CITY HALL — The long-delayed Civic Center Village housing project narrowly skirted another stumbling block Tuesday when three City Council members dug in their heels over a provision requested by the developer to extend the term of the land lease 50 years past its original expiration date.
William Witte, president of development company Related California, urged the change on behalf of investors who felt that the 99-year ground lease granted by City Hall for the two market-rate properties on the 1700 block of Ocean Avenue wasn’t enough.
Granting the extension would lock in financing for the project, which has been hard to secure given the climate of the real estate market and the nature of the project, said Andy Agle, director of Housing and Economic Development at City Hall.
The financing trouble doesn’t stem from the fact that half of the 324-unit housing project spread across three large buildings will be affordable housing, nor that the deadlines for the $10 million in state bonds financing the affordable housing component are fast-approaching.
“What makes this unique is that it’s a major condominium project,” Agle said. “When we finalized this thing in 2008, the real estate market and economy were still moving along.”
Financiers are not looking favorably on condominium projects right now, even in a town like Santa Monica where the real estate market has been relatively stable, Witte told council members.
It’s also a major condominium project built on land leased out by City Hall to the developer, a lease which will expire in 99 years, potentially leaving homeowners high and dry.
That uncertainty made investors uncomfortable, particularly in the case of the market-rate condominiums located in one of the three buildings proposed.
The proposed extension would give the Homeowner’s Association in the condos the option to extend their lease for another 50 years for the fair market value of the property.
It would also constitute a major benefit for the “sophisticated developer,” one which the proposed agreement did not account for, said City Councilmember Bobby Shriver.
“The extension of a lease is a significant value, however, to the development, and that might be a good thing to do,” Shriver said. “Hearing about this … we’re creating a significant value there. What are we getting for it?”
The answer, it seemed, was nothing extra.
“This is not an attempt to increase the value, although in some indeterminate way it might do that,” Witte told council members. “It’s an attempt to get financing.”
Even if it did increase the profitability of the project, City Hall would benefit through a profit-sharing clause built into the agreement from day one.
“If it does do better, the city will benefit,” Witte said.
And, if the future homeowners decide to exercise that 50-year option, municipal coffers would benefit again through the payment of the market value of the property.
Shriver urged council members to request an appraisal of the added value, which he felt could then be turned around to get more out of the applicant in terms of community benefits.
“This isn’t an arcane thing, it’s quite a common thing,” he said. “The value of optionality is simple.”
His argument won support from council members Bob Holbrook and Terry O’Day, who didn’t see the harm in delaying the approval two weeks in order to get clarity on the matter of financing.
Even two weeks, this late in the game, might scuttle the project because of impending deadlines for the $10 million in bonds that will be used to finance the 160 units of affordable housing, staff protested.
“Everything is lining up now,” Agle said. “If we miss that, we risk the ability to finance the affordable housing.”
While running the numbers could be accomplished in the two weeks before the next council meeting, how that would work into the deal is totally unknown.
The potential benefit wasn’t enough to convince Mayor Pro Tem Gleam Davis to risk the financing.
“The whole reason we’re here tonight is for Related to get financing,” she said. “They’re not sitting in the catbird seat on negotiations with Wells Fargo. If we impose additional costs on the project, we’re going to kill the project.
“To me, that is unacceptable,” she said.
The item was put on hold, and a flurry of negotiations followed in a separate room while the City Council finished out the remainder of the agenda.
When the developer and City Manager Rod Gould returned, they agreed to include a local source hiring program for the 20,000 square feet of retail that will be built into the three buildings.
If that was to be a requirement of the deal, the local source hiring had to be included last night, Agle said Wednesday.
Despite the win for local hiring, Shriver, O’Day and Holbrook were not willing to move forward with the project without the requested analysis.
The item passed four to three.