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File #: 2017-4440   
Type: Regular Agenda Item
Body: City Council
On agenda: 7/5/2017
Title: Public Hearing to Consider Introduction of Ordinance Amending the Disposition and Development Agreement between Alameda Point Partners, LLC and the City of Alameda for Site A at Alameda Point. (Base Reuse 858)
Attachments: 1. Exhibit 1 - Summary of Progress Made on Site A Project Since Execution of the DDA in June 16, 2015, 2. Exhibit 2 - City of Alameda Notice of Default to Alameda Point Partners, dated April 12, 2017, 3. Exhibit 3 - Alameda Point Partners' Response to City's Notice of Default, dated April 12, 2017, 4. Exhibit 4 - Approved Amendment to the Site A Development Plan, 5. Exhibit 5 - Second Amendment to Disposition and Development Agreement between Alameda Point Partners, LLC and the City of Alameda for Site A at Alameda Point, 6. Exhibit 6 - Disposition and Development Agreement Between Alameda Point Partners, LLC and the City of Alameda for Site A at Alameda Point (August 6, 2015), 7. Exhibit 7 - Alameda Point Partners Projected Financial Proformas for Site A by Phase, 8. Presentation, 9. Ordinance, 10. External Correspondence

Title

 

Public Hearing to Consider Introduction of Ordinance Amending the Disposition and Development Agreement between Alameda Point Partners, LLC and the City of Alameda for Site A at Alameda Point. (Base Reuse 858)

 

Body

 

To: Honorable Mayor and Members of the City Council

 

From: Jill Keimach, City Manager

 

Re: Public Hearing to Consider Introduction of Ordinance Amending the Disposition and Development Agreement between Alameda Point Partners, LLC and the City of Alameda for Site A at Alameda Point

 

BACKGROUND

In June 2015, the City Council unanimously approved the Site A Development Plan and a Disposition and Development Agreement (DDA) with the private developer, Alameda Point Partners (APP), for a 68-acre area within Alameda Point that extends generally from the Main Street entrance of Alameda Point to the eastern edge of the Seaplane Lagoon.  Site A includes 800 housing units (200 affordable), 600,000 square feet of commercial development, and extensive parks and utility infrastructure (Site A Project).  The Site A Project represents the first major public/private development at Alameda Point since the base closed and lost 18,000 jobs in 1997.  The DDA contemplates that the Site A Project will be constructed in three phases over the next 15 years.   

Since the approval of the Site A Development Plan and DDA, APP and its team of architects, engineers, and design professionals, in coordination with City staff, have expended significant staff and financial resources, including $15 million to date in equity funds, making extensive progress on implementing the Site A Project over an 24-month period. A summary of the progress made on the Site A Project is provided in Exhibit 1.

On January 17, 2017, the City Council approved an amendment to the DDA to extend the closing on the Phase 1 property (Phase 1 Property) by four additional months from December 12, 2016 to April 11, 2017 (Phase 1 Closing Date) due to the rising cost and complexity of the project requiring more time to complete property due diligence items and to finalize financial commitments.  Although significant efforts were made by APP to finalize these commitments, APP did not meet the requirements of the DDA necessary to accept conveyance of the Phase 1 Property by the Phase 1 Closing Date of April 11, 2017 and did not opt to make the payment to extend the date, which is allowed under the DDA.  APP stated that they could not close on the Phase 1 Property because APP could not underwrite a financially feasible project due primarily to the extraordinary escalation and volatility in construction costs since execution of the DDA without commensurate revenue appreciation.  In other words, the projected proceeds from land sales (the difference between development revenues and costs), especially for the apartment rental blocks (Blocks 9 and 11), were narrowing to such an extent that there was significant risk that these revenues would not sufficiently cover the cost of Site A’s complex infrastructure needs. More detailed information is provided below regarding the financial status of the Site A Project.

As a result of the uncertainty and APP’s inability to meet the requirements of the DDA, the City did not transfer the Phase 1 Transfer Property to APP and APP is in default under the DDA pursuant to Section 17.4 of the DDA. The City issued a Notice of Default to APP on April 12, 2017 (Exhibit 2).  In response to the City’s Notice of Default, immediately sent a letter to the City outlining an explanation for the default and a detailed plan for curing their default under the DDA (Exhibit 3).  As allowed under the DDA and explained in APP’s letter, APP committed to commencing the cure to their default within the 30-day cure period required in the DDA and completing the cure within the maximum 120 days allowed under the DDA.  The addition of the maximum cure period of 120 days results in a new Phase 1 Outside Closing Date of August 9, 2017.  In order to cure the default APP must meet all of the conditions necessary to close on the Phase 1 property by the August 9, 2017 date.  If APP does not close on the Phase 1 Transfer Property by August 9, 2017, the DDA terminates.

If the DDA terminates, the Site A Project would not move forward and City staff would most likely recommend seeking interest from new developers.  If the City Council decided to move forward with a new developer selection process, it may take 2-4 years to reach the point the City is with APP today assuming no delay related to an economic downturn over that time period.  During this time, the existing substandard wastewater (sewer), storm drainage, and drinking water, and transportation facilities would continue to deteriorate. The delay would also represent a major setback for the funding of the Alameda Point Ferry Terminal, since $10 million of the funds are being supplied by APP upon closing of the first phase.  Additionally, staff would expect that a new developer will likely experience similar cost challenges and may also require changes to the design, uses, amenities and type of housing currently planned as part of the Site A Project. To bridge the financial shortfall, a new developer may propose more townhomes and/or single family homes, fewer apartments, less rehabilitation and reuse of existing structures, and/or fewer waterfront amenities.

Since responding to the notice of default, APP has commenced the cure within the 30-day timeframe by submitting proposed changes to the Site A Development Plan and DDA to the City that enhance the financial underwriting of the Site A Project and improve the potential that APP will meet the financing requirements in the DDA and be able to close on the Phase 1 Transfer Property by August 9, 2017.  These changes required that the Planning Board approve an amendment to the Site A Development Plan (Plan Amendment) (Exhibit 4) and the City Council approve an amendment to the DDA (DDA Amendment) (Exhibit 5).  A complete copy of the executed DDA, as amended and clarified, is attached as Exhibit 6.  The Planning Board unanimously approved the Plan Amendment on May 22, 2017 after hearing public comment from a number of community members in support of the Site A Project.  This evening the City Council is considering approval of the DDA Amendment, as described in greater detail below.

DISCUSSION

 

The following staff report provides a summary of the proposed changes to the Development Plan and DDA requested by APP, review of APP’s financial proformas by phase, and staff’s assessment of the benefits and risks to the City regarding these changes. 

Summary of Development Plan and DDA Amendments

                     Amount of Development. The amendments do not propose any change to the overall amount of development and amenities included in the Site A Project, which will still include 800 housing units (200 affordable), 600,000 square feet of commercial development, and approximately 15 acres of publicly accessible parks and open space. 

 

                     Transportation Services and Improvements. The amendments do not propose any change to the amount or timing of the transportation services and improvements proposed as part of the Site A Project.  As a result, if APP closes on the Phase 1 Property, APP will continue to provide the City with $10 million for construction of the Seaplane Lagoon Ferry Terminal, which completes the capital funding for the terminal with the $8.2 million grant the City recently received from the Alameda County Transportation Commission.  Construction could commence as early as 2018 and operations as early as 2019, as the Water Emergency Transportation Agency has obtained funds for the required boats.  Additionally, there is no change in the projected amount of approximately $600,000 per year in special tax revenue from the Site A Project to support transportation services, such as 15-minute bus service in the peak hours.

 

                     Phasing Plan and Infrastructure Package. The amendments do propose a change to the phasing of the Site A Project by switching Phases 2 and 3 so that the land south of West Atlantic Avenue that the City does not currently own and which contains environmental restrictions on ground floor residential use becomes Phase 3 and the land north of Phase 1 that the City does currently own becomes Phase 2, as depicted in Exhibits 4 and 5.  This change allows APP to accelerate a Phase 2 development so that they do not have to wait for the Navy to transfer the land to the City and are able to spread the cost of the Phase 1 infrastructure over a larger development program, which helps improve the feasibility of the Site A Project.  All of the Phase 3 streets, infrastructure, and parks would be moved to Phase 2 and all of the Phase 2 streets, infrastructure and parks would be moved to Phase 3, as presented on Exhibits 4 and 5.  Completion of Phase 2 infrastructure would be accelerated by nearly four years, as shown in Exhibit F of Exhibit 5 to this staff report.

 

                     Relocation of Housing Units. The amendments propose a relocation of the housing units currently planned for Blocks 1a, 1b and 3 on land south of West Atlantic Avenue with ground floor environmental restrictions on primarily Block 15; and a relocation of approximately 160,000 square feet of commercial space from Block 15 to Blocks 1a, 1b, and 3, as shown on Exhibit 4.  This relocation moves housing units off of land with environmental restrictions onto land that the City currently owns with no ground floor environmental restrictions so that the revised Phase 2 can be accelerated, which improves the feasibility of the Site A Project. 

 

                     Moderate Income Housing Units. The amendments propose to move 70 of the 72 moderate income units to Block 15 in Phase 2, as shown on Exhibit 4.  Two of the moderate income units are planned for Block 8 in Phase 1, along with all of the 128 very-low and low-income affordable units.  The current Site A Development Plan allows the moderate income units to be interspersed among blocks in both Phases 1 and 2 without assigning a specific number of moderate units to particular blocks, including Blocks 1, 3, 6, 7, 9 or 11.  The current DDA allows APP to assign the moderate units to specific blocks prior to the sale of the first parcel to a vertical developer.  APP now contemplates constructing a 70-unit housing project on Block 15 in Phase 2 in partnership with the Alameda Unified School District (AUSD) targeted towards AUSD employees (i.e., teachers and maintenance and service staff) that meet moderate income affordability requirements (AUSD Project).  AUSD recently issued a Request for Proposals from developers for employee housing, which APP submitted a response to for Block 15 in Site A.  The AUSD Project also improves the feasibility of the Site A Project by leveraging public financing mechanisms through AUSD to help pay for the moderate units without any financial impact to AUSD.  This public finance leverage increases the land value associated with Blocks 9 and 11 that are no longer responsible for supporting moderate income units.   Additionally, according to APP, Phase 1 includes 162 market rate workforce housing units (27 percent of all market rate units planned for Site A), in addition to the deed-restricted moderate income units, that are currently projected to have market rents of less than 180% area median income, which falls below the typical definition of workforce or middle-income housing. 

 

                     Timing of Sports Complex Payment.  The DDA Amendment does include a change to the timing for the $5 million Sports Complex payment. The Phase 1 project is not feasible with the full $5 million payment for the Sports Complex currently required by the DDA to be fully paid by the Phase 1 Closing Date.  As a result, APP proposes to pay $1 million of the Sports Complex Payment in Phase 1 and the remaining $4 million by the outside closing date for Phase 3, which is currently projected for 2024.  As the Recreation and Park Director is planning and constructing 35 acres of new parks and open space elsewhere in the City, there is not an immediate need for the $4 million payment for construction of an initial phase of the Sports Complex, and the $1 million is sufficient to start any planning and design process for the Sports Complex in the next several years.

 

                     Extension Payment.  The DDA Amendment includes compensation to the City for the delay in the Phase 1 Outside Closing Date from April 11, 2017 to the Phase 1 Closing Date at the rate provided for in the DDA of $50,000 per acre (Option Extension Payment). For instance, assuming the Phase 1 Closing Date occurs on August 9, 2017, the Option Extension Payment for the 27 acres of Phase 1 prorated by the partial year delay of four months would be approximately $445,000.  The DDA Amendment states that after APP completes 50 percent of Phase 1 infrastructure that this payment (less $150,000 in a non-refundable payment to cover City transaction costs) would be applied towards the ferry terminal payment. 

 

                     Lender Requested Clarifications on Security Financing Interests and Rights of Permitted Mortgages. As is common practice when securing financing and as contemplated in the DDA, major lenders typically require clarifications regarding their security interest in the property at the time of closing.  UDR, a financial investor and vertical developer in the Site A project, is expected to make a $30 million infrastructure loan to APP and as a condition of making that loan has requested clarifications to the mortgagee protection provisions of the DDA.  Section 3 of the DDA Amendment provided in Exhibit 5, provides numerous clarifications requested by UDR and in a number of cases restates certain provisions of the DDA in their entirety to avoid the need to cross-reference multiple provisions in different sections of the DDA.  Most importantly, these changes do not diminish the City’s remedies provided in the original DDA to obtain backbone infrastructure and affordable housing.  The performance bonds required for all Phase 1 infrastructure at the time of the Phase 1 Closing Date will still be the City’s primary remedy in the event of default consistent with the original DDA and APP will be required to deposit the $3 million affordable housing contribution prior to recording any security interest on the Phase 1 property so that the City is assured that this money will be available to help fund the affordable housing obligations even in the event default by APP.

 

Financial Proforma Review

APP has provided its financial proformas for the current Phase 1 with and without moderate income units; Phase 2, including the AUSD Project; and the commercial only Phase 3 (Exhibit 7).  City staff and its financial consultants have reviewed the assumptions in the proformas. Based on this review, the following provides staff’s and consultants’ assessment of the Site A financial status:

                     The current Phase 1 land development proforma achieves a break-even financial status, which is worse than previous proformas due to a reduction of approximately $8 million in land value for Block 9 attributable to significantly increased vertical construction costs.  Additionally, the townhome buyer reduced its purchase price from $40 million to $36 million after finalizing their property due diligence in late May.  APP has also reduced its contingency from 18% of hard infrastructure costs to 8%.  The land development costs and revenues in this proforma are based on executed construction contracts for infrastructure, approved infrastructure improvements plans, and on anticipated final purchase and sale agreements for Blocks 6, 7, and 9 from third-party buyers that have completed all due diligence periods at the values presented in the proforma.  Despite the low projected return, APP states that they currently anticipate moving forward with financing the Phase 1 project for the following reasons: (1) there is the potential to increase their return with an accelerated Phase 2, as discussed above; (2) the vertical development is projected to generate a market rate of return for APP on the blocks they are financially involved in; and (3) if APP does not move forward, they lose $15 million of predevelopment investment with no opportunity to recover their costs, whereas if they  do move forward they are likely to recoup the $15 million and have the possibility of making a return on their vertical development.

 

That said, APP has requested that the City Council on July 18, 2017 assign $4 million in credits out of a total of $27 million provided to the City by the East Bay Municipal Utility District, intended to offset the system capacity charges and wastewater capacity fees for businesses and new development at Alameda Point, to Phase 1 of Site A.  The assignment of a $4 million credit will allow Site A to restore their contingency to its previous level of 18%, a more prudent level helping to ensure that APP closes and moves forward with the Phase 1 project on August 9.

 

                     The Phase 1 project is not feasible with moderate income units other than the two units included in the very-low and low-income affordable housing project being financed and constructed by Eden Housing.  The land value for Block 9 increases from $11.8 million to $17.7 million without the moderate income units.

 

                     Related to the affordable housing financing, Eden Housing and APP have been recently successful at obtaining crucial financing for the very-low and low-income project, in addition to the $5 million from Measure A1 allocated by the City Council, including 40 Veterans Administration Supportive Housing vouchers from the Alameda Housing Authority and a $1.4 million loan from the State Veterans Housing and Homelessness Prevention Program.  These financing awards put Eden Housing and APP in a competitive position to apply for final funds this fall from the State’s Affordable Housing and Sustainable Communities’ grant program for the family project and the 9% Low Income Housing Tax Credit Allocation early next year for the senior project.

 

                     The Phase 2 project is feasible with 70 moderate income units as part of the AUSD Project described above.  The amount and type of development planned in Phase 2 does not support the financing of the moderate income units without the AUSD Project.  APP is exploring contingencies for improving the feasibility of Phase 1 and Phase 2 in the event that the AUSD Project does not proceed.  Contingent possibilities that are being explored and evaluated for feasibility include constructing instead market rate units designed to meet the workforce housing income levels of 120% to 180% area median income or financing these units as an additional very-low and low-income housing project eligible for numerous other public financing sources.  These and other potential options, however, would require an amendment to the City’s Settlement Agreement with Renewed Hope Housing Advocates.

 

                     The Phase 3 project is feasible to support the $4 million deferred sports complex payment and the required Phase 3 backbone infrastructure if the commercial market is sufficiently strong at the time of closing to achieve the improved land values projected in the proforma.

 

Assessment of Benefits and Risks

Benefits The following provides a summary of the benefits to the City of the proposed amendments:

                     Phase 1 Infrastructure and Amenities. If these changes are not made and Phase 1 of Site A does not move forward, all of the benefits and amenities included in Phase 1 will not be realized or at least delayed, including the 130-unit affordable project for low- and very-low income households, 8 acres of parks and open spaces, the $10 million funding for the Seaplane Lagoon Ferry Terminal, and major gateway and backbone utility improvements.  As described above, according to APP, benefits also include 162 units of workforce housing planned for Phase 1 (27 percent of all market rate units planned for Site A) that are currently projected to have market rents affordable to households earning less than 180% area median income, which is the typical definition of workforce or middle-income housing.  Additionally, the delay of the infrastructure improvements jeopardizes the development of the Enterprise District, Adaptive Reuse area and the Main Street Neighborhood, including the reconstruction of the supportive housing units, which are all dependent on the significant infrastructure efficiencies and benefits provided by Phase 1 of the Site A Project.

 

                     Expediting Street Improvements Benefiting Main Street and Adaptive Reuse Area. As shown in Exhibits 4 and 5, expediting the development of Block 15, expedites the construction of streets to support Phase 2 in Site A, the first phase of the Main Street Neighborhood, and the Adaptive Reuse area to the west, which includes all of Main Street and West Tower Street adjacent to Site A and the extension of Pan Am Way between Site A and the Historic District in addition to the streets internal to Site A north of West Atlantic (Coronado, Ardent, Orion, and Skylark).

 

                     Placing Housing on Property Without Environmental Restrictions. The changes to the Phasing Plan and the relocation of housing units to Block 15 removes planned housing from land that is environmentally constrained and will have  ground floor environmental restrictions and moves it to land currently owned by the City and without environmental restrictions.  This allows the housing proposed for Phase 2 to be developed on cleaner property and on an accelerated timeline.

 

                     Alameda Point Land Use Compatibility. Residential development on Block 15 is compatible with the residential development immediately adjacent to the south on Blocks 6, 7, and 8 and the residential zoning to the north in the Main Street Neighborhood.  Commercial development on Blocks 1 and 3 is compatible with the commercial zoning in the Enterprise District (Site B) directly to the south of Blocks 1 and 3.

 

Risks The following provides a summary of the risks to the City of the proposed amendments:

                     Feasibility of Phase 2 and Moderate Income Units. The financial feasibility of the revised Phase 2 development depends on the AUSD Project financing the 70 moderate income units on Block 15.  If the AUSD Project is not successful, there are an insufficient number of market rate units on Block 15 in Phase 2 to subsidize the construction of the 70 moderate income units and Phase 1 cannot financially support subsidizing the moderate income units.  As a result, there is a risk to the City that Phase 2 cannot meet its financing requirements prior to transfer of the Phase 2 land, the land is not transferred to APP, and the moderate income units are not constructed on the anticipated time line.  While APP is exploring contingencies if the AUSD Project does not occur, there is not a straightforward solution to this issue at this point. 

 

                     Feasibility of Phase 3 and Sports Complex Payment.  As described above, $4 million of the Sports Complex payment is being postponed to the Phase 3 commercial phase.  As shown in Exhibit 7, the financial feasibility of Phase 3 depends on a market for new commercial development sufficiently strong to support the values in the financial proformas.  In general in the City and at Alameda Point, the commercial market is less certain than the residential market.  As a result, there is a risk that there  will not be sufficient commercial land value to cover the cost of the Phase 3 new commercial construction, infrastructure and the $4 million Sports Complex payment, which depends in large part on the success of the Phase 1 development.

 

After reviewing APP’s proformas and weighing the above benefits and risks to the City of APP’s proposed changes and the likely alternative if the Site A Project fails, staff recommends approving the proposed DDA Amendment.  In sum, the benefits of the infrastructure, affordable housing and parks provided in Phase 1 outweigh the risks of Phases 2 and 3 not being realized, as currently envisioned. 

FINANCIAL IMPACT

 

There is no financial impact to the General Fund.  The DDA Amendment includes a one-time $150,000 payment to the Base Reuse Fund to cover the City’s transactional costs related to the current and previous DDA Amendments not covered through the City’s standard cost recovery process.

MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE

 

These actions are consistent with the approved General Plan, Zoning Ordinance, Town Center Plan, and MIP.

ENVIRONMENTAL REVIEW

 

On February 4, 2014, the City of Alameda certified the Alameda Point Final EIR in compliance with the California Environmental Quality Act (CEQA).  The Final EIR evaluated the environmental impacts of redevelopment and reuse of the lands at Alameda Point consistent with the Town Center Plan, which included Site A. Pursuant to CEQA Guidelines Section 15162, no subsequent environmental review shall be required when, as here, an EIR has been certified for a project unless certain events have occurred.  As explained below, none of the conditions specified in CEQA Guidelines Section 15162 requiring subsequent or supplemental environmental analysis have occurred; therefore, no new environmental analysis is required to comply with CEQA.

Specifically, the Amendment to the DDA does not include any substantial changes in the Town Center Plan, and there is no evidence in the record that the Amendment to the DDA would result in new significant environmental effects or a substantial increase in the severity of previously identified significant effects necessitating major revisions to the EIR. Similarly, there is no evidence in the record that substantial changes have occurred with respect to the circumstances under which the Site A development is to be undertaken that will require major revisions of the EIR.  Finally, there is no new information of substantial importance, which was not known and could not have been known with the exercise of reasonable diligence at the time the EIR was certified, in the record that shows new or considerable different significant effects, mitigation measures, or alternatives than were analyzed in the EIR.

Because no new effects could occur or no new mitigation measures would be required under CEQA Guidelines Section 15162, CEQA Guidelines Section 15168(c)(2) permits the approval of the DDA Amendment as an activity within the scope of the EIR, and no new environmental document is required.

None of the changes proposed by the Plan Amendment or DDA Amendment change the overall amount of development and therefore, no further review is required for these amendments. 

 

RECOMMENDATION

 

Hold a public hearing to consider introduction of Ordinance amending the DDA between APP and the City for Site A at Alameda Point.

 

Respectfully submitted,

Jennifer Ott, Base Reuse Director

 

Financial Impact section reviewed,

Elena Adair, Finance Director

 

Exhibits:

1.                     Summary of Progress Made on Site A Project since Execution of the DDA in June 16, 2015

2.                     City of Alameda Notice of Default to Alameda Point Partners, dated April 12, 2017

3.                     Alameda Point Partners’ Response to City’s Notice of Default, dated April 12, 2017

4.                     Approved Amendment to the Site A Development Plan

5.                     Amendment to Disposition and Development Agreement between Alameda Point Partners, LLC and the City of Alameda for Site A at Alameda Point

6.                     Disposition and Development Agreement between Alameda Point Partners, LLC and the City of Alameda for Site A at Alameda Point (August 6, 2015), DDA Amendment No. 1, and Operating Memoranda

7.                     Alameda Point Partner’s Projected Financial Proformas for Site A by Phase