
Plunging Property Prices Raise Questions About City Plan To Help Fund Arena
Source: Sacramento Business Journal
Brokers: Ken Turton
In 2006, with real estate at its peak, the city of Sacramento tried to sell the last undeveloped parcel on Capitol Mall to help finance the expansion of the Crocker Art Museum. Estimates for the property ranged up to $57 million.
But real estate values soon began to plunge. Occupying about a standard city block at the southwest corner of Third Street and Capitol Mall, the land known as “Lot X” sat unsold for a year until it was pulled from the market.
Now the idea of selling off city-owned property is back — this time to finance a new arena to house the Sacramento Kings. But it’s unclear how many of those properties are marketable in this brutal environment. And brokers are skeptical that the city could get much of a return — unless it’s willing to part with revenue-producing parcels like those in Old Sacramento.
“It’s such a buyer’s market right now, and people are only buying if it’s a real bargain,” said Greg Levi, co-managing director of the Sacramento office of Jones Lang LaSalle. He estimated that Lot X could be one day be worth $15 million, but hesitated to put a price on it now. It might sell if it came with entitlements for a new project. But the value of the land alone is a mystery because there are no sales comparisons under today’s market conditions.
Think Big Sacramento, the group studying the feasibility of a new arena, said last week that selling excess city property could help fund the project. Officials won’t say, however, which properties are potentially for sale, only that they have identified 40 priority candidates and estimate those properties could generate $30 million to $60 million toward a new arena.
Melissa Anguiano, economic development manager for the city, said the department staff has met with the Think Big committee and discussed the evaluation of excess property.
“We think there may be 40 to 60 properties with a range of values,” she said.
Sacramento in March hired brokerage CB Richard Ellis to take an inventory of city-owned property, determine if excess parcels can be sold and formulate a plan to dispose of them — well before the idea surfaced of using such proceeds for the arena project. The firm is still reviewing the city’s 2,400 properties to determine which of them aren’t needed, Anguiano said. A broker from the firm did not return a call seeking comment.
A review of those properties shows the city owns everything from cash-generating parking garages and golf courses to tiny easements without much value. Potential assets for sale could include a city-owned empty office building near Cesar Chavez Plaza, a sizeable piece of property north of Power Balance Pavilion in North Natomas and riverfront property in Old Sacramento and the Docks project south of there.
But value for such assets would be compromised by the depressed real estate market. And the sale of the Natomas land would require a solid plan for the current arena, which leaders are still working on.
Ken Turton, who runs his own brokerage in Sacramento and specializes in the central city, said no property is particularly viable in the current market and that even Lot X would need to be discounted significantly due to potential contamination. The city could investigate and remove any contamination there, but that would reduce the potential return.
Because of those challenges, he doubted that Lot X is one of the candidates for sale.
Turton also said there is virtually no lending for land or vacant buildings, so most buyers are using cash and demanding steep discounts.
And many of the city’s excess properties would not be marketable, Levi said.
“A lot of them are easements behind someone’s yard,” he said.
Another indicator of low values for city-owned property is that the Capitol Area Redevelopment Authority has been forced to discount land entirely in the central city. The authority has offered land on 16th Street for free to developers who submit proposals to help make those projects more economically viable. None of the proposed housing projects have been built.
One factor in the city’s favor, however, is that some of its property produces revenue. Turton said the city’s property in Old Sacramento and parking garages have value contingent on long-term leases with retail outlets and others. But CB Richard Ellis was hired to formulate a plan to sell excess properties, not profitable, cash-flowing ones, he said. And Sacramento is unlikely to sell parking garages, as revenue from them is also expected to help finance the arena.
So what kinds of properties are changing hands? The answer is usually distressed property that can be pried cheaply from lenders.
The Senator Hotel office building, for example, whose owners are in default on the building’s debt, has gone to a receiver.
Levi said there has been “a ton” of interest in the property, including from local investors. But he noted the property was once considered highly valuable due to its proximity to the state capitol building.
“Now they’re asking, ‘How cheaply can I get that asset?’ ” he said.