California’s retail aftershock

As California dissolves its public redevelopment agencies, some 2,500 properties are set to hit the market.

by Anna Robaton

A movie theater in downtown San Bernardino, Calif., that reopened this year with help from redevelopment funds. The city filed for federal bankruptcy protection in 2012.  A year after the California Supreme Court upheld the dissolution of state redevelopment agencies, the municipalities that formed them are looking at what to do with the thousands of properties these so-called RDAs once held.

Some 2,500 properties could be sold over the next several years, creating opportunity for developers and investors as the state tries to recover from the recession. And yet some observers see dissolution of the roughly 400 RDAs as a blow to economic development.

These agencies, which were tasked with combating blight and creating affordable housing, became a force for economic development in California over the past several decades as the cities struggled to raise revenues.

According to the League of California Cities, the RDAs relied heavily on tax increment financing and collected some $6.5 billion annually in tax increment revenues, with which they issued billions of dollars in debt. Gov.
Jerry Brown insisted at the start of his third term in 2011 that cash-strapped California, which faced a $26 billion deficit, and which capped property tax increases while earmarking a percentage of general revenues for education, could no longer afford redevelopment.

Backed by the teachers’ and firefighters’ unions, Brown outlined a process for winding down the RDAs’ financial affairs and distributing the funds to other local taxing entities while allowing RDAs to avoid dissolution if they agreed to make payments into special funds. “Redevelopment agencies were a huge part of local economic development activity in California,” said Dan Carrigg, legislative director for the League of California Cities. “The dissolution of the agencies took away the most powerful tool – tax increment financing – that local governments had in California.”

Early last year the RDAs were disbanded and their assets and liabilities mainly transferred to some 350 successor agencies – generally, the cities and counties that had created them in the first place. Each successor agency has an oversight board, typically comprising city officials and other representatives of local taxing entities such as school districts. After liquidating non-real-estate assets, the successor agency is obligated to prepare a property management plan that is subject to the approval of its oversight board and the Department of Finance. The plan must contain an inventory of RDA properties and supply their estimated current value, their purpose, any rental or other revenues generated and any existing development proposals. The plans should also provide a description of the property’s potential for transit-oriented development and its role in the advancement of the planning objectives of successor agencies. The successor agencies have options when deciding what to do with former RDA properties. They can recommend that individual properties be sold or retained for government use or future development or to fulfill obligations through the rental and parking revenues.

Not surprisingly, the dissolution process has been complex. It has given rise to about 100 lawsuits, many involving disputes between the Department of Finance and successor agencies, according to Carrigg. So far about 25 of these lawsuits have been settled. “You have got controversy over all sorts of issues, including whether land acquired by the redevelopment agencies should be retained or sold,” Carrigg said. “Successor agencies have just begun the process of submitting their long-range property management plans to the state. There will be lots of controversy related to those plans.”

The successor agencies must decide the fate of some 8,000 parcels in all, according to Kosmont Cos., a Los Angeles-based consulting firm. Of those, about 2,500 properties – some of which comprise multiple parcels – will be put up for sale. Each successor agency controls about 15 properties, according to Kosmont, and each property measures about 2.5 acres. “This is an astonishingly unique real estate event,” said CEO Larry Kosmont.
“Redevelopment agencies were very good about buying, but they were not really sellers.”

Of course, not every property up for sale will be attractive to developers, either because of size, zoning or environmental issues. Some of the parcels are tiny swaths of land left over from previous projects such as the construction of freeway interchanges. Some sites are home to obsolete buildings in downtown areas, and others are contaminated and require environmental remediation.

“There will be opportunities to invest in properties, but it is not a tidal wave of opportunities, given the bureaucratic nature of the delivery of the assets,” said Edward Hanley, president and founder of Hanley Investment Group, an Irvine, Calif.-based retail investment advisory firm. “It is a looming opportunity that should be fruitful to some individuals who are in the right place at the right time.”

Many RDA properties are not zoned “to their highest and best use,” says Kosmont, and this is because the agencies tended to wait until they had lined up a developer or had settled other matters before pushing ahead with rezoning. “If the Department of Finance allows cities to take their time and rezone some of these properties, the parcels are more likely to fetch fair market value, better achieving the liquidation goals of the state,” said Kosmont, whose firm is advising municipalities on their long-range property management plans.

So far the state has approved only a few property-management plans, including one from Sanger, the third-largest city in Fresno County. Sanger’s RDA had been working to revitalize the city’s downtown core, but its dissolution led to a temporary suspension of activity. This “essentially shut a large part of our activity down,” said Dan Spears, the city’s manager of community and economic development. Sanger is now the successor to its RDA, with the exception of the agency’s housing-related activities. “Now that the uncertainty has passed,” Spears said, “we can get back to business here.”

From the September 2013 issue of Shopping Centers Today