Possible progress for City Walk?

Oh, City Walk. I had such high hopes for you. I used to daydream about how nice you would look when you were all done as I gazed at your construction crane from the window by my cube in 555 12th St. I really thought your two hundred and fifty two units could go a long way towards livening up the West DTO. I dreamed that all your residents would come to my restaurant at night to eat. You had such pretty signs. There were rumors that you were going to house the world’s largest Starbucks. And you were supposed to be finished in December 2007.

But you weren’t. Instead, three years later, every time I go to AAMLO, I am forced to stare at this tremendous ugliness:

City Walk, half-built and abandoned

You guys know where I’m talking about, right? It’s the half-finished condo project between the Federal Building and Preservation Park, and it’s a giant freaking eyesore.

City Walk: Abandoned since 2007

City Walk suddenly halted constructed in July of 2007 when the developer, Olson Co., ran into, like, all sorts of problems. Olson insisted they were going to be able to get it together and finish, and in December of 2007, the City Council gave them an extension on their completion deadline. They were supposed to restart construction by the end of January 2008 and finish by July 2009.

Obviously, that didn’t happen. Then, like nine months later, Olson was all “Oh yeah, we will restart construction – in November!.” Hahaha. Finally, in February of 2009, Olson admitted defeat and asked the City to amend the DDA so the project would no longer be in default and they could sell it to a rental housing developer, which they said at the time was like, totally about to happen any day now. Construction was going to restart in May, and be finished by December 2010.

Big surprise, that plan didn’t work out either. So then, last summer, someone else decided they wanted to buy the building and finish it up as rental units, so the City once again extended the DDA, this time promising completion by the end of 2011. If you’re wondering at this point why we even bother having these construction deadlines, well, it’s a good question. I don’t have an answer for you.

New City Walk owners need help

Anyway, this time, the sale actually did go through. So that’s something. Unfortunately, this new company that owns it now and wants to finish the building off as a 264 apartment project (instead of the originally planned 252 condos) can’t get the all financing to finish construction. Or, I guess more precisely, they can’t get enough financing that they think it’s worth their while to finish construction.

So in order to just get the damn thing finished already and give the poor pedestrians of downtown Oakland their sidewalks back, Redevelopment Agency staff is now proposing that we just loan them $5 million of redevelopment money (PDF), which will be enough, apparently, to fill in the financing gaps that are preventing the project from getting restarted. I’ll let the report explain it to you:

The loan is required to decrease the equity and investor profit requirements in order to make the project financially feasible. Without this reduction in equity the investor does not meet its minimum return and is therefore unwilling to finance the project. Providing the loan will help complete the project and transform the blighted site into beautiful new rental housing.

I don’t know how “beautiful” the finished building it going to be, but “blighted” is definitely an accurate way to describe the site as it sits now. Here are the loan deets, also from the agenda report (PDF):

The loan terms will be at least as favorable as the other debt financing Wood Partners obtains for the project. The interest rate will be set after negotiations are completed with the other construction lender. The negotiations were under way at the time this report was being written. The interest rate will be at least 8%, but no less than one percentage point higher than the interest rate on other debt; the higher rate on the Agency loan is appropriate given that the loan will be in second priority position. Wood Partners’ latest offer from a construction lender is a loan at 7.5% interest, with a term of up to 7 years, a 1% origination fee and a 1% early termination fee, which would set the Agency loan interest rate at 8.5% assuming similar fees. The Agency loan would be interest-only until stabilized occupancy and then converted to a 25 year amortization schedule with a balloon payment (i.e. loan due in full) in 2015, five years from execution of the loan documents. The Agency could be repaid sooner if conditions are favorable for refinancing with a long term permanent loan. There will not be a prepayment penalty. Given 1) that this is a market rate loan, and 2) the troubled status of the housing market, no additional project development conditions are being proposed in return for the loan.

As far as I’m concerned, this is excellent. It is just like, downright shameful that the City could let that freaking eyesore just sit there unfinished, sometimes shrink-wrapped, sometimes not, for years and years, right in the middle of downtown! It’s blight, and it makes the City look like crap. It just needs to be finished, I don’t care what it takes.

The City Walk loan will be considered by the City Council’s Community and Economic Development Committee on Tuesday. The meeting starts at 2, but this is last on the agenda (PDF) and the first item is going to take like a year.

19 thoughts on “Possible progress for City Walk?

  1. Patrick M. Mitchell

    The only downside I see to this plan is if the creditor defaults, the City takes ownership and then turns it into Section 8 housing.

  2. Ralph

    I think this is a good plan and if I can get down to CH next week I will weigh in my support. For the right project in Oakland, the rental market is very strong. Anyone who has frequented that area knows the obvious concerns, but I think it has good potential. If they do as good as job on the rental units as The Grand, I think it will be a positive development. This is beyond the scope of what this discussion but I wonder if they could something with a rent to own.

    And as complete aside, how could the city not know that the developer was in trouble. It was evident to people who had contracts there.

  3. len raphael

    When you say the sale went thru, isn’t it contingent on financing to complete the project? if yes, do nothing, until the lender in possession accepts a lower price and the city doesn’t have to put any of our money at risk. if the prospective new owner can’t get enough financing the lenders think the project is overpriced/too risky.

    this isn’t the fox.

  4. Navigator

    I agree, something needs to be done with that eyesore. Also, what are “the obvious concerns” for that area? Is it the liquor store at 14th & Jefferson?

    It’s also unfortunate that we have a San Francisco developer squatting on a parcel of downtown land after he dug a huge crater. That’s another unproductive and blighted property in the area. It’s time for Shorenstein to either —- or get off the pot.

  5. dto510

    Oy Navigator, don’t get us started on Lake Shorenstein!

    Though I am generally not in favor of using City funds to finance privately-owned development, the Redevelopment Agency is already an equity partner on CityWalk and the money will eventually be paid back. Just finish the damn thing already! Ralph is right, the residential renting market is very strong downtown.

    Can the City also lease a few floors from Shorenstein to get that one going?

  6. len raphael

    dto510, how many hard dollars could the city lose if it didn’t put more money into citywalk? how much does it already have invested?

    exactly what happens if the city refuses to ante up more money?

  7. DontBotherDelores

    This all sounds very sensible.
    It will never happen.
    It needs something like a large sculpture of famous people with no connection to Oakland and give that the money instead. Yes, that’s what this needs.

  8. len raphael

    maybe the city should walk away from city walk?

    v, some of the links to the docs are broken.

    so what happened at the council meeting?

    i’d like to read the docs, to see who was or was not squeezing whom in this deal. normal troubled real estate deals, the stronger partner puts in more cash but gets bigger percentage of the future hoped for profits. Sounds like in this situation, we’re getting squeezed by the new developer who has no money in the deal yet, and threatens to walk away if we don’t put 5 million more into the deal.

    But again, how much have we already invested in this project?

  9. dto510

    What do you mean “walk away”? This is the City’s property and ORA made a deal with a developer to build on it. Like you said is normal, the City is putting more money in the deal in order to realize profit.

    It’s hard to say how much the property cost since it was acquired decades ago, but the City’s interest is seeing it developed. If the City can’t develop without providing a low-interest loan, that’s too bad, but there’s no more profitable alternative for the land, and the ORA is not supposed to be in the business of land-banking. Also, ORA loans don’t really cost the City anything, unless you think there’s something more lucrative we could loan to, and even then I’m not sure the Central District RDA is close to its bonding limit.

  10. len raphael

    dt, more background on project or a link so we can understand the economics of this? Is the endgame supposed to be ORA selling a completed project including the land; or ORA owning but not managing it?

    Is ORA just guaranteeing the 5mill in worst case, or just putting up a bond? or by bonding limit, do you mean issuing bonds?

    -len

  11. dto510

    The O Redev Agency will receive property tax from the residents and revenue-sharing payments from the developer when the project is completed. That’s why Redevelopment Agencies make loans and purchase land, financed by bonds issued per district and paid back by increased property taxes in the Redevelopment district. The Central District, which may expire soon, has an overall ceiling on total debt, but the ORA certainly isn’t acting as if it’s anywhere close to its limit.

    The change to the development agreement is the City advancing the developer a construction loan. It’s not at a below-market rate, and the ORA doesn’t make any money by not doing the loan, so the only possible cost is pushing the Central District closer to its debt ceiling. I am not concerned about that and the ORA doesn’t seem to be either.

  12. matt

    I say get ‘er done!

    This is a win-win. We’re not getting played by a shady, fly-by-night developer. The terms of the loan are great for ORA and there is no more risk in this loan than any other you may find on a project today. In fact I think there is less risk.

    Nearby at 1424 Jefferson and 587 15th the owners are working with Affordable Housing Associates to convert the hotels’ 150 rooms into 102 affordable apartments. AHA is responsible for the critically acclaimed Madison @14th affordable housing development and many others.

    With these three buildings complete the area will surely garner more interest from developers. Even if it doesn’t the area should still gain about 900 permanent residents from the 366 new units.

    Now get ‘er done!

  13. len raphael

    matt, in the good ol’ days residents like me could care less to know the details of city or it’s familiars’ real estate deals. we’d look at places like the skating rink, or Trans Asian Center, the Convention Center, or JLS shake our heads or laugh and figure it was so much funny money involved that couldn’t affect us normal residents.

    Rising tax revenue and Federal grants covered all mistakes.

    At this point, officials have screwed up so many times and times are so bad, and officials’ credibility so low, more residents actually want to understand these deals instead of trusting our leaders to understand what their own bureaucrats are doing.

    So humor us mere mortals, and explain more how this deal was structured in plain english.

    -len raphael
    temescal

  14. V Smoothe Post author

    The links should work now, Len.

    The City does not have a financial stake in the development other than having an interest in seeing the project completed. The land was the City’s in the first place, and they put it out to bid several years ago to have it developed. In 2004, the City sold the property to a developer who was going to build condos on it. That company was unable to complete the project and it has sat half built for several years. Now a new company has bought the project, but cannot obtain the financing necessary to make it worth it for them to finish building it. So the question now is whether the Redevelopment Agency should give the new company a loan so that they can finish construction on the building.

    It seems like a no brainer to me that they should. It is in nobody’s interest to have an abandoned half-built building sitting in the middle of downtown.

  15. Cat

    This isn’t a below-market loan, and the terms (I/O during construction, then 25 am, 5 year call) are pretty standard for commercial construction/miniperm financing– minus the subordinated lien interest, but the whole POINT of public financing is that it can be in a “more risky” lien position, so that’s not at all unreasonable.

    The developer needs this loan because construction lenders are skitish right now and won’t lend on what in other times would be considered “normal” LTV’s. As a result the developer is asking for help to stack their financing– commercial construction loan for ~55% of costs, RDA loan for ~10% of costs, with the remainder of the funds coming from equity.

    Seems like a totally reasonable use of RDA funds, both to get this eyesore finished and to plug a financing hole that’s hardly unique to this project.

    Did it pass?

  16. livegreen

    Interesting that both Pulte Homes (on beautiful 98th) & Monte Vista (in Leona Quarry) are building again. I wonder where their commercial loans are coming from? I also wonder how they’ll be able to sell lower than the homeowners who are trying to get out from under water…

  17. len raphael

    i’d have called this a market rate loan 3 years ago. Since then you would need hard money guys to lend 5 mill on this.

    why didn’t ora do a variation of some of the federal bailouts and get an increased equity interest if the project exceeded a target? A larger share of net rents and eventual sale proceeds. That is the norm in troubled deals when one partner has the needed additional capital.

    Somehow I have never gotten the impression that ORA could drive a hard bargain if it’s employees’ compensation depended on it. To say that’s not it’s function begs the question of why can’t ORA make more/lose less on it’s expenditures when it’s the lender of last resort?

  18. len raphael

    ORA, btw, how’s it doing on it’s debt limits after this loan, the proposed Kaiser Convention Centr, and the Merritt? Are the limits per district or per city?