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Merchants Lot sale: An overstuffed taxpayer turkey

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The Merchants Parking Lot auction proves City Hall is still the best show in Fresno.

Overwrought sentiment, contrived process, wily posturing – this fleecing of the taxpayer had it all.

Let me emphasize that this is merely my view of things. The Bee’s Tim Sheehan and CVObserver publisher Alex Tavlian have already weighed in on the auction. They did fine jobs in reporting on the controversy.

But I saw the auction in a different way.

I’ll begin with a brief review.

Merchants Lot is 2.8 acres of asphalt located due west of the old Crest Theatre in Downtown. The high-speed rail station is to be built just a few yards west of the lot.

In other words, Merchants Lot is in a prime location should the bullet train become reality.

Merchants Lot is owned by the government entity that replaced the Fresno Redevelopment Agency when Gov. Brown a few years ago killed all RDAs. This entity is called the Successor Agency.

Now, the old RDA in the course of its 50-plus years of existence came to own a lot of land in distressed parts of Fresno. Some of these properties were still in the RDA’s hands when Brown killed RDAs throughout the state.

The Fresno Successor Agency by law has to sell these properties. The money is to be distributed to four parties: Fresno County, local schools, small taxing agencies (the local Flood Control District, for example) and Fresno City Hall.

I don’t know the precise distribution formula. I’m guessing 25% to each party is pretty close.

The old RDA was a City Hall creature. The governing board was the City Council. Marlene Murphey was executive director in the RDA’s final years.

The Successor Agency is a City Hall creature. The governing board is the City Council. Murphey is the Successor Agency’s executive director. (She has a much smaller staff these days to help in the sale of properties.)

Everything is simple so far, right? RDA is killed by the governor. Successor Agency replaces RDA. Successor Agency must sell properties. Merchants Lot is among those properties. City Council is the boss.

But there’s more.

The law that killed the RDAs called for creation of oversight boards to oversee the dissolution of the RDAs. That’s why we’ve got the Fresno Oversight Board.

The local Oversight Board has seven members. Each represents a specific party (county, schools, city, small taxing agencies) with a financial stake in proceeds from the sale of properties.

The birth of the Fresno Oversight Board was a mess of uncommon proportions. Things have settled down of late. City Hall has come to control a majority voting bloc. Therefore, the Oversight Board is essentially an extension of City Hall.

The Oversight Board has, among other powers, broad authority over how the Successor Agency disposes of properties. Board members last February got into a nasty fight over the best process for selling the properties.

Four things occurred at that meeting that bear on our discussion:

1.) The board was supposed to decide on the sale of 19 properties. Some were in Downtown. This was no surprise. The sole purpose of the RDA in its heyday was to leverage specialized tax policy to encourage private development in blighted areas. Mayor Ashley Swearengin and the City Council in the last eight years have made big strides in revitalizing Downtown. That has increased the value of Downtown sites. Developers are well aware of this. Spotting the emergence of new markets, after all, is their job.

2.) One of the properties for sale was a 0.61-acre site at the corner of Inyo Street and Fulton Mall (soon to be Fulton Street again). This site is a parking lot. This site also is monumentally important to the Swearengin Administration’s overall vision for Downtown.

As I wrote for CVObserver on Feb. 26, the site is to be part of a larger footprint that local developers Terance Frazier and Mehmet Noyan are trying to put together. They want to build a mixed-used high-rise that includes affordable housing. The project will be built in phases and cost tens of millions of dollars.

The Noyan-Frazier project also is expected to jump-start development throughout the six-block Fulton Corridor. Such development would benefit from proximity to the high-speed rail station a block to the west. The controversial high-speed rail project, in turn, would benefit from having a thriving downtown Fresno next to its very first train station.

But the Noyan-Frazier project has plenty of hurdles, not the least being money.

So, the Swearengin Administration last February pitched a deal to the Oversight Board. The site at Inyo/Fulton was appraised at $328,000. The Administration asked the board to sell the site to City Hall for the full $328,000. City Hall would turn around and sell the site to Noyan-Frazier for $1 once the developers had all their other financing in place.

I wrote back in February: “The board was told that doing this deal could only help the developers as they seek financing further up the government food chain: See! Fresno City Hall is 100% on our side.”

Oversight Board Member (and Fresno County Supervisor) Debbie Poochigian asked why the board should cut a deal with a specific set of developers rather than put the parcel on the market and see if it could get more than $328,000.

Board Member (and city economic development director) Larry Westerlund said the board would best fulfill its legal duty by getting a fair price for a property that, in the hands of strategically-minded developers, would generate the highest long-term value for the public.

At this point, as I wrote last February, Frazier went to the public microphone and addressed the Oversight Board.

“This project is the catalyst for our Downtown,” Frazier said. “That whole project is going to be over $100 million. The more we delay, the more problems we’re going to have.”

The board on a 5-2 vote decided to let the city at some future point buy the property from itself for $328,000.

There are several key points here. Perhaps the most important is this: Based on my experience, Frazier knows top-to-bottom how the process works when it comes to the sale of Successor Agency properties. He’s not one to get blind-sided by bureaucratic fine print.

3.) Last February’s Oversight Board meeting was chaotic. In the end, the board kicked 13 of the 19 properties backed to the Successor Agency. For a variety of reasons, the board said, the time wasn’t right to sell them.

One of the properties kicked backed to the Successor Agency was – you guessed it! – Merchants Lot.

At the time, Merchants Lot’s appraised value was $1.65 million. The minimum bid was $1.65 million. Potential buyers submitted sealed bids. The idea was to open the bids and sell the site to the highest bidder.

Three bids were submitted. San Diego-based Pacifica Enterprises and Fresno’s Granville Homes each offered the minimum $1.65 million. City Hall had the high bid — $1.66 million.

It was all for naught once the board told the Successor Agency to try again at a later date.

Make no mistake – city officials back in February knew Merchants Lot was important the high-speed rail train station’s future. In my opinion, so did everyone attending the Oversight Board meeting.

4.) What exactly did the Oversight Board back in February have in mind when it came to selling the remaining properties?

Auctions. The message to potential buyers would be simple: Bring you cash and your courage.

I know I’ve given you a lot of context. But I want you to have a sense of what everyone at City Hall, high-speed rail headquarters, and the offices of Terance Frazier most likely knew leading up to events of last week.

Because we now circle back to the Merchants Lot auction on Wednesday. As Sheehan and Tavlian reported, the Oversight Board held a typical auction for the 2.8-acre parking lot.

There were two bidders – the California High-Speed Rail Authority and a development group led by Frazier. A new appraisal put the lot’s value at $1.8 million. The rules required bidders to submit a written sealed bid of at least $1.8 million. A certified or cashier’s check of 5% of the minimum bid ($90,000) had to accompany the sealed bid. The losing bidders would get their check back.

The sealed bids would be opened. Then an oral auction would be held. High bidder would get Merchants Lot. The winner had to pay the full sale price within 30 days.

“In addition,” the auction’s written rules stated, “the City of Fresno shall have a right of first refusal in connection with the purchase of the this property.”

It’s safe to assume that everyone at the Rail Authority and Frazier headquarters read and understood this sentence long before the oral auction took place.

The two sides bid up the price until Frazier offered $2,402,000. The Rail Authority dropped out.

On Thursday, the City Council on a 5-2 vote authorized City Manager Bruce Rudd to exercise the right of first refusal and pay $2,403,000 for Merchants Lot.

You might think that was a simple end to a simple auction. You’d be wrong for two reasons.

First, why did the Rail Authority get involved in the bidding war?

The Swearengin Administration wanted to exercise the city’s right of first refusal so it could sell Merchants Lot to the Rail Authority. In theory, the Rail Authority would want to get the site for the lowest price and protect taxpayer money.

The Rail Authority knew at the start of the oral auction that its only competition was Frazier. The Rail Authority merely had to let Frazier make the first bid (what was it – something like $1.85 million?), then drop out of the competition. The Swearengin Administration would then swoop in, exercise (with the council’s blessing) the city’s right of first refusal and buy the lot for $1,000 more than Frazier’s first oral bid.

Instead, the Rail Authority continued bidding against itself and American taxpayers until the price passed $2.4 million. It was only then that the Rail Authority dropped out and asked City Hall to save the day, which was the only logical option from the get-go.

I guess that’s what you do when you have billions of dollars to spend that belong to nameless and powerless taxpayers.

And why did Frazier even think about making a bid? He almost certainly knew months ago that the Rail Authority wanted Merchants Lot. That’s the same thing as knowing Gov. Jerry Brown wanted Merchants Lot.

Frazier and Noyan probably aren’t going to get their hugely expensive high-rise built at Inyo and Fulton unless they get an immense amount of money (cap-and-trade, grants, low-interest loans) from Sacramento. Just imagine Frazier and Noyan going to the Governor’s Mansion, hats in hand, pleading for piles of free dough to a Jerry Brown who remembers all too well how he got beat over Merchants Lot.

Makes zero sense. And rest assured – Frazier is a very smart man.

Well, actually the Rail Authority strategy makes sense if you suspect, as I do, that the auction was simply a low-profile way for the Rail Authority to send a bonus payment to Fresno City Hall – which is just about the only friend the bullet train has in the Central Valley.

If Merchants Lot had been sold for $1.8 million, City Hall would have received about $450,000 – its estimated share among recipients of Successor Agency property sales (the others being the county, schools and small taxing agencies).

But if the sale price could be jacked up to $2.4 million, then City Hall’s jackpot would be $600,000. That’s an extra $150,000 to the general fund.

City Hall could always use a free $150,000. And as far as the Rail Authority is concerned, that amount is chump change to an infrastructure project that figures to get most of its $100 billion-plus from the feds – and the feds simply print all the money they want.

Second, why did City Council members on Nov. 17 act as they did when Rudd asked them to approve the “right of first refusal” option?

Council Member Steve Brandau made a motion to reject that option. He got a second from Clint Olivier. Their beef: Frazier won the auction fair and square. Government shouldn’t be picking winners and losers in the private sector. (The motion failed 2-5; the “first refusal” option then passed, with Brandau and Olivier voting no.)

That argument makes no sense to me. Frazier must have known the rules when he submitted his sealed bid with the $90,000 check. If he didn’t like the possibility of City Hall exercising the right of first refusal, then he should have stayed on the sidelines. And as to City Hall being partial to another party (the Rail Authority) with development interests, I don’t remember Frazier back in February making a fuss when he watched the Oversight Board take a big step toward transferring the $328,000 property at Inyo and Fulton to him and Noyan for $1.

I’m guessing Frazier didn’t make a fuss last February and didn’t raise much of a stink on Nov. 17 because he knows how the game is played.

“Whether we get the property or we don’t get the property, I know what we did was right,” Frazier told the council. “We will be OK with whatever decision the council makes. We will respect that decision.”

Yet, on Nov. 17 council members on both sides of the issue talked at length about how sad (or angry) they were that Frazier wasn’t going to get Merchants Lot. In light of the backstory, the council’s chatter had the feel of “Look! A squirrel!”

I agree with the council – Frazier is a developer of high integrity who has built many fine projects in Fresno. He had every right to try to buy Merchants Lot. But Frazier’s character wasn’t the issue on Nov. 17. The issue was transparency in government. The people had a right to know what was really going on with their property and their money.

Instead, they got snowballed by City Hall and the Rail Authority.

Turns out that the Rail Authority at some point may turn to a private-sector developer to help develop the 2.8 acres that are now Merchants Lot. And it’s this possibility that may account for all the posturing from the dais about Frazier getting a raw deal from the auction.

“I think and I believe and I hope that when this is settled that Mr. Frazier is the developer for this property that will be one of the most important components for the high-speed rail station in Downtown,” said Council Member/Mayor-elect Lee Brand.

I’m betting all this is somehow connected to high-speed rail’s heavy maintenance facility. I’d give you the lowdown if I weren’t chasing squirrels.

George Hostetter
George Hostetter is The Sun’s Fresno Civic contributor – covering the City of Fresno, County of Fresno, and Fresno Council of Governments.

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