Delay of gain

Typically, residential development projects have been sold to skeptics in Alameda by emphasizing the “public benefits” they provide.

For those who aren’t persuaded that the City needs more housing for the affluent (the pitch goes), just look at what else the project will give Alamedans:  a new bus line running every 20 minutes . . . or a 44-acre sports complex . . . or more housing for low- and moderate-income households.

These promises all may come true – but they come with a catch:  The touted extras will materialize only if the development actually gets built.  And if it doesn’t, or if it’s delayed?  In that case, the benefits may come to pass only if somebody else – like the taxpayers or a non-profit organization – foots the bill.

This Tuesday, Council will hear about two cases in point:  the Del Monte warehouse and Site A at Alameda Point.

When staff presented the plan for the Del Monte warehouse in December 2014, it described the project as a “transit-oriented development that minimizes automobile use and traffic congestion, reduces greenhouse gas emissions . . . , and maximizes the use of transit, bicycling, and walking.”  One of the steps to be taken to achieve this goal, the staff report stated, was facilitating bus and shuttle service from the Del Monte warehouse (and other new developments along the northern waterfront) to BART.

After Council approved the Del Monte project, City staff pressed AC Transit to restore the old Line 19, which ran from the Fruitvale BART station along Buena Vista Avenue through the tube to the 12th Street BART station.  Staff also approached Tim Lewis Partners, the Del Monte developer, and Lennar Homes, the developer of the nearby Marina Shores project, about subsidizing the new service so that the buses would run more frequently than every 30 minutes during peak hours.

These efforts succeeded:  Line 19 began operating again in January 2017 with a 20-minute “headway” during peak hours.  In a press release, the City credited a “funding partnership” between Tim Lewis and Lennar and AC Transit for making this possible.  According to the release, the two developers had agreed to pay AC Transit more than $175,000 a year to provide the enhanced rush-hour service.  This agreement was assumed by the Alameda Transportation Management Association, of which Tim Lewis and Lennar are members, when it was formed in June 2017.

Things are now going to change – unless the City itself picks up part of the tab.

According to the staff report prepared for Tuesday’s meeting, the Alameda TMA recently informed the City and AC Transit that “due to delays with the Del Monte project, the Alameda TMA will not be able to continue to contribute funds for the enhanced service until such time that the Del Monte Project is occupied, consistent with the City’s approvals.”  As a result, the 20-minute service, which has averaged 362 daily boardings during peak hours, will end on June 30.

To keep it going for another 30 months, staff is proposing that the City pay AC Transit $177,000 per year for a total cost of $491,215.  For the next fiscal year, about half of the money will come from Measure B/BB funds and the balance from the General Fund.  Essentially, the payment by the City will replace Tim Lewis’s share of the subsidy, since the homeowners’ associations for the Marina Shores and 2100 Clement Street developments and Wind River Systems will continue to pay AC Transit directly for the enhanced service.

If Council doesn’t okay the proposal, frequency on Line 19 will be reduced to every 30 minutes during peak hours.  The staff report doesn’t address the impact of this change on ridership, but, of course, it won’t have any effect on residents of Tim Lewis’s Del Monte project – since there aren’t any.

The impact on public transit caused by the delay of the Del Monte project is a far less serious matter than the effect of the delay at Site A.

Under the Disposition and Development Agreement between the City and Alameda Point Partners, the developer was supposed to take title to Phase 1 of the project on
December 12, 2016, and begin construction of the backbone infrastructure within 30 days thereafter.

Just before the deadline, APP asked for an extension of the Phase 1 closing date to April 11, 2017, citing the need for more time to “complete property due diligence items and obtain additional financing commitments.”  Staff told Council that the extension “would not extend any of the major performance milestones,” such as completion of the infrastructure and vertical building construction for Phase 1.  Council went along and approved an amendment to the DDA in January 2017.

APP missed the new closing date, and the City declared a default.  The developer’s excuse for failing to close, according to a subsequent staff report, was that they “could not underwrite a financially feasible project due primarily to the extraordinary escalation and volatility in construction costs since execution of the DDA without commensurate revenue appreciation.”

To cure the default, APP proposed a second amendment to the DDA.  This time, the developer wanted to change the terms of the deal.  Originally, the 72 units of moderate-income housing included in the project would be interspersed among the market-rate units.  Now, APP proposed to move 70 of the moderate-income units from the blocks planned for market-rate housing into a separate building owned by the Alameda Unified School District and dedicated to housing for teachers and other AUSD employees.  (Taking the moderate-income units out of the market-rate blocks, APP said, would raise the price at which it could sell those lots to other developers.)  If this new plan “is not successful,” the staff report warned, “there is a risk to the City” that “the moderate income units [will] not [be] constructed on the anticipated time line.”

In addition, APP proposed a change relating to another of the “public benefits” the Site A project was supposed to provide:  the sports complex.  The DDA required APP to pay the City $5 million toward the cost of the complex on the Phase 1 closing date.  APP asked that its obligation be changed to $1 million at Phase 1 closing, with the balance to be paid on the Phase 3 closing date (which was estimated not to occur until 2024).  Since only commercial development was planned for the latter phase, the staff report cautioned, “there is a risk that there will not be sufficient commercial land value to cover the cost of the Phase 3 new commercial construction, infrastructure and the $4 million Sports Complex payment. . . .”

In exchange for extending the Phase 1 closing date, APP agreed to pay an extension fee at the rate of $50,000 per acre.  The new closing date was set for August 9, 2017.

APP missed that date, too.  Instead, the developer paid the City $1.3 million on August 9 to obtain a further extension of the Phase 1 closing date to April 9, 2018.

And this is where the risk of really significant adverse consequences arises.

Under the DDA, APP is obligated to build a total of 128 units of low- and very-low income housing at Site A.  APP assigned its obligation to a non-profit developer, Eden Housing, which came up with a plan to construct a 70-unit “family project” and a 60-unit “senior project” at the site.  APP is required to contribute $3 million toward the cost of these two buildings.  Moreover, it is required to put in all the of the backbone infrastructure necessary to serve the block on which they are located.  The City is not obligated to transfer the property to Eden Housing until that infrastructure is completed.  Nor, of course, can any vertical construction occur before then.

The delays in the commencement of construction at Site A have jeopardized the non-profit developer’s ability to arrange financing for the affordable-housing project.  One issue was “direct site control”:  Eden Housing wouldn’t own the property until the City transferred title, and the City wouldn’t transfer title until APP completed the backbone infrastructure.  Last October, Alameda Point Chief Operating Officer Jennifer Ott told Council that lack of site control was one reason the state Department of Housing and Community Development turned down Eden Housing’s application for a cap-and-trade grant.

In addition, some funding agencies impose “readiness” requirements – i.e., that construction begin or be complete by a date certain.  This, too, depends upon the backbone infrastructure being in place.  Last month, Eden Housing’s Neil Saxby told the Planning Board that the non-profit developer stands to lose all of its federal “HUD-VASH” funding – $8.8 million, according to the pro formas – unless it begins construction of the affordable-housing project by the end of this year.

The solution to the site-control issue was for the City to enter into ground leases for the property with Eden Housing, which it did last October.  And the solution to the readiness issue was to include in the ground leases an “infrastructure contingency plan.”  Under that plan, if Eden Housing doesn’t want to wait for APP to put in the backbone infrastructure, the non-profit developer can do the job itself – at its own expense.  Except for installing a new water line to connect to EDMUD, the work can consist of repairing rather than replacing the existing utility systems.

(We should note that Eden Housing also has proposed design changes intended to reduce the cost of the two buildings.  On February 18, the Planning Board voted unanimously to authorize City Planner Andrew Thomas to agree to the changes.)

The “infrastructure contingency plan” gives Eden Housing an option; it doesn’t impose an obligation.  And, presumably, before Eden Housing would exercise the option, it would need to find a source of financing for the additional cost.  As Ms. Ott told Council, “Just because we’re providing a contingency plan doesn’t mean Eden has to go down this road.  They may determine that those infrastructure costs and obligations are too much, that they can’t finance them, or they don’t want to accept the liability.”

And if Eden Housing chooses not to exercise the option?  Well, APP still is obligated to provide 128 units of low- and very-low income housing at Site A.  Good luck with that.

Another item on Tuesday’s Council agenda complicates the affordable-housing issue even further.  Under the DDA, the City will not issue any building permits for more than 395 market-rate units until Eden Housing has obtained the tax credits that are a key part of its financing package.  But APP now is seeking a third amendment to the DDA to remove this restriction, arguing that it “inhibits their ability to sell the market rate development blocks at sufficient value to cover the costs of the Phase 1 project, as the provision restricts one property owner based on the timing of another property owner out of their control.”  APP contends that eliminating the provision will enable it to close by April 9 and start construction on the backbone infrastructure within 30 days.

Staff is recommending that Council approve the amendment, since, without it, “the Developer will not be able to continue with the Site A Project.”  But you know what might be a bolder – and more effective – step?  For Council to get their construction trade union friends to rescind the Project Labor Agreement that binds APP and everyone else to whom it wants to market lots at Site A.  If that were done, construction costs would go down dramatically, even if the developers still had to pay “prevailing wages” to construction workers.  In that event, it’s likely APP would be able to find buyers and jump-start the infrastructure work, Eden Housing would be able to secure the necessary financing, and the affordable-housing project could get off the ground.

Politically, of course, this would be a risky move.  But if Donald Trump can defy the N.R.A. (or says he can), why can’t the Triumvirate ruling our City Council disappoint the Building Trades Council of Alameda County?  They can always turn to the Alameda firefighters’ union to fill the hole in their campaign coffers.

Affordable housing always has been one of the main goals for development at Alameda Point.  To settle a lawsuit brought by Renewed Hope, the City agreed that 25 percent of any new residential development at the Point must consist of very low-, low-, and moderate-income housing.  Throughout the planning process, the prospect of 200 new affordable units often was cited as a reason for moving forward with development at
Site A.  And virtually every staff report on the APP proposal made that prospect a major selling point.

This is a “public benefit” that it would be a shame to lose.

Sources:

Del Monte warehouse TDM plan:2014-11-10 Ex. 1 to staff report to PB – Draft Transportation Demand Management Plan

Line 19: 2017-01-05 press release re Line 192018-03-06 staff report re Line 19

DDA extensions: 2017-01-17 staff report re amendment to DDA2017-07-05 staff report re extension of closing date2018-03-06 staff report re DDA amendment

Alameda Point Affordable Housing Implementation Plan: 2015-06-16 Ex. 5 to staff report – DDA Exhibit M

Eden Housing project: 2017-10-17 staff report re Eden Housing lease2018-02-12 staff report to PB re Eden Housing

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
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