From mixed-use projects in Koreatown and Chinatown to a massive office and hotel complex in Monrovia, dozens of redevelopment projects across Los Angeles County are on life support.
The projects are threatened as redevelopment agencies throughout the county and the state grapple with a new California law that forces them to pay millions of dollars a year to the state or face dissolution. The uncertainty has several developers considering whether to pull out of the projects and is forcing other developers to dig deeper into their own pockets.
“This is a terrible frustration for us,” said Blaine Fetter, principal with Samuelson & Fetter, a Monrovia commercial developer that is trying to build a 55-acre project next to a planned light-rail station in the San Gabriel Valley city.
Samuelson & Fetter is proceeding with a single apartment building on the site, but everything else is on hold.
“If we can’t move forward on the rest of the project, it would be terrible for our business,” Fetter said. “We’ve thrived the past 40 years on infill redevelopment projects. Now we’re looking at having to change our business model.”
The Monrovia and other redevelopment projects are up in the air, despite actions over the last couple of weeks by the Los Angeles City Council and other cities to save their redevelopment agencies from elimination. In order to preserve the agencies under the new law, the cities have to come up with millions of dollars each year to pay to the state, which in turn will distribute the money to school districts and other local governments.
However, the loss of funds means future redevelopment and affordable housing projects are likely to become casualties, facing long delays or being scrapped altogether. That realization is sinking in among developers who have for decades thrived on redevelopment projects.
“Redevelopment is now becoming more difficult and costly for developers,” said R.J. Comer, partner with Armbruster Goldsmith & Delvac LLP, a land-use consulting firm in West Los Angeles. “Some developers may decide it’s not worth it.”
L.A. projects at risk
In Los Angeles, several major redevelopment projects have already been delayed or thrown into limbo.
The Los Angeles Community Redevelopment Agency, the largest in the state, received City Council approval last week to remain in business and pay the state the required $97 million next year and at least $25 million in subsequent years.
However, the money will come from planned agency contributions to affordable housing projects; some redevelopment projects; and other agency programs, such as façade upgrades for retail and commercial buildings.
Chris Essel, chief executive of the CRA, told the Business Journal that the agency’s biggest concern is being able to make the first payment of $97 million, which amounts to about one-sixth of its total annual budget.
“That’s a big hit out of our budget, so some projects will not be worked on,” Essel said.
Among the projects facing CRA funding delays is Blossom Plaza, a mixed-use development in Chinatown. The plan calls for 262 residential units atop 40,000 square feet of retail space. The CRA acquired the parcel out of bankruptcy and asked developers to bid on it. The developers who bid all said they needed public subsidies to make the project work. The agency estimated the gap is about $10 million.
“The project is not toast,” Essel said, “but it will be much, much more difficult to move the project forward on a timely basis.”
Another project that has already felt the impact is a parcel on Wilshire Boulevard at Hobart Avenue in Koreatown. The redevelopment plan called for the CRA and L.A. developer Hankey Investment Co. LP each to put up roughly $10 million to acquire the land from another party.
But the CRA had to back out of its $10 million commitment, forcing Hankey to pay the entire $21 million land acquisition cost in order to close escrow.
“This extra payment will cause a delay in the project and it hurts my return on investment,” said Chief Executive Don Hankey.
But Hankey said he intends to continue with the project, which includes a five-story building with 240 apartments atop 15,000 square feet of ground-floor retail. He’s counting on rising rental rates to make up some of the additional up-front cost.
Monrovia projects
In Monrovia, much of that massive 55-acre redevelopment project around a planned Gold Line Metro station is up in the air as the money the city had planned to use to purchase the property may go to the state.
Plans for the Station Square Transit Village include 850,000 square feet of offices, 140,000 square feet of retail, a 250-room hotel, a sports club and up to 3,800 residential units.
As of now, only a single 250-unit apartment building is slated to move forward. The rest is at risk because the redevelopment agency must pay $1 million to the state next year.
“We’re talking about $1 billion worth of investment in our local economy that is now in question,” said Monrovia City Manager Scott Ochoa. “Redevelopment is one of the few tools we have to jump-start the local economy and now much of that is being taken away from us.”
Just up the street, another project is also at risk. Plans for a vacant 1.7-acre site at Myrtle Ave. and Huntington Drive include 67,000 square feet of offices and a 7,500-square-foot restaurant.
The city signed a development agreement in 2008 with Pasadena-based MHi Corp. for the site. The deal called for the Monrovia Redevelopment Agency to sell the land at a discounted rate. However, with the required state payment, the agency may not now be able to discount the land.
“With real estate values being what they are now, this project won’t work for us unless we can get that discount on the land,” said MHi President Lary Mielke. “It’s very frustrating; we’ve got tenants interested in the property but all of a sudden this new element pops up that we never expected.”
Redevelopment a target
Redevelopment agencies, which have long been controversial for their use of eminent domain and taxpayer funds, were targeted by Gov. Jerry Brown as a way to help balance the state budget.
After months of budget negotiations, Brown in June signed a pair of bills expected to extract up $1.7 billion in revenue from the agencies next year and $400 million in subsequent years. One bill abolishes the agencies; the other allows the agencies to re-establish themselves if they agree to turn over millions of dollars in tax revenue for use by local school districts and other local government bodies.
Most redevelopment agencies have asked city governments to authorize the payments to Sacramento so they don’t have to be dissolved. But John Shirey, executive director of the California Redevelopment Association, said about 13 percent of the state’s 350-plus agencies indicated in an internal survey they are considering shutting down because they don’t believe they will be able to make the payments.
Shirey said a handful of these agencies were in Los Angeles, though he said he could not identify them because of the confidential nature of the survey. He also said it’s possible that some of the agencies considering shutting down may still find ways to make the payments to the state.
For those agencies that decide to shut down, the law authorizes the creation of a successor agency that would see through all existing project agreements and bond repayments. However, that successor agency would not be allowed to enter any development agreements or issue bonds, which in the past have been repaid by property taxes paid by landowners in the redevelopment district.
The California Redevelopment Association has filed suit in the state Supreme Court claiming the laws violate last year’s Proposition 22, which bars California from raiding local government coffers. The court last week placed an injunction on the law while it considers the case. A final ruling could come by the end of the year.
In the meantime, redevelopment officials statewide are going through their project lists, evaluating which projects they can afford to pursue and which ones to cast aside.
“All agencies are looking through their program plans,” Shirey said. “They are cancelling projects, delaying the projects or reducing the scope of their projects.”
