This guest post is written by Tom Thurston, an East Oakland resident and member of the Central City East Redevelopment Area PAC.
On Monday night, June 6 (PDF), Oakland Redevelopment Agency (ORA) staff presented to the Central City East Redevelopment District Project Area Committee (CCE PAC) a proposal for ORA to buy the Henry J. Kaiser Convention Center from the City for $29 million [6/14/11: Added the word "million" for clarity, thanks livegreen -V]. The reason for the deal is obvious: Redevelopment has money; the City needs money. CEDA Deputy Director Gregory Hunter made an eloquent case for ORA taking charge of this landmark building and turning it into a productive cultural resource for the City, like the Fox Theater. The proposed deal was for the Central District to pay $13 million and CCE to pay $16 million. The Kaiser Center lies in the Central District. Laney College, just south of the Center, is in CCE.
CCE PAC members were unreceptive to the idea. Some PAC members have been working for decades to improve their neighborhoods, and were distressed that, now that we had money to accomplish some of their goals, that money was being snatched by the City. They did not see how the proposed purchase would benefit CCE. The claim that any development that draws positive attention to Oakland helps all of Oakland did not comfort. The PAC rejected the proposal 13-1.
But the PAC is only advisory to the City Council. The Council was reviewing the proposal as part of the ORA budget the next night. PAC Chairperson Gloria Jeffrey, heading up a delegation from the PAC, spoke passionately against the proposal. Others spoke individually, including myself. I questioned the price.
The $29 million tab is based on the replacement value of the Center (PDF). When the City buys or sells a property it is required by law to pay or receive fair value for the property. Fair value is the value that a willing buyer would pay a willing seller in an arms-length transaction. This is not an arms-length transaction, since the City Council decides both for the buyer and the seller. Therefore the valuation price demands special scrutiny.
When an oil tanker explodes and destroys a section of an overpass, the fair value of the overpass is the replacement value. The overpass must be replaced. There is no choice. In the current economy, would the City feel absolutely compelled to replace the Kaiser Center with a similar building if the building were lost? Clearly not. The building has sat vacant and locked for years, and the City has not sought money to bring it up to code. Replacement value is arguably not fair value.
There are two other ways of valuing a commercial building: comparable sales and cash flow. This is a unique building; there are no comparable sales. The alternative cash flow method asks what the building is worth in terms of the stream of income it could generate. Gregory Hunter told the PAC that the appraised cash flow value of the Kaiser Center was $14 million. It could be used by the East Bay Symphony, Oakland Ballet, Laney College and others. I told the Council that I might be persuaded to support a deal, but not at $29 million.
Mayor Quan was present at the meeting, and caught up with a group of the PAC members on our way out. She explained that if the Council did not come up $29 million here, they would have to find it in additional cuts to libraries, senior and youth programs, arts programs and such. She foresaw that the Council would avoid such cuts by pushing through this deal.
I asked the Mayor why $29 million, when the next day the Center would only be worth $14 million to ORA. The issue, she explained, is in the hands of the City’s bond underwriters. She told us that the Kaiser Center is collateral for some of the City’s outstanding bonds. If the City treated the fair value of the Center as $14 million, they would violate the bond covenants. The Mayor hinted that an alternative would be to transfer the collateral to City Hall, but she didn’t want to put City Hall in hock.
So there it is. In order to avoid a lien on City Hall, ORA is compelled to go along with the legal fiction that the Kaiser Convention Center is worth $29 million. While the Center might generate a stream of income worth $14 million, the remaining $15 million is simply an overpayment and is irrecoverable to the two redevelopment districts. It is an unwilling gift from the people of the Central and East Oakland flatlands so that the City can balance its budget this year.