700 Block K Street Holdup

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K Street land swap hits snag
Finance disputes stall plan for retail projects on mall.
By Mary Lynne Vellinga - Bee Staff Writer

Last-minute financial issues raised by property owner Moe Mohanna are delaying a land swap required for a major retail project to move forward in the 700 block of the struggling K Street Mall.

Furniture retailer Joe Zeiden, owner of the Z Gallerie chain, had expected to have all of the properties in the 700 block under his control by the end of 2006, said Wendy Hoyt, his local consultant.

But Zeiden is still waiting for Mohanna, who owns many properties on K Street and the surrounding blocks, to sign documents putting his 700 block parcels into escrow.

"We signed everything we need to sign some time ago," Hoyt said.
"We have several tenants lined up to open by the end of '07, and everything is hinging on this land assembly swap happening within the time frame it was committed to," she said.
"We should be in our buildings by now and doing tenant improvements, but instead we're waiting for land assembly agreements to be finished."

If the deal falls apart, it would be a major blow to the city of Sacramento, which is already scrambling to get the stalled Towers condominium project at Third Street and Capitol Mall back on track.

In her State of the Downtown speech Thursday, Mayor Heather Fargo alluded to the problems dogging K Street and other developments planned for downtown when she said: "We will go over, under, around or through to make these projects happen."

Zeiden has promised to revamp the row of historic buildings just outside the entrance to Downtown Plaza in time for the 2007 holiday shopping season.

Retailers expressing interest in the project have included Urban Outfitters, Sur La Table and Anthropologie.

Eager to bring new life to K Street, the city has helped Zeiden by spending about $24 million to buy properties in the 700 and 800 blocks of K and L streets.

It plans to trade those in the 800 block to Mohanna in exchange for his properties in the 700 block.

Once the transfer is complete, Zeiden will control the 700 block, and Mohanna will have most of the 800 block.

Mohanna and his partners, John Lambeth and John Saca, plan ground floor retail topped by high-rise condominium towers in the 800 block. With the housing market in a slump, Mohanna said they plan to concentrate on getting the retail built first.

Mohanna said his current problem is that a November fire in the already-devastated 800 block resulted in two additional buildings being demolished, one belonging to him and one belonging to Zeiden.

Another building, now owned by the city, is slated for demolition. And a fourth building has been declared dangerous.

Given this state of affairs, he said, the four banks that hold loans totaling $4 million on his 700 block properties have thus far been unwilling to transfer those debts to the collection of ruined buildings in the 800 block.

"The banks gave us loans because the buildings were operable and had tenants," Mohanna said.
"Now we are asking the lenders to take their loans and put them on the next block, so the banks have a legitimate argument saying these are not similar types of buildings. There is no income."

"Right in the middle of the appraisal, two buildings got demolished," he said.
Mohanna said he did not have insurance on 810 K St., which burned in the fire. Zeiden's adjacent building, 812 K St., also was destroyed.

The Sacramento City Fire Department is still investigating the cause of the fire, but Mohanna said transients were trespassing in both buildings.

Mohanna said the city should figure out some way to help resolve the issue of the loans for the
700 block.

He also said any insurance money collected for buildings in the 800 block should go to help fix up the 800 block.

"I think it can get worked out," he said.

"It's not a major obstacle. It's just a matter of the city sitting with the banks and convincing them that these collaterals are equal."

Assistant City Manager John Dangberg said Friday that Mohanna's loans "are not our issue."

"We have a land exchange agreement -- period," he said. Dangberg said he planned to meet with Mohanna next week.

"If there's some way to work this out, we're eager to do that. Our objective here it to get this transfer done. We're doing everything we can to make this happen, however we have to do it."

Dangberg said the use of eminent domain to wrest the buildings from Mohanna is "not out of the realm" of possibility.