The draft financing plan for Lennar's southeast development keeps getting sweeter for the troubled company
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The San Francisco Redevelopment Agency has endorsed a draft financing plan for Lennar's massive proposed Hunters Point Shipyard/Candlestick Point development project, one that increases the company's housing entitlements and profits.
The agency's endorsement came during a hastily convened Oct. 27 special meeting, raising the eyebrows of Lennar's critics. So did the details of the agency's non-binding financial agreement with Lennar, which two citizens' committees in the BayviewHunters Point community had jointly endorsed a week earlier.
BayviewHunters Point resident Francisco Da Costa claimed that "there was almost no public notice of the plan," while Leon Muhammad, who sits on the BayviewHunters Point Project Area Committee, fretted that some committee members have business ties and connections with Lennar.
"A group that supposedly represents the interests of the community needs to have transparency and full disclosure," stated Nation of Islam Rev. Christopher Muhammad, who has been a staunch critic of Lennar ever since the developer failed to properly monitor and control asbestos adjacent to his group's K-12 University of Islam school.
"Lennar never intended to do anything with this land but bank it," Muhammad opined about the public land that Lennar is getting for free. "And now they are hoping to squeeze more profit out of the deal, so they can hedge to where they can make it more attractive to sell."
Alicia Schwartz of People Organized to Win Employment Rights (POWER) observed that the deal is likely being driven by Mayor Gavin Newsom's unrequited desire to see the Olympics come to San Francisco a dream that was squashed two years ago, Schwartz recalls, "amid a hoopla around toxicity at the shipyard."
Sup. Chris Daly, who has argued that Lennar's recent $500,000 settlement with the Bay Area Air Quality Management District over Lennar's asbestos violations was "too small and poorly handled," said he wasn't surprised by the latest deal: "That Lennar wants to pull a fast one is not news."
But with the financing deal likely headed for the full Board of Supervisors this month, Lennar's critics are worried that the city is being rushed into a deal that has already changed since voters approved Proposition G in June, supporting the vague outlines of Lennar's project.
They note that while Prop. G specified that the project would create "between 8,500 and 10,000 homes" in the depressed southeast sector, the financing deal that Redevelopment endorsed last week specifies 10,500 homes and a demand that the agency and the city cooperate to help increase Lennar's annual rate of return.
Stephen Maduli-Williams, the agency's deputy executive director, told the Guardian that it was always the agency's intention to finalize Lennar's draft financing plan by the end of 2008. Asked if Lennar increased the number of proposed housing units by reducing unit size or increasing building height, Maduli-Williams told us, "They did it by finding a way to squeeze more units into the existing space. They redesigned one of the roads."
"Things are probably going to change again in the next year or two," Maduli-Williams said. "This is a living document. And overall, it is a really nice real estate deal."
Yet critics of Lennar are openly wondering whether it's nice for the beleaguered company, which had rapidly plummeting stock value even before the recent real estate meltdown, or nice for the city. Maduli-Williams said the deal works for all parties.
"We have strong financial partners," he said. "Any investors that look at the deal know that is it really solid. It includes mostly $600,000 homes, which are cheap by San Francisco standards. And we are not looking to break ground for another three years, by which time the economy, hopefully, will be in good shape."
Maduli-Williams also observed that despite nationwide housing woes, San Francisco remains "one of two or three top destination spots where there is only so much land left and where folks have very high incomes."
But the health of the San Francisco real estate market (compared to the rest of the nation) combined with Lennar's ongoing financial woes, including a June 8 bankruptcy at Mare Island, is precisely why some folks are questioning Lennar's increased profit demands. But Maduli-Williams said, "San Francisco cannot be compared to Mare Island."
According to the draft financing deal (which is non-binding), Lennar, the city, and the agency "will work cooperatively to reduce risks and uncertainties" and "find additional efficiencies and values," to achieve Lennar's proposed 22.5 percent annual profit margin.
As Maduli-Williams explained, if the developer puts up $800 million in equity and wants a 22 percent return, it would have to get $1.2 billion in land sales. "And just like any developer, they want to get the highest return possible," he said, adding that the project's proposed community benefits are "hard wired into the deal" and thus are "not threatened" by Lennar's proposed target return increase.
Lennar's proposal, which represents a 7.5 percent increase over current project projections, has also received validation from CBRE Consulting, which is a subsidiary of CB Richard Ellis a global real estate firm headed by Sen. Dianne Feinstein's husband, Richard Blum.
In an Oct. 15, 2008 memo (coincidentally written the day President Bush announced a partial nationalization of the US banking system) to Michael Cohen, who heads the Mayor's Office of Economic and Workforce Development, CBRE's Mary Smitheram-Sheldon and Thomas Jirovsky observed that, "Based on Consultants' extensive experience in evaluating large scale mixed-use developments, including military base reuse plans, we are of the opinion that the proposed 22.5 percent per annum target return ...is reasonable."
Earlier this year, as Lennar spent $5 million to support Prop. G, CBRE declared that 50 percent affordability in Lennar's proposed mixed-use development at the shipyard, as was being recommended in Daly's Prop. F, was "not financially feasible."
At the city's request, CBRE analyzed Prop. F and concluded in a memo to Cohen that it would reduce Lennar's revenue by at least $1.1 billion. Reached by phone this week, Jivorsky acknowledged that his firm has done work for different developers around the country for years, including Lennar.
"But we are not working on anything for Lennar in San Francisco," Jivorsky told the Guardian. "Our client is the city of San Francisco and we take our job very seriously. We would never make recommendations that we didn't believe were in the city's best interests."
Meanwhile, Cohen told the Guardian that the strain for real estate capital is likely going to push the rate of return demand up even more. Noting that the city agreed to 25 percent returns at Lennar's previous Treasure Island and Hunters Point Shipyard deals, Cohen said, "Real estate is considered to be a greater risk than it was six months ago, even in San Francisco. So, it's not so much that we have to negotiate this as have to understand what is required for private capital to invest."
Cohen believes that when the construction plans which currently have few details spelled out get more detailed, they will help increase the project's rate of return. "Which is why," Cohen added, "the developer's partners are willing to spend a boatload of money."
On Aug. 19, the Redevelopment Agency approved the addition of Kimco Developers and MACTEC Development Corporation as Lennar BVHP's retail and infrastructure partners, and Scala Real Estate Partners, Hillwood Development, and Estein Associates USA Ltd. as Lennar BVHP's equity partners.
Cohen also hopes that the 49ers' intentions towards San Francisco will be resolved by November 2009, when Lennar hopes to enter into an agreement with the football team. The 49ers continue to pursue plans to relocate to Santa Clara, and have not signaled any desire to remain here.
To date, Lennar's draft financing plan includes an agreement that the developer will contribute $100 million in cash toward construction of a new 49ers stadium, and that the city will enter a long-term $1 ground lease with the 49ers for a 17.4-acre Hunters Point Shipyard site.
Meanwhile, disgruntled community advocates claim that since January, when Feinstein, House Speaker Nancy Pelosi and Mayor Gavin Newsom announced $82 million in federal funding for the cleanup of the Hunters Point Shipyard site, those funds have gone primarily to cleaning up the potential 49ers site.