August 17, 2004
SUBJECT: Disposition and Development and Owner Participation Agreement with Fourth Quarter Properties XLVIII, LLC.
REPORT IN BRIEF
On December 2, 2003, the Redevelopment Agency designated practically all of Block 18 (Town Center Mall site) of the Downtown Specific Plan as a Master Development Area, and directed staff to solicit proposals for its redevelopment from current and prospective property owners. On April 27, 2004, the Agency selected as Master Developer for the site Fourth Quarter Properties XLVIII, LLC, a development entity formed by Forum Development Group and Lehman, ALI.
This report recommends that the Redevelopment Agency enter into the attached Disposition and Development and Owner Participation Agreement (DDOPA) with Fourth Quarter Properties. The DDOPA will require Fourth Quarter Properties, among other things, to: demolish the Mall, the former J.C. Penney building and the Mathilda Avenue parking deck; construct and operate an open-air mixed-use development, containing retail, office and residential uses; build, maintain, repair and replace certain public parking structures; build, maintain, repair and replace certain public streets; and build and maintain a “Redwood Square” of at least 0.8 acres. The DDOPA obligates the Agency to pay Fourth Quarter $800,000 as its share of the demolition cost of the Mathilda Avenue parking deck. The DDOPA also provides for Fourth Quarter to receive payments equal to all of the net new secured property tax generated by this specific development (“project tax increment”) up to a cumulative annual cap of $4.0 million, plus 50% of any amount over $4.0 million. The DDOPA also provides for an exchange of land in approximately equal amounts between the developer and the Agency, such that the Agency will own the land under the public streets and public parking structures.
BACKGROUND
The Redevelopment Agency of the City of Sunnyvale was established pursuant to provisions of the community redevelopment laws of the State of California by a resolution of the City Council on November 19, 1957. The Agency oversees only one redevelopment project, the Central Core Redevelopment Project. The area of the project is 184 acres, representing one percent of the area of the city and half of one percent of the city’s total assessed property value.
Under California law, redevelopment agencies are granted two powers not otherwise available to cities:
· Power to acquire property for the purpose of resale to a private developer, utilizing eminent domain if necessary.
· Tax increment financing, whereby all increases in property tax (including portions that would normally go to the county, school districts and special districts) flow to the redevelopment agency for the sole purpose of paying back funds borrowed for land acquisition and public infrastructure improvements.
The primary activity of the Agency since its formation was to assist in the development of the Town Center Mall. On March 1, 1978, the Agency entered into a Construction, Operation and Reciprocal Easement Agreement (REA) with Mall developer Sunnyvale Town Center Associates (a limited partnership formed by Ernest W. Hahn, Inc.), Macy & Co., and Montgomery Ward; in 1992, the REA was amended to include J.C. Penney. Among the obligations of the Agency through the REA was the responsibility to construct the parking deck along Mathilda Ave.
In 1977, $16,800,000 of tax allocation bonds were sold to fund the acquisition of property, relocation, demolition and public improvements. Sunnyvale Town Center Associates subsequently purchased a portion of the site from the Agency for $5,500,000, and that amount of bonds was defeased. The bonds were twice refinanced. The current outstanding loan balance is $7,960,000. The debt service is fully covered by current tax increment receipts; the debt is scheduled to be retired in 2023.
Also in 1977, two issues of lease revenue bonds totaling $22,300,000 were sold to construct the parking deck along Mathilda Avenue. These bonds were twice refinanced. The current outstanding loan balance is $14,965,000. The debt service is fully covered by the Agency’s current tax increment receipts; the debt is scheduled to be retired in 2023.
Town Center Mall opened on September 26, 1979. After many years of apparently successful operation, Sunnyvale Town Center Associates decided to sell the property. On July 9, 1998, American Mall Properties (AMP) became the new owner. AMP proposed to expand the Mall, by adding 205,000 square feet of new retail space in an outdoor appendage extending to Mathilda Avenue along the McKinley Avenue alignment (extended); it also proposed to add an entertainment component in the form of a 4000-seat, 20-screen movie theater. On March 11, 1999, the City Council approved the expansion plans of AMP, and on December 3, 1999, the REA was amended to accommodate the AMP expansion plan. A major part of the amendment dealt with a land “swap” between the Agency and the developer, wherein the Agency deeded to the developer 5.33 acres of property, including certain properties fronting on Mathilda Avenue and approximately 1/3 of the parking deck centered roughly along the alignment of McKinley Avenue (extended); the developer deeded to the Agency 4.07 acres of property on the Sunnyvale Avenue side of the property where two new parking structures were planned, and paid the Agency $1,495,000, for the difference in the amount of land exchanged. (This amounted to approximately $27/sq.ft. for the 1.29 acre difference in the land exchange.)
In late 2002, American Mall Properties completed construction of the public parking structure at Sunnyvale and Iowa, funded by Mello Roos Community Facilities District Act Bonds. The debt service on these bonds is paid by the developer through a special property tax which is secured by a lien against the Mall property. Although AMP began some initial demolition of the parking deck and utility relocation, it was 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 AMP. The default resulted in appointment by the court of a receiver, James Baron, who has since operated the Mall. On June 30, 2002, AMP defaulted on a payment of the Mello Roos bonds and foreclosure proceedings were initiated on behalf of the bond holders. On September 24, 2002, AMP filed for bankruptcy protection. AMP had been negotiating with Harvest Partners of Dallas, Texas, for Harvest 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, on January 18, 2003, the J.C. Penney store closed and the property was purchased by Harvest. Subsequently, Lehman ALI, who had a lesser loan on the Mall, acquired the major loan from San Diego National Bank.
On June 2, 2003, the Chief Building Official ordered that the second level of the parking deck along Mathilda Avenue be closed for safety reasons, noting that the structure “is rapidly approaching the end of its useful, safe life”. Attorneys for AMP immediately filed papers with the Agency, alleging that the Agency is responsible, under the REA and a related Parking Lease Agreement, for the repair and replacement of the parking structure. The Department of Public Works estimated that it would cost $15 million to replace the deck in kind (because the Agency owns only approximately 2/3 of the structure, its share of the replacement cost would be about $10 million). Such reconstruction, however, would be contrary to the desire of the developer and of the City to extend McKinley Avenue into Block 18; the more appropriate replacement of 2,400 parking spaces in an above ground structure would cost more than $30 million.
On December 2, 2003, in recognition of the many challenges facing the redevelopment of Block 18 (which challenges included multiple ownership of significant parcels within the block, the deteriorated condition of the parking deck, and the bankruptcy and closure of the Mall), the Agency designated all of Block 18 (except for the Bank of the West property) as a Master Development Area, and directed staff to solicit proposals from owners of property in the Master Development Area and from those who have contracts for purchase of property in the Area. Agency staff transmitted a Request for Proposal to all of the parties designated by the Agency: American Mall Properties, Federated Department Stores, Target Corporation, Harvest Partners, WHL Architects, and Forum Development Group.
One proposal was received, from Fourth Quarter Properties XLVIII, LLC, a development entity formed by Forum Development Group and Lehman ALI. After thorough review of the qualifications and experience of the members of this development entity, and their ability to implement a large and complex mixed-use project, the Agency unanimously acted on April 27, 2004, to select Fourth Quarter Properties as Master Developer for the subject site. (By the time the Master Developer was selected, Lehman ALI had acquired the WHL Architects Building and the former J.C. Penney building from Harvest, giving Fourth Quarter Properties control over all of the private parcels needed to implement its proposal.) An Exclusive Negotiating Rights Agreement was executed between the Agency and Fourth Quarter Properties, and staff was directed to negotiate a business agreement whereby the project could be successfully developed.
EXISTING POLICY
Implementation Plan, Sunnyvale Central Core Redevelopment Project:
Goal 1 Meet the Agency’s Existing Financial and Administrative Obligations.
Objective 1.5 Continue to invest in downtown and encourage and nurture private investment in commercial developments.
Goal 2 Establish the downtown as the cultural, retail, financial and entertainment center of the community, complemented by employment, housing and transit opportunities.
Objective 2.1 Establish a 24-hour downtown with Class A office buildings around a vibrant retail district with easy parking and public transportation and easy access from a variety of housing types.
Objective 2.2 Continue public/private partnerships in the development of office, retail, housing, hotel and open space facilities.
Objective 2.3 Create a unique shopping, dining, entertainment experience in Downtown, combining new restaurants with small shops, major retail stores and theatre with easy, available parking and strong pedestrian connections to other parts of the Downtown.
Goal 3 Implement Specific Actions such as the Provisions of Public Improvements in an attractive and cohesive physical form, which clearly identifies Sunnyvale’s downtown.
Objective 3.2 Complete priority streetscape projects to facilitate an attractive pedestrian environment and to promote development on adjacent parcels.
Goal 4 Development and implementation of an overall parking strategy that meets the needs of retail, office, housing and visitor demand
Objective 4.1 Implement overall parking strategy that optimizes parking use based on office, retail, and entertainment peaks.
Objective 4.2 Replace existing public parking
as required.
Goal 5 Increase housing opportunities.
Objective 5.2 Encourage mixed housing consisting of market rate and affordable housing in appropriate locations on transit corridors in or near the downtown.
Downtown Specific Plan:
Goal B. Establish the Downtown as the cultural, retail, financial and entertainment center of the community, complemented by employment, housing and transit opportunities.
Policy B.3.
Improve the Town Center area by reinforcing connections into and through the mall and improve the quality of the tenant mix and the mall’s physical environment
Land Use and Transportation Element:
Action Statement C1.2.1 Promote Downtown as a unique place that is interesting and accessible to the whole City and the region.
Policy N1.12
Permit more intense commercial and office development in the downtown, given its central location and accessibility to transit
Action Statement N1.12.1 Use the Downtown Specific Plan to facilitate the redevelopment of downtown.
Socio-Economic Element:
Goal 5.1C Endeavor to maintain a balanced economic base that can resist downturns of any one economic sector
Policy 5.1C.
Support efforts to establish Sunnyvale’s downtown area as a strong commercial center for the city.
Community Development Strategy Goals:
Tax Base: to retain and attract businesses which will provide a stable tax base to support City services
Retail Services: to retain and attract businesses which provide a variety of needed retail services for our residents at locations which are convenient for them.
In March, 2003, the Agency Executive Director (City Manager) appointed a negotiating team for the Agency consisting of Robert Paternoster, Director of Community Development; Mary Bradley, Director of Finance; and Jerry Keyser, Agency consultant in real estate economics. The team was supported by City Attorney Valerie Armento, and special redevelopment counsel Lee Rosenthal of Goldfarb and Lipman. The Agency set forth three major initial parameters or objectives for the negotiations:
1. To minimize risk for the Agency and the City
The Agency warned that it did not want a repeat of the present situation, wherein the Agency is still paying back loans for the development of a Mall which has since closed.
2. To recreate as much of the historic public street grid as possible
The Agency sought to integrate the project into the historic downtown by extending public streets through the project, but desired no additional on-going cost to the City for maintenance and repair of the streets and other infrastructure.
3. To get out of the parking business
The Agency wanted no responsibility for building, maintaining, repairing and replacing public parking facilities, noting the present problems with deterioration of the parking deck along Mathilda Avenue.
In subsequent meetings with the negotiating team, the Agency added three other parameters or objectives:
4. None of the new sales tax generated by the project and other revenues flowing to the City’s General Fund should be committed to the developer to support the project, although the Agency and City are willing to consider investing in the project an amount equal to some portion of the new project-generated secured property tax which flows to the Agency (the “project tax increment”).
5. Any unanticipated windfall in project tax increment should be shared equally between the Agency and the developer.
6. The developer should place underground as much parking as is feasible.
Summary of Proposed Business Deal:
The negotiating team conducted a series of day-long negotiations with representatives of Forum Development Group and Lehman ALI, and met frequently during the course of the negotiations with the Redevelopment Agency in Closed Session. The negotiating team is pleased to report to the Agency that it has negotiated a proposed business deal which it believes meets all of the parameters and objectives set forth by the Agency. The main elements of that agreement are as follows:
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The developer will demolish the Mall, the former J.C. Penney building, and the parking deck along Mathilda (Macy’s and Target will remain on their parcels, as will the new parking structure at Sunnyvale and Iowa Avenues). In accordance with the existing Reciprocal Easement Agreement, the Agency will pay the developer for demolishing the Agency’s portion of the parking deck an amount of $800,000 (2/3 of the $1.2 million demolition estimate of the Department of Public Works, because the Agency owns 2/3 of the structure and the Mall owns the remaining 1/3).
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The developer and the Agency will exchange land of approximately equal area and equal value as shown in Attachment A. The Agency will obtain fee title to the land where the public parking structures are located (excepting that area of the parking structures over which private residential units are developed), and to all of the land under the new street grid, guaranteeing that the public will have perpetual control over these rights-of-way.
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The developer will build, maintain, repair and replace all parking structures. A minimum of 5651 parking spaces will be provided (inclusive of the private parking spaces for the residential units), 1667 of which will be underground. The City, Agency, and developer will cooperate to provide Mello-Roos financing to “take out” the construction financing arranged by the developer for the public parking structures. This special financing, authorized by the State, will provide a lower interest rate to the developer. The developer will pay the debt service through a special tax on its property, which will be the sole collateral for the loan. The City and the Agency will bear no financial risk or obligation for payment of debt service. Should the property owner fail to pay the special tax for debt service on the bonds, the City may be obligated to participate in an accelerated foreclosure process on behalf of the bond holders. City costs for this process are ultimately recoverable from the developer.
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The developer will build, maintain, repair and replace all public streets in Block 18. The developer will also construct all sidewalks within the block and along the adjacent streets which bound the block; these sidewalks will be consistent with the Downtown streetscape standards, including new street lights, decorative paving, benches, waste receptacles, and street trees in decorative grates.
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The developer will construct and maintain a “Redwood Square” of at least 0.8 acre around the six heritage redwood trees, and make it available at no cost to the City for public events up to 15 times per year. The square is intended to remain open to the public at all times.
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The developer will establish a private security force to provide a high level of security and traffic control for the project, such that the Department of Public Safety will not be required to provide routine patrol, but will respond to emergencies, crimes in progress and other events that are beyond the scope of routine patrol.
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Upon approval of the City Council of a Special Development Permit, the Developer will build, lease and operate a mixed-use, open-air development consisting of approximately 1.0 million sq. ft. of retail (including a 2950-seat movie theater complex and existing Macy’s and Target stores), and 275,000 sq. ft. of office; and will enter into agreement with another developer or developers to construct up to 292 for-sale housing units.
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In consideration for the above, and in particular for replacing the Agency’s Mathilda Avenue parking deck, for placing a substantial amount of the new parking underground, and for constructing, repairing and replacing public streets and other public amenities, the developer will receive annual payments equal to the project tax increment. The project tax increment is the increase in secured property tax generated by the development over and above the existing secured property tax (2003-2004 secured tax roll) which flows to the Agency after deduction of required set asides and payments to other taxing entities. The annual payments will be made for each year between the base year of 2003-2004 and the expiration of the project on November 26, 2026; however, no funds will be payable to the developer until the first year after completion of the project. The estimated present value of this tax increment is $39.5 million. To protect against an unanticipated windfall to the developer, the payments will be limited to a cumulative cap of $4.0 million/year, plus an amount equal to 50% of any tax increment in excess of this limit.
The negotiating team believes that the proposed business deal achieves all of the objectives of the Agency. Paramount among these is the minimization of risk to the Agency and the City. Under this agreement, the Agency and the City will borrow no money (no new debt), will construct no streets, parking facilities or other infrastructure, and will assume no additional responsibility for infrastructure maintenance, repair or replacement. Rather, the developer assumes:
Because the developer is designing and constructing all improvements, including all public streets and public parking structures, the developer will be responsible for any and all cost overruns.
Because the developer is financing the construction of all of the improvements, the developer assumes the risk that interest rates and other borrowing terms will become less desirable in the future.
The amount of secured property tax increment generated by the project is dependent upon the developer’s performance in building a center of high value and maintaining that value through proper leasing and operation. Because the annual payments to the developer are based only on the amount of secured tax increment which the project actually generates each year (i.e., the Agency does not guarantee the developer any specific amount), the full risk for performance rests with the developer. This is particularly important should the project be forced to close down, as is the present case with the Mall.
Unlike the present situation, where an argument can be made that the Agency is responsible for the repair and replacement of a deteriorated parking facility, the agreement clearly places sole responsibility for maintenance, repair and replacement of the parking facilities and of all of the public streets upon the developer.
The proposed agreement imposes two financial responsibilities upon the Agency and City. First, the Agency will reimburse the developer for the cost of demolishing the Agency’s portion of the Mathilda parking deck. Specifically, the Agency will pay the developer $800,000.
Second, the developer will receive annual payments equal to the secured property tax generated from Block 18 due to the construction of the project (“project tax increment”), up to a cumulative maximum limit of $4.0 million per year, plus an amount equal to 50% of the tax increment in excess of this limit. Keyser Marston, consultant to the Agency, has estimated the present value of the total annual payments to the developer through 2026 to be approximately $39.5 million. Keyser Marston has also informed the Agency that a project of this proposed complexity and risk, which essentially rebuilds Downtown Sunnyvale, is not economically feasible without a contribution of this magnitude by the Agency. In partial return for the Agency’s contribution, the developer would:
|
Relieve Agency of parking deck replacement cost |
$10.0 million |
|
Place 1442 new parking spaces underground |
11.5 million |
|
Construct streets and sidewalks |
11.0 million |
|
|
$ 32.5 million |
In accordance with the direction of the Agency, all of the sales tax revenue generated by the development will flow to the General Fund. This represents new General Fund revenue for the City of approximately $2.0 million per year.
Disposition and Development and Owner Participation Agreement (DDOPA):
The Disposition and Development and Owner Participation Agreement (DDOPA) is the legal agreement between the Redevelopment Agency and Fourth Quarter Properties XLVIII, LLC, which provides for the redevelopment of Block 18 of the Downtown Specific Plan. It provides the mechanism for property transfers between the Agency and the developer, for construction by the developer of specified public and private improvements which constitute the project, and for certain payments to the developer to support the construction of the public improvements.
The DDOPA includes all of the elements of the proposed business deal summarized above. It also sets forth performance criteria for the developer, in the form of specific milestones which must be achieved or else the Agreement will terminate. The key milestones are: the developer must close escrow on the Mall property by September 30, 2004; the developer must submit to the Agency the agreement with the residential developer or developers by December 31, 2004; and, the developer must close escrow on the land exchange with the Agency by April 30, 2005. The developer is expected to commence construction no later than June 31, 2005, and must complete construction of the entire project within 24 months.
The DDOPA also requires the developer to be supportive of the existing Downtown business community, and to minimize negative impacts of construction activity upon these businesses. Specifically, the developer is required to meet at least monthly with Downtown businesses during construction, and to prepare and implement a construction mitigation program which will prescribe construction truck travel routes, location of construction worker parking, enforcement mechanisms to keep workers and suppliers out of retail customer parking spaces, and signs indicating that stores are open for business during construction. The developer and his contractors are also required to meet regularly with a representative of the City to facilitate coordination with City agencies and to resolve construction issues affecting Downtown businesses and residents. The developer is required to make good faith efforts to attract local merchants to lease spaces in the new development. The developer is also required to be supportive of a business improvement or property improvement district, if one is formed to support Downtown businesses, and to work with the Downtown business community in producing special events, programs and advertising to promote the entire Downtown area.
The DDOPA also requires that all contractors and subcontractors pay prevailing wages, pursuant to Labor Code Sections 1720 et. seq. and regulations of the California Department of Industrial Relations.
A copy of the DDOPA accompanies this report. The DDOPA incorporates five other legal documents as described below:
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Public Street Maintenance Agreement: providing for the developer to operate and maintain the publicly owned streets and sidewalks within the boundaries of the project.
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Public Parking Construction Lease: Agency lease to developer of parcels where public parking is to be constructed to allow developer to undertake construction; this lease will terminate upon completion of construction and purchase of the completed parking with Mello-Roos bond proceeds.
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Public Parking City Lease: Agency lease of the public parking to the City that is to go in effect when the public parking is completed and purchased with the proceeds of the Mello Roos bonds.
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Public Parking Maintenance Agreement: providing for the developer to operate, maintain and replace the publicly owned parking within the boundaries of the project.
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Interim Mathilda Parking Agreement: Providing for developer to operate and maintain the public parking closest to Mathilda prior to construction of the project.
In accordance with Section 33433 of the California Health and Safety Code, the Agency is required to prepare a report to inform the public about the terms of the land transfers proposed in the DDOPA. Attachment C to this document is a copy of the required report.
Alternative Development Scenarios:
At the request of the Agency, staff and consultants have considered alterative scenarios for development of Block 18 should the Agency choose not to approve the DDOPA with Fourth Quarter Properties. Three possible alternatives have been identified and evaluated:
1. Do nothing
Under this scenario the Agency would offer no financial support (such as transfer of tax increment) to support development. The parking deck would be demolished for safety reasons, and replaced with a surface lot at a cost to the Agency of approximately $3 million. This may result in the owner of the Mall property suing the Agency over its failure to meet its alleged obligations to replace the parking deck.
2. Rebuild the parking deck
Under this scenario the Agency would agree to rebuild the parking deck or pay the Mall property owner the cost of rebuilding it (approximately $10 million). There would be no additional financial support to the developer, such as transfer of tax increment. Development would proceed as on any other privately owned site within the zoning requirements for the site (allows 1,007,876 sq. ft. of retail including Macy’s and Target, 282,000 sq. ft. of office, and 292 housing units).
3. Acquire property and offer it for development
Under this scenario the Agency would acquire the property owned by American Mall Properties and Lehman ALI, using eminent domain, if necessary. This 24.81 acres would be combined with the 11.84 acres owned by the Agency, and a developer would be sought through a Request for Proposals, with development limited to that currently permitted by zoning. The Agency would require that the street grid be reestablished as in the Fourth Quarter proposal.
The table on page 14 compares these three alternatives to the current proposal.
Evaluation of Alternative Development Scenarios, click here
The “Do Nothing” alternative requires the least initial expenditure of public funds, but also has the most dire negative impacts. The property would eventually develop, but when and with what is uncertain. The second scenario, “Rebuild Parking Deck,” allows a developer to follow market forces and maximize its return. More than a third of the $2.8 million annual secured property tax increment would be used to pay off the debt incurred to rebuild the parking deck. The market-driven project would most likely be what is commonly known as a “power center,” a suburban style shopping center composed of very large national retailers surrounded by predominantly surface parking.
The third scenario is very similar to the current proposal, because in both cases the City is directing the developer to channel market forces into the rebuilding of a traditional downtown. Because the economics of both are the same (with high front-end costs for parking structures, public streets and other infrastructure), it is assumed that the cost to the Agency would be the same. The main difference between the two is that acquisition by the Agency would delay construction by two years and could lead to unanticipated acquisition costs, particularly if eminent domain is used to acquire the property; the Agency would risk that the developer might not be able to reimburse the Agency for these costs without making the project economically infeasible.
FISCAL IMPACT
Approval by the Agency of the Disposition and Development and Owner Participation Agreement requires no expenditure of funds by the City of Sunnyvale (General Fund). The Redevelopment Agency would incur two financial obligations. First is the $800,000 for the demolition of the parking deck. These funds have been programmed in the Twenty Year Resource Allocation Plan adopted by the City Council on June 15, 2004. Second is the transfer to the developer of all project-generated secured property tax increment between the base year of 2003-2004 and the project termination on November 26, 2026, up to a cumulative maximum of $4.0 million per year. These funds do not exist today, and will only materialize if and when a project is developed; they flow to the Redevelopment Agency and can be used only to support the Central Core Redevelopment Project. In addition, an estimated $200,000 per year of unsecured property tax will flow from the project to the Agency and will not be transferred to the developer.
The completed project is estimated to generate approximately $2.0 million per year in new sales tax for the City’s General Fund. It will also pay a one-time construction tax of approximately $450,000. In addition, Fourth Quarter will pay the City approximately $1.5 million for construction plan check and inspection services and $60,000 for processing its application for planning approval.
The project will result in no net increase in infrastructure cost to the City. The developer will be required, through the Disposition and Development and Owner Participation Agreement and the Conditions of Approval of the Special Development Permit, to construct at its cost all streets and sidewalks, and to improve all affected intersections around the periphery of the project. Sidewalk improvements will be made along Mathilda, Washington, Sunnyvale and Iowa, including enhanced paving, new streetlights, benches, and street trees with ornamental grates. Unlike most other public infrastructure, the developer will also be required to repair and replace all streets and sidewalks within the boundaries of its project.
In addition, the project will contribute to provision of public infrastructure on a city-wide basis through the payment of impact fees, approximated as follows:
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Traffic impact fee |
$1.5 million |
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Park Dedication fee |
$1.5 million |
The project will also pay utility connection fees in the amount of $1.4 million to recover the full costs of the developer “buying into” the City’s water and sewer systems. The project will also pay the Sunnyvale School District and Fremont Unified High School District impact fees of approximately $1.2 million.
With regard to ongoing service costs to the City, both Public Works and Parks and Recreation estimate that there will be no or minimal increases in demand for general City services. The City’s utility rates for water, sewer, and refuse cover all ongoing costs for these services on a full cost recovery basis.
In April, 2001, the Public Safety Department commissioned a study by Hughes, Perry & Associates entitled “Evaluation of the Impact of Projected Downtown Development on Public Safety Department Workload and Staffing.” This study was based on development projected to occur in the entire downtown at that time. This projected development included 674 dwelling units, 762,000 sq. ft. of office development, 1 million sq. ft. of retail and recreation, and a 150-room hotel. This study has not been updated to reflect current plans, nor has it been objectively verified. Nonetheless, its conclusions are helpful in projecting potential future costs.
Hughes, Perry & Associates concludes that there will be no measurable impact on fire services because of existing capacity in the fire area. In the police service area, they project 456 additional police calls for residential, a range of 3,456 to 1,788 calls for retail/entertainment, 343 additional calls for office, and 49 for a hotel. The report goes on to translate these calls into new positions needed, giving a low range of four new police positions and a high range of eight. To accommodate these projections, a total of $1 million for seven new positions has been reflected in the General Fund long-range financial plan. This cost is attributed to the redevelopment of the entire Downtown, of which the Fourth Quarter project is only a part.
Summary of Fiscal Impact
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|
Agency |
City |
|
One-time impact
Cost
Income
Net |
- $0.8 M demolition
$0.0
- $0.8 M |
$0.0
$6.5 M fees & taxes
+$6.5 M |
|
Annual impact
Cost
Income
Net |
- $4.0 M
$4.0 M project tax increment
$0.2 M unsecured property tax
+$0.2 M |
- $1.0 M public services
$2.0 M sales tax
_____
+$1.0 M |
Environmental review
A Mitigated Negative Declarative (ND) has been prepared for the Town Center Mall Redevelopment Project, tiered off the 2003 Final EIR for the Downtown Improvement Program Update. The ND evaluates site specific environmental impacts of the Special Development Permit and the Disposition and Development and Owner Participation Agreement that were not evaluated in the EIR. It is the responsibility of City Council to adopt the ND. Once adopted, the ND must be considered by the Agency prior to acting on the DDOPA.
PUBLIC CONTACT
On July 29, 2004, nearly three weeks prior to scheduled action by the Redevelopment Agency, a draft of this report and a draft of the recommended Disposition and Development and Owner Participation Agreement were made available to the public at the Department of Community Development, the City Clerk’s Office and the Library; in addition, they were posted on the City’s web site.
On August 2, 2004, two Open Houses were held at the Heritage Center to provide an opportunity for the public to ask questions regarding the proposed development plan and DDOPA. They were held at 1:00 p.m. and at 7:00 p.m. Staff and representatives of the developer were present to explain the plans and documents and to answer questions.
The public hearing before the Redevelopment Agency and the two Open Houses were announced to the public through advertisements in the Sunnyvale Sun and the San Jose Mercury News, by posters placed in public buildings, by mailed a notice to over 2000 individuals and businesses on a mailing list compiled for this project, by posting on the City web site, and by announcements on KSUN. The Council agenda was posted on the City’s official notice bulletin board.
ALTERNATIVES
1. Approve the Disposition and Development and Owner Participation Agreement With Fourth Quarter Properties XLVIII, LLC (DDOPA).
2. Approve the DDOPA as revised by the Agency.
3. Do not approve the DDOPA and direct staff to demolish the Mathilda parking deck.
4. Do not approve the DDOPA, authorize staff to take steps to replace the Mathilda Avenue parking deck, and direct staff to work with the other parties to the existing Reciprocal Easement Agreement to devise a feasible development plan with no financial support from the Agency.
5. Do not approve the DDOPA and direct staff to return to the Agency with a strategy for the Agency to acquire the site and sell it to a developer selected through a request for proposals process.
RECOMMENDATION
Staff finds the proposed project and the DDOPA to be consistent with the goals and objectives of the Implementation Plan for the Sunnyvale Core Redevelopment Project, as set forth in the Existing Policy section of this report.
Staff also believes that the development plan submitted by Fourth Quarter Properties achieves the vision of the 2003 Downtown Specific Plan: to create “an enhanced, traditional downtown serving the community with a variety of destinations in a pedestrian-friendly environment”. The isolation of an interior-oriented mall is replaced by an open-air project on public streets which recreate much of the original street grid, thereby integrating the new development with the historic downtown. This redevelopment should have the positive spin-off effect of stimulating substantial redevelopment and property improvements elsewhere in Downtown. At the request of the Agency, the developer has made all of the housing units for-sale, and placed nearly 30 percent of the parking underground. The developer has also agreed to take all responsibility for construction, repair and replacement of parking structures, completely removing the City and the Agency from the “parking business.”
An independent analysis by Keyser Marston Associates of the projected income and costs to the developer (the proforma) has indicated that these concessions to the desires of the City of Sunnyvale have added significant cost to the project and have made it economically infeasible without financial support from the Agency. Specifically, the assumption by the developer of responsibility for the Mathilda Avenue parking deck has relieved the Agency of a $10.0 million obligation. The underground placement of 1442 new parking spaces will cost the developer approximately $11.5 million more than placing those spaces in above-ground parking structures. In addition, the developer will construct streets and sidewalks which, if built by the City, would cost $11.0 million.
Staff believes that the public benefit achieved through these costly concessions by the developer, together with the developer’s proposal to rebuild a substantial portion of Downtown Sunnyvale, are worth the $39.5 million present value of the proposed payments based on project generated secured tax increment. These funds will flow to the Agency only when and if the project is developed; no new tax increment will exist if the Mall is not redeveloped. The $800,000 cost of demolishing the Agency’s portion of the parking deck is a current obligation of the Agency, and will be required whether or not this project proceeds.
Staff believes that the negotiating team has brought forward a proposed agreement which meets all the parameters and objectives set forth by the Agency. The Agency is not required to acquire property or to assume additional debt, and is not guaranteeing to the developer any minimum annual payment. The City is not required to commit monies from the General Fund. All of the financial, construction, and performance risk is assumed by the developer. The development will create 37 below market rate housing units and ultimately generate approximately $25 million of tax increment funds to be set aside, in accordance with State law, for construction of affordable housing. There is no cost to the City or Agency for construction, maintenance and repair of new infrastructure. In addition, the City’s General Fund will benefit from an estimated $2 million per year in new sales tax revenue, a portion of which (up to $1 million) may be budgeted for increased Police services in the Downtown.
Staff believes that Alternative 3 (the “do nothing” scenario) would at best preserve an unsatisfactory status quo, but would more likely result in a downward spiral of Downtown as a lengthy court battle unfolds. Alternative 4 (the “rebuild the parking deck” scenario) would result in a financially successful retail project, but as a “big box” center, it would not meet the City’s goal to rebuild a traditional downtown. Alternative 5 (the “acquire and offer for development” scenario) would have the same long-term positive benefits of the Fourth Quarter proposal, but would require considerable additional effort by the City and would delay construction by about two years.
Therefore, staff recommends that the Agency adopt Alternative 1.
Prepared by:
Robert Paternoster
Secretary, Redevelopment Agency
Reviewed by:
Mary Bradley
Treasurer, Redevelopment Agency
Approved by:
Amy Chan
Executive Director, Redevelopment Agency
Attachments:
A. Proposed Land Exchange Between the Agency & the Developer (.pdf)
B. Disposition and Development and Owner Participation Agreement with Fourth Quarter Properties XLVIII, LLC. (.pdf)
C. Summary Report Pursuant to Section 33433 of the California Health and Safety Code (.pdf)
D. Resolution Approving the Disposition and Development and Owner Participation Agreement and Authorizing the Executive Director to Execute and Implement Agreements (.pdf)