May 1, 2012 - From the May, 2012 issue

LA’s Process for Transitioning from Redevelopment to... ?

MIR is pleased to offer the following excerpts from the March Bisnow Summit, Los Angeles Redevelopment: Moving the Way Forward. Amongst a illustrious group of panelists, we focus on John Given, Principal, Investment & Development, CIM Group; Nelson Rising, Rising Realty; Renata Simril, Managing Director, Public Institutions Southwest Region, Jones Lang LaSalle; and Larry Kosmont, Kosmont Companies. The excerpts do not follow a narrative but instead should be read as a  sampling of how the post-redevelopment community is grappling with enforceable obligations, public-private partnerships, and local government.


Nelson Rising

“The oversight agency represents the taxing authorities, so they’re producing obligations to maximize the revenues they get.” -Nelson Rising

John Given:  One of the treasures that Nelson has the pleasure of overseeing is the case of LA. You have somewhere around $900 million in assets that have to be managed. A lot of people have said, “oh it’s a dying agency,” but if anybody here was asked to take a job managing $900 million in assets, I think you’d jump for it. One of the things we need to keep an eye on is that while there are a lot of crazy deals among that $900 million—some benefiting people who are well-placed and some that are rock-bottom deals that need to build neighborhoods—this is still the engine that LA needs to use to build and stimulate itself. The foundation may have been pulled away for the long term, but there is a lot of work ahead to finish what’s been started. 

Nelson Rising: I am the chairman of a group that is the designated local authority for CRA-LA reconstituted, and we are a three-person board. We have the duty of using reasonable business judgment. 

With the oversight committee, which hasn’t been appointed yet, there will be four members, in essence, appointed by County or County-related organizations. Two will be appointed directly by the County, one by the Flood Control Board, which is the largest County agency, and then one by the County Board of Education. Then, there are two members from the City—one of whom has to represent the union, and then the last is one from the Community College Board. Their duty is a fiduciary obligation to benefit the tax recipient agencies. One of the reasons the Governor decided to do this to redevelopment agencies was that 12 percent of the property tax in California doesn’t go to the taxing authorities; it goes to the redevelopment agencies. That’s a very large number. 

What’s going to happen is, the authority will approve a list of recognized enforceable obligations, and that has to be updated every six months. We’re in the process of doing that and will continue in our next meeting. In any event, once we make a decision, the oversight committee can look at it and agree with us or reject it. 

We have two basic standards we have to live up to. One is to go through the dismantling of the redevelopment agencies in the most expeditious way possible. That’s what the statute requires, and we have to maximize value. Anybody who has been in this business for as long as I have understands that if you’re doing it as expeditiously as possible, it always going to maximize value. What will happen once the oversight committee approves what we put in place? That is supposed to be by April 15th, and we’ll have a much better sense then. But my view is they’re going to try and do their job of representing the taxing agencies and get as much cash to them as possible.

We are handicapped as the successor agency right now because we are limited by statutes to three percent for administrative costs. If properties are enforceable obligations, staff for those properties is permissible, so that’s going to be a very tight situation. Unfortunately, in my first meeting we had to approve notices of termination for 144 people. The agency had about 224 county employees. After June 30th there’ll be 43 to 44. A lot of change is going on in a lot of people’s lives, and I’ve done a lot of work with redevelopment agencies here, in San Francisco, in Pasadena. They’ve done a great job for their cities, but as Bea pointed out, there are some places where that is not the case. 

It is what it is. I understand what the Governor is trying to do, which is to cure our financial ills. I think all of us in the redevelopment business know we’ll be better off when the state’s finances get straightened out. This is a bitter pill to swallow for many, but it’s something we have to do. 

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John Given: Nelson, have you encountered the clawback provisions of AB 26 with respect to deals that could be unwound in the future and that would relate to transfers between the sponsoring agency and the redevelopment agency, whether transfers of property or indebtedness? I think that is one of the issues on the minds of entitlement insurance companies and enforceable obligations, which is where there is a level of certainty in this two-year window of looking back to transfers that occurred prior to January 1st of 2011, whether there is a possibility that certain of those transactions could be unwound.  I don’t know if that is something that has come up yet, but I think it’s an issue for the industry, particularly for entitlement insurance.

Nelson Rising: The issue hasn’t come up yet, but I’m sure it will. Keep in mind the bright line is the 28th of June, anything that happened after that is not an enforceable obligation, period. Things that happened before that, they are enforceable obligations and we won’t know for sure, until we meet with the oversight committee, which items we put on the recognized obligations list they will accept. If they don’t accept then the Department of Finance is the voice, and both of those groups are looking for capital and are looking for cash. 

Chris Ganan (Moderator): One question I have relates to the mandate of the oversight boards and the enforceable obligations, with respect to the successor agencies. Are those inherently in conflict? 

Nelson Rising: Yes. The oversight agency represents the taxing authorities, so they’re producing obligations to maximize the revenues they get. 

Chris Ganan (Moderator): With those potential conflicts looming, what potential litigation do you see? 

John Given: I think there’s a myriad of potentials. It’s all going to be about implementation, and it’s all going to be about the level of cooperation and the level of problem solving. At the end of the day, where you have this inherent conflict with an oversight board that has it’s mandate to maximize revenue flow to the taxing agencies and a successor agency, which is recognizing the legally enforceable obligations that must be implemented, the devil is going to be in the details of how that’s implemented. 

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Ultimately the bondholders, who have an expectation of a certain return, are one stakeholder in this dynamic. It really comes down to the legal issue of this impairment of contract concept, which is in the California Constitution Article 1 Section 9 and the United States constitution Article 1 Section 10, which essentially say that the government shall adopt no bill that would impair existing contractual obligations. That issue is not addressed by the California Supreme Court. It’s an open question. When you actually are imposing and applying AB 26 to projects on an as-applied basis, ultimately the Department of Finance will be determining how truly enforceable obligations are. They are really implementing measures for projects, if they run afoul of the impairment of contract provision in the Constitution. That is a fertile area for conflict. 

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John Given: There are two sides of the coin, though. In particular, the Los Angeles Redevelopment Agency has built an extensive organizational structure around each of these decisions that you are talking about, and their agreements are tending to be very extensive, with compliance requirements about each of these agreements. 

Compared to other agencies, most agencies just say apply to the state; they don’t require the reporting to the redevelopment agency as people who work in LA have gotten used to doing. To the credit of the DLA, I’m finding that so far they’re being very pragmatic in saying we have got to move things because we only have so many people. 

I think the big questions will be when you get down to whether you feel that there are obligations as to intent that you have to continue to dig deeper before you sign off on, say, a certificate of completion or a covenant agreement that has to be recorded, which is a precondition to drawings and funds. These are things that a lender or a new buyer wants to know, that everything is up to snuff on this project. 

Nelson Rising: You raise a very good question. We have a limit of three percent of the tax that we’re allowed to keep for administration, but that does not cover specific projects. If the decision is made that there are 140, 200, 1500, depending on what you look at, enforceable obligations, and the oversight committee agrees that these are enforceable obligations, then I think those projects are going to be better off from the standpoint of staffing available. It’s not decided yet, but that’s the way I interpret it. 

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Larry Kosmont: Let’s talk about what is happening in city halls today because I think it’s an important contextual reference. Then we can move on to talk about how some projects have not used redevelopment financing. And then, perhaps, we can bring it back to talk about what it’s going to look like, how these interactions are going to appear, and what tools we can use to structure and manage private transactions. 

Renata Simril: How many people have driven to Big Bear? Have you driven to Big Bear in the fall? It’s a long winding road, and you’re waiting for the fog to clear—that is the state of city halls up and down the State of California. 

A few points to sort of set the context: one is before the elimination of redevelopment, all the cities within the state, and really across the nation, were facing budget deficits. Less revenue, laying off staff, structure deficits, health care, pensions—they were dealing with that issue prior to the elimination of redevelopment agencies. 

Second, laying off staff, a lot of whom were early retirement, cost you thought leadership. The brain trust within government has now retired. You’ve got the junior staff (and this is just a gross generalization), and I think for the most part you’ve got less staff, more work, and less seasoned professionals. 

To give you some context using Los Angeles County as an example, you have got 71 rebound agencies within the County of Los Angeles. Each one of those will have a seven-member successor agency board. So when you think about just the sheer nature of trying to get this sort of organizational system in place to start having the conversation on listing enforceable obligations or on what is not an enforceable obligation, suffice to say, it is going to be a long foggy road before you reach some clarity. This lies in terms of which property are going to hit the market for sale and whether those go forward as public-private partnerships and financing mechanisms that are really going to help former redevelopment agencies really focus on economic development. 

One other point that I’ll make very quickly is I think the term redevelopment is dead, and I think historically, over the 60 year history of redevelopment, it has really become an excuse for economic development. I think the larger context going forward is really going to be economic development 2.0. How do we move forward in an era post-redevelopment, like many other states that don’t have redevelopment, to really engage in public-private partnerships in urban core communities to help job creation, economic stability, and tax revenues. 

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