California Real Estate Journal June 29, 2009 : Page 1

INSIDE ����������������������� ��������������������������� PAGE 3 ������������������������ �������������������������� PAGE 4 ������������������ ����������������������� PAGE 5 CA L I FORNI A www.CARealEstateJournal.com Real Estate Considers Role In State Cap-and- Trade System Costs to real estate, other utility users expected to increase at least in short term BY KARI HAMANAKA CREJ Staff Writer and all public workshops on the issue held thus far point to the task as being a laborious one. Although only major green- G Recovery Act attempts to create jobs, mod- ernize transportation infrastructure, enhance energy independence, expand educational opportunities and increase access to health care by providing $787 billion in spending and tax relief. California expects to receive approximately $85 billion — $50 billion for infrastructure, energy, education and other spending and $35 billion in tax benefits. Since the Recovery Act’s enactment, O Californians have been asking one another, the government and us — the lawyers — a natural question: “When will stimulus dollars arrive to stimulate our business?” The short answer: “It depends.” It depends on your business — its ability to offer the services house gas emitters, such as the transportation and electricity sectors, will be directly regulated under the state’s cap-and-trade program, the impact of the pro- gram undoubtedly will be felt on real estate and other utility users. The May 22 appointment of the 16 members of the Economic and Allocation Advisory Committee GUEST COLUMN California Contractors: Ready Your Shovels and PV Panels BY KAYLYNN KIM AND ZEIN OBAGI JR. n February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 into law. The that the government has prioritized, to fi nd agencies that have been awarded stimulus monies and, of course, its ability to stand out as the business that can complete Recovery Act projects on time and within budget. The Recovery Act primarily channels opportunities through state agencies and municipal governments. The following identi- fi es the specifi c California economic sectors that have begun or will soon begin receiving Recovery Act funds and further describes best practices for turning Recovery Act op- portunities into positive business gains. and construction of transportation infrastruc- ture have received substantial Recovery Act funding. The Transportation Economic Stimulus Act of 2009 revised California trans- What Specifi c Opportunities are Available in California? � Transportation infrastructure. The repair portation project-funding formulas to provide the Transportation Commission with greater fl exibility to maximize California’s receipt and use of federal “use it or lose it” dollars. Approximately $625 million has already been obligated to 57 transportation projects. On June 11, the Transportation Commission released an additional $128 million, stating that more such project funding would be follow because “[c]ontractor’s bids have been signifi cantly lower than expected.” The unexpected savings will help fund other proj- ects that otherwise would not have received funding. In addition to these opportunities, small construction and trade contractors can also benefi t from numerous projects valued at less than $147,000. Extra perks including bidding preferences often apply to small businesses, See KIM, page 8 aping omissions on the details of a cap-and- trade program under Assembly Bill 32 now are being worked out, SPECIAL REPORT GREEN IT TAKES MENTAL MUSCLE TOBUILD GREEN INTO HOSPITAL DESIGNS PAGE 13 assigns another group a role in carving out the details of the mar- ket-based approach to reducing California’s greenhouse gas emis- sions to 1990 levels by 2020. “This committee will provide valuable advice and expertise to shape the cap-and-trade program to maximize the overall economic See EMISSIONS, page 18 Traffic drives toward downtown Los Angeles on the 110 freeway as a curtain of smog shrouds the skyline.Based on the Assembly Bill 32 scoping plan, the state’s cap-and-trade system will be rolled out in two phases.The market-based approach aims to reduce California’s greenhouse gas emissions to 1990 levels by 2020. REAL ESTATE JOURNAL ���������������� ��������� ������������� This special sponsored section brings together a panel of five experts to explore the state of the mixed-use market. PAGE 21 DEVELOPMENT Landmarks to The Rescue? State property sales still considered as time runs out on budget deal BY GREG KANE CREJ Staff Writer violent criminals. It also has a spectacular view of the San Francisco Bay and is surrounded by exclusive communities. The California Exposition and State Fair is S largely known for its horse racing, festivals and special events, such as the annual corn- dog-and-kettle-corn extravaganza from which it gets its name. But its proximity to downtown Sacramento, freeways and other major arteries has developers thinking houses, shopping and an arena for the area National Basketball As- sociation team. The two properties, like several other high- profi le parcels California offi cials recently put on the market in an effort to fi ll the state’s $24 billion budget hole, present obstacles that could create headaches for developers looking to maximize their location through redevelop- ment. The state hopes to raise billions of dollars from properties that would require long years of rezoning, environmental and entitlement work amid potential opposition from local com- munities, observers said. But the one-of-a-kind locales presented in the state’s proposed fi re sale — San Quentin’s views of the bay, the Pacifi c Ocean vistas of the Ventura County Fairgrounds and high-value in- fi ll opportunities in San Francisco, Sacramento, Los Angeles and San Diego — do present development opportunities for those willing to do the legwork. Amanda Fulkerson, deputy secretary of communications for the California State and Consumer Services Agency, said the reuse potential of each of the seven parcels is a major reason why they’ve been placed on the See LANDMARKS, page 9 an Quentin State Prison is a dreary, angu- lar bunker, built more than 120 years ago and is home to some of California’s most PUBLISHED WEEKLY � $3 � JUNE 29, 2009 AP PHOTO/NICK UT

Real Estate's Role In State Cap-And-Trade

Kari Hamanaka

Gaping omissions on the details of a cap-andtrade program under Assembly Bill 32 now are being worked out, and all public workshops on the issue held thus far point to the task as being a laborious one.<br /> <br /> Although only major greenhouse gas emitters, such as the transportation and electricity sectors, will be directly regulated under the state’s cap-and-trade program, the impact of the program undoubtedly will be felt on real estate and other utility users.<br /> <br /> The May 22 appointment of the 16 members of the Economic and Allocation Advisory Committee assigns another group a role in carving out the details of the market- based approach to reducing California’s greenhouse gas emissions to 1990 levels by 2020.<br /> <br /> “This committee will provide valuable advice and expertise to shape the cap-and-trade program to maximize the overall economic<br /> Benefi ts to California and assure we meet our environmental goals,” said Mary Nichols, chair of the California Air Resources Board on the day of the committee appointments.<br /> <br /> Based on what is specifi ed in the AB32 scoping plan, the cap-and-trade system will be rolled out in two phases. The fi rst phase, beginning in 2012, will place a cap on industrial facilities emitting more than 25,000 metric tons of carbon dioxide equivalent annually as well as electricity generators. The second phase will be rolled out in 2015 to include other sectors that emit at or below the 25,000 mark. This would include fuel use in the transportation and the residential and commercial sectors.<br /> <br /> The committee will have to fi nd answers to questions about the distribution or auction of greenhouse gas emission allowances and how those allowances will be used under the program. More importantly, committee members will have to analyze the impacts of those allowance decisions on the regulated industries under cap and trade.<br /> <br /> “Setting a binding cap on carbon will necessarily create a new currency [allowances] worth a signifi cant amount of money,” Nichols said.<br /> <br /> “Whether the allowances are freely distributed or auctioned, the decisions about how to distribute this value will have signifi cant implications for the costs and benefi ts to California consumers and businesses.” Upon the appointment of the 16 members of the Economic and Allocation Advisory Committee last month, the governor sent a letter to members with his own set of suggested considerations.<br /> <br /> More specifi cally, Gov. Arnold Schwarzenegger asked in his letter that the committee look into having the value of allowances returned.<br /> <br /> This would be done either on the basis of an auction or distribution of auction rebates or dividends “in order to minimize the cost to California consumers and maximize the benefi ts to the state’s economy,” Schwarzenegger wrote in his letter.<br /> <br /> The state is also working with the Western Climate Initiative to tie the AB32 cap-and-trade program to the WCI’s program, which will have authority in member Western states and some Canadian provinces. And following on the heels of all of this is a federal cap-and-trade program that would ensure consistency throughout the country. As of press time, Congress was scheduled to vote on a climate change bill Friday.<br /> <br /> Program Analysis As more details are considered for the state’s cap-and-trade program, more questions continue to be asked about implementation, how to avoid business leakage outside of the state and other considerations that would render the program more effective.<br /> <br /> CARB’s timeline, according to what was presented at a June 5 public workshop that looked at reporting and verifi cation under cap and trade, the plan is to spend the rest of this year looking at the issues associated with the system.<br /> <br /> Next year, actual program regulations will be developed so that CARB may adopt a policy by the end of 2010.<br /> <br /> “One of the big debates is how to treat emission reduction credits generated outside of California versus inside of California,” said Gregory McClintock, a shareholder in the Los Angeles offi ce of Akerman Senterfi tt. “While the state would like to encourage the emission reductions to occur in California, moving us more toward a green economy, the way you would do that is probably by assigning a higher value to emission reduction credits in California versus somewhere else.” If a higher value is assigned to the reduction credits, then issues could arise having to do with the Commerce Clause, something McClintock said is being looked into.<br /> <br /> In general, no one wants a situation that would drive business out of the state, an important issue that will have to be considered as program specifi cs are hashed out next year.<br /> <br /> “”We don’t want to have big market dislocations,” said Jonathan Redding, an environmental law partner in the Oakland offi ce of Wendel, Rosen, Black & Dean LLP.<br /> <br /> A good example of such dislocation would be the cement industry. It is more expensive to make cement and other aggregates in the United States because of the cost of natural gas, which is signifi - cantly higher than in other countries.<br /> <br /> “If we tax too much on cement kilns, we’ll drive our local people out of business, and it’s already hugely coming from overseas,” Redding said. “The goal is to try and fi nd out ways to stop such signifi cant market dislocations, and the state’s very aware of it and trying to fi gure out how to deal with it.”<br /> Most who are following the cap-and-trade program say that it is too early to determine the full brunt of legal issues that could arise from the program since nothing has been adopted.<br /> <br /> “The real vetting of issues is to check in with the environmental organizations and see what everyone’s talking about in terms of the federal cap-and-trade system,” Redding said.<br /> <br /> “California has been in this for several years and is going through a very deliberate process to try to create a marketplace and regulatory system that works together to eventually have a successful system that incentivizes greenhouse gas emission reductions without over-penalizing people.” Because cap and trade only is in the early stages of development, real estate remains on the fence about the program. Ultimately, the main question on the minds of those in the industry is at what cost cap and trade comes in addition to other green building mandates.<br /> <br /> “The industry has already embraced LEED [Leadership in Energy and Environmental Design] and green building and started to implement that in offi ce, retail and industrial buildings,” said John Magness, legislative cochair for NAIOP Inland Empire and senior vice president in Hillwood Investments’ San Bernardino offi ce. “Now, having the state come down and make those requirements even more stringent in these economic times is a little bit short-sighted.” Real Estate Implications Although Magness said a fi nal decision about cap and trade cannot be made until more details are worked through, he said NAIOP’s stance continues to be focused on what’s best for property owners.<br /> <br /> “We’re for business and we’re for the property owners,” Magness said. “Of course we’re for clean air and low carbon footprints, but we think the people that understand the tenant’s requirements best are the trade and building industry associations such as the CBPA [California Business Properties Association] and NAIOP.” As to whether additional costs will be incurred on real estate, the answer is most likely that there will be additional costs at least for the short term.<br /> <br /> “Right now, there isn’t really any direct impact [on real estate],” Redding said. “Overal, cap and trade is going to affect every homeowner and business in the state because it’s going to drive up the cost of energy at least in the short term.” The energy providers are one of the regulated industries included in the fi rst-phase rollout of the cap-and-trade program in 2012. This means there will be greater pressure to reduce their emissions, which means user costs will increase.<br /> <br /> “Electricity does have a direct impact on the building industry because of all the multi-tenant buildings for offi ce or retail,” said Aleka Skouras Eisentraut, an attorney in Wendel, Rosen, Black & Dean’s Oakland offi ce. “Usually, if you have a triple net lease, the tenant bears the [utility] cost.<br /> <br /> Cap and trade will be another driver to get people to think about the parties paying for the utility.” McClintock said that to fi nd the answer to cost implications, one need only to look at current green building costs for developers.<br /> <br /> “Probably the best indication of that [additional cost] would be what’s going on with green building standards,” McClintock said. “It’s generally believed that to design and construct a building with lower greenhouse gas emissions, it involves some additional upfront costs. The hope is that over time the energy savings that result offset those upfront costs and pay back dividends in terms of lower operating costs.” But if real estate is paying for a green building that helps to reduce greenhouse gas emissions, some wonder why the industry is not being given the opportunity to receive offsets under the currently proposed cap-and-trade program.<br /> <br /> “Cap and trade has some opportunities and some challenges for the real estate industry,” said David Cranston, a partner in the Los Angeles offi ce of Greenberg Glusker Fields Claman & Machtinger LLP. “One of the big shortcomings of the cap-and-trade program that is currently being contemplated is that it does not offer the real estate industry the opportunity to develop sustainable or green buildings and obtain carbon offsets from those projects.” Cranston went on to use the example of a developer voluntarily building a green offi ce building or shopping center in a way that is different from business as usual. The project will not receive credit for helping to reduce emissions within the state.<br /> <br /> “I think it would be far better to have a system that would allow for projects to obtain carbon offsets to incentivize the development and retrofi t of green buildings,” Cranston said.<br /> <br /> “By creating fi nancial incentives, especially for the existing inventory of buildings, you could create a lot more green buildings than without that incentive.” The Industry Has Time The issue in including real estate in the capand- trade market is the possibility of double counting. If a utility and developer receives the credit for reducing fuel consumption in a green building, the credit is awarded twice for the same reduction in emissions.<br /> <br /> “Their concern is that they would be double counting,” Cranston said. “If you reduce the energy usage of a building that could also be something for which electrical providers could take credit for. That’s a simple accounting issue that could be resolved fairly effi ciently.” There is still time before a fi nal decision is rendered, and some say the additional time could be good for real estate given that the industry will eventually be regulated under the second-phase rollout in 2015.<br /> <br /> “For commercial buildings they would not be included in the cap-and-trade program prior to 2015, but that provides an opportunity for commercial building owners to make reductions above and beyond those that are required and then use those reductions as credits to sell to the large electrical generating facilities that are going to need emission reduction credits,” Mc- Clintock said.<br /> <br /> Even if real estate does not get to participate directly in the cap-and-trade program, Cranston said there is a possibility that the utilities will begin offering more incentives to their energy users to help the utilities reduce their emissions.<br /> <br /> “You could have a bilateral market where the utility may incentivize in the reduction of greenhouse gas emissions,” Cranston said.<br /> <br /> “They’re already doing that to some extent, but we think a robust market in which the real estate industry can participate is a far more effi cient method in achieving the carbon reductions we’d like to see.” And on the upside, Cranston added that there are benefi ts to real estate outside of just the capand- trade market.<br /> <br /> For example, he cited undeveloped land that could be used for forestry projects, which would present an opportunity to obtain carbon offsets.<br /> <br /> “When we’re buying and selling real estate, it’s important to remember that the availability of carbon offsets is a right tied to the property that needs to be properly documented,” Cranston said. “We need to fi gure out what exactly it is so that legal issues don’t arise in the future when we buy and sell land.” There will be a lot of considerations to be addressed in the coming months. For real estate, understanding the program and how to maximize the potential for assets under cap and trade regardless of whether the industry will receive credit for its green building efforts is crucial.<br /> <br /> “I think it’s in everybody’s interest in California since the interplay of AB32 and cap and trade is very diffi cult to understand, even if they think they’re not in the cap-and-trade market, they’re going to be impacted by this,” Redding said. “It’s important to understand and mitigate on the fi nancial front.” — E-mail Kari_Hamanaka@DailyJournal.com

Landmarks To The Rescue?

Greg Kane

San Quentin State Prison is a dreary, angular bunker, built more than 120 years ago and is home to some of California’s most violent criminals. It also has a spectacular view of the San Francisco Bay and is surrounded by exclusive communities.<br /> <br /> The California Exposition and State Fair is largely known for its horse racing, festivals and special events, such as the annual corndog- and-kettle-corn extravaganza from which it gets its name. But its proximity to downtown Sacramento, freeways and other major arteries has developers thinking houses, shopping and an arena for the area National Basketball Association team.<br /> <br /> The two properties, like several other highprofi le parcels California offi cials recently put on the market in an effort to fi ll the state’s $24 billion budget hole, present obstacles that could create headaches for developers looking to maximize their location through redevelopment.<br /> <br /> The state hopes to raise billions of dollars from properties that would require long years of rezoning, environmental and entitlement work amid potential opposition from local communities, observers said.<br /> <br /> But the one-of-a-kind locales presented in the state’s proposed fi re sale — San Quentin’s views of the bay, the Pacifi c Ocean vistas of the Ventura County Fairgrounds and high-value infi ll opportunities in San Francisco, Sacramento, Los Angeles and San Diego — do present development opportunities for those willing to do the legwork. Amanda Fulkerson, deputy secretary of communications for the California State and Consumer Services Agency, said the reuse potential of each of the seven parcels is a major reason why they’ve been placed on the<br /> Market.<br /> <br /> “These properties wouldn’t be on the list if we didn’t feel they had the potential to be put to a higher use,” Fulkerson said.<br /> <br /> That potential worries some observers who fear the state is setting itself up to lose millions by selling some of its most valued properties at recession-level bargains. Michael Teitz, a professor emeritus at the University of California, Berkeley, whose specialties include urban development and planning, said the development prospects of properties such as San Quentin should be seen as a valuable asset in the current economy rather than as an avenue to a quick $1 billion, which is what the state hopes to receive for selling it.<br /> <br /> “It’s really unlikely that it makes sense to sell them right now,” Teitz said. “But it does make sense to ask where they fi t in the changing morphology of the metropolitan area, its economy and its society.” Gov. Arnold Schwarzenegger, too, has shown reservations, saying on June 12 that this is not the best time to sell the assests because of the fi nancial crisis and the fact that people will be able to pay much less for those properties. The governor maintained, however, that there needs to be a critical look at each property and why the state is holding on to it.<br /> <br /> “We’re not saying let’s go and destroy those properties and then build housing or something like that,” Schwarzenegger said. “We’re just saying let’s go and let’s not us be in the real estate business, because when we have a fi nancial crisis we should not be in the real estate business.” Possible Developments In addition to San Quentin, Cal Expo and the Ventura Fairgrounds, the other properties listed for sale include San Diego’s Del Mar Fairgrounds, Costa Mesa’s Orange County Fair, the Los Angeles Memorial Coliseum and Sports Arena, and the Cow Palace near San Francisco.<br /> <br /> On some of the parcels — such as San Quentin — offi cials envision landmarks to be replaced by mixed-use development, including houses, shopping and offi ces. Some, including Cal Expo and the Cow Palace, already have been attached to such mixed-use redevelopment projects in recent years.<br /> <br /> At least one of the parcels — the Los Angeles Coliseum site — likely would not undergo radical changes. The University of Southern California signed a 25-year lease to use the property last year that includes a promise to implement “substantial capital improvements” on the 86- year-old stadium.<br /> <br /> The state’s analysis of each property concludes that all but the Del Mar Fairgrounds and the Coliseum would be suitable for some type of infi ll or mixed-use development, although securing entitlements for such projects would take fi ve years in most cases. And Teitz believes there is legitimate development potential on many of the properties — as long as proponents are prepared for battles over historical and community preservation, density and other issues.<br /> <br /> “Properties like these are so unique,” Teitz said. “But you’re not going to be able to do anything with them for who knows how long.” One place that might prove an exception to that rule is Cal Expo, located just northeast of downtown Sacramento. The property — home to the state fair for a few weeks each August, but otherwise largely headquarters for horse racing, various expositions and events and a small water park — sits right off the busy Capital City Freeway and is located near busy thoroughfares and one of the region’s busiest shopping malls.<br /> <br /> Cal Expo offi cials voted in February to begin searching for a developer who could transform a portion of the 850-acre property into nearly 7 million square feet of residential, retail and offi ce properties, creating an urban village on one of the city’s largest infi ll sites. At the center of that village, according to a proposal by architectural fi rm Gensler, would sit an NBA arena that would be home to the Kings as well as the WNBA Monarchs franchise.<br /> <br /> The proposal still is in its early stages, but has enough legs that the NBA has gotten behind it, entering into an exclusive negotiating agreement with the state on the property, said Norb Bartosik, Cal Expo’s general manager. But it remains to be seen how a potential sale of the property — valued at $80 million without and $150 million with entitlements — would affect the current project.<br /> <br /> “Nobody’s really studied it yet,” Bartosik said.<br /> <br /> The Cal Expo Board of Directors plans to bring in a group of area developers this summer to conduct a peer review of the latest site proposal, Bartosik said. After that, a request for qualifi cations or proposal could be issued, setting the wheels in motion for making zoning changes, conducting environmental reviews and other steps toward breaking ground.<br /> <br /> The existing plan includes a new fairgrounds on the site, although the harness racing would likely not be included, offi cials said. Some have voiced opposition to the project, including local retailers and the horse racing community. Others still could come out against the project as it moves forward, but Bartosik said the site’s size and location is likely to continue luring development.<br /> <br /> “It’s the largest single piece of property in the region that something like this could be done on,” he said. “By virtue of its size, it commands attention.” Historical Signifi cance Fairgrounds such as Cal Expo make up the majority of the properties listed by the state, something Teitz said creates an interesting paradox: whether such properties, once a cultural and community center when regions were more identifi able by the crops they produced, should be held on to for nostalgia’s sake in today’s information age.<br /> <br /> “In many ways, they’re wonderful,” Teitz said.<br /> <br /> “But they’re really a product of a much more rural past. You could ask, ‘Well, what function does this land have for the other 50 weeks of the year?’” The high-profi le properties also aren’t the only ones the state has put on the table. Separate proposals by Schwarzenegger to help balance the budget recommend selling two other vacant properties — the Fred C. Nelles School for Boys in Whittier and the Agnews Developmental Center in San Jose — as well as seeking sale-leaseback arrangements for 11 large offi ce buildings in Sacramento, Los Angeles, San Francisco and other cities, offi cials said. Those two deals could generate as much as $825 million, according to the State and Consumer Services Agency.<br /> <br /> Fulkerson said the big-name properties have long been asked about by the development community, and that “the interest has piqued” since the May announcement that they were for sale.<br /> <br /> She declined to say which investors have shown interest in the properties.<br /> <br /> Interest, in today’s economic climate, does not equate to transactions, however. If the state is going to sell any of these properties in the current market, it likely will have to do so at a steep discount, observers said.<br /> <br /> Without entitlements — something none of the properties carry — the state values the land for sale at just more than $1.6 billion, nearly half what offi cials have said they expect to receive, according to state fi gures. And that value does not include the Coliseum, which does not include a valuation in the state’s projections.<br /> <br /> With entitlements, the six properties the state has listed values for total $2.1 billion. That disparity between expected value and what the state perceives it can get has drawn criticism about whether listing would be a smart decision. John Hillas, senior vice president at real estate appraisal fi rm Hulberg & Associates in Modesto, said each of the properties has characteristics that make them unique, but not enough to hold their value in such a depressed market.<br /> <br /> “There could be some emotional value or historical signifi cance,” Hillas said. “But it would pale in comparison to the fact that any real estate property today would sell at a discount.” Teitz agrees that selling in the current market would be a mistake, calling it a “short-term political palliative.” The shining example of that short-sightedness, he said, is the property with likely the greatest hurdles against and potential for successful development: San Quentin.<br /> <br /> “It has to be one of the great properties in California,” he said. “To sell it in the middle of a recession at some reduced price: Does that make sense?” Displacing Death Row San Quentin State Prison sits on 275 acres of waterfront property in the Bay Area’s pricey Marin County. The prison has been home to Charles Manson and Sirhan Sirhan, has been written about by Jack London and is home to California’s death row.<br /> <br /> A prison has sat on the site since 1852, according to the California Department of Corrections.<br /> <br /> But the latest facility, built in the 1880s, according to state fi gures, is in need of major upgrades — more than $400 million in death row renovations alone, according to a report by state Sen.<br /> <br /> Jeff Denham, D-Merced — and it houses nearly twice the 3,300 prisoners it was built to contain, offi cials said.<br /> <br /> Denham, arguing that the prison had “outlived its usefulness,” sponsored legislation earlier this year to decommission the prison, relocate the prisoners and death row to a new, more modern facility, and sell the San Quentin property for development. A hearing in late March on that bill, however, showcased the challenges such a proposal will likely face in the future: Prisoners rights advocates and representatives from the city of Folsom, which would expect to take on overfl ow in its own state prison, spoke against the move, leading the bill to be shelved in committee.<br /> <br /> Teitz also believes the closure would be subject to a fi ght from historical preservation advocates, considering the building’s place in local lore. Another famous prison, Alcatraz, still exists as a tourist attraction nearly 50 years after it shut its doors.<br /> <br /> Marin County Supervisor Steve Kinsey, who has been involved in discussions about San Quentin’s future since 2002, said planners have envisioned the post-prison property as a mix of high-density housing, offi ces, restaurants and shops. The new community would be built around a state-of-the-art public transportation hub, featuring trains and a ferry.<br /> <br /> Past studies performed before the recent economic downturn have shown that proceeds from the sale of the San Quentin property could support the construction of a more modern facility elsewhere in the state, Kinsey said. Other tools, including the use of public-private partnerships, could also help offi cials fi nance such a project.<br /> <br /> With the state prison system already highly overcrowded, however, the prospect of subtracting thousands of beds to build houses presents a challenge, Kinsey said.<br /> <br /> “The fact that it houses over 6,000 inmates in a system that is heavily stressed doesn’t make it a liquid property,” Kinsey said. He later added: “It’s a constraint, and it’s a cost to the project, but it isn’t a deal-breaker.” — E-mail Greg_Kane@DailyJournal.com

Ready Your Shovels and PV Panels

Kaylynn Kim And Zein Obagi Jr

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 into law. The Recovery Act attempts to create jobs, modernize transportation infrastructure, enhance energy independence, expand educational opportunities and increase access to health care by providing $787 billion in spending and tax relief. California expects to receive approximately $85 billion — $50 billion for infrastructure, energy, education and other spending and $35 billion in tax benefits.<br /> <br /> Since the Recovery Act’s enactment, Californians have been asking one another, the government and us — the lawyers — a natural question: “When will stimulus dollars arrive to stimulate our business?” The short answer: “It depends.” It depends on your business — its ability to offer the services that the government has prioritized, to fi nd agencies that have been awarded stimulus monies and, of course, its ability to stand out as the business that can complete Recovery Act projects on time and within budget.<br /> <br /> The Recovery Act primarily channels opportunities through state agencies and municipal governments. The following identifi es the specifi c California economic sectors that have begun or will soon begin receiving Recovery Act funds and further describes best practices for turning Recovery Act opportunities into positive business gains.<br /> <br /> What Specifi c Opportunities are Available in California?<br /> <br /> . Transportation infrastructure. The repair and construction of transportation infrastructure have received substantial Recovery Act funding. The Transportation Economic Stimulus Act of 2009 revised California transportation project-funding formulas to provide the Transportation Commission with greater fl exibility to maximize California’s receipt and use of federal “use it or lose it” dollars.<br /> <br /> Approximately $625 million has already been obligated to 57 transportation projects. On June 11, the Transportation Commission released an additional $128 million, stating that more such project funding would be follow because “[c]ontractor’s bids have been signifi cantly lower than expected.” The unexpected savings will help fund other projects that otherwise would not have received funding.<br /> <br /> In addition to these opportunities, small construction and trade contractors can also benefi t from numerous projects valued at less than $147,000. Extra perks including bidding preferences often apply to small businesses,<br /> Socially and economically disadvantaged businesses and disabled veteran-owned businesses meeting certain criteria.<br /> <br /> . Renewable energy and energy-effi ciency retrofi ts. In early May, the Energy Commission requested $226 million from the U.S. Department of Energy. If approved, the State Energy Program would fund renewable energy and energy-effi ciency improvements for existing public and private buildings, in part, through municipal fi nancing districts. Municipal fi nancing districts empower real property owners to make green improvements to their property by lending them the upfront costs of doing so. Cash-strapped municipalities, however, have struggled to fund these districts in the past.<br /> <br /> Now the Energy Commission hopes to pump new life into green fi nancing districts by using over $195 million from the Fed as “seed money.” When these funds arrive to established districts, renewable-energy and energy-effi ciency contractors can expect a boost in activity from both the private and public sectors.<br /> <br /> In addition, inspectors and subcontractors skilled in attic insulation, caulking, water heater blankets, heating/cooling systems repair and other energy conservation measures should seek contracting opportunities derivative of the $74.3 million delivered on June 18, 2009, to the Department of Community Services and Development for weatherization.<br /> <br /> That amount represents only 40 percent of all Recovery Act funding that the CSD expects to receive. The CSD’s Web site lists by area local community action agencies that can be contacted for the latest weatherization opportunities.<br /> <br /> Where Do I Go From Here?<br /> <br /> Government Web sites now serve as the main portals for discovering public contracting opportunities. Reviewing city, county and state agency Web sites as frequently as once a week will permit you to discover fresh opportunities and submit any questions in time to receive an adequate response.<br /> <br /> . Visit www.recovery.gov, the federal government’s frequently updated Recovery Act Web site with links to numerous government agencies.<br /> <br /> . Look closely at recovery.ca.gov, California’s one-stop resource to track the state’s provision of Recovery Act funds.<br /> <br /> . Investigate other state and local agencies’ Web sites (i.e., Caltrans, California Energy Commission, local departments of public works) for opportunities.<br /> <br /> . Consult experts at a local procurement technical assistance center. Go to www.aptacus. org. How Do I Apply for and Win Contracts?<br /> <br /> Because the decision-making process shares common elements across government agencies, the following practices should be followed when seeking public procurement opportunities: . Register as a vendor. First, a business should register as a vendor with city, county and state agencies. In some cases, like in Los Angeles County, a business must become a registered vendor to respond to a solicitation.<br /> <br /> As a benefi t of registration, agencies often send automatic e-notifi cations when an opportunity matching a registered vendor’s profi le arises.<br /> <br /> . If applicable, obtain certifi cation as a specially classifi ed business. If applicable, certify your business as a small business, socially or economically disadvantaged business, disabled veteran-owned business or as any other specially classifi ed business. Some public agencies encourage participation by specially classifi ed businesses through bid preferences (e.g., Caltrans offers certifi ed small businesses a 5 percent bid preference).<br /> <br /> Note that certifi cation opportunities vary based on project funding source and should thus be investigated early. Business certifi cations must typically be included in the solicitation response.<br /> <br /> Prepare the Best Solicitation Response . Be responsive. Government agencies evaluate companies’ proposals based on their responsiveness to the precise agency requests. Most government agencies host pre-bid meetings which provide detailed project specifi cations, requirements and clarifi cations. While developing a response, frequently check whether any updates, amendments or addenda have been posted to the solicitation. Solicitation responses must be based on the latest documents available.<br /> <br /> To ensure responsiveness, attend to detail and thoroughly review your solicitation response prior to submitting it.<br /> <br /> . Be responsible. Generally, government agencies award contracts to well-established businesses. Demonstrate fi nancial soundness and physical capability to complete the solicited undertaking considering your business’ preexisting obligations and any applicable contract requirements, including, for example, the payment of prevailing wages.<br /> <br /> Also, specially certifi ed businesses should investigate the availability of bond assistance programs to bolster their ability to assume the project and shoulder any liabilities that could arise.<br /> <br /> . Be mindful of the selection criteria.<br /> <br /> The government awards most construction contracts according to the lowest responsive and responsible bid. Lowest bid does not always control the awarding of a professional services contract (for example, engineering services). Provide competitive prices if the solicitation documents call for the lowest bid and custom tailor all other solicitation responses to the selection criteria employed by the agency for the subject contract.<br /> <br /> . Know the rules and your rights. An agency may deem a response nonresponsive or not responsible, thereby disqualifying it from consideration. Based on the agency’s procurement guidelines some such fl aws may be waived or cured prior to disqualifi cation. Consult the latest procurement manual for the agency with which you desire to contract. Doing so may permit you to make use of legal rights to cure and remain in the competition for a desired contract.<br /> <br /> . If you lose, fi nd out why. Learn from mistakes and from victorious competitors.<br /> <br /> Except in limited circumstances, the Public Records Act confers a right to discover the terms of an awarded contract. Exercise your right to submit a Public Records Act request in writing if you have trouble fi rst discovering the same through less formal means. .

Self-Storage Interest on The Rise

Julie Nakashima

It may not evoke the glamour of office, the sinew of industrial, or the hominess of multifamily, but from an investment standpoint, the self-storage business offers some distinct attractions.<br /> <br /> Tapping into investors’ desire for resilience, Strategic Storage Trust Inc., a non-traded real estate investment trust, is attempting to raise $1 billion over a two-year period. So far, it has raised $50 million of that, according to<br /> <br /> H. Michael Schwartz, the Ladera Ranch-based company’s chairman and chief executive offi cer.<br /> <br /> “We’re a new fund, we’re raising fresh equity and there are just not a lot of buyers out there,” Schwartz said.<br /> <br /> The growing company is an all-cash buyer that recently paid $9.6 million for two properties in suburban Atlanta totaling 1,170 units.<br /> <br /> The self-storage industry’s fi fth public, Securities and Exchange Commission-registered company, SSTI plans to take on the big four public storage companies consisting of Public Storage, Extra Space, Sovran Self Storage Inc. and U-Store-It. Some people also lump in U-Haul, although it’s more of a truck rental company that has self-storage facilities.<br /> <br /> According to Schwartz, the self-storage industry is packed with mom-and-pop players.<br /> <br /> Of the 50,000-plus self-storage properties in the United States, he said probably less than 10 percent are controlled by the publicly traded REITs.<br /> <br /> “Self-storage is a very fractured and fragmented business where 80 [percent] to 90 percent are individual owners with one, three or fi ve properties,” he said. “Our belief is that there’s another seat at the table for another program.” To accomplish its goals, SSTI aims to buy up and consolidate those mom-and-pop properties.<br /> <br /> Schwartz pointed to economies of scale and effi ciencies that are created by pulling together large and diversifi ed portfolio of storage properties.<br /> <br /> “We’re out there trying to fi nd those diamonds in the rough that we can put into our portfolio,” he said.<br /> <br /> The company is looking to acquire properties from Seattle to California, Texas and Florida, and into the northeast, focusing on areas where it believes there is going to be net population increase.<br /> <br /> “Primarily, we’re looking at growth areas because storage is driven by migration,” Schwartz said.<br /> <br /> As far as sellers are concerned, he sees two categories. One consists of owners whose properties are cash-fl owing and doing well, but need to sell because they have a loan that is coming due. Others need to sell because their properties aren’t working out the way they planned.<br /> <br /> He said that, for the most part, there a lot of stabilized, well-managed properties owned by people who are happy with their cash fl ows.<br /> <br /> But as with other property types, there also are plenty of deals that never should have been done.<br /> <br /> At the moment, SSTI is seeing a number of those early distressed properties and is not interested, Schwartz said. But if things get worse, he expects to see high-quality properties coming on the market that are distressed because the debt is due.<br /> <br /> “One of the things you fi nd in real estate is that most deals make sense at the right price,” Schwartz said. “I think that’s the key: Can we take over a property that is properly priced and add our institutional systems, accounting, management and over time add value?” The company owns 4,200 storage units totaling 535,000 net rentable square feet, but through its sponsor, U.S. Commercial LLC, oversees 3.7 million square feet of storage properties.<br /> <br /> SSTI is aggressively pursuing acquisitions that make sense, according to Schwartz.<br /> <br /> “Because we’re all-cash buyers, that provides us with additional power with someone that wants guaranteed execution,” he said.<br /> <br /> An Attractive Property Type Grubb & Ellis Co. Just hired a self-storage industry expert as part of a greater effort by the fi rm to create practice groups. Stephen Mellon, formerly with Holiday Fenoglio Fowler LP, will serve as vice president and director of Grubb & Ellis’ Self-Storage Group.<br /> <br /> Mellon asserted in a recent report that self storage is poised to weather the current real estate market shifts. Compared to other types of real estate, he stated that, self storage offers investors several advantages such as no tenant improvement or leasing commission costs.<br /> <br /> In addition, maintenance reserves for self-storage properties are included in the net operating income, so that if an investor buys a self-storage property at an 8 percent capitalization rate, it’s a true return compared to offi ce, industrial and retail investments in which maintenance reserves are excluded from NOI.<br /> <br /> Self storage is on the shopping list of Newport Beach-based Stoneridge Capital Partners, a real estate investment company that is looking to place several hundred million dollars into a variety of property types.<br /> <br /> Greg Merage, chief executive offi cer, said self storage is driven by demographics and supply constraints.<br /> <br /> “We think the fundamentals make sense for self storage as a long-term investment,” Merage said. “It’s an attractive property type.” In terms of the real estate, the self-storage experience mirrors that of other commercial property types: a credit boom, record-high pricing, skyrocketing values, plummeting cap rates, loose underwriting and, now, a freeze in credit.<br /> <br /> In early June, Extra Space announced an “immediate wind-down” of its development program, citing the scarcity of reasonably priced fi nancing and a need to conserve capital.<br /> <br /> The Salt Lake City-based company said it would incur one-time charges in respect to development projects that are not under construction, ranging from $19 million to $23 million in the second quarter, and severance costs of between $1 million and $2 million, while spending at least $50 million to complete 18 remaining development properties.<br /> <br /> Schwartz said that every now and then his company gets calls from lenders asking if it would be interested in buying discounted notes on storage properties, and it has looked at that. He said SSTI also gets approached by sellers touting the fact they have CMBS fi nancing at very attractive rates.<br /> <br /> “They have the perception that you’re going to assume my debt and you can pay more,” Schwartz said. “Unfortunately, that’s not our position. Our position is that you’ve got to evaluate the real estate based on today’s value.” Cooling economic conditions caused businesses to increase their storage needs, pushing self-storage occupancy levels above 80 percent in commercial and industrial districts, according to Marcus & Millichap Real Estate Investment Services’ semiannual self-storage report. Meanwhile, occupancies have fallen to the high-70 percent range in self-storage properties in residential areas.<br /> <br /> In the West, self-storage capitalization rates increased 50 basis points this year due to conservative rent and occupancy expectations, according to the report.<br /> <br /> “It didn’t help that our entire fi nancial foundation was on the brink of disaster in September,” he said. “When I look at all the asset classes — self-storage, offi ce, retail, industrial — what I fi nd is that storage seems to be resilient.” Schwartz noted that Detroit has one of the highest foreclosure rates in the country, but occupancy rates for self storage remain strong.<br /> <br /> He said self storage also requires careful management because one does see shortterm spikes. For example, he said that after Hurricane Katrina in 2005, there was a welldocumented increase in occupancy from New Orleans to Florida that lasted about two years until people received their insurance proceeds and began to rebuild.<br /> <br /> “You can’t take advantage of or gouge people,” Schwartz said.<br /> <br /> As a value-enhancing move, SSTI has entered into an agreement with Penske that will allow it to provide sort of a one-stop shop for storage and moving truck needs at many of its locations. According to Schwartz, Penske, based in Reading, Pa., will evaluate SSTI’s existing self-storage centers as well as pending acquisitions to see if it makes sense to have a Penske truck rental facility on site.<br /> <br /> Although SSTI doesn’t claim to the be the fi rst storage company to have such a partnership, he said the agreement represents an additional amenity, especially for do-it-yourselfers who are moving out of the city or state.<br /> <br /> “The storage business is about people in transition,” Schwartz said. “The Penske relationship allows us to offer more services to our customers that are looking to move.” — E-mail Julie_Nakashima@DailyJournal.com

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