Sale of the PJCC Land
The agenda for our first meeting in September will include the issue of whether or not to approve the final agreement selling the property on which the PJCC is located. Some people have expressed concerns over the sale and so I want to address those concerns here in this article.
The land is currently subject to a ground lease originally entered into in 1998. There is about 45 or so years left on that lease. Presently, the annual cash portion of the rent is about $170,000. Nearly a year ago, a disagreement between the parties resulted in the City demanding arbitration of various rights and obligations under the lease. That arbitration has resulted in the parties incurring significant legal costs. Thus, a settlement and compromise was pursued.
The settlement includes a sale of the land by the City. The price is $20 million and the City is financing $19 million of that at 3.25% interest over 25 years. There will be an initial payment of $1 million and annual payments on the note will be more than $1.1 million per year. The concerns expressed by various people have included the price, the interest rate, the loss of the Foster City resident discount and the loss of the Cultural Arts Center. I will address each of those in turn.
The price: The site is just under 11 acres, with about 3 of those acres under the power lines and thus usable only for ground level parking. Thus, the 8 or so acres of buildable land is being sold at more than $2 million per acre, which is at least current market value, if not above.
The interest rate: 3.25% interest is a low interest rate but not terribly low given the current real estate market. However, due to legal restrictions on the amount of risk the City can take in its investments, and the current investment market, we are currently earning about 1% on our other investments. Thus, for the short term, we will be getting more than three times the return on this investment as we are on our other investments.
The issue then, for the interest rate, is what about the long term. Certainly interest rates will not stay as low as they are for the next 25 years. Agreed, but much of that will be ameliorated in the way we will be handling the money. Also on the agenda for the September meeting will be a new section of our Municipal Code which will require that all of the funds, including most, if not all of the interest, will be placed in a capital asset fund and will be secured for future long term major capital asset acquisitions or replacements and will require a super-majority (4 votes) to use it in any other way. Since these funds will be segregated and since interest payments are larger at the beginning of a loan than at the end, those interest payment will be invested and earn more interest, which will lessen, if not eliminate the long term effect of a 3.25% interest rate.
Foster City Resident Discount: As of December 31, 2012, the PJCC will no longer be obligated to offer discounts to some Foster City residents. However, the PJCC is not required to increase the membership costs to those who already get the discount and it is perfectly free to continue those discounts, should it choose to do so. While this potential loss is certainly regrettable, it is important to know that these discounts are only offered to some of the PJCC’s member that live in Foster City. In contrast, the proposed sale will actually benefit all Foster City residents by ending the cost of further arbitration and by increasing long-term revenue and stability in that the City will be able to monetize its interest in the land at least twenty years earlier than it otherwise could have with the ground lease in place.
The Cultural Arts Center: The sale does not result in the loss of the Cultural Arts Center. The Cultural Arts Center can still be built. More importantly, under the lease the City could not force the building of the Cultural Arts Center, rather it would simply get that portion of the land back. Thus, the proposed sale does not effect whether or not the cultural arts center will be built.
Overall, given the length of the lease, the amount of the rent and the pending arbitration issues, I believe that the terms of the sale are a material improvement for the City and all of its residents.
Those are my thoughts. You can always share your ideas with me by email at email@example.com or call me at (650) 286-3504.
August 22, 2012
Sale of the PJCC Land
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