SunnyvaleRTC

December 2, 2003

SUBJECT: MASTER DEVELOPMENT AREA SELECTION AND REQUEST FOR PROPOSALS

The Agency's Rules for Tenant Preference and Owner Participation contemplate a process whereby the Agency may designate a portion of the Sunnyvale Central Core Redevelopment Project Area as an area that requires assemblage and development by a single master developer. Once such designation is made, the rules contemplate that the Agency will then solicit proposals for redevelopment of the designated parcels. Proposals must be solicited from the owners of the parcels so designated and may be solicited from others as well. Once proposals are solicited, the Agency would select a master developer and seek to negotiate and finalize an agreement between the Agency and the developer providing for redevelopment of the property in question in accordance with the Redevelopment Plan and the Downtown Specific Plan. Once the Agency designates the area as a master development area, the Agency is authorized to acquire property in the area to forward the redevelopment efforts.

At the current time, the Agency does not have the power of eminent domain; however, the Agency has authorized the Agency staff to bring forward a plan amendment to the Redevelopment Plan that would reestablish the Agency's power of eminent domain in certain circumstances. If that amendment is ultimately adopted, then acquisition could be by means of the Agency's exercise of eminent domain. Designation of a master development area does not mean that the Agency will in fact acquire any property in that area or exercise the power of eminent domain. If the Agency's eminent domain authority is reestablished, that power would only be exercised after an Agency noticed hearing on a resolution of necessity at which time the property owner has a right to raise objections to acquisition. The resolution of necessity can only be adopted by affirmative vote of two-thirds of the members of the Agency.

The Agency staff recommends that the Agency designate the parcels in the Town Center as a master development area. Those parcels consist of all the land in the block bounded by Mathilda, Washington, Sunnyvale and Iowa with the exception of the existing bank building at the corner of Iowa and Mathilda. Attached is a map showing the parcels that are proposed for designation as the master development area. The owners of the properties in that block consist of the Agency itself, Sunnyvale LLC, Sun Town Center Properties Corporation, Target Corporation, Harvest Partners, and WHL. In accordance with the Agency's Rules for Tenant Preference and Owner Participation, the Agency staff provided written notice of the consideration of this matter on the Agency agenda as well as a copy of this staff report to each of those owners (except the Agency itself). The notice was sent on November 21, 2003.

BACKGROUND

The Town Center parcels were originally developed as a shopping center in the late 1970's. The shopping center was developed by a private developer as a redevelopment project pursuant to agreements with the Agency. By the late 1990's the center was struggling and was sold to a new owner, Sunnyvale LLC ("LLC"). LLC developed plans for revitalization of the center and applied to the City and obtained a special development permit to allow that revitalization to go forward. The City Council approved the special development permit in March of 1999. LLC also entered into various agreements with the Agency and the other owners in the center to permit the development contemplated by the special development permit. Pursuant to those agreements, there were property transfers between the Agency and LLC and Mello-Roos bonds issued to raise money for construction of two new parking structures. One of those structures, at the corner of Iowa and Sunnyvale, was completed. LLC went forward with first steps towards completion of the redevelopment including preliminary steps towards demolition of the middle portion of the parking deck facing Mathilda. However, LLC encountered a number of difficulties that prevented them from ever completing the project. Among the problems they encountered were the bankruptcy of their main lender, Finova, difficulties in obtaining and retaining tenants, and difficulties in coming to final agreements with their contractors as to the construction costs for the project.

Other problems ensued. The Finova loan to LLC was transferred to San Diego National Bank as part of the resolution of the Finova bankruptcy. Beginning in May of 2002, San Diego National Bank filed a notice of default and sought to foreclose on the center property owned by LLC. In September of 2002, LLC itself filed for bankruptcy in an effort to stave off the impending foreclosure. LLC's default in its loan obligation also resulted in appointment of a receiver to operate the property in the interim. Lehman ALI, a financial institution that made a mezzanine loan to LLC, has purchased the San Diego National Bank debt as well as other debts of LLC. As a result, Lehman is the primary creditor of LLC.

Montgomery Ward, one of the major tenants in the center, went into bankruptcy and closed its store in the center. In the one positive note for the center, Target bought the Montgomery Ward property and reopened as a Target store in March of 2002. The Penney's store was closed in 2002 and was sold earlier this year to Harvest Partners. The store remains vacant. In 2002, Harvest Partners itself had sought to purchase the center from LLC with the goal of undertaking the redevelopment of the center. However, those efforts were abandoned in the spring of 2002.

In 2003, City inspections of the Mathilda parking decks indicated structural deterioration problems resulting in the City Building Official ordering the upper level decks closed in June of 2003. The surface parking remains open. In addition, the receiver concluded that the enclosed mall should be closed due to cash flow considerations. As a result, almost all of the tenants in the enclosed mall have moved out and the mall is largely vacant. Macy's and Target remain open, as does the freestanding Chevy's restaurant at the corner of Washington and Mathilda. The WHL building on Mathilda is occupied but has been for sale. Without the support of the mall shops, Macy's and Target's sales volumes are not meeting expectations.

The City was also reevaluating its Downtown Specific Plan through the preparation of a Downtown Design Plan. On July 10, 2001, a 21-member Downtown Stakeholders Advisory Committee was appointed, consisting of Downtown residents, businesses and property owners, and on March 26, 2002 the Committee presented its plan to the City Council. The Plan called for the redevelopment of the area into a “Traditional Downtown”, a place where Sunnyvale residents could shop, live, work and be entertained. The Plan built upon the success of the 100 block of Murphy Avenue, and called for the enclosed mall to be converted to an open-air shopping center, with streets and pedestrian ways cutting through the mall to begin to reestablish the historic street grid.

Recognizing the significant departures of this new Plan from prior planning efforts, and the potential controversial nature of the Plan’s proposed increased densities, particularly along Mathilda Avenue, the City Council directed staff to undertake an extensive 12-month public outreach program to obtain broader community input. This process culminated in the City Council adoption of a General Plan amendment on June 17, 2003 and a Downtown Specific Plan amendment on October 14, 2003, which set a new direction for Downtown based upon the Stakeholders’ Downtown Design Plan. The Council action, however, reflected the input from the community outreach effort by reducing the heights and densities along the east side of Mathilda Avenue and in Town & Country Village, and by calling for “restoration of as much of the original street grid as possible.”

The most recent events involve the efforts of LLC and Lehman to sell the center to a developer who would undertake redevelopment of the center properties. LLC has entered into a conditional sale agreement for sale of its property to Forum Development Group. However, to date Forum has not come to the agreements with the other property owners in the center that would be necessary to allow the center to be redeveloped in the manner that Forum believes is necessary if the redevelopment is to be successful. Part of the difficulty for any owner in the center seeking to accomplish redevelopment is that all the separately-owned parcels in the center are tied together by a reciprocal easement agreement that puts legal constraints on the ability of an individual owner to make significant physical changes to its property. The result is that unanimous agreement and cooperation among all the owners is necessary for any redevelopment in the center.

DISCUSSION

The use of the master developer process provides a means for the Agency to obtain a resolution of the issues that are constraining the redevelopment of the center at the present time. The selection of a master developer and negotiation of an agreement between the chosen master developer and the Agency will create a framework for moving forward with redevelopment of the center. Assuming the Agency eminent domain authority is reestablished in the near future, that authority would give the Agency the ability to compel transfer of property and property rights that the Agency deems necessary for redevelopment of the center. Even without eminent domain authority, the selection of a master developer and agreement of the selected developer with the Agency offers a means of providing Agency incentives to accomplishing the redevelopment such as Agency assistance with the financing of new public parking structures to serve the center.

In order to select a master developer, the staff recommends that the Agency solicit proposals from the existing owners of property in the center as well as from any entity (such as Forum) that has a contract for purchase of any portion of the center. The Rules for Tenant Preference and Owner Participation define holders of options and rights to purchase as owners for the purposes of submitting proposals.

It is also the staff recommendation that owners be permitted to submit proposals that contemplate that existing buildings remain and be integrated into the new development. Proposals for the center have contemplated various combinations and permutations of retaining existing buildings and demolishing them. The LLC development as approved by the 1999 special development permit contemplated demolition of the middle of the Mathilda parking deck. Harvest's 2002 proposal contemplated demolition of the enclosed portion of the mall and Forum's most recent proposal contemplates demolition of all buildings except the Macy's and Target stores and the parking structure at Sunnyvale and Iowa.

The staff also recommends that the Agency adopt criteria for selection of proposals which would include:

Consistency of the development proposal with the Downtown Specific Plan.
The quality of the design of the development proposal.
The amount of revenue that the proposed development will generate for the City and the Agency.
The economic feasibility of the development proposal.
The amount of Agency or City financial assisted requested.
The financial capability of the developer to undertake and complete the proposed development.
The experience of the developer and the development team in undertaking similar projects.
The need for acquisition of property or property rights.

FISCAL IMPACT

PUBLIC CONTACT

Public contact was made through posting of the agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page and the availability of the report in the Library and the City Clerk’s Office.

In accordance with the Agency's Rules for Tenant Preference and Owner Participation, the Agency staff provided written notice of this matter as well as a copy of this staff report to each of the property owners (Sunnyvale LLC, Sun Town Center Properties Corporation, Target Corporation, Harvest Partners, and WHL).

ALTERNATIVES

1. Adopt the attached resolution designation specified parcels as a Master Development Area for redevelopment.

2. Do not adopt the attached resolution.

RECOMMENDATION

Staff recommends that the Agency Board approve Alternative #1.

Prepared by:

Brice McQueen
Redevelopment Manager

Reviewed by:

Mary J. Bradley
Director, Finance Department - Treasurer

Reviewed by:

Bob Paternoster
Director of Community Development

Approved by:

Robert S. LaSala
Executive Director-Secretary

Attachments

1. Resolution of the Redevelopment Agency of the City of Sunnyvale designating parcels in the Sunnyvale Central Core Redevelopment Project Area as a Master Development Area for redevelopment.

2. Notice to Property Owners.