Council balks at latest Point strategy

Council balks at latest Point strategy

Michele Ellson

A deeply divided Alameda City Council may end up walking away from the city’s latest proposal to prepare Alameda Point for development, with some council members saying they think the city should focus on existing tenants and forget about moving forward with new development plans for a few years. The development strategy has been in the works since the council fired former master developer SunCal in July 2010.

After a failed vote to implement the proposed strategy and another to focus on existing tenants, Vice Mayor Rob Bonta asked city staff to come back with a revised version of the strategy, which calls for taking out $5 million in bonds backed by lease revenues to cover the cost of creating entitlements that would lay out what can be built at the Point, how much, and where, and also the environmental review required before development can move forward.

“I don’t want to throw this out, that’s not what I have been saying. I’m saying it needs some tweaks in certain areas,” Bonta said at the council meeting Tuesday night.

But City Manager John Russo, who called the suggestion “demoralizing” for city staffers who were on their third presentation of the plan to the council, said the scaled-down version of the proposed strategy Bonta requested wouldn’t push Point development efforts forward and could end up costing the city more money in the long run.

“If you’re asking whether we think that will succeed, we don’t think it will succeed,” Russo said.

Councilwoman Beverly Johnson and Councilman Doug deHaan supported the plan, saying they want the Point ready for developers when the economy picks up and that short of hiring another master developer to proposed and manage development plans for the entire Point, they don’t see another good alternative for revitalizing it. Johnson said she feared the Point would “rot away” if the plan weren’t approved.

“This is the big prize,” deHaan said. “I beg of you that you got to move in this direction this evening.”

Johnson said the plan would give the community control of the development process and would ensure backbone infrastructure is uniform and where it needs to be, citing piecemeal development at Fort Ord in Monterey as an example of the perils of developing a former military base bit by bit.

Mayor Marie Gilmore and Councilwoman Lena Tam said they thought the strategy was too risky, saying they didn’t want to spend $5 million on a proposal that wouldn’t pencil out financially according to a preliminary analysis and is predicated on state legislators creating at least one new mechanism to direct future tax dollars toward former redevelopment efforts like the Point. They said they’re concerned the city will spend $5 million and have nothing to show for it, and they would rather see the city find a developer who will share some of the cost of the predevelopment work.

“I as much anybody else want to jump on the fact that we are going to get this large chunk of land we’ve been sitting on for 17 years,” said Gilmore referring to the Navy’s plans to transfer much of the base to the city by the end of this year. “But if we can’t afford it, we can’t afford it.”
Gilmore and Tam said they want the city to focus on existing Point tenants for the next year or two, and to pursue other development opportunities as they become available.

Russo and Alameda Point Chief Operations Officer Jennifer Ott, who worked with developers to prepare the strategy, said preparing entitlements and an environmental review for the whole site would remove a major stumbling block to developing the Point, and doing it now would allow the city to have the Point ready for development when the economy picks up again. They said a developer is not likely to be willing to help the city pay those costs and even if they were.

Ott said other projects, like Mission Bay in San Francisco, looked poor on paper at first but saw the value of the project improve as work got underway. She and Russo said the prep work would draw developers to the site because providing entitlements and a completed environmental review would provide them highly desired certainty. And Russo said the city will end up paying the entitlement costs whether they move forward with this plan or another to redevelop the base.

Russo said slow absorption rates for multi-tenant commercial buildings – which were hit especially hard by the recession – were dragging down the Point’s financials, though budget estimates showed that a residential project could make money. The three-pronged approach for developing the Point includes areas for homes, commercial development – a major campus user or build-to-suit opportunity is envisioned – and adaptive reuse of existing buildings.

Another expense: A community “wish list” of projects that Russo said the proposed strategy was designed to allow city leaders to discuss with the community.

“If these are the economic facts of life, then really, there’s no future for the base,” Russo said.

He had suggested the city use reserves dedicated specifically to Alameda Point to pay for some or all of the development strategy, an idea Johnson, deHaan and Bonta backed.

The discussion and vote marked the latest twist in the complicated Point development saga. After the original consortium of developers backed out of developing the project due to a declining economy, a divided council voted to hire SunCal to serve as the master developer for the Point, with Tam, Gilmore and deHaan voting in favor of retaining the Irvine-based developer over other candidates. When that developer asked to go beyond the 2,000 homes contemplated by a community-developed reuse plan, the council balked at asking voters for an exception to development-limiting Measure A needed to make that happen, instead asking SunCal to handle that task.

City leaders subsequently moved back to the 1996 reuse plan, a move that helped them convince the Navy to take the $108.5 million price tag off the Point. Under the deal, the Navy would collect an additional $50,000 per home developed at the Point beyond the 2,000 mark.

But a few months after that, the state’s highest court voted to eliminate California’s redevelopment program, taking with it the city’s ability to use future property taxes to pay some of the infrastructure costs associated with developing the Point, which are estimated at as much as $774 million. City staffers are working with legislators in an attempt to recoup the ability to collect at least some of that money again.

The proposal is slated to come back to the council on June 6.

Comments

Submitted by Chuck on Thu, May 10, 2012

I am glad our council is looking out for our public dollars. This council did not want to float a public bond to pay for deferred improvements at the Corica Golf Complex, and opted to get private capital from Kemper or Greenway. With the Golf course, we would have seen most of the changes. With Russo's proposal, we would get an EIR, guaranteed approvals for developers, and a hope that the legislators would restore redevelopment monies to pay the $774M. That's not a good deal for the city. It's good to know some council members care about risks.

Submitted by Karen Bey on Thu, May 10, 2012

The Mayor’s and the council’s job is to protect the assets of the city --- and therefore did their jobs by asking good questions. Russo’s claim is that there were three presentations and he and his staff were demoralized after having their strategy rejected by council, but this was the first presentation where the council and the public got to see actual numbers, and budgets, and projections.

I thought the Mayor, and Council member Lena Tam raised some valid questions and concerns about John Russo’s strategy. Both the Mayor and Councilmember Tam raised concerns about going into debt or using our reserves to pay to entitle a plan that doesn’t pencil out. The Mayor also raised the question, why should we sign on to a plan where the city takes on all the risk, and the developer takes none? She asked where is the shared risk in this development strategy.

There are a lot more questions than are answers in my opinion.

I too have a number of concerns and questions about the strategy, but I was also concerned about the tone that John Russo took with the city council in this session. It is his job as City Manager to implement the vision of the city council, not the other way around – yet when he was asked to come back with other options, he pushed back and told the council that it was their responsibility to come up with other options and to give him guidance. Finally after several attemps from Bonta to refine the strategy, Russo agreed to come back in June. I was quite surprised to see this side of Russo and left the council meeting wondering if this is the beginning of something new?

Submitted by Karen Bey on Thu, May 10, 2012

The other concern I have has to do with the $5M in projected predevelopment and entitlement costs. My bet is that we've spent way more than $5M to date on this project. The predevelopment and entitlement costs for most development projects this size far exceed $5M. The Alameda FISC project had well over $5M in predevelopment and entitlemlent costs. The city should know the actual costs because they had to reimburse Catellus for some if not most of their predevelopment and entitlement costs -- but my recollection was that it was close to $15M or more.

My question is what do we do if and when the city exceeds the $5M? Where do we get the money to pay it?

Submitted by Karen Bey on Thu, May 10, 2012

Another concern that I have with this strategy is the use of a “Development Advisor”. In my opinion this appears to be a round about way of hiring a master developer without calling him a master developer. The scope of work for the Development Advisor and the Master Developer is very similar except the Development Advisor is paid as a consultant and gets paid up front whether the development is successful or not. He gets paid either a fixed monthly fee and/or a brokerage fee.

Here is the definition of a Master Developer:

The master developer is responsible for managing the development and
disposition of the site from initiation to final build out, overseeing site preparation
and infrastructure development, financing, marketing, and asset management.
The master developer may or may not be involved in construction of buildings. In some cases they will simply sell improved building sites to other builders or
developers.

In the case of a master developer – he gets paid as improved building sites are sold or on the back end of the project, assuming the risk along with the city as its partner. This is why developers require a specified return on their investment, because of the risk they assume. The master developer must also go through a pretty extensive vetting and review process including the preparation and approval of a Development and Disposition Agreement which is approved by the City Council. But the Development Advisor is hired via a contract, assumes no risk, and apparently gets to skip this very important process.

Submitted by Michele Ellson on Thu, May 10, 2012

@kabey Your last question about what happens after the $5 million is expended is a good one. I'll ask.

Richard Bangert's picture
Submitted by Richard Bangert on Thu, May 10, 2012

kabey,

Back in the last century, the city started down the road of implementing the reuse plan - the same plan that we just said we would implement in exchange for a no-cost conveyance. Not long into that process in the last century, someone pointed out to city hall that the city did not have the financial capacity to sell enough infrastructure bonds to provide the needed upgrades.

We then embarked on our master developer odyssey, going through two master developers to try to get us a fully planned community that seamlessly integrated with the city. For the first master developer, the numbers didn't pencil out for them. In SunCal's case, the numbers didn't pencil out for us.

The post-SunCal emerging consensus was that we would try a new way of developing Alameda Point. That new strategy (articulated by staff at Tuesday's meeting) would have the city preparing the paperwork that would then allow us to sell property. The new disposition and development strategy is a heretofore untried strategy for Alameda Point. While some people have characterized the spending of $5 million as risky, the strategy itself, over a 25-year timeframe, is the least risky to the city of any strategy that has been tried.

Under this new strategy the city faces less risk of having one developer tie up the whole 700 acres forever. In theory, we could (and likely would, due to different subarea focuses) be dealing with multiple developers. That provides less risk, less uncertainty, greater flexibility, and greater potential to reap greater financial rewards for the city through competition and phasing into a future in which land prices for scarce inner-city land will trend upward . And most importantly, our rewards go up because of the simple fact that a developer can start building in a relatively short time - they're pre-approved, without having to go through a year of community meetings and then do an environmental impact report for another year or so.

Unless the council reverses its rejection of the staff recommendation, we are headed straight back to the big master developer, more presentations, studies, dog and pony shows - and 5,000 homes. And every home over 1,400 will have a $50,000 surcharge which may or may not be included in the appraised value - meaning potentially a very big downpayment.

And by the way, the challenge I issued two years ago for someone to show me a closed military base similar to Alameda Point that has successfully implemented a Calthorpe-type plan has produced no examples. The era of bubble economics, what I call bubblenomics, is over. City staff understands that. Hopefully you will as well.

Submitted by frank on Fri, May 11, 2012

Thank you Richard.

Submitted by Chuck on Fri, May 11, 2012

Richard -- Can we count on you vote and support a $15M bond (Catellus) to pay for the entitlement costs when we bond against lease revenues that can barely support $5M? Are you supporting Measure C which looks at bonding for 30 years.

If the plan doesn't pencil out financially, do we disclose that in the bond prospectus that is being used to pay for the EIR?

Richard Bangert's picture
Submitted by Richard Bangert on Fri, May 11, 2012

Chuck says, "If the plan doesn't pencil out financially, do we disclose that in the bond prospectus that is being used to pay for the EIR?"

Whether or not the plans being entitled pencil out is irrelevant to the safety of the bonds as an investment. The $5 million bond would be backed by current lease revenue, not future taxes.

The real issue in this debate is not the $5 million anyway. Let's be honest. It's about whether or not we hire a master developer for the entire Point. There are strong points for doing so, but the course outlined by the staff on Tuesday is not inherently a dead end. The development community has said that they will invest in entitled land. They obviously think something will pencil out. And if it pencils out for them, it will pencil out for us because we will derive greater sales revenue from the enhanced (entitled) land that otherwise would go to repay investors who took the entire risk.

And contrary to what others have said, there IS shared risk. We risk $5 million, and developers risk tens of millions on land improvements and building construction in hopes of making a profit.

What amount of risk do you want the city to assume? None, a little, a lot? Do you place "hiring master developer for entire Point" in the "No risk" category? If you do, the community would like to know why. Ten years of experience with master developers has shown that there is risk - total failure. Recounting all the drama of the past decade and who made what mistakes does not erase the end results that we've seen. The ten years of master developer drama that ended in failure has to, in my opinion, be counted as a risk.

Related issues include local control and local self-reliance. There is more of both under the strategy outlined on Tuesday by city staff.

Richard Bangert's picture
Submitted by Richard Bangert on Sun, May 13, 2012

On April 20, Michele reported on efforts at the state level to create new infrastructure financing mechanisms in the face of redevelopment agencies being eliminated http://www.alamedacommunitynewsproject.org/news/point-little-used-distri...

One promising bill she reported on was AB 1827 by Susan Bonilla of Concord, where they face an even greater financing challenge for the old Naval Weapons Station. Last Monday, May 7, the amended bill was read the final time in the Assembly, passed without opposition, and was moved to the Senate where it was read for the first time.

If passed as is, the bill says in part: "This bill would authorize a military base reuse authority to form an infrastructure financing district for purposes of financing public facilities and issuing bonds. The bill would further authorize infrastructure financing districts to finance homeless accommodations, as specified."

The lack of a taxing authority for infrastructure at Alameda Point was one of the key reasons that Mayor Marie Gilmore balked at going forward with staff's proposal, which included creation of a master infrastructure plan.

Submitted by Michele Ellson on Wed, May 16, 2012

Hey Karen - got an answer to your question about how the city would cover predevelopment costs over $5 million. Alameda Point COO Jen Ott says the money would come from lease revenues or from a developer, depending on when the city engages one.