DATE: November 5, 2003

TO: Mayor and Members of the City Council

THROUGH: Robert LaSala, City Manager

FROM: Robert Paternoster, Director of Community Development

SUBJECT: Progress Report on Proposed Redevelopment of Town Center Mall

Brief Recent History

On March 11, 1999, the City Council approved a Special Development Permit (SDP) for American Mall Properties (aka Sunnyvale LLC), owner of Town Center Mall, to expand and improve the retail center. The plan called for the addition of a 4000-seat multiplex movie theater and 205,000 square feet of new retail facilities along an extension of McKinley Avenue from Mathilda Avenue to Town Center Drive. The enclosed mall and the then existing three anchor department stores (Macy’s, J.C. Penney, and Wards) would remain. When Wards declared bankruptcy, Target acquired the property and on March 13, 2002 opened a new Target store.

Although American Mall Properties completed construction of the public parking structure at Sunnyvale and Iowa (funded by a Mello Roos lien against the Mall property), and began some initial demolition of the parking deck and utility relocation, they were unable to proceed with implementation of the approved project due to difficulties in signing retail leases and bankruptcy of their primary lender, Finova.

The Finova loan was purchased by San Diego National Bank, which, on May 14, 2002, recorded a Notice of Default against American Mall Properties, resulting in appointment by the court of a receiver, James Baron, who has since operated the Mall. On September 24, 2002, American Mall Properties filed for bankruptcy protection. American Mall Properties had been negotiating with Harvest Partners of Dallas, Texas, to purchase and redevelop the Mall. That deal fell through, presumably because Harvest believed that it could acquire the property more cheaply and free and clear of liens if it purchased it through the bankruptcy sale. In the meantime, the J.C. Penney store closed and the property was purchased by Harvest.

San Diego National Bank petitioned the court to proceed with a bankruptcy sale, but the holder of the second trust deed, Lehman ALI, stepped in and purchased the Bank’s loan and, together with American Mall Properties, began preparation of a “work-out” plan for the bankruptcy. American Mall Properties found another potential buyer, Forum Development Group of Atlanta, Georgia, with whom they executed a sales agreement. Lehman ALI, which now held all of the debt on the Mall, supported the sales agreement.

While all of this was taking place, the City of Sunnyvale was reevaluating its Specific Plan for Downtown 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”.

Throughout the period of public outreach on the Plan, the Forum Development Group was preparing its proposal for redevelopment of Town Center Mall. Its plan benefited from the public outreach effort, incorporating two elements strongly recommended by the citizens: (1) a more complete restoration of the historic street grid, and (2) creation of a “Town Square” which included the six majestic redwood trees in the center of the old Mall. Their proposal would demolish the entire Mall, with the exception of the Macy’s and Target buildings, and replace it with 592,000 sq. ft. of open-air retail on public streets and walkways, a 2400-seat multiplex movie theater, 260,000 sq. ft. of office, and 300 housing units. With the extension of both Murphy Avenue and McKinley Avenue through the site, their plan would require acquisition of the former J.C. Penney Building from Harvest Partners. On August 7, 2003, Forum applied to the City for a Special Development Permit to implement its plan. Because the City Zoning Code requires the signatures of all property owners to which a permit would apply, Forum was required to obtain approval of Harvest Partners, Macy’s and Target. Without these signatures on the application, the City has been unable to process the application through the Planning Commission and City Council.

Implementation of the Forum plan would require a series of real estate transactions between the City (Redevelopment Agency) and the developer, including land trades, reconstruction of public parking facilities, and construction of public streets and open spaces. Staff began discussions with Forum to negotiate these real estate transactions. However, the development is dependent upon the acquisition of the former J.C. Penney building and reaching new agreements with Macy’s and Target. Because Forum has been unable to reach agreement with Harvest Partners on purchase of the J.C. Penney building, and has not yet reached new agreements with Macy’s and Target, City staff has withdrawn from further negotiations with Forum at this time.

Present Situation

Town Center Mall was closed by the Receiver, James Baron, on August 31, 2003 because the cost of operation exceeded the income of the property. The Receiver has initiated steps toward demolition of the building, such as asbestos removal, but has not yet applied for a demolition permit.

Macy’s and Target, who own their buildings and building pads, remain open. Target has had an acceptable opening, but it is well below its potential in retail sales. Macy’s, which does not have Target’s historic experience with freestanding stores, is suffering a serious decline in retail sales as a result of the closure of the Mall.

The second level of the Mathilda parking deck, which is owned by the Redevelopment Agency (approximately 2/3) and the Mall (approximately 1/3), was ordered to be closed by the Building Official on June 2, 2003, because of structural deterioration.

Forum Development Group has filed an application for redevelopment of the Mall, but that application cannot be processed by the Planning Commission and City Council  because Macy’s, Target and Harvest Partners have not signed the application. Forum had hoped to start construction by August, 2004, and open the new center in Fall, 2005. However, if there is no agreement among the owners so as to permit the City to consider and approve applications for redevelopment of the mall, neither Forum nor any other party can expect such an early start of construction. 

Harvest Partners has met with Planning Staff to discuss modifications to their building to accommodate three or four large tenants. They indicate that they are about to sign leases with two tenants. Two of the three tenant spaces would be accessed from the Sunnyvale Avenue side of the building, and the third would be accessed from the Washington Avenue side. Harvest cannot provide any access to the building from the east because of the abutting Mall; this wall would remain blank when the Mall is demolished.

It is apparent that the parties in interest --- American Mall Properties, Lehman ALI, Forum Development Group, Macy’s, Target, Harvest Partners, and the Redevelopment Agency --- are at a stalemate which now jeopardizes the ultimate successful redevelopment of the Mall in accordance with City policy as expressed in the Downtown Specific Plan. Although all of the parties share a common interest in the successful redevelopment of the Mall, the various property owners on the Mall block seem unable to reach the necessary agreements to move forward with a comprehensive redevelopment plan. Such a plan cannot be achieved if each entity pursues only its own self-interest. If each proceeds independently, the opportunity which exists to create a truly exciting and financially successful Downtown will not be realized, and every property owner will suffer. More importantly, the City of Sunnyvale will not realize its vision for the revitalization of the heart of the city, the creation of a great public place for the enjoyment of all of its residents and visitors.

Proposed Actions

Staff believes that it is appropriate and necessary for the City to play a leadership role at this time. Staff proposes to undertake the following actions:

1.      Create and facilitate a meeting of all of the property owners on the Mall block: Town Center Mall (represented by its Receiver), Lehman ALI, Forum Development Group, Macy’s, Target and Harvest Partners. The purpose of the meeting would be to seek a voluntary agreement among all property owners on a plan for redevelopment of the property.

2.      Provide the Redevelopment Agency with the powers and processes necessary to undertake redevelopment if the property owners are unable to reach agreement. These include: (1) the adoption of updated Owner Participation Rules which protect tenants displaced by redevelopment, establish the rights and responsibilities of property owners to redevlop their property in accordance with the plan, and allow the Agency to select a master developer from among the property owners based upon proposals submitted by them; and,

(2) amendment of the Redevelopment Area Plan to reinstitute the power of eminent domain over non-residential property for a period of 12 years. These are normal powers and processes of a redevelopment agency in California, but their enactment would in no way require that they ever be exercised by the Sunnyvale Redevelopment Agency.

The proposed schedule for establishing these powers and processes is as follows:

·         November 11

City Council and Redevelopment Agency schedule joint public hearing to consider amendment of the Redevlopment Area Plan.

Redevelopment Agency adopts Owner Participation Rules.

·         November 24

Planning Commission makes recommendation to the City Council on proposed amendment to the Redevelopment Area Plan.

·         December 2

Redevelopment Agency designates a Master Development Area in accordance with the Owner Participation Rules and instructs staff to solicit development proposals.

·         December 16

City Council and Redevelopment Agency hold a joint public hearing to consider adoption of amendment to the Redevelopment Area Plan.

3.      Amend the City Zoning Code to allow acceptance and processing of development permit applications, under certain circumstances, without the signatures of all property owners to which the permit would apply, provided that the permit could not be exercised until all property owners agreed. The proposed schedule for this amendment is as follows:

·         November 24

Planning Commission makes recommendation on zoning code amendment.

·         December 16

City Council holds public hearing on consideration of adoption of zoning ordinance amendment.

4.      Work with Macy’s, Target and the Receiver for the Mall to allow temporary signage on Mathilda Avenue frontage of the Mall property indicating that Macy’s and Target are open for holiday shopping.

Cc:     Valerie Armento, City Attorney

          Cathleen McKay, City Clerk