Almanac

News - June 9, 2010

A locus for big issues, Bohannon project may hinge on yet another

•Profit-sharing agreement may be key for some on council.

by Sean Howell

As it made its way through Menlo Park's city process over the past few years, a real estate project proposed by the Bohannon Development Co. has become a touchstone for the issues facing the city and its residents.

Some of those issues: the state of the city's "small-town" character; the future of its "light-industrial" region; how the city deals with greenhouse gas emissions from commercial buildings; how or whether it should provide housing for low-income families; the role of marketing in local politics; and how the city would address prominent power lines that stretch along its waterfront.

If that sounds like a long list, the developer, David Bohannon, would agree with you. When Mr. Bohannon and the many consultants in his employ weren't working to address some of the aforementioned issues, they were trying to warn city officials against trying to solve other city issues through this proposal.

As the project nears a final council vote on June 15, another major issue has wiggled its way onto that list, one that could be a decisive one in the council's vote. That issue might be summed up like this: How much profit are real estate developers entitled to, when the city grants zoning concessions?

It's a thorny subject, not to mention a complicated one, but two council members have signaled that their support of the project may hinge on the Bohannon company's willingness to share profits with the city. A third member of the five-person council said he is undecided.

While several council members say they see a slice of the profits as the city's just deserts, Mr. Bohannon says he wonders if the issue is yet another wrench critics are throwing into the city's bureaucratic gears, in the hopes of delaying or squelching the project.

"This has been a long process, and the public and the council weighed in on what was important to the city," Mr. Bohannon said in an interview. "As the process unfolded over many months, we spent hundreds of hours and we dealt with all those issues, in great detail, at a great investment of time and money, and with a lot of expertise. We really rolled up our sleeves to deal with all the issues that were presented.

"The profit-sharing provision seems to have come out of left field, at the 11th hour," he continued. "I'm not sure what to make of it."

The idea wasn't raised until late April, when council members got their first look at an analysis of the value of the land-use entitlements they're being asked to grant. A city-hired consultant estimated that the value of the entitlements for the office buildings could be anywhere between $0 and $24 million, based on standards used in the real estate development world.

When some residents argued that the estimate was too low, the council asked for new numbers, and got them. The value of the entitlements could be worth as much as $101 million using a different set of assumptions that the consulting firm, Cushman & Wakefield, admitted were highly unlikely.

Vince Bressler, a member of the Planning Commission, looked at the problem another way entirely. The consultant's report suggests that the office buildings alone would generate in the ballpark of $35 million per year in rent, not including expenses, beyond what a project that maximizes the current zoning would bring in — a figure nearly equal to the city's annual general fund revenue. Once the project is clear of debt, shouldn't the city be entitled to some of that money?

"I look at this as a community resource, as community property," he said in an interview. "I don't think (Mr. Bohannon) is any more entitled to that upside than anyone else in Menlo Park.

"There's a tremendous concentration of wealth in this country," Mr. Bressler continued. "Things are just being given to people who are already wealthy by the virtue of the fact that they have wealth, and can play the system. This is a complete little example of that."

That sounds pretty good, Mr. Bohannon said, as does the idea of "windfall" profit sharing. But he contends that neither of those scenarios have much to do with reality.

"We have not been successful in getting across the point that we cannot provide (profit-sharing)," he said. "Either people are ignoring what we're saying, or it's a message they don't want to hear."

The lending industry is "very brittle," Mr. Bohannon said. A profit-sharing deal with the city, even if it kicked in only when rental rates soared, would likely dissuade people from financing the project. Equity investors would also look askance at sharing profit with an entity (Menlo Park, in this case) that isn't investing anything in the project, he said.

"Investors in a project look to the upside to offset the potential risk," said Joanne Brion, an urban economist employed by the development company.

Even if the city would share in those profits only if they exceeded everyone's expectations?

"If (the threshold) is so ridiculously high that it would never happen, it would be disingenuous on our part to promise that," she said.

"It's just not the society we live in," she continued. "It's the city's job to allow development to happen, not to become private developers."

In response to Mr. Bressler's idea that profit-sharing could start once the project is "free and clear" of debt, Mr. Bohannon said: "Free and clear? When is that?" The project will cost more than $400 million to finance, according to Ms. Brion, a debt that would likely be paid off over a 20- or 30-year period.

Mr. Bohannon and Ms. Brion elaborated on the level of risk the Bohannon company and other investors would be taking. The company will spend $7 million to $8 million doing the preparatory work required to begin developing — money it will not get back if the project doesn't get off the ground. If costs are higher than expected, or if the market takes a dive, returns on investments will be delayed, Ms. Brion added.

As an example, Mr. Bohannon said that 400,000 square feet of Bohannon land in Menlo Park sat vacant for five years early in the last decade, while the company maintained the property and paid taxes on it.

Andy Cohen, one of the two council members (along with Kelly Fergusson) who have been most insistent about a profit-sharing agreement, said in an interview that he's not insensible to Mr. Bohannon's claims.

"Real estate development is a speculator's paradise. There's so much risk," he said. "Bohannon says (profit-sharing) may make the project impossible, and I'm taking him at his word here. I have no reason to doubt him, and our own experts confirm it."

That hasn't prevented Mr. Cohen from pressing for such an arrangement, which he says would make up for the fact that the office buildings wouldn't generate sales tax for the city, as an industrial use might. Mr. Bohannon views the hotel his company is building, and the annual $1.6 million it's predicted to bring to city coffers in hotel tax, as fair compensation, but Mr. Cohen notes that the revenue stream is not completely guaranteed.

He says he's "on the fence" over the project, and that he's agonizing over the decision. While the revenue-sharing issue is important to him, he continues to be troubled by some of the big issues mentioned above.

He has misgivings about the negotiation process that he was a part of, and about what the project would mean for the city's ability to carry out comprehensive land-use planning in the area, among other things. He said he feels squeezed between critics of the project, many of whom are close advisers of his, and by the outpouring of support from the Belle Haven community. He's having trouble gauging the level of community support for the project, he said.

"No one (on the council) had the courage to say the project was too big at the outset, and now the chute is getting narrower and narrower, and we have to make an up-or-down vote," he said. "I'm not certain in my own mind that the amount of public benefit, even $1.6 million, is enough for what the city is giving up."

To complaints by Mr. Cohen (and to a lesser extent Ms. Fergusson) about the negotiation process, Mr. Bohannon said: "It's pretty late in the game to criticize the process. I have difficulty with their comments, given that they were on the (council) subcommittee" throughout the negotiating process.

To the suggestion made by Mr. Cohen and several residents that the city might want to do more land-use planning before approving the project, Mr. Bohannon noted that the city is already planning for the area in a piecemeal fashion. He added: "It's no secret that 'let's do more planning' is a euphemism for, 'let's not do anything.'"

Despite Mr. Bohannon's stated aversion to the idea of profit-sharing, Ms. Fergusson said she was "optimistic that the (city's) negotiating team will be able to come back with something favorable."

She said she supports the concept of revenue-sharing for several reasons, maintaining that "zoning is the currency of local government."

The Bohannon project

The Bohannon project, also known as "Menlo Gateway," is a development proposal for three eight-story office buildings, a 230-room Marriott hotel, and a sports club, totaling nearly one million square feet. It's proposed for land near the intersection of Bayfront Expressway and Marsh Road.

Menlo Park's City Council is scheduled to vote on whether to approve the project at its meeting Tuesday, June 15. The meeting will begin at 7 p.m. in the council chambers, located between Laurel and Alma streets in the Civic Center complex.

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