Delay everything a year and hope it gets better

My heart sank when I read yesterday that the Oak Knoll project is now on hold. Obviously, it wasn’t exactly a shock, given current market conditions, but still, after that debate stretched out for soooo long, I get chills at the thought of Suncal pulling out and us having to start all over again. We will, I’m sure, all cross our fingers and hope they’ll be able to get it together to resume the project in a year or so.

Oak Knoll, due to its size and the controversy surrounding the project, is obviously going to be the most headline grabbing of stalled developments, but if you review Planning Commission agendas over the last year, you’ll find that more often than not, there’s at least one request for an entitlement extension per meeting.

So, under normal circumstances, once you get approval for a project in Oakland, you have two years to start building it. If you don’t, your entitlement expires and if you still want to build, you have to start all over with a new application and get all new approvals. Since the whole process is really expensive, obviously, nobody wants to do that. Instead, if you can’t build before your entitlement expires, you apply for an extension.

Now, my understanding is that pretty much all entitlement extension applications do get granted, although getting one is, again, costly and kind of a pain. (Also, a waste of public meeting time when you have to do them for every damn project in Oakland.) The Oakland Builders Alliance has spent the last several months clamoring for an automatic three-year extension of all entitlements. When asked by Dan Lindheim at an event early this summer why they couldn’t just submit applications for entitlement extensions project by project, one developer explained that it had something to do with financing and the extension has to be by right and not by application. I didn’t totally understand that and didn’t have a chance to follow up. Perhaps someone can explain in the comments. Carlos? (On a side note – I didn’t feel too bad about not fully understanding why exactly an automatic three year entitlement extension was necessary, because, well, why would I know that, but I found it appalling that Dan Lindheim, who by this point had been running Oakland Community and Economic Development Agency for months, was even more clueless on the subject than I was. For starters, he seemed to be surprised to learn that the development community even wanted the extension, which, honestly, if he read the newspaper, he should know. Clueless!)

Anyway, nobody’s getting an automatic three year extension. But Oakland City Council President Ignacio De La Fuente has proposed a one-year extension (PDF) for all entitlements that expire before January 1, 2010 (unless your property is a nuisance blight, in which case, you’re out of luck). De La Fuente’s proposal will be considered at today’s Community and Economic Development Committee (PDF) meeting.

One year is uncontroversial, and should pass without much debate. Two weeks ago, the Planning Commission gave their unanimous approval to the one-year extension, but agreed they felt uncomfortable granting three years. Nobody had anything particularly interesting to say on the subject, except for Doug Boxer (who appears to have been hit harder by the current economic crisis than most – straits are apparently so dire in the Boxer household that they can’t even afford razors anymore!), who said that he didn’t support an automatic three year extension because the projects they’ve approved might not be dense enough to be appropriate for the future. Seriously, watch:



Anyway, I’m all for the extension. I’d certainly rather see projects pushed back a little while than evaporate. I’m going to keep my fingers crossed and hope that Suncal eventually finds another way to finance Oak Knoll.

And because I just can’t help it – KTVU’s story on the subject is incorrect. At the end of the story it saws that Citywalk at 14th and Jefferson is unfinished due to the current credit crunch. Totally wrong! Olson had financing problems, obviously, but since they quit work on the project over a year ago, it seems rather preposterous to blame those troubles on today’s financial meltdown. Anyway, as of last Thursday, at least, work had restarted on the building.

34 thoughts on “Delay everything a year and hope it gets better

  1. V Smoothe Post author

    It’s horrible! And if it was only once, I wouldn’t have said anything, but he showed up like that to the ZUC/LPAB meeting last week and also to an event on Sunday. I’m sorry, dude needs to shave.

  2. Chuck

    V, this is off topic, but I wanted you to know something really must be wrong. While I was out grabbing lunch, I saw Ron Dellums.

    Outside.

    In Oakland.

    Talking with citizens!

    I’m not sure what this means, but it can’t be good.

  3. Chuck

    I had my phone out and ready to go, Max, but he started walking in my direction so it would’ve been way too obvious. But I actually did think I should try to capture the moment on “film” because we may never see it again.

  4. Carlos Plazola

    V, I’m running from meeting to meeting but understand the importance of this so here’s the short version before Committee meeting:

    Why is a two or three year extension on entitlements important?

    I’ll use a hypothetical that is probably the case in Oakland for many projects.

    Joe Castro bought a parcel with an old duplex in 2003. He makes decent income from the duplex so doesn’t need to demo and build unless the numbers add up. His rent isn’t much above carrying cost for the lot so he can’t afford to invest a great deal in beautifying the duplex so he maintains it decently but it’s not something to put on a post card to write home about.

    In March 2005, he entitled it for 12 residential units as a very attractive project. He spent 2006 and 2007 lining up financing, and as he prepared his working documents, the bottom fell out of the market. Since the city allows two extensions beyond the initial two, Joe extended his entitlements for one year in March 2007, and then again in March 2008 for another, and final, year. His entitlements will expire in March 2009.

    A one year extension, as proposed by staff, will allow Joe to extend his entitlements until March 2010. He will have to pull a building permit by then, and even if he slow-plays his construction, his units will come up for rent or for sale by mid to late 2011. Rentals, as well as for sale condos, with new construction are not breaking even right now, and the best Joe can hope for is to break even.

    Most builders seem to agree that it will be difficult to make a project break even in 2010, 2011, or maybe even 2012. It’s unclear when the market will recover.

    So, around January 2010 Joe will decide whether or not to build his 12 unit project. In all likelihood, Joe will choose not to build it. If his entitlements expire, it is highly unlikely that Joe will re-entitle his project any time soon because he will have already lost his initial $50,000 to $100,000 for entitlements. For him to invest in entitlements again, he will have to feel very optimistic that there is sufficient upside to the market again, which may not come for another 7-10 years. So, the duplex will sit for another decade.

    On the other hand, if staff lets Joe keep his entitlement rights until 2012, the market may have recovered enough by 2012 for Joe to pull the trigger and build his twelve units. The city will get the increase in revenue. Jobs will be created. Renters will have more rental stock. And the neighborhood will look a little nicer (assuming Joe builds an attractive project).

  5. Matt Novak

    V:
    The issue is that the extensions Lindheim was referring to are discretionary (the city does offer a 1-year extension, but after that you have to go back to the planning commission or council). This means the planning commission or city council could, of course, say no. The banks do not like this as it adds an element of risk to the valuation of the project/land. If you got a land loan when the project was entitled you will be in trouble when it comes due and your entitlements have expired.

  6. Stan

    Don’t hold your breath that they will be back. They got greedy with projects all over and when the ____ hit the fan, they got burned. This should not have been a surprise to anyone who has following them for the last year. One broken promise after another.

  7. Carlos Plazola

    Stan, the next time you’re sipping your coffee at the local coffee shop, or healing a wound at a hospital, or relaxing in your home/apt watching your favorite show, don’t forget to curse the greedy builders who built it.

    The next time you’re enjoying one of Oakland’s parks or enjoying a city-funded project, don’t forget to curse the contractors, engineers, and architects in the building industry whose work helped raise 50% of the city revenue that pays for them.

    The next time one of your family members lands a job as a realtor, laborer, subcontractor, escrow officer, or designer, don’t forget to curse the investor/developer who took the risk that led to the creation of their job.

  8. Carlos Plazola

    To round out the point I was making above about Joe Castro, if Joe can wait until 2011 or 2012 to build his project, he may be looking at a reasonable probability that he can break even or maybe make a small profit. If he does not have to pay again for entitlements, then he will likely move forward on building his project. Multiply this times 100 such projects in Oakland and we are talking a lot of jobs and a lot of revenue at a time when Oakland will desperately need both (we will continue to experience a decline or stagnation in city revenue until at least 2011 or 2012, IMO).

    If Joe has to spend another $50,000 to $100,000 on entitlements again in 2012 in order to build, without much upside, he’ll keep his duplex. Multiply this times 100 such projects throughout Oakland, and, well, you get the picture: a lot of jobs and revenues that will never have been created, but we’ll never have known the difference.

    Now, ask this question: why is Oakland’s budget revenue so low that we can’t pay for even our basic social and infrastructure needs? And then re-read the statement above. Oakland has a 30 year history of making bad decisions on economic growth. Our annual budget should be $1,000,000,000 right now, not $500,000,000, given our great climate, place in the Bay, excellent public transportation, and beautiful vistas.

  9. Max Allstadt

    In addition to the cost of redoing entitlements, aren’t we in the middle of a zoning update? Could some lapsed projects end up having their zoning changed on top of them while they wait to become feasible?

  10. V Smoothe Post author

    Carlos, I understand why people want to extend their entitlements, what I was asking is why it has to be automatic instead of people just applying for extensions. I think Matt answered my question – even if we all know the city isn’t going to say no to the application, the bank doesn’t know that. Is that right?

  11. Doug Boxer

    V, Thanks for covering the various meetings including the downtown rezoning process. Very difficult issue to get exactly right. But we’ll continue to work on it.

    Regarding the entitlement extension, my comments regarding increased density has to do, for the most part, with transit oriented development. We have a number of approved projects that are either very close to BART stations or, in some cases, right on top of BART stations. Clearly, we only have one shot to develop the sites. In the current economic climate, some of these projects were downsized to give them the best chance of finding financing for development. Many of these projects haven’t been built and probably won’t start within their initial four year entitlement (original two years, plus one year via administrative extension and now the additional one-year extension which the Council will probably approve).

    Thus, my comment was intended to suggest that in four years we might determine that some of these projects should include more density, if the marketplace could support it. I’m not saying every project should be re-opened just the ones where increased density makes real sense.

    Thanks.

    P.S. Some people love facial hair, others…not so much. I’ll put you in the latter category. My wife likes it. So there you have it. But I’m always changing things up.

  12. John

    I think the City isn’t collecting adequate fees for the extensions. I am not certain why developers are complaining about paying “less than $100″ (to quote Eric Angstadt from CED yesterday) for what are already essentially automatic extensions. The City of Oakland should be treating these entitlement extensions as the asset and revenue generating sources they truly are, rather than giving them away as political favors – that is really what this is about; the City already provides the extensions upon request.

    My suggestions are:

    1. Increase the fee on the extensions to $300-$500. Using Mr. Angstadt’s numbers from yesterday, there will be 470 projects for a total revenue stream of $36,000 in the next year. By increasing the fee to $300, that revenue stream becomes $141,000; if increased to $500, the City would collect $235,000.

    This fee could then fund additional planners for the City. This is how the fee is supposed to work. At the current low level, the fee serves no purpose to the City so it is no wonder the Committee gave up on the fee.

    1. For all extensions, the developer must certify that they have a viable project or submit a declaration as to why it is not viable.

    2. For all discretionary extensions, the developer must accept the affirmative duty to timely inform the City of any material changes in the viability of the project, including financing, change of ownership, etc., and must certify so with each extension

    3. There should be limit on the number of discretionary extensions. If a builder is extending the project indefinitely, it really means they have no project. Maintaining entitlements indefinitely only encourages vacant properties and lots, or blighted conditions. The City of Oakland should be neutral with regard to whether a developer must sell their property if they can’t build their project.

    Increasing this fee is not expensive to developers and is appropriate. It allows the developer to avoid the complete project review which everyone wants to avoid. However, it is obvious that the City is underestimating the value of this fee as a revenue generator. $300-$500 a year will not “kill jobs” or “kill projects” but rather will fund the very services developers need in Planning and Building.

  13. dto510

    John, developer fees pay directly for planners and the building department, and those costs are fully covered by fees (which are raised every budget to reflect staff costs). Extending the entitlements by ordinance uses much less staff time than having hearings. The city gets revenue from developments increasing the tax rolls, not from development applications. To raise revenue, the city should take steps to make Oakland a more desirable place for residents and businesses, so that demand causes projects to build sooner.

    The problem with extending entitlements currently isn’t the cost of the fee, it’s the time preparing for a public hearing and, mostly, the enormous risk and uncertainty associated with discretionary decisions. As Carlos explained, and it’s just simple logic, maintaining an entitlement makes it more likely developers will build, not less. Punitive fees and anti-growth zoning is what encourages vacant lots and blight.

  14. Carlos Plazola

    John, I hope you and Eric don’t bump into each other as you trip over dollars to chase the dimes. Or how about this cliche: Don’t miss the forest for the trees?

    If, because of debates over nickels and dimes, the city allows the entitlements to expire, millions of dollars in potential future revenues will be lost.

  15. Max Allstadt

    any answer for me about whether zoning can be changed on top of a property with lapsed entitlements, thereby scuttling a project? I ask because my little lot could quite possible see a change in zoning.

  16. V Smoothe Post author

    Max, if you have an entitlement, then any change in zoning will not change what you’re allowed to build. If your entitlement expires and you go get a new one, the new one will have to conform to the new zoning.

  17. Max Allstadt

    thought so. A building bust in the middle of a zoning update is all the more reason to extend entitlements. Talk about potential wasted work.

  18. John

    I simply believe the City should be charging a much higher fee for the extensions – period. It could and should be a good revenue stream regardless of where the money ends up being used. I don’t buy the argument that raising this fee to $300 – $500 (or more) a year is going to make any developers go anywhere.

    Btw, Eric and I already crashed into each other, distracted as we were as we watched the City give away a valuable asset as a political favor.

  19. Max Allstadt

    Is that $500 for an entire project? Or per variance, per CUP, etc.? I can’t believe I’m agreeing with Nimby McNimbypants here, but if it’s per project, and if the extension is for multiple years (it isn’t now, right?), than $100 is too low.

    3 cents a square foot might be an interesting way to go about it.

    Or perhaps it would be appropriate to assess fees based on the condition of the parcel in the interim. I’d certainly support something that allowed developers to credit themselves with the cost of setting up a temporary public park on a blank parcel.

    Let’s say you have a blank lot downtown, or anywhere for that matter. Beautify it, cheaply. Perhaps put a basketball hoop or two up. Maybe a garden. Promise the community that you’ll give three months notice before resuming development. The city promises it won’t obstruct your resumption. CEDA could offer a credit on you’re upcoming fees in exchange.

  20. Carlos Plazola

    Debating how much to charge for entitlement extension fees is like debating the color of the tourniquet while the patient lies bleeding to death. How about you all just pick a color and make sure we don’t leave a bunch of bodies on the operating table?

  21. John

    When this issue is revisited again by the City of Oakland, I hope it realizes that the entitlement is an asset and that it decides to price them in a way that accurately reflects this value.

    No one is suggesting that Joe Castro fork out $50-$100K again for his entitlements – that would be lunacy. But, I don’t believe that the annual $300-$500 fee is too much for Joe to pay to retain his entitlements in lieu of revisiting the entire process. This would be a good deal all around: Joe keeps his entitlements (as he should) and the entitlement is properly valued. Properly valued at $300-$500, in Joe’s case, anyway. Right now, the good deal falls completely to Joe, but none to the City.

    But, let’s discuss a situation different from Joe’s. Let’s talk about Blaine O’shea, a very successful developer from outside Oakland, whose entitlements for his 40-story luxury condominium project downtown are about to expire because Blaine is hit by the same economic slow down as Joe. Regardless of how much Mr. O’shea initially paid for the entitlements (and I’m sure it was a substantial amount), it is pretty unreasonable that Mr. O’shea, a successful developer of multiple high-rise projects, should pay the same entitlement renewal fee as Joe, with his one-time, 12 unit project. For Mr. O’shea to pay only $300-$500 is to vastly under value the entitlements. In this regard, I can envision a fee schedule for entitlement renewals based on some metric related to the project size, value, or cost of the initial entitlements. Under such a scheme, it may not be unreasonable for someone like Joe to pay a $300-$500 renewal fee , while someone with a project like Blaine to pay $3,000 – $5,000 annually.

    When the City revisits this issue, I hope it will realize the real value of the entitlements as a revenue source to the City.

  22. Max Allstadt

    Carlos,

    I don’t think the fees should be exorbitant. If CEDA is approached with pleas or demands for free extensions, particularly when there is an obvious value to those extensions, it’s quite likely that the development community will be perceived as not negotiating in good faith, or opening from a position that’s too extreme. Clearly the city is going to do something to extend entitlements. If we ask for what we need, rather than what we want in an ideal world, I expect the extension program will be passed faster.

    If the extension is a blanket three years, developers will likely wait not just until viability, but perhaps longer, for a time when their investment to hold the property pays off even more. That option actually potentially slows development. It also potentially creates additional profit. Why shouldn’t there be a modest fee for that privilege?

    I can understand making extensions inexpensive on parcels that will be usable during the wait. If a building is in use, and would be demolished to create a larger development, than the impact of the wait is minor. On the other hand, if the parcel will be fenced and vacant, there’s more of an impact. Incentives to beautify in the interim might actually push desirability in an area up faster. The same goes for disincentives for leaving parcels blank or buildings vacant and boarded up.

  23. Carlos Plazola

    Max,

    You haven’t heard me say that I am opposed to extension fees. My tourniquet metaphor was to encourage people not to miss the forest for the trees.

    The bigger issue, IMO, is that council and staff are wrong in limiting the extensions to only one year.

    I believe they are coming from a place of wanting control, without understanding the nuances of the issue. In retaining “control”, by making the entitlement owner come back each year to renew their entitlement, they are introducing uncertainty into the project, at a time when uncertainty is already too ubiquitous. Matt pointed this out above.

    Lenders won’t lend on a project that is set to expire in 3 months, even if the owner has an option of requesting an entitlement. What if the entitlement is not renewed? Staff will say: “we always renew entitlements”. Lenders will say: “I don’t know who the hell that staff person is, so unless I have the approval in my hand, your not getting your loan.”

    Also, staff and council keep saying, “well, entitlement owners will get 5 years instead of four” without realizing that some projects are already on their third or fourth year. So, one year will help some people, but Oakland may still lose a lot of potential projects.

    Extension fees are fine. You won’t find many people, if any, opposing them if they’re reasonable. That’s not the real debate. The real debate is: Does Oakland value the people who are taking a chance on this city and investing in it enough to give them flexibility and certainty to increase the probability they will invest more money in Oakland, or will decision-makers continue to view developers, builders, and investors so suspiciously that they damage the opportunities in front of them to increase potential investment into Oakland.

    I heard today that Oakland’s budget deficit may get severely worse in the next 2-3 years, while at the same time our pension and COLA obligations are only increasing. Doesn’t this worry people? Are people thinking this far out?

    Shouldn’t we be figuring out ways to partner with private investment, not just in grandiose ways with few deliverables, but in real ways, and actually listen to the people who have shown their commitment to invest in Oakland?

    So, pick a fee and let’s move on to the real debate.

  24. Carlos Plazola

    Max,

    And with all due respect, I think one of your conclusions speaks to the kind of counter-productive thinking that is keeping Oakland from growing its budget enough to pay for its social and infrastructure needs.

    You say: “If the extension is a blanket three years, developers will likely wait not just until viability, but perhaps longer, for a time when their investment to hold the property pays off even more.”

    Eventually, Oaklanders have to come to terms with the fact that our fate is tied to the fate of investors (assuming decision makers are being responsible in ensuring that we’re not giving away the farm, of course). If investors succeed in Oakland, our budget grows, we get better parks, more programs for kids, etc.

    If a builder waits 2 years to build instead of one, or even three years instead of one, and he or she makes more money, guess what, so does Oakland. Their transfer and property taxes will be higher, for starters.

    I think the trick is to have a good balance of making Oakland a good place to invest, while ensuring that these investments are leading to tangible improvements in Oakland.

    We have to stop viewing investors and developers as necessary evils, or else we’ll spend yet another 30 years waiting for Oakland’s “potential” to be realized.

  25. Max Allstadt

    Carlos,

    I don’t view investors as an evil. I view stagnation as an evil. Hence I showed up and helped speak against Ada Chan, who wasn’t just a NIMBY, but a BANANA

    I view growth as a good thing. Hence my nuanced comments about the impact of different types of entitled property that may languish in the coming economic mess.

    I don’t like surface parking lots, because they make landbanking more attractive than building. I have similar feelings about billboards in many circumstances. If the rules provide landowners with physically unattractive ways to cover their opportunity and holding costs, what we get is an ugly city.

    Conversely, if we can find ways for the City to make it financially attractive or neutral to make a vacant lot into a temporary park, we get a more beautiful city. And that in turn makes Oakland a better place to invest.

    You are absolutely right that extensions should be available for more than a year. I think three or even five may be necessary given the dire predictions I’ve been reading. If as a result a parcel will be blank, vacant, or dormant, I think it’s fair that the developers be asked to take extra steps to prevent blight while they wait to build.

    (btw, did you know BANANA was invented by Don Terner, RIP)

  26. Max Allstadt

    BRIDGE housing exec, went down on the same plane as DNC chair Ron Brown in 1993 in Bosnia. Never met him, but heard a lot of kind stories.

  27. John

    There is a mid-range project size that might be accounted for along with Joe and Blaine’s, a project which belongs to Darnell Jackson. Darnell has a four-story, 110 unit project out along the estuary – same economic downturn, same expiring entitlements. It probably isn’t fair that Darnell pays the same as Blaine pays for his luxury project. But, to be fair, Darnell should, like Blaine, pay more than what Joe pays for his 12 unit project. Should the City realize the value of the entitlement extensions and price them accordingly, then Darnell might pay something in between Joe and Blaine, say, $2,750 annually for each one-year entitlement extension.

    Taking the figure of 470 as the number of projects which will apply for entitlement extensions in the next year (the figure 470 was provided during the 10/14 CED committee meeting), the following scenario might occur:

    Assuming 400 projects at Joe’s renewal level, 60 projects at Darnell’s renewal level, and 10 projects at Blaine’s renewal level. (Chime in if you think the project mix is too far off)

    Joe – $500 x 400 = $200,000
    Darnell – $2,750 x 60 = $165,000
    Blaine – $5,000 x 10 – $50,000

    Total for one year = $415,000
    Total for three years = $1,245,000

    During the same CED committee meeting, it was projected that these same 470 projects were projected take in a combined grand total of $36,000 in entitlement extension fees; an amount that vastly undervalues the entitlements.

    I hope when the City of Oakland revisits this issue that it realizes the value of the entitlement extensions.