THE WALL STREET JOURNAL
Just as the California commercial real-estate market begins to stir from its postcrisis lows, many property developers fear they are about to lose a financing tool needed for hundreds of projects across the state.
Builders are lashing out against a provision in Gov. Jerry Brown’s proposed budget that would eliminate the state’s 425 redevelopment agencies, local authorities that pay for low-income housing as well as roads, sidewalks and other infrastructure.
The developments cover everything from a proposed $2.2 billion project with houses, shops and transit access across the river from downtown Sacramento to a planned affordable and senior housing development and child-care center near downtown San Diego.
The bond debt that finances infrastructure projects is paid off using part of the increases in local property-tax revenue that result from the development. Under the current model, any extra revenue goes back to the agencies to pay for low-income housing and other improvements. Gov. Brown, whose budget proposal could be voted on as early as this week, said any increased property-tax revenue would be better used to pay for schools and other services.
The plan comes at a dismal time for the construction industry in California, whose boom and bust were more striking than nearly any other state. Construction jobs in California have dwindled to 559,800 from 933,700 at the peak of the housing boom in 2006. Redevelopment has been a rare source of funding for new projects.
Ahead of the vote, executives at building and real-estate trade groups such as the California Building Industry Association and the California Business Properties Association have met with dozens of legislators to voice opposition to Gov. Brown’s plan.
“We’ll talk with anyone who will listen to us,” said Richard Lyon, vice president of public policy at the California Building Industry Association.
Last week, the California Redevelopment Association, a business group that represents the agencies, proposed alternative legislation, in which the agencies would voluntarily contribute a greater portion of funds to school districts in exchange for certain benefits. The agencies “are staring at the face of a very large gun” said John Shirey, executive director of the association, who said hundreds of projects are being put on hold.
California isn’t alone in its budget woes: 44 states face projected budget gaps for fiscal 2012, according to the Center on Budget and Policy Priorities, and other states have eliminated tax programs that benefit developers. California’s budget hole, projected to be $26.6 billion in 2012, is the largest in the country.
Supporters of the governor’s plan said areas like education and health care should be prioritized above redevelopment, especially during a budget crisis. “You’ve got teachers being laid off while redevelopment budgets are ballooning,” said Evan Westrup, a spokesman for the governor.
One of the at-risk projects is located a block and a half from the Statehouse in Sacramento, where developer Meea Kang, is planning 200 housing units and 25,000 square feet of shops and offices next to a light-rail station. The project’s total cost is $60 million, and because 85 of the housing units were to be rented at below-market rates, it would receive $4 million in bond funding from the city’s redevelopment agency. If the proposal is voted into law, that plan would fall through, Ms. Kang said.
In Santa Rosa, a venture is planning New Railroad Square, a mixed-use project located on a proposed rapid-transit train line between Sonoma County and the southern tip of Marin County, near San Francisco. The $200 million project depends on $39 million in public funds administered by the redevelopment agency, said Michael Dieden, a partner in the project.
“No bank is going to give you a loan based on how precarious these funds are, until this is resolved,” Mr. Dieden said.
State finance officials have assured developers who struck agreements with city redevelopment agencies prior to Jan. 1, just before the governor’s plan was announced, that any commitments made to issue bond financing for development projects would be honored by the state, as long as the developer has made substantial progress on the development.
But some developers are worried that financing isn’t safe, and point out that the proposal sets up local oversight boards that will have the power to cancel contracts on projects that were planned five to 10 years ago but have failed to make meaningful progress.
“The final legislation isn’t clear, so there’s significant risk that the ability to bond against future revenue streams will be eliminated,” said Mark Friedman, a developer who is poised to start erecting buildings at the Bridge District, a 188-acre project in West Sacramento on the former site of a cement plant that anticipates thousands of housing units, parks and commercial space valued at more than $2 billion. The project depends on $80 million to $100 million in redevelopment funds over the next two decades, and without those monies, his project would be stalled, half-completed. “People who say, ‘We’re not worried,’ are kind of whistling in the dark,” said Mr. Friedman
The opposition to the redevelopment plan has complicated Gov. Brown’s hope for quick approval. Last week, the state Assembly fell just short of the two-thirds supermajority required for the governor’s proposal to pass, with nearly all Republicans rejecting it and all Democrats supporting it. It also is unclear whether the plan will have enough support in the state Senate, which hasn’t yet voted.
State Sen. Rod Wright, a Democrat from Inglewood, Calif., said he may propose legislation of his own that would tweak how redevelopment works and potentially integrate the association’s ideas without eliminating redevelopment.
“We clearly want to make some changes in redevelopment,” he said. “At the same time, you don’t want to get rid of it entirely.”
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