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Sacramento Railyards Project Off the Tracks?

Posted by HMS Law Group | Apr 19, 2013 | 0 Comments

By Blair W. Will –

Last Wednesday night the Sacramento Kings lost to the LA Clippers in what might prove to be the final Kings game played here in Sacramento.  Or not.  The drama regarding the Kings' possible departure to Seattle remains the talk of Sactown.  Seattle is a much larger media market, and the Seattle investors are deep pocketed heavy-hitters.  Sacramento has to be viewed as the underdog in this match-up.  Still, Mayor Kevin Johnson (KJ) has worked tirelessly on behalf of Kings fans, and been very effective in presenting Sacramento's case to the NBA.  As Yogi Berra once said, it ain't over till it's over.

The deal to keep the Kings in Sacramento incorporates several major elements.  Most importantly, somebody has to come up with the money to buy the team from the current owners.  KJ has organized a group of wealthy individuals with roots in Northern California, and it looks like these folks have the resources to match the Seattle investors' offer.  The second element is a plan to build a new arena.  This, too, looks promising.  The site would be at the location of the Downtown Plaza shopping center adjacent to K Street.  In 2012, the Downtown Plaza was purchased by JMA Ventures, a San Francisco-based group.  Prior to that, it had been in long-term ownership of the Westfield Group, an Australian company that owns more than 100 shopping malls worldwide.

All of these Kings-related machinations raise a question (at least in my mind).  What about the Sacramento Railyards project?  The original plan to redevelop the Railyards included siting an entertainment and sports complex (“ESC”) there.  Without that anchor property, what is the current status of the Railyards project?

Background Information Regarding the Sacramento Railyards

Before considering that question, I should probably provide a little background information for readers who may not be familiar with Sacramento.  The Railyards site, which is just a few blocks north of present-day downtown Sacramento, was first established in 1869 as the western terminus of the transcontinental railroad.  Later, it became the main Southern Pacific maintenance yard.  It's big—over 240 acres.  In fact, through most of the 20th Century, it was the largest railroad facility in the United States.  But with the completion of the Interstate highway system and more freight moving by truck, the railroads' impact gradually dwindled.  By 2000 the Railyards was more or less permanently shuttered.

In the early 2000s the commercial real estate market was booming.  Despite the continuing contamination problems on the site, the Railyards was potentially the largest urban infill project in the country.  Developers were interested and several undertook purchase discussions with Union Pacific RR through 2003 and 2004.  In 2006 Thomas Enterprises of Atlanta, GA, announced that it was the successful buyer.  The purchase price was undisclosed but was likely in the neighborhood of $190 million.  Thomas immediately sold 8.8 acres that included an existing rail depot building to the City for $55 million. [1]

The Redevelopment Plan

Substantial effort was expended formulating the redevelopment plan for the site.  Due to strict copy limits imposed upon me by the Commandante of HMS Law Group, Don F. Harris, I must skip over many of the details here.  Suffice it to say that it is a big project.  More than 20 year build out, $5.3 billion estimated cost, 12,000 residential units, 800,000 of retail space, scattered parkland, transportation infrastructure and—maybe—that entertainment and sports complex.

The initial planning process went more or less as expected.  Studies confirmed economic viability and a financing schedule was put together using a patchwork combination of private and public capital.  Full environmental review was done; the CEQA final EIR for the “Railyards Specific Plan” was published in November 2007.  The City certified the EIR in December 2007 and approved the allocation of redevelopment funding for initial stages of the project in May 2008.

The City's CEQA analysis was challenged in two lawsuits, one by Downtown Plaza, LLC, the owner of the mall [2] and one by Davis attorney William Kopper representing a group called Sacramento Citizens Concerned About the Railyards. On November 6, 2009, the reviewing court ruled that the City, and the Redevelopment Agency, had fully complied with CEQA.  The matter is on appeal.  Though no stay was imposed, the project has been delayed pending ultimate resolution of the CEQA challenges.

On a project the size of the Railyards, CEQA litigation is virtually inevitable.  A larger potential problem is the changed financing landscape.

Funding Without Redevelopment Dollars

A redevelopment agency was first created for Sacramento in 1973.  Others were established around the state.  By 2011 there were more than 400 redevelopment agencies in California.  The basic idea behind the redevelopment agencies was that they would be able to undertake urban infill projects that were often too large in scale, or required complicated entitlements and land-use approvals, to attract purely private development.

Redevelopment agencies often partnered with private developers.  The agencies could use eminent domain to obtain site-control, assist with securing governmental approvals and provide infrastructure and development capital.  This last point is particularly important—being quasi-governmental entities, the redevelopment agencies could invest in projects that might not “pencil” in the strict private-development analysis.

The fundamental funding mechanism was based on tax-increment, i.e., the difference in tax revenue resulting from the post-redevelopment increased tax basis of the redeveloped property.  Other public money could also be part of the financing schedule of a large project.

By 2011, after several years of recession, it had become impossible to ignore that California faced a massive budget crisis.  On February 1, 2012, by an act of the Legislature subsequently upheld by the California Supreme Court, all redevelopment agencies in California were dissolved and all monies that were previously used for funding redevelopment projects were applied to basic government services.

The dissolution required that “Successor Agencies” take over the existing obligations of the redevelopment agencies.  (See, H&SC §34173)  The Sacramento Housing and Redevelopment Agency (SHRA) was replaced by the City of Sacramento.  At the time the City became the successor agency, in early 2012, SHRA's enforceable outstanding obligations were approximately $790 million, including $565 million in debt.

Of the several projects at risk with the loss of redevelopment dollars, the Railyards and a mixed-use project in north Sacramento, Township 9, are the largest.  In the case of the Railyards, the financing structure included $50 million in redevelopment funding.  Obviously $50 million is a relatively small portion of the overall money needed to complete even the initial phases of Railyards redevelopment.  But it is significant, especially since additional funds from other public-sources is obtained through leveraging those redevelopment dollars.

Without redevelopment funding, it will be more difficult to move forward on the Railyards project.  The CEQA issues will be resolved one way or another with additional studies or extra mitigation measures.  The contamination problems at the site will be worked out through agreements with the EPA and state DTSC.  But the funding gap is a problem, especially if the entertainment and sports complex (aka, Kings arena) will be sited elsewhere, as now appears to be the case.

Redevelopment was—and continues to be, even if we don't refer to it by that moniker anymore—a big part of the legal practice at HMS Law Group.  Senior Partner, Don Harris, has worked on large scale real estate transactions for many years and was historically involved with the Township 9 project as the Founder/CEO of Nehemiah Corporation of America.  Since the end of the redevelopment agencies, we have been considering various different potential funding sources that might replace the lost redevelopment dollars.

We think direct foreign investment is one answer.  Typically such investment involved funds moving from a developed economy to a developing economy.  But the 21st century economy is global.  More importantly, the funds are available.  Despite an economic slowdown in the U.S., there is significant foreign capital looking to invest in U.S. assets.  Structuring such a deal using foreign capital will be novel, interesting and exciting.  It will also be critical to keeping “at-risk” projects around the state, like the Sacramento Railyards, moving forward in the post-redevelopment-agency environment.

[1] Subsequently, in June of 2010, Thomas Enterprises defaulted on the loans used to purchase the Railyards from Union Pacific.  At the time of default the outstanding loans totaled approximately $187 million.  The property is presently owned by TE's lender, American Real Estate Trust, Inc.

[2] Recall that Downtown Plaza was then owned by Westfield Group.  The mall wasn't purchased by JMA Ventures, of San Francisco, until 2012.

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