It’s one of the hottest real estate opportunities in Sacramento, a vacant city block just a few hundred feet from the future home of the new Kings arena.
But the property’s owner, CalPERS, is not rushing to build anything at Third Street and Capitol Mall. The pension fund lost billions on real estate during the crash, including $60 million at Third and Capitol on a failed plan for two 53-story condominium and hotel towers. Since then, CalPERS has become more conservative about developing property from the ground up and now says it will take its time before proceeding at the downtown site.
“We plan to be very smart before jumping back into construction,” said Ted Eliopoulos, the newly installed chief investment officer at the California Public Employees’ Retirement System.
That’s not to say the nation’s largest public pension fund is ignoring the site’s potential. With the Kings’ arena set for an October 2016 opening and the downtown market in a state of revival, Eliopoulos said CalPERS and its development partner, CIM Group of Los Angeles, are committed to eventually doing something big at Third and Capitol.
“It deserves a project of scale, an iconic project,” said Eliopoulos, the man who pulled the plug on the original condo and hotel towers in 2007 after construction had begun.
In the most extensive comments the pension fund has made about the site in years, Eliopoulos said CalPERS and CIM are trying to determine “what mix of office, apartment, retail would be most appropriate for the site, from an economic standpoint, from a community standpoint.”
City officials are keen to have a project materialize at Third and Capitol. As development plans take shape at other key locations in the central city, they see the CalPERS-owned site as one of the next great frontiers in downtown real estate. The location at the west end of the mall, where it serves as a gateway to downtown from the Tower Bridge, makes the property particularly important.
“It’s arguably one of the grandest boulevards in Northern California, or certainly the Central Valley,” said John Dangberg, assistant city manager.
For the past seven years, though, Third and Capitol has been a humbling reminder, for both CalPERS and the city, of the collapse of the real estate market.
With CalPERS as his major financial backer, Sacramento developer John Saca was going to build twin 53-story condo and hotel towers on the site that once housed the old Sacramento Union newspaper. Along with the Aura condo project proposed a few blocks east, the Saca Towers were going to launch a downtown housing boom.
Neither project materialized, but the Saca project was the more spectacular failure. The fenced-off site, now a ghost town of weeds, trees and concrete pilings, has become known in some quarters as “the hole in the ground.”
Billed as the tallest residential project on the West Coast, the towers got off to a surprisingly strong start. The condos were priced at a minimum of $360,000, and skeptics were stunned into silence when 400 customers made down payments, staking claim to about half the total units. The luxury InterContinental chain signed on to operate a hotel in the bottom third of one of the towers, and the city was prepared to kick in an $11 million subsidy toward the hotel. Saca’s crews knocked down the former newspaper building, and the noise of piles being driven into the ground to support the immense structures rattled downtown.
Eventually, though, the project ran into big problems – namely, $70 million worth of cost overruns caused by troubles with the concrete pilings. After spending $25 million, CalPERS cut off funding in January 2007. The decision was made by Eliopoulos, a private developer who had just joined CalPERS as senior investment officer for real estate.
“That was my first week on the job,” Eliopoulos said. “That was the first decision that I made, to stop the project.”
Months of public wrangling ensued between the two partners, with Saca complaining that he’d been undermined by CalPERS. Eventually, the pension fund got control of the site, but at a cost. On top of the original $25 million, it spent an additional $35 million to satisfy contractors’ liens, repay a mortgage and perform some additional pre-construction work. (The customers’ deposits, parked in an escrow account, were also returned.) CIM Group, which has built several downtown Sacramento buildings and partnered with CalPERS on the Plaza Lofts project on J Street years ago, was brought in to manage the forlorn site and advise the pension fund on possible uses.
The lack of visible progress since 2007 has made some elected officials anxious.
“We have a window of opportunity to do things while the market is good,” said City Councilman Steve Hansen, who represents the downtown area. “It really is the perfect development site; all CalPERS and CIM have to do is make a decision.”
It’s not that simple, at least as far as CalPERS is concerned.
The market crash made the pension fund considerably more cautious about real estate. It now focuses mainly on relatively safe investments in office buildings and other properties that have already been completed and are producing income. Of its nearly $30 billion in real estate investments, only $2.5 billion is set aside for developing projects from scratch.
That means no rush to judgment at Third and Capitol.
“CalPERS has been patient about ensuring that the project reaches its potential and is more focused on the ultimate outcome rather than a quick solution,” said CIM in a prepared statement.
On the other hand, CalPERS and CIM are well aware that downtown is heating up – and that city officials want to see something built at the boarded-up site, which is one of the first things people see when they come off the Tower Bridge. The pension fund values the property at $17 million, up from $14 million a year ago.
“Because it’s in our hometown and so close to our headquarters here, it has a higher visibility and a higher priority for us,” Eliopoulos said, sitting in his office four blocks south of the empty corner. “It’s a terrific location, and we’re determined to do something to develop the property in a way that Sacramento will be proud.”
Some ideas have been floated for the site. In 2010, a new county courthouse was proposed, although that has since been rerouted to the downtown railyard. Hansen said the site might work as a new headquarters for the state Board of Equalization, whose current offices may need millions of dollars in repairs for toxic mold and other defects.
Others at City Hall are hoping for some version of Saca’s original vision, a project devoted mainly to luxury housing on a corridor that is dominated by office buildings and could use a jolt of off-hours energy.
“It would be a great address for high-end residential,” said Dangberg, the assistant city manager. “Something that would help activate Capitol Mall.”
Bruce Slaton, an area real estate broker who specializes in the condominium market, said the parcel is ripe for a hybrid hotel and condo project – a “condo-tel,” he called it. That was Saca’s original concept, and it makes more sense than a pure condo tower because it’s less risky, he said. Instead of sitting empty, unsold condo units can generate income as hotel rooms.
Sacramento already has one “condo-tel”: the top three floors of the Marriott Residence Inn at Capitol Park have 30 condo units. Kings President Chris Granger said the team plans to build as many as 75 condo units on top of the 250-room hotel they plan next to the arena.
“In general, condominiums in midtown and downtown are selling really well right now,” said Slaton, who runs a website called www.sacramentocondos.com.
Steve Ayers is one of those interested in buying a condo if a residential project emerges at Third and Capitol. He runs Armour Steel Co. of Sacramento, which worked on the original Saca project, and he was among the hundreds who paid deposits on a condo unit all those years ago. He said CalPERS’ decision to repay Armour and other contractors for unpaid bills restored his faith in the project.
“I am very much interested in acquiring (a unit) and being part of that tower, and so are many of my friends,” Ayers said. “When they bring it back, I look forward to being first in line.”
Call The Bee’s Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.