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Cities Shield Funds, Face Liquidation of Redevelopment Assets

As the clock ticks down to an imminent -- but as yet unscheduled -- vote on Gov. Jerry Brown's budget proposal, localities and their respective redevelopment agencies have been taking frantic evasive measures to try to shield funds and properties from liquidation and transfer to the state. 

The language of the budget bill would not only eliminate redevelopment agencies but also liquidate all assets that are not yet under contract to be developed. This means that land holdings and infrastructure projects that are planned but do not have private partners may be fair game. In the past few weeks, and especially in the past few days, redevelopment agencies have entered into new contracts, transferred title of properties to their respective cities, and even hustled brand-new bond issues out the door. In particular, the issuance of new debt creates ironclad obligations that the state would not, presumably, be able to nullify. 

Though the bill language implies that the state may try to nullify some of these transactions—and could do so for transactions dating back as far as three years—cities are nonetheless trying to shield as much as possible.  

It is an unfortunate but necessary strategy, say supporters of redevelopment who do not want the state to force a "fire sale" of, in many cases, cherished civic assets. 

"I think it is eminently prudent in the face of the invasion that the governor's legislation is mounting against every community in this state, trying to commandeer and control the assets of the RDAs in the state," said Chris McKenzie, executive director of the League of California Cities. "It's unthinkable that they would not prepare." 

On the other hand, this unprecedented situation has created uncertainty for both developers and public agencies across the state, with the potential for rash decisions. "It's hard because of the manipulations in Sacramento are hard to understand and coming pretty fast-and-furious," said Larry Kosmont, president and CEO of Kosmont Companies, a real estate advisory firm with a long history of working with redevelopment agencies.  

If cities fail to prepare, or if the state government can nullify shielding agreements, many fear that the state's real estate market will be flooded with a motley assortment of un-developable and orphaned land parcels--as well as a few plum deals--that may be sold for pennies on the dollar. 

"I think the liquidation clause is the most incredibly stupid idea that you could put into legislation," said McKenzie. "The governor just said he didn't want to dump a bunch of state property on the market and get below-market prices. This bill forces a lot of government-owned property to get below-market prices. It's going to waste dramatic amounts of public funds."

Although official statewide figures are difficult to ascertain, the value of shielding transactions is likely well into the billions, if not tens of billions, of dollars. 

The City of Los Angeles alone has approved $1 billion in new contracts and transfers. The City of San Diego and its three redevelopment agencies has entered in a whopping $4 billion worth of cooperation agreements, according to Derek Danziger, spokesperson for the Center City Redevelopment Corp. The City of Santa Ana took control of $210 million in assets from its redevelopment agency. And the list could go on. 

On a smaller, but perhaps more aggressive, scale, National City is one of many cities whose redevelopment agencies have issued and obligated bonds. National City Redevelopment Director Patricia Beard said that her city's issuance of $39 million in bonds was likely the first in San Diego County. Those are a small fraction of the $700 million in bonds that redevelopment agencies have issued since the first of the year, according to State Treasurer Bill Lockyer. That compares against $1.2 billion in bonds for all of last year. 

Larry Westerlund, chair of the Fresno Redevelopment Agency, said that he proposed the approval of a wide range of projects, some of which were only in early planning stages. The city council, acting as the RDA board, ended up approving around $20 million worth of projects that were reasonably far along in the planning process. 

"We have tried to expedite projects that were in the pipeline to get those MOUs, OPAs, DDAs out the door," said Westerlund.

The City of Oxnard has taken title to 53 properties worth around $60 million, according to Community Development Director Curtis Cannon. The city has also transferred a cache of contracts and cash worth, he said, around another $60 million. Thus, cities like Oxnard are rapidly becoming the caretakers of land considered crucial to their future development. 

"All of us at the local level have much more at stake, I believe, than does the state," siad Cannon.  "That doesn't discount the state's own problems.  But we at the local jurisdictions cannot physically sit down and let this happen."

For many cities, these assets represent years of work and planning, and they are considered crucial components of cities' development plans. 

"We have goals and objectives that we have been working towards. So when we purchase property or assets we have them for a purpose," said Sidnie Olson, community development director of the City of Eureka. "To have someone liquidate it and just divvy it up, that doesn't help our community."  

Olson said that redevelopment is crucial for small cities that have few revenue sources. Even in behemoth San Diego, Danziger said that the properties owned by the Center City Corp. are complements to a planned increase in the residential population of downtown San Diego from a current 35,000 to 90,000. 

"There are people who won't have backyards, so parks will be essential to their future," said Danziger. "If we suddenly lose the properties that we being earmarked for those developments, it creates a very tenuous situation for us." 

Cities are even trying to shield high-profile megaprojects, such as sites for proposed professional sports stadiums in Oakland, San Jose, and Santa Clara. Danziger said that San Diego has not explicitly earmarked land for a rumored football stadium. However, a potential downtown brownfield site is among the parcels that the Centre City Corp. has tried to shield, along with funds to clean up the property. 

"We've set about $150 million on the list for environmental remediation for the site on which the stadium could potentially go," said Danziger. "That's irrespective of whether you build a stadium, housing, a park or anything…you need to remediate on that site."

While not all of the state's brownfields are expected to go to such illustrious uses, the mere chance to remediate hundreds, or even thousands, of currently marginal sites throughout the state is looking precarious under the governor's proposal. Many such sites have no apparent purpose other than to serve redevelopment plans and would be laughable if put up for sale on the open market.  

"With the loss of redevelopment we will also lose some exceedingly important brownfield tools," said Stephanie Shakofsky, executive director of the Center for Creative Land Recycling, which promotes the reuse of brownfields and other inner city parcels. "These are laws that allow a redevelopment agency to clean up, or require a property owner to clean up, a contaminated property while providing essential liability relief." 

Whether redevelopment agencies' parcels are marginal or not, the rush to liquidate them in order to plug the state's budget hole makes little business sense, according to some analysts--especially given the state's already depressed real estate market. 

"It's a bit like leasing out your house to buy a boat," said Kosmont. 

As well, they may be properties that a private developer cannot, or would not, want to do much of anything with.  

"In general these properties would be the cats and dogs of a private portfolio...they need help," said Kosmont. "They would have a pre-development value with a low valuation because a lot of things would have to happen for those properties to achieve their highest and best use."

With a redevelopment agency, said Kosmont, those properties could be utilized. But without the help of, for instance, infrastructure improvements and a wider community plan, they would likely languish. 

As cities try to shield assets in order to avoid these kinds of devaluations, the state stands to net far less than the $1.7 billion anticipated in the governor's budget draft because so many assets will be taken off the books. And those that are left will be worth little. 

"Given the rush to go to the altar to terminate redevelopment, and given the defensive measures that are going on now--whether or not they can be pierced legally or not--at the end of the day, you're you're probably looking at no more than $200 or $400 million that could be allocated," said Kosmont. 

Contacts: 

Larry Kosmont, CEO, The Kosmont Companies, 213.417.3300

Chris McKene, Executive Director, League of California Cities, (916) 658-8200

Stephanie Shakofsky, Center for Creative Land Recycling, , 415.398.1080

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