. And the administration wants the redevelopment to benefit the entire state, not just Providence.

“If I lived in the neighborhood, it would be a great facility for the neighborhood,” said Daniels. “I don’t know it’s necessarily smart to ask taxpayers to put at least $60 million into a project that has limited benefit to the state.”

Globe reporter Steph Machado contributed to this report. This article has been updated to include news from the governor’s press conference, information about Scout’s lack of response to the termination, and information from a spokesperson for the Attorney General’s office.