As the fog begins to clear (ever so slightly) in the wake of the court decision on AB1x26, the process for unwinding RDAs throughout the state is well on its way. Successor agencies, oversight boards and the Department of Finance (DOF) are immersed in an alphabet soup of analysis, reports and approvals – ROPS, EOPS, Asset Transfer lists, Housing Inventory lists, etc. – to ensure that all enforceable obligations are identified and accounted.
In the coming months efforts will all shift from identifying to selling assets. However, in evaluating the disposition of assets, it is important to avoid the ‘fire sale’ mentality. The process for ensuring a successful outcome is predicated on:
- Knowing what you have;
- Understanding the local / sub-market economic conditions;
- Having an idea of the asset value; and
- Determining the most appropriate disposition process and timing.
First, successor agencies should create an inventory of their real property assets and prioritize these properties. The inventory is likely to include both vacant and improved land, ground leases, parking covenants, parking garages, easements and air rights, as well as properties acquired for governmental purposes such as roads, school buildings, parks and fire stations — which can be transferred to the local jurisdiction by direction of the oversight boards. Information such as location (APN and project area), description, date of acquisition, source of funds and land area zoning is key to understanding the potential value of and prioritizing the assets. This information will also be necessary to prepare timing and market strategies for disposing of properties in a thoughtful manner.
Next, it is important to triage the list into manageable ‘buckets.’ For clients, Jones Lang LaSalle uses color-coded buckets: Green, Yellow, Red and Grey.
- The Green bucket holds high value opportunity assets –assets likely to be of interest to the private investment market – prioritized for marketing and disposition as soon as possible.
- The Yellow bucket holds assets that have site or market challenges and/or constraints – properties that could benefit from land use changes, entitlements or development to help improve their overall market potential and thus drive maximum value to the taxing entities.
- The Red bucket includes assets that have zero or negative value such as contaminated or brownfield properties, some easements or small ‘slivers’ of land. Without identified funding for clean-up, developers and/or investors are not likely to take on such liability-prone assets or assets with little to no market value.
- The Grey bucket includes assets that are likely to be part of a disagreement between successor agencies and the Department of Finance. Potentially disputed assets include real property that was purchased with a mix of low/moderate funding sources and other non-housing funds or with non-housing funds but for affordable housing purposes.
While the legislation and action taken by the Department of Finance concurs with permitting the transfer of housing assets to the housing successor agency, the Department of Finance has clarified with a number of successor agencies that they must sell any ‘mixed use’ assets and distribute the prorated share of proceeds to the taxing entities subject to governing and oversight board approval. However clear the legislation concerning housing related assets, it is unclear what the final determination of mixed-income assets will be.
Market and Submarket Conditions
Once successor agencies understand what they have, it is critical to know and understand the market / submarket conditions where the assets or properties are located. Successor Agencies should prepare a market overview that details the demographic trends as well as the supply and demand factors for commercial, residential and industrial uses including rental rates, occupancy rates and the overall development activity. This market overview will provide a good understanding of the health of the market as well as the potential developer or investor demand for these assets.
When determining the value of an asset or property there are three methods:
- An appraisal using the income or sales comparable;
- Residual value based upon current zoning and entitlements; and
- Residual value as determined by the highest and best use analysis which could require zoning and other land use changes to enhance value.
A proper appraisal is a means to capture the maximum value of the assets while at the same time balancing uses that benefit the community. There are trade-offs between maximizing value and uses that are compatible with adjacencies or consistent with a redevelopment project area’s plan. Understanding these trade-offs will better enable a successful outcome.
Once these three steps have been completed, and only then, Successor Agencies can determine the most appropriate disposition strategy/approach and timing. These can include an auction, a broker sale or strategic procurement process. Whatever process is used, it is important to market the properties to a broad network of investors and developers. The approach will be multi-pronged and phased, and it will need to balance the immediate revenue needs of local taxing entities with market realities in local communities.
Going forward, the real question is how cities focus their efforts to address their ongoing financial obligation while strategically using this opportunity in a way that can achieve the intended affordable housing and economic development objectives balanced against the goal of the legislation – sell assets quickly and maximize value.
Renata Simril is Managing Director for Jones Lang LaSalle’s Public Institutions practice covering the Southwest region where she and her team advises governments on their leased and owned real estate portfolios, monetizing excess property and development projects. Renata can be reached at Renata.simril(at)am.jll.com.