Governor’s Plan Could Mean Fire Sale

March 10, 2011
Daily Journal Andrew Raines quoted

Real estate portfolios filled with office and apartment buildings, hotels and parking lots might sound like a purview of billionaire investors, but these properties represent just a small sampling of the thousands of assets held by the state’s many redevelopment agencies.

Gov. Jerry Brown’s proposal to shutter California’s 397 redevelopment agencies as of July 1 has touched off an ongoing battle between the governor and redevelopment advocates around the state.

Amid the clamor, one largely overlooked aspect of the legislation, which lawmakers could vote on as soon as today, has thrown the future of redevelopment agencies’ massive holdings into question.

Brown’s plan, one of many spending cuts aimed at closing the states $25 billion budget gap calls for new successor agencies - in many cases cities and countries - to take over and liquidate redevelopment agencies’ properties as quickly as possible. The proceeds from the sales would be distributed to those cities, counties, school districts and other local entities to help pay for basic services.

The value of the properties in question could easily add up to billions of dollars. Critics charge that the mandate could result in a fire sale of a massive number of valuable public assets at an inopportune time.

“There is no central inventory of assets, and it would be a horrendous project for us to try to compile that,” said John Shirey, Executive Director of the California Redevelopment Association. “I can tell you its significant. It would probably be amazing to see the list ... and likely [a] foolish sell in the current market.”

Panicked that lawmakers could sign off this week on Brown’s spending cuts, redevelopment agencies all over the state have transferred ownership of real estate assets to local governments in recent weeks. The sheer volume of property changing hands hints at how large redevelopment agencies’ holdings could be statewide.

On Tuesday, the Los Angeles City Council voted to take control of four redevelopment agency-owned properties worth approximately $50 million. The collection includes the two tower at downtown Los Angeles’ California Plaza office and retail complex, the Martin Luther King Jr. Shopping Center in Watts, and the Omni Hotel on Bunker Hill.

The properties yield a total of $3.7 million in annual rent and represent just a small ported of the agency’s total real estate portfolio, said Los Angeles Community Redevelopment Agency spokesman David Bloom. The agency owns 400 properties, he said, though most were purchased years ago and have not been recently appraised. However, property values have fallen by as much as 40 percent since the real estate boom.

“Dumping a bunch of assets in a fire sale is going to yield very small returns on investment,” he said. “We have [high] unemployment, a stumbling commercial’s not going to help the commercial or housing markets.”

The private market demand for these assets is unclear. Los Angeles recently tried to sell its parking garages to help close its budget gap, but failed after no bids were received.

Blume also criticized the governor for mandating the sale of redevelopment agency-owned properties so soon after blocking the high-profile sale of a portfolio of state-owned office buildings to private investors. That transaction, though stopped by the governor, resulted in a lawsuit against state officials that is ongoing.

Joseph Cotchett of Cotchett, Pitre & McCarthy LLP, who represents the plaintiffs in that case, said he received inquiries from advocates interested in blocking redevelopment agencies’ asset sales but sees it as an entirely different situation.

“You have to look at what laws govern the sales,” Cotchett said.

Los Angeles is not the only municipality to move to protect real estate assets in recent weeks.

The Long Beach Redevelopment Agency this week reportedly handed ownership of more than 200 properties valued at roughly $180 million to the city. Fullerton city officials voted last week to transfer 80 properties to the city, and municipalities including Bakersfield and Salinas floated similar proposals.

Whether these transfers will be upheld by the state remains to be seen. However, H.D. Palmer, a spokesman for the state Department of Finance, said these actions are not expected to make a large dent in the money Brown hopes to save by eliminating redevelopment agencies.

“We have no reason at this point to move off our assumption of $1.7 billion in the coming fiscal year,” Palmer said.

He also said that Brown’s plan calls for liquidating the properties in a financially prudent way.

“The idea is to do it in a way that would maximize the value of the asset,” Palmer said, “not just liquidate it quickly.”

That could be a tall order, according to real estate market watchers. “When there is an oversupply, generally its not possible to dispose of properties in a profitable way,” said Andrew Raines, a real estate attorney and name partner with Raines Feldman LLP. “They may end up not getting the benefit of their bargain."

"However," he added, "dealing with such a large number of publicly owned assets a different stages of development is unlikely to result simply in a glut of properties being thrown into the market."

“There are so many developers and parties that have interests in not seeing this financing go away, I don’t see its going to happen that way,“ Raines said. “It’s more complicated.”

Senate President Pro Tem Darrell Steinberg said earlier this week that the Senate would vote Thursday to pass Brown’s spending reductions. On Wednesday, a spokesman for Steinberg said that the vote could be delayed until as late as next week.

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