Thursday, February 15, 2007

More Towers News

The latest Bee article is a very interesting one. The fact that CalPERS made an offer to pay all the debt and keep moving forward seem to me they are still interested in this project and think is still makes a solid return.

Does it sound like all this trouble might just be hard renegotiating by both CalPERS and Saca??? As someone who has spent 8+ years in sales, first rule is never accept the first offer given to you. Maybe this is the case here. I think CalPERS holds the upper hand though.


Towers developer defaults on loan
By Mary Lynne Vellinga - Bee Staff Writer

Developer John Saca Wednesday said he has defaulted on a $22 million loan he used to buy the downtown land where he broke ground last year for two 53-story condominium and hotel towers.

The default -- the first step in a foreclosure -- doesn't necessarily mean the development is dead. Rather, it's a public exposure of the months-long private struggle between Saca and his equity partner in the Towers, the giant California Public Employees' Retirement System -- CalPERS.

Construction on the prominent site at Third Street and Capitol Mall stopped in January, leaving a hole in the ground, studded with piles, a few blocks down from the Capitol.

Nearly 400 buyers have paid deposits on condominiums in the Towers. That money is in a special escrow account and will be refunded if the development collapses.

Saca sent an e-mail Wednesday to all the buyers, assuring them he is "working diligently and doing everything possible to move this forward."

Contractors and professionals on the project have filed about $13 million worth of liens, bringing the project's total unpaid debts, including the land loan, to about $35 million, Saca said in a prepared statement.

As Saca's budget for what was introduced as a $500 million project ballooned by $70 million due to rising construction costs, CalPERS refused to give him more money.

The pension fund confirmed Wednesday that it has delivered just $25 million of the $100 million it had committed.

Ted Eliopoulos, CalPERS' senior investment officer, said the fund recently offered Saca a deal that would have allowed him to retain a financial stake in the project but would have given control to one of the large developers with whom CalPERS currently does business.

"We made a formal offer to John that would have paid all of his debts, including this note, and would have given him a good return," Eliopoulos said. "Unfortunately, he has turned that proposal down."

Eliopoulos said Saca also offered to buy out the pension fund by bringing in other investors. But CalPERS said Saca's offer didn't ensure the fund enough profit.

"We concluded it was not of the investment value we would even consider," Eliopoulos said.

Saca said Wednesday that the assertion that CalPERS had offered him a "good return" was a "complete misrepresentation of the facts."

He said he is bound by a confidentiality agreement that has prevented him from speaking about his dealings with the fund.

"I would like to make our offers to each other public record," he said. "I believe they won't allow this, because I don't think they'll want the truth to come out."

According to John Dangberg, Sacramento assistant city manager, CalPERS expects to earn a return of 21 percent on its money.

"While our first objective is to get the project done, we'd like to see everyone treated fairly. John has put a lot into this as a local developer, and has brought a new vision to our downtown. And we certainly would like to see him be a part of that if it's at all possible." In a written statement Wednesday, Saca placed the blame for the project's difficulties squarely on the pension fund.

"This predicament is out of my control," Saca said. "If it were my choice, all the outstanding invoices would be paid immediately. I have proposed several alternatives to my partner on how we can pay these bills; however, none have been accepted."

Saca went on to say that he's "not sure (CalPERS is) the right partner for this project."

Eric Rasmusson, a spokesman for Saca, said Deutsche Bank remains willing to lend Saca up to $400 million for construction. The city has agreed to provide an $11 million subsidy for the hotel portion of the project, which would be used for furniture and fixtures once the buildings were complete.

The land for the Towers is owned by Towers on Capitol Mall, LLC, a partnership of Saca and CalPERS.

The $22 million Saca borrowed from First Bank & Trust to buy the prime real estate on Capitol Mall was due at the end of December, Saca said in his statement.

Last week, local investor and developer Joseph Mohamed Sr. bought the note from First Bank & Trust, meaning that the Saca-CalPERS partnership now owes him $22 million. Mohamed said he filed a notice of default on the loan Wednesday with the county.

Mohamed said he doesn't expect to have to go through with a foreclosure but thinks Saca and CalPERS will pay off the debt and move forward.

"We try to buy only notes we feel are reasonably secure, and that's how we felt on this one," he said. "I don't throw money to the wind."

In its quest to restart the Towers project, Sacramento enlisted state Sen. Darrell Steinberg and Assemblyman Dave Jones, who have been talking to CalPERS.

Steinberg said Wednesday he's confident the issues can be worked out and that high-rise condominiums will materialize.

"Projects of this magnitude have their ups and downs," Saca said. "I am very confident that this project is going to succeed consistent with the vision that has rightfully excited this community."


Zwahlen Images said...

John Saca did an interview this morning on KFBK saying the Towers has sold $262 million in real estate and he has also lined up another bank to commit the additional $70 million needed. He just needs CalPERS to agree to what the next step will be.

This is a good sign as far as I'm concerned... no new news for a month was killing me. I hope John can pull it off.

PetCo field down in San Diego had a funding problem when it was being built and the project stalled for months in the middle of construction... so this is not unusual.

Uneasy Rhetoric said...

Hey, maybe all of this is just media positioning. Saca "I'm poor! Give me a better deal or it's a hole in the ground!" CalPERS. "Nonsense, we can't let it be a hole in the ground."

Eh, in any case, we're going to see the towers go up, some way, some how, in some form.

ANK said...

Since you have much more experience in real estate than I do I wonder if I might pick your brain. Do you think that the real problem is that John Saca's original plan included a much higher percentage of the condos to be sold before construction and hence he did not prepare adequately for the contrary (leading to insufficient funds)? "Zwahlen images" said that "the towers has sold $262 million" and I wonder when this huge project was first proposed what would be a normal percentage of occupancy/sale to use when predicting if the project would indeed become profitable?


LivingInUrbanSac said...

ANK - Thanks for dropping in from SoCal. I'm not in development or the real estate business, I work for a tech company, so I'm not really the best person to answer some of those questions. I'm just very much into seeing this cities urban core grow.

The insufficient funds seems to be mostly due to cost and material increases. They had 100M in equity from CalPERS, a 375M loan lined up (now they say they are willing to lend up to 400M), and whatever Saca put in to make for the 500M. But when the costs drove up to ~570M they didn't have enough $$$ lined up. Apparently, Saca lined up mezzanine financing for the extra 70M , but CalPERS rejected that due to being uncomfortable with the debt ratio. CalPERS has dished out 25M of the 100M, but won't give anymore until I assume everything is worked out, thus the stoppage.

Selling a higher % of the units upfront (more than 50%) probably doesn't matter that much for locking in financing. In the end it obviously does to be profitable, but Deutsche Bank (The lender) is only requiring him to sell 50% of th units (which I hear it pretty standard) to unlock the funding. There were even reports that they relaxed that requirement as well.

There is a deal to be had here between Saca and CalPERS. It's clear though that they want a more experienced developer in there. Its looking more and more though that Saca might have to take a reduced role in the project. I was listening to KCRA yesterday and Saca mentioned he has never had a lien or defaulted on anything (easy to verified I imagine) and he seemed very mad about this happening. Even if he does take a back seat, I think he will always be associated as the person who had the balls to propose something pretty much what every one thought would be impossible.

Predicting profitably, the way I look at it at a very high level is, Aura is pegged at a ~175M project (prices locked in) for 297K square feet of sell able space (not including retail or parking they charge for), that comes to $589 a square foot. They have been selling units on average of $655 sf, so assuming sell out at those prices. That comes out to about a 20M profit, not including retail and parking. With those numbers, you can figure out break even points as well.

I'm sure it's much more complicated then that though.