Time to hit the reset button?

Last Tuesday’s Council meeting was billed as a test of the defeated incumbents’ willingness to give themselves a last hurrah for their “vision” of Alameda Point before Mayor Marie Gilmore, Councilwoman Lena Tam, and Councilman Stewart Chen, D.C. leave office.  In this they succeeded.

By a unanimous vote, Council approved an Exclusive Negotiating Agreement with “Alameda Point Partners” for the 68-acre site staff calls “Site A,” extending from Main Street to the Seaplane Lagoon.  The “mixed-use” development will include 800 new housing units and feature “artisanal” retail shops (as distinguished, we suppose, from stores selling goods people actually need).

The approval of the ENA for Site A got the headlines in The Alamedan and the Alameda Journal.  But, to the Merry-Go-Round, equally significant were two announcements made by the Mayor and Alameda Point Chief Operating Officer Jennifer Ott.

Say goodbye to the proposal to build two hotels with 250 rooms and 200 condominiums along the taxiways next to the Seaplane Lagoon (thereby busting the 1,425-unit cap on residential development at the Point).

Say au revoir – for now – to the effort to bring a “major sales tax generator” such as a “premium retail outlet” or a “build-to-suit” commercial user to an 82-acre site staff calls “Site B,” located primarily in the “Enterprise” district at the southeast corner of the Point.

As a result of the demise of the proposal for the taxiways and the failure of the negotiations over Site B, the scope of development in the works for the Point has shrunk and its pace has slackened.  And the pullback occurred even before Mayor-elect Trish Spencer and Vice Mayor-elect Frank Matarrese, both of whom ran on a slow-growth platform, took their seats on the dais!

But we’d advise the victors’ supporters not to gloat.  And we’d urge Ms. Spencer and Mr. Matarrese (and even their new colleague, “Citizen Jim” Oddie) to consider carefully the message these events send, and the opportunities they create.

We’ll start with the taxiways.

Taxiways

Back in July, Council approved two ENAs with an outfit calling itself “Alameda United Commercial, LLC.”  One was for renovation of the former Bachelors’ Enlisted Quarters.  (City Manager John Russo told us these negotiations were still on-going).  The other was for the hotel and condo development on the taxiways (the yellow boxes above).  The term sheet stated that AUC offered to purchase the 5.5-acre site for $7.5 million and agreed to pay an additional $56,000 per unit fee “for all market rate residential condo units.”

Tuesday night, Mayor Gilmore announced that the City and AUC had entered into a “settlement agreement” under which the ENA would be terminated and the City would refund AUC’s $250,000 deposit.  The Mayor chose not to explain further, so we got a copy of the “settlement agreement” from City Clerk Lara Weisiger and found out that “disagreements” had “arisen” between the City and AUC on a host of issues:

(1) infrastructure requirements for the Taxiway site and their related costs; (2) the inability of AUC to own in fee portions of the site that are in the Tidelands Trust; (3) profit participation for the City to ensure the City participates in any windfall profit on the project after AUC has met a market rate of return; (4) and whether AUC is responsible for paying $56,000 per market rate residential unit on the site; and (5) whether AUC is entitled to any refund of its $250,000 deposit upon termination of the ENA.

According to the Settlement Agreement, AUC contended that “the City’s position on these issues was not fully disclosed” to AUC before it entered into the ENA; had AUC known the truth, it would not have signed the ENA or made the deposit.  For its part, the City “allege[d] that all material facts regarding the City’s position were either fully disclosed directly to AUC or were public information which AUC could have obtained through due diligence.”

This sounded like a pretty interesting credibility contest to us – how could AUC not know about the $56,000 per unit payment when it was right there in the term sheet? – so we sought more details from Mr. Russo.  He was predictably, and (from a lawyer’s perspective) legitimately, circumspect, but he did elaborate as follows:

We concluded mutually that they could not go forward with the project given the infrastructure costs that were attached to those parcels, the fact that some of the state lands areas had to remain green [later corrected to “remain in City ownership”], and the demand by the city for $57K per housing unit as required by Navy for units over the 1425 limit.  We considered housing on this site to be over the limit.

So what lessons can we draw from this experience?

One involves the housing cap.  Ms. Ott confirmed for us the breakdown she gave to Council last April of the 1,425 units permitted under the conveyance agreement between the City and the Navy:  225 existing units consisting of the “Big Whites” and the “supportive housing” run by the Alameda Point Collaborative; 800 units at Site A; 200 units in the “Main Street Neighborhood,” and 200 (presumably rehabilitated) units in the “Adaptive Reuse” district.  Any housing in excess of these numbers exceeds the cap and is subject to a $50,000+ per unit “penalty.”

According to Mr. Russo, the penalty applied to the housing units proposed by AUC.  So residential developers – and housing advocates – take note:  The only way more housing units than those included in staff’s breakdown are going to get built is if the developer agrees to pay the $50,000+ per unit penalty.  And at least one developer – AUC – already has determined that that is too high a price to pay.

The second involves infrastructure.  Mr. Russo declined to say how much the City was seeking from AUC for infrastructure costs.  But the “Development Impact Fee” schedule approved by Council in July calls for residential and mixed-used developers at Alameda Point to pay – in one form or another – $1,107,121 per acre.  This works out to $6.05 million for a 5.5-acre parcel.

We don’t know if, when AUC submitted its $7.5 million offer, it was aware of the magnitude of the infrastructure costs for which the City intended to hold it responsible. But its backing away from the deal suggests that even residential developers, who supposedly are champing at the bit to invest at Alameda Point, may balk at the size of the tab the City is asking them to pick up.  So even if more housing was allowed at the Point, no one may be willing to build it.

Now to Site B.

Site A & B map

Back in April, at the same time staff sent out a request for qualifications for developers for Site A, it also sent out an RFQ looking for parties interested in “developing mixed commercial projects, with a focus on a major sales tax generator, such as a premium retail outlet (not a ‘big box’ store)” at Site B.  Four entities submitted qualifying responses.  An “interview panel” selected two finalists, but, according to the staff report, one of them bowed out “due to the uncertainty of the market for commercial uses at Alameda Point.”  Another of the four original candidates was tapped as a replacement.

Both finalists proposed “significant commercial development with a focus on build-to-suit corporate users, including office/R&D and light industrial uses, and also potentially retail, hospitality and other commercial uses.”  In September, Council directed staff to pick its “preferred developer” with whom to negotiate a final deal.  The choice was scheduled for presentation to Council on December 2.

That ain’t gonna happen.  Instead, the negotiations will be put on hold – indefinitely.  Ms. Ott explained that staff had asked both finalists about their willingness to “commit” to pay for infrastructure costs.  Both replied that they “were willing to commit nothing,” she reported.  “They’re not willing to pay for infrastructure upfront, they’re not willing to pay for any land payment, and they’re not willing to commit to any performance milestones.”  And if the developers weren’t willing to show the City any money, there was no reason to keep talking.

Again, no further details about the amounts at issue were forthcoming.  But the DIF schedule calls for commercial developers at the Point to pay $978,965 per acre toward infrastructure costs.  That works out to more than $80 million for all of Site B.

So what lessons can be drawn from the collapse of the prospects for Site B?

To staff, it just showed the importance of going forward with the development of Site A.  According to Ms. Ott’s slideshow, the Site A proposal contains features that will “catalyze” new “job-creating development” at Site B:  the new sewer line will reduce infrastructure costs; the extension of Ralph Appezato Memorial Parkway from Main Street to the Seaplane Lagoon will “create an attractive entry” to the Point, and the “amenities” offered to potential employees will be “crucial to attracting major commercial users.”  (“You can’t bring in the CEO of a major corporate user in the condition it is now,” she said).

Well, maybe.  A more straightforward conclusion would be that the types of commercial users the City is trying to attract aren’t willing to incur the kind of costs the City is asking them to bear.  As Ms. Ott herself said, the problem wasn’t that the two finalists lacked the financial resources to meet the City’s price.  Instead, it was that they “don’t think that it’s feasible economically to invest millions of dollars in infrastructure for something that is so speculative at this point.”

We’re sure that the Russo/Gilmore administration’s detractors would characterize the demise of the proposal for the taxiways and the failure of the negotiations over Site B as evidence of a flawed strategy for developing the Point.  Mr. Russo wanted to take control over finding and vetting developers and then cutting deals with them.  The current Council, ever-inclined to “lead from behind,” gave him free rein.  And what did we get?  One potential residential/retail project for Site A – and four developers who expressed interest in, and then walked away from, other locations at the Point.

But let’s cut Mr. Russo and his team some slack.  During the campaign Mayor Gilmore touted the “no-cost conveyance” of the former base by the Navy to the City as one of her major achievements.  A more cynical, but perhaps more realistic, assessment is that, by “giving” the property to the City, the Navy hung an albatross around the City’s neck rather than pinning a medal on its chest.  As a result of the “gift,” the City ends up with a vast amount of land, some of it still undergoing remediation, with an outdated and deteriorating infrastructure.  Unless the entire site were to be set aside for open space, any development plan was fated to be problematic.

What’s more, unless staff had stepped up, it’s unlikely that anything at all would have gotten done in the last two years.  If Ms. Gilmore and her like-minded colleagues on Council had been running the show, we suspect they’d still be scheduling town-hall meetings – facilitated, of course, by Jeff Cambra – imploring the public to tell them what to do.

No, we choose to take a more forward-looking approach.  Let’s focus not on past failures but on future opportunities.  Unencumbered by any need to defend the decisions made by the prior administration, the new Council can hone in on the reasons for the unsuccessful efforts to find a developer for the taxiways and Site B.  And in doing so it may be able to chart a course correction that will lead to smoother sailing down the line.

For both the taxiways and Site B, the major stumbling block appears to have been infrastructure costs.  None of the developers was willing to pay the amount calculated to constitute its “fair share” of the amount necessary to bring the base-wide infrastructure up to snuff.  So the deals cratered.

The operative numbers come from the MIP approved by the current Council in February and the DIF schedule approved in July.  The former estimated the total “backbone” infrastructure costs for the entire Point; the latter allocated the costs on a per-acre basis between residential/mixed use and commercial development.

The estimates in the MIP in turn are based on a “land use program” consisting of 1,425 housing units and 5,500,000 square feet of commercial space (4,688,000 square feet of “office/manufacturing” and 812,000 square feet of “retail and service”).  The plan allocates the residential and commercial development among five sub-districts as follows:

Table 1 - Land Use Program(“A” refers to the Main Street Neighborhood, “B” to the Waterfront Town Center, “C” to the “Enterprise” district, “D” to the “Adaptive Reuse” district, and “E” to open space)

But there’s no reason to treat the “land use program” upon which the MIP’s estimates were based – which itself was derived from the 20-year-old Community Reuse Plan – as if it was written in stone.  What if one scaled back, or otherwise changed, the scope of development?

Suppose, for example, that the total number of housing units were decreased below the 1,425-unit cap (as both Mayor-elect Spencer and Vice Mayor-elect Matarrese want).  Or suppose that the commercial component were reduced from 5.5 million square feet to a lesser (and more realistic) number.  Or suppose that, within the commercial component, the target uses were re-directed from “premium retail outlet” and “build-to-suit corporate user” (as staff proposed) to maritime enterprises or “green” businesses (as Mr. Matarrese suggested).

We don’t purport to be urban planners, but we suspect that each of these changes would affect the estimate of total backbone infrastructure costs.  It shouldn’t be too difficult to run the numbers with a different set of assumptions.  Indeed, the consultants who prepared the MIP already computed infrastructure costs for a “less development” and a “transit oriented mixed use” alternative.

Not surprisingly, the former produced lower total infrastructure costs, and the latter higher total infrastructure costs, than the “land use program” upon which the estimates in the MIP are based.  The differences are relatively small.  But the more inputs you change, the more the result may change.

We won’t know until we ask.  But if the total infrastructure costs would go down significantly for a scaled-back development plan, the cost per-acre to developers would drop accordingly.  And maybe it would decline enough that proposals like those that just fell through – and others – will become economically feasible.

To us, this seems like an analysis worth undertaking (and maybe even, to use the vernacular, a conversation worth having).

If so, it’s a shame that the current Council decided Tuesday to move forward with the current development plan for the Point rather than to defer to the newly elected Council.

Despite requests by the Mayor- and Vice-Mayor-elect, and an especially cogent argument made by Spencer supporter Paul Foreman, Council refused to delay taking action on the ENA for Site A until the new Council is sworn in on December 16.  For our part, we sat through the video of the meeting – all right, we admit we fast-forwarded when the usual sycophants approached the podium – waiting for the answer to a simple question:  What would be the harm of postponing a decision until the new Council took office?

Few of the public speakers chose to address the question.  And those who did resorted to platitudes (“Justice delayed is justice denied,” said Alameda Point Collaborative director Doug Biggs).  When it came time for the Council members to speak, the party line quickly surfaced:  “We need to respect the process that brought us to this point,” Vice Mayor Marilyn Ezzy Ashcraft intoned in opposing a postponement.  A few minutes later, Ms. Tam stated the same position using exactly the same phrase.

We’d suggest that the current Council would have shown more “respect for the process” by holding off than it did by pushing ahead.  The ENA contemplates that the parties will be able to agree on a Disposition and Development Agreement for Site A in six months.  The DDA will then go to Council – the new Council – for approval.  If three Council members – say, Mayor Spencer, Vice Mayor Matarrese, and one other – object in principle to a residential/retail mix, or in particular to the project proposed by Alameda Point Partners, the deal will die – and the City and the developer will have wasted the last six months.  A more efficient “process” would have eliminated this possibility by deferring to the newly elected Council at the ENA stage.

As it is, we’ll just have to watch the incumbents slink off the dais on the 16th.  We hope that the new Council then will be willing to consider re-examining prior assumptions and, if necessary, adjusting current plans, for developing the Point.

Sources:

MIP: I. Executive SummaryXIV. MIP Flexibility

DIF: 2014-07-01 revised presentation re DIF

Taxiways: 2014-07-15 staff report re AUC (taxiways)

Sites A & B: 2014-04-15 staff report re RFQ2014-09-02 staff report re Site A finalists2014-09-16 staff report re Site B finalists2014-11-10 staff report re selection of Site A developer

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
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4 Responses to Time to hit the reset button?

  1. Tom Bertken says:

    I am very interested in the activities going on in the North Waterfront Development projects and their impact on the traffic issues with the tubes.
    You might like to listen to part of the Transportation Commission’s meeting on last Wednesday. There are a number of statements by the City’s Planning Director about the inevitability of increased congestion and delays to traffic in Alameda exits. He cited the requirements of the regional government to promote urbanization with more concentration of population closer to activity and work areas. Alameda falls in this net and to receive various regional and State grants for development we have to meet for their additional housing opportunity requirements. Therefore that is the motivation for more congestion.
    This is my take on this, Please listen to the video for the Transportation Commission meeting for Nov. 19 to see if that is what you take on this.
    I was there as a member of the Transportation Commission

  2. Paul Foreman says:

    Thank you for your judgment that the argument that I submited at the Council meeting on the Parcel A ENA was “especially cogent”, but your subsequent remarks appear to have missed the point that I made. My point was that the City Charter requires four votes to convey city real estate,so Ms.Spencer and Mr. Mataresse do not need a third vote if they choose to scuttle the project.

  3. elliott gorelick says:

    I’m confused. For 7.5 million in land (or less than 40k per unit -ignoring hotel rooms) plus 6 million in inrastructure (30k per unit) plus a 50k penalty per unit, these developers could have built market rate condos on the water. So they presumably saw that there was less than 120k potential to sell these units above their building costs. I, for one, don’t believe it. These numbers are worse than the developers actually were facing since they put 100% of the acquisition and infrastructure cost on the condo units.

    I am guessing they saw their quick, easy, enormous profits with a fairly development friendly council become, normal, slow, market rate profits with a more circumspect elected body. They did what grifters do when the deal goes south and skedaddled.

  4. “So even if more housing was allowed at the Point, no one may be willing to build it.” Which, of course, was the intent of the “penalty,” or surcharge, of $56,000 in the no-cost conveyance deal. Congress decided a long time ago on a disposition system for the military bases it was closing, once it took over that authority from the Pentagon, and there four or five different choices.

    Alameda opted for an Economic Development Conveyance, in short, to replace lost jobs. By whatever method it was, the Navy interpreted Congress’s intent by shaping the parameters of the deal as allowing 1,425 housing units. A housing number over that amount was getting into housing and subdivision creation, not job creation. Maybe these assumptions, 17 years after the base closed and even longer since Congress passed the Base Realignment and Closure Act, are stale. But the collapse of the AUC taxiway deal does not necessarily signal that the market is enforcing the cap. Over at the Main Street Neighborhood area where single-family units are being contemplated (beginning a year from now, by the way), the $56,000 surcharge may not be a constraint for buyers and thus for builders.

    As for the Site B situation, it’s not clear to me what that means for the future – as in the next ten years. Was it just that the infrastructure costs were too high, or was it that a major corporate user could not be found that wants to locate at Alameda Point and would sign a letter of intent – at least right now? This discussion could just as easily end up turning to housing on Site B, especially if the shiny new gateway project is successful. In fact, if Alameda Point Partners’ business plan works at Site A, they may want to buy Site B. After all, they are the ones who have offered to fund the construction of a new passenger ferry terminal in the Seaplane Lagoon. Enlarging their development footprint will help offset their public benefit contributions.

    As for just scrapping the whole mixed-use idea and going with maritime and open space, there is still the fixed cost of a levy system. Sea level rise still requires a response. There would be a huge demolition tab for old buildings and pavement to make way for a park. Some of those buildings, such as Building 360 in Site B, have a lot of toxics in the soil under the building that was always assumed to be the responsibility of a future developer. Building 360 was never slated under any scenario for reuse. It’s a little late in the game to tell the Navy we’re going to demo Building 360 and that they then have to clean up the soil so it can be a ball field or park. I’m just scratching the surface here, but suffice it say, chucking the existing plan will open up a host of new and potentially equally challenging reuse problems.

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