Gateway Center: Kiss Your Assets Goodbye.

In October 1991 the Gateway Center at Brea Blvd. and Imperial was launched as one of Brea’s first RDA projects. On March 7, 2017 the City Council, acting as the Successor Agency, terminated 100% of the city’s interests in the center in exchange for a check in the amount of $7.8 million dollars.

But wait… there’s more. Brea had to pass this revenue on to the Orange County Auditor-Controller to pay off all taxing entities (other agencies having a right to a portion of the proceeds). The City netted only $1.2 million. I’ll explain later where it went.

Not such a good deal.

In simple terms, staff provided Council with their recommendations, backed by just a 5 page Memorandum by Keyser-Marston, extolling what a great deal this was.

Since 2012 we’ve received an average of $354K annually from rental income (subject to the same pay off to all taxing entities). This one time payout would generate around 3.5 years income.

Instead, why didn’t we opt to continue collecting annual rent? Our participation agreement ran another 30 years… until 2048. Rents would have more than doubled by then but Keyser-Marston left that out.

What staff and Keyser-Marston also failed to disclose to Council was that we had a 25% equity stake in the Gateway Center. It would be triggered by either a refinancing or a sale (full or partial) of the property.

In 2005 Watt-Craig Associates Limited Partnership, per the timeline provided by staff, “sold majority stake in ownership to AFL-CIO Building Investment Trust (AFL-CIO) but continues to retain a small portion of the partnership interest.”

Staff’s claim, when pressed on the matter, is that only a 100% sale would trigger a payout to the city. Watt-Craig retained a 1% stake in Gateway. Who was the rocket scientist that thought this was okay and that we should walk away from around $16.2 million?

Conservatively, the Gateway Center is worth about $80 million… you do the math. Termination of the city’s interest robbed us of $20 million if the property sold today.

Who knows how much our equity would be worth if we simply let it ride?

You can fool some of the people…

Did no one on Council see these red flags? No, because they assumed staff had provided the full scoop. The deception of Council was anchored in their belief that the property owner, Watt-Craig Associates LP, had opened the discussion of a termination agreement.

Not so, even though the staff report, the Keyser-Marston memorandum, the fancy always to be trusted PowerPoint presentation and the Successor Agency Resolution SA 2017-02 all stated otherwise, “The Owner is proposing the buyout of the Successor Agency’s interest…”

It was disclosed, early last week, that this process was initiated by our Director of Development, David Crabtree, presumably at the suggestion of City Manager Bill Gallardo. It was also disclosed that protracted negotiations followed which lead to staff’s recommendations.

From where I sit, this smacks of premeditation and reinforces the notion that this was all fabricated to generate the revenue needed to balance an otherwise upside-down budget (see below).

I’ve made a series of thorough CPRA requests for all communications and documents relating to the termination of our participation in the Gateway Center project. The City’s initial response last week overlooked numerous responsive documents and the City Clerk, Lillian Harris-Neal, has promised to provide them as quickly as she can.

gatewayFollow the money.

You can’t. As is the custom, the revenue was dumped into the General fund where it vanished into thin air. Well, sort of.

It had been determined that the FY2016-17 budget, thanks to declining sales tax revenue, was coming up short somewhere between $800K and $1M – an alarming dilemma for a city that had “always” balanced it’s budget.

Subsequently, unanticipated revenue miraculously offset the shortfall and… voila, the budget was balanced after all. I can’t help but wonder how many preceding “balanced” budgets benefitted from similar fiscal skullduggery.

A couple more scary thoughts.

Not one of Brea’s commissions or committees has a resident member with expertise in commercial real estate or the taxing authorities.

Staff has been careful to keep City Treasurer Rios, Planning Commissioners McGrade and Ullrich (both with deep experience in commercial real estate and the taxing authorities) as much in the dark as they have Council.

We own Embassy Suites and lease land. Staff is contemplating to sell off another “legacy “ asset!

Where does this leave us today?

In deep shite. We have a new budget about to be proposed in the face of continued revenue decline.

Cuts have been made, without clear validation as to how and where considering that the city’s “soft cost” approach to accounting fails to consider labor as a cost.

Many fees have been increased thanks to the city’s ability to calculate labor and overhead down to an hourly rate.

Hang on… am I the only one who sees the contradiction? The city needs to convert to a true cost accounting system and to stop trying to solve the reduced income situation by handing is off to taxpayers to pony up even more.

Time to put on the brakes!

A FY2018-19 operating budget would go into effect in about 47 days. I’ve seen no report from that new fancy special strategic budget oversight committee.

The City Treasurer, Rick Rios, who has leveraged California statutes governing the authority and scope of responsibilities of an elected City Treasurer to reconstitute the office’s role as fiscal watchdog, has yet to see a single page of a proposed budget.

It’s time to put a halt to City Staff’s Ready-Fire-Aim approach to managing city business.

I suggest that Council approves a 30 day emergency stay by employing the proposed operating budget for the month of June only.

This breathing room will allow for Council to give staff more finite instruction, for the Budget Oversight Committee to actually do some oversight and give the City Treasurer the time and opportunity to do the job we elected him to do.

rock the boat

12 thoughts on “Gateway Center: Kiss Your Assets Goodbye.

  1. Damn. Thank you.

    I’m following comments on Nextdoor and am shocked so few have commented. The magnitude of what this suggests and what it’s going to take to clean up the mess – assuming we can – probably has people dumbstruck. It took me a day and a couple of readings for it to sink in.

    • Mark… Nextdoor has always been 100 members lurking for every 1 member commenting. Like you, I think many may still be in a state of shock. It should wear off by November.

  2. Let’s look at this from another perspective.

    If the City was tasked with selling the asset at the best price possible, how many people were offered the asset? Was an offering created?

    It defies logic that an agency selling something that is a public asset would select whom to offer it to, exclusively, and then have a report written that excludes valuing a 25% windfall provision as well as not projecting the rent increases for 30 years!

    • Dwight… Big “if” as we’re still waiting for full disclosure but an angle worth talking about. Assuming the public record proves the City was tasked by the State, under what guidelines or limitations? Creating an offering couldn’t possible conflict and it makes as much sense as seeking multiple bids.

      I’m learning that there is little logic behind many staff decisions beyond “sounding like a good idea at the time.” Creating a sales pitch for Council that only includes information supportive of their recommendation has also become the status quo.

      At it’s heart this method of running the city seems riddled with unexpressed motives, chronic deception and, apparently, a complete disregard for either the law or common sense.

  3. The magnitude of this debacle is overwhelming, to say the least. I am grateful to Rick, Jason, Dwight and others who are more involved and well versed in what has actually taken place and may continue to take place if those in power are not held accountable.

    My thanks to all who are trying to bring this matter and other matters to the forefront in hopes of correcting the wrongs heaped on the residents of Brea.

    • Judy… we all appreciate your continued interest and support. When we see Brea voters digging into the details before forming opinions it gives us all hope.

      Do add Rick Rios to that list. He’s succeeded in getting the Treasurer’s authority and responsibility restored to a level unseen in decades. We now have a true advocate, with the skills to really follow the money, keeping an eye on things for us. We need to consistently support his efforts by reminding Council and staff the importantance of the balance of power.

  4. Rick, Were there any appendices or other back up information to the fairness opinion? Also are the original agreements and amendments available?

    Usually a fairness opinion is backed up by detailed information that provides a foundation or basis for the fairness opinion. How were the consultants providing the fairness opinion selected, and why is there no statement in the fairness opinion that there is no conflict of interests between the consultants and any other party to the agreement.

    Curious as to the consultant’s reasoning and basis for using such a long period of past rents to estimate future rents and the use of 9% discount rate which is outrageous.

    Why did the consultants not consider and add to the property’s value of additional income from potential future refinancing and future sales?

    I have seen many fairness opinions, but this is the most outrageous. From what I have seen, whoever requested the fairness opinion could have and should have sought the free advice of many Brea residents with expertise in the area.

    • Tom… There were no appendices and I am still waiting for the City Clerk to provide all of the genesis communications between the City, State and Owner to determine exactly how this whole fiasco started. The city is blaming the State but the staff report, Keyser Marsten memorandum and resulting resolution ALL point the finger at the owner (Watt-Craig) as initiating everything.

      As has been noted, much of the information Council should have had available to make their decision was never provided. Council was completely unaware of the 25% equity windfall or what an additional 30 years of rental income would be. And the 9% is ridiculous.

      Going forward the Council needs to form and fully empower the proposed Budget Oversight Committee and it should be heavy with residents as you suggest. Are you interested?

      • Rick, Maybe. As someone suggested on Nextdoor it may require a federal investigation to get the whole story. If what you found is true, a citizens committee will not get full and unfettered access, just like your requests for information.

        The past and recent discoveries of fiscal problems does not bode well what will be discovered regarding the Gateway Center, though it is wildly possible for a plausible explanation for what you have uncovered. But is this the tip of the iceberg?

        For too long the revenue stream from the Brea Mall has facilitated hiding fiscal problems, but now that stream has slowed and skeletons are coming out.

      • Tom… I have little doubt that we will at least get close to the truth about the Gateway Center matter. Everything points to staff withholding information from Council that would stop the termination of rights and foil their attempt to get the funds needed to cover up a budget deficit.

        As Don said, it’s water under the bridge. The decision cannot be reversed without complicated and expensive legal battles whose outcome is not guaranteed. Not so regarding the Paramedic Tax or enforcing Measure T to force a revision to the City Manager’s recently approved employment contract.

        Public pressure can motivate Council to demand full disclosure on the Cal Domestic matter they wrestled with last night. They wisely pulled it from Consent Calendar and, fearing a quick decision would turn their constituents against them, continued the item to the next meeting. The missing and confusing information pointed out from the audience will need to be resolved so Council can make a decision with all of the facts.

        That’s the magic decoder ring. Putting an end to the rampant deception that’s been the hallmark of the last forty years.

        And I must add, lay no blame at the feet of the Brea Mall. They have responded as they could to the shifting patterns of retail sales and are entering yet another phase designed to shore up their profitability. They win, Brea wins.

  5. Rick,

    I am an illiterate, when it involves the financial conditions/manipulations of our fair city, for which you bear keen witness. At the same time, I want to give voice, as one long time Brea resident, of gratitude for your dogged effort. Kudos to you.

    Sally on, you ardent crusader,

    • Doug… Wow, I’ve never received props with such a unique cache. Thank you.

      This story continues to unfold. I’ve just been informed that the Community Development Director claims critical public records I’ve formally requested (CPRA) do not exist.

      There is no precipitating correspondence from the California Department of Finance requiring the Successor Agency to terminate the Disposition and Development Agreement (DDA) for the Commercial Center Component (aka Gateway Center) as has been claimed.

      Likewise, there are no documents proving that the city made first contact with the property owner or that there were protracted negotiations between the city and the property owner (as has also been claimed) resulting in the appalling final Payoff Agreement, DDA Termination Agreement and the Deed of Trust Reconveyance.

      For this condition to exist there are only two logical possibilities.

      First, the multi-million dollar, complicated divestiture of a 27 year old legacy asset was conducted over the phone, leaving no paper trail whatsoever.

      Or second, out of some need to mask the true facts of the process, remember important information was withheld from Council/Successor Agency when they approved the termination as recommended by staff, critical documents have been destroyed in direct contradiction to the city’s Records Retention Plan.

      Doug, this is far from over. The next chapter of this story, already in development, will rock every boat in the harbor.

      Yes… I have every intent to sally on (to charge out of a besieged place against the enemy; a sortie).

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