SUBJECT:  A Resolution of the Redevelopment Agency of the City of Sunnyvale Approving Minor Revisions to the Disposition and Development and Owner Participation Agreement Between the Agency and Fourth Quarter Properties XLVIII in connection with Town Center Mall, and Authorizing the Executive Director to Take Actions Necessary to Execute and Implement the Authorized Agreement

 

REPORT IN BRIEF

On August 17, 2004, the Redevelopment Agency approved a Disposition and Development and Owner Participation Agreement (DDOPA) with Fourth Quarter Properties XLVII, LLC (the developer), regarding the redevelopment of the Town Center Mall.

 

Since adoption of the DDOPA, the United States Bankruptcy Court has confirmed the debtor’s plan of reorganization for the Mall. In addition, the developer has negotiated an Operation and Reciprocal Easement Agreement with Macy’s and Target, and has obtained a commitment of financing from Inland Real Estate Group of Companies, Inc. On December 7, 2004, the developer requested certain revisions to the DDOPA necessitated by the time that it has taken to complete negotiations with Macy’s and Target and with Inland, and by the content of the documents which were the result of those negotiations. Staff recommends that the Agency adopt a resolution approving revisions to the DDOPA, in some cases modified from the request of the developer, and authorizing the Executive Director to execute the DDOPA.

 

 

On April 27, 2004, the Redevelopment Agency selected Fourth Quarter Properties XLVIII, LLC, as Master Developer for the Town Center Mall site within the Central Core Redevelopment Project. 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.

 

On August 17, 2004, staff presented to the Agency a proposed Disposition and Development and Owner Participation Agreement (DDOPA) which resulted from its negotiations with the developer. After public hearing and extended discussion, the Agency adopted the DDOPA with modifications (See Attached A, without proposed blue-line revisions).

At the time of the Agency actions, the United States Bankruptcy Court was scheduled to confirm the plan of reorganization on October 4, 2004. However, the Court did not confirm the plan until November 12, 2004, primarily because the developer was unable to reach agreement until that date with Macy’s and Target regarding an Operation and Reciprocal Easement Agreement. The developer also entered into extended negotiations with its principal lender, Inland Real Estate Group of Companies, Inc., and was unable to obtain a loan commitment until recently.

 

As a result of all of these delays, the developer was unable to execute the DDOPA by the required date of August 31, 2004, and was unable to close escrow on the Mall property, the former J.C. Penney property, and the former WHL property by October 30, 2004, as anticipated in the DDOPA.

 

 

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.

 

 

On December 7, 2004, the developer submitted a letter requesting revisions to the DDOPA adopted on August 17, 2004 (See Attached B). These proposed revisions would not alter the basic business agreement, but would extend the dates of the milestones which the developer is required to achieve, permit the developer to finance the parking structures privately rather than through Mello-Roos public bond financing, reflect agreements reached with Macy’s and Target in the Operation and Regional Easement Agreement, allow transfer to the primary lender, and make other minor changes and corrections.

 

With regard to the milestones in the implementation of the project, the developer requests the following changes:

 

Purchase of property	from 10/30/04 to 03/31/05
Agreement with housing developer	from 01/30/05 to 04/30/06
Completion of construction plans	from 09/01/05 to 04/30/06
Closing on land swap	from 04/30/05 to 04/30/06
Begin construction	from 06/30/05 to 06/30/06

 

With regard to financing of the parking structures, the original DDOPA anticipated that the City would sell Mello-Roos bonds and place a lien on the developer’s property to repay the bonds. This would result in a lower interest rate than private financing. The developer has since determined that it can afford to finance the construction of the parking structures though private financing.

 

The developer discovered in its negotiations with Macy’s and Target that the department stores had concerns over the wording in the DDOPA which would permit the City to schedule events in Redwood Plaza up to 15 days per year. Concerned that the City’s use might interfere with the operation of their businesses, the department stores sought and achieved language in the Operation and Reciprocal Easement Agreement which would give them “reasonable approval rights as to the dates, time of day and manner of such use”, and “the right to prohibit use by the City and Agency of the plaza on any successive days, and at any time during the period from the day after Thanksgiving to and including January 10 of the next calendar year.” The developer requests that the DDOPA be revised to be consistent with their agreement with Macy’s and Target.

 

The developer has obtained a loan commitment from Inland Real estate Group of Companies, Inc. to acquire the property and to construct the improvements. The lender seeks the right to acquire and complete the project, should the developer be unable to do so. This type of lender protection is normal in a project of this type.

 

 

Because the proposed revisions do not affect the business agreement, they would have no direct fiscal impact. Any delay in the project, however, as represented in the extension of the milestones, would delay the receipt by the City of the sales tax generated by the project, estimated to be $2.0 million per year.

 

The developer has been unable to move forward within the timeframe originally contemplated to acquire the Mall out of bankruptcy proceedings and to obtain financing for the project. It now appears that the developer will be able to achieve these objectives by the end of 2004, or shortly thereafter. In addition, the Operation and Reciprocal Easement Agreement negotiated by the developer with Macy’s and Target is inconsistent with the approved DDOPA with regard to City use of Redwood Plaza. The developer has requested revisions to the adopted DDOPA to reflect these changed conditions.

 

 

 

Public contact was made through the posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s website, publication of the City Council Agenda in the San Jose Mercury News and the availability of this agenda and the report in the Public Library. 

 

 

 

1.  Approve a Resolution revising the DDOPA as requested by the developer, and authorize the Executive Director to execute and implement it.

 

2.  Approve the attached Resolution revising the DDOPA as proposed by staff and indicated in the blue-line revisions, and authorize the Executive Director to execute and implement it.

3.  Approve a Resolution adopting the DDOPA with any revisions directed by the Redevelopment Agency, and authorize the Executive Director to execute and implement it.

 

 

Staff recommends Alternative 2.

 

Staff believes that the dates proposed by the developer represent an unnecessary delay in proceeding with the project, and could result in completion 12 months later than originally anticipated. Acknowledging the unforeseen difficulties which the developer has faced and the uncertainties with a project of this scope and size, but also recognizing the strong desire of the City of Sunnyvale to expedite the construction and opening of this important project, staff recommends revision to the milestone dates as shown in the following table:

Milestone	8/17/04 Approved	Developer’s Request	Staff Recommendation
Purchase of property from Mall to Lehman	10/30/04	3/31/05	12/31/04
Agreement with housing developer	1/30/05	4/30/06	3/31/05
Completion of construction plans -       demo, grading, foundation -        all other	9/1/05   9/1/05	4/30/06   4/30/06	7/1/05   9/1/05
Closing on Land Swap	4/30/05	4/30/06	12/01/05
Begin construction	6/30/05	6/30/06	12/01/05
Opening	4/30/07	4/30/08	09/30/07

 

These revised dates are reflected in the blue-line revisions in Attachment A in Sections 2.01, 2.03, 3.04, 3.05, and 4.04. In all cases, the Executive Director would have the authority to extend the dates up to 90 days if the extension is reasonably necessary to complete the project.

Staff views the proposed private financing of the parking structures as a positive step which is in accordance with the desire of the Agency to have no responsibility for design, construction, operation, maintenance, repair and replacement of the parking structures. Staff, therefore, recommends revisions to Sections 3.03 and 8.06, as shown in the blue-line revisions in Attachment A, to permit the developer to privately finance construction of the parking structures.

Staff finds the developer’s request for limitations on the City’s use of Redwood Plaza to be inconsistent with the intent of the earlier direction of the Redevelopment Agency. Staff, however, understands the desire of Macy’s and Target to have some reasonable review over public use of the plaza. Although the plaza, as approved in the Special Development Permit, will appear to be a public plaza and public access will always be permitted, the plaza is private property. The operation and maintenance of the plaza will be supported by the merchants through the payment of monthly common area maintenance fees, just as such areas are maintained within enclosed malls. The department stores would not want City events to preempt promotional events generated by the management of the shopping district, or to interfere with access to their stores during busy shopping periods. Therefore, staff proposes revisions to Section 10.06 to allow the manager of the shopping district and the local store managers of Macy’s and Target to have reasonable approval rights as to the dates, time and manner of City use of the plaza, and require that City use during the holiday shopping season be coordinated with holiday events sponsored by the developer and/or the merchants.

 

Staff supports the developer’s proposed revision to allow the lender to acquire and complete the project if the developer is unable to do so, and has incorporated a blue-line revision in Sections 6.03 and 9.04 of Attachment A. The collateral for the loan is the property and the development rights thereon. It is normal and appropriate that the lender have the right to complete the project if the developer cannot. If the lender desires to bring in a new developer to complete the project, existing language in Section 6.03 gives the Agency reasonable rights to approve or disapprove of such developer.

Staff also recommends a number of minor changes and corrections to the document in response to concerns raised by the developer:

·        Section 3.01 is revised to reference the City Council approved Special Development Permit in describing the project.

·        Section 3.02 is revised to state that the existing City BMR requirement for sales units is 12 ½ % of the total number of housing units built; the developer will be required to comply with whatever requirement is adopted in the city-wide BMR program at the time that the BMR agreement for this project is executed.

·        In Section 3.03, the Parcel Map shall not “materially” deviate from the land swap map attached to the DDOPA. Minor changes are to be anticipated as the engineering studies are completed, but they will not alter the overall equity between the Agency and the developer in the land exchange.

·        In Section 3.04, the wording “the Construction Plans shall also provide for high-quality exterior design and articulation” is deleted, since this section does not deal with design. Wording is also added in paragraph (c) to permit the developer to begin demolition, grading, utility work and foundation construction before closing on the land swap, provided that all required City permits are first obtained. Construction initiated prior to closing is at the risk of the developer.

·        Staff has added wording to Section 3.07 to insure that the developer has evidence of financing for the entire project, even if it chooses to submit plans in phases. The developer requested that evidence of “permanent” financing not be required. Staff agrees, unless construction financing is contingent upon obtaining permanent financing.

·        In Section 3.08, the estimated cost of Public Improvements is deleted. A specific dollar amount is inappropriate in the DDOPA, since the bonding must be for the full amount of construction cost, whatever that may be.

·        In Sections 4.11 and 4.12, paragraphs (iii) are removed. The developer correctly points out that frivolous litigation should not be an excuse to not close escrow on the land exchange and proceed with the project. In the case of litigation, both the Agency and the developer would have to agree to proceed to close escrow.

·        The developer has requested changes in Section 5.06 such that special payroll book keeping to demonstrate payment of prevailing wages not be required if the contractor uses union labor. Staff has not made this revision on the advice of the City Attorney, because such prevailing wage records are required by State law.

·        Section 5.09 is revised to provide 120 days for the developer to resolve a lien or encumbrance before it is required to bond around it.

·        The developer has requested revision to Section 8.01 to require only 50% of the residential units to be complete in order for the Agency to begin transfer of tax increment funds to the developer. Staff does not believe that this provides sufficient incentive for the developer to complete the residential units; therefore, staff proposes that Section 8.01 be revised to require completion of the shell for 100% of the residential units, and issuance of certificate of occupancy for at least 200 of the units.

·        Section 9.04 (xiv) is revised to allow the developer to suspend construction for up to 60 days before it is in default. The original DDOPA provided only 30 days and the developer has requested 120 days.

 

Prepared by:

Robert Paternoster

Secretary, Redevelopment Agency

 

Approved by:

 

Amy Chan

Executive Director, Redevelopment Agency

 

 

Attachments:

 

A. Disposition and Development and Owner Participation Agreement is adopted on August 17, 2004, with blue-line revisions recommended by staff

B. Letter of December 7, 2004, from Jane Vaughan requesting revisions to the DDOPA

C. A Resolution of the Redevelopment Agency of the City of Sunnyvale Approving Minor Revisions to the Disposition and Development and Owner Participation Agreement Between the Agency and Fourth Quarter Properties XLVIII in connection with Town Center Mall, and Authorizing the Executive Director to Take Actions Necessary to Execute and Implement the Authorized Agreement