July 23, 2013

Sacramento's downtown railyard nears sale to local developer

Sacramento's dormant downtown railyard is on the verge of changing hands again – this time to a local developer who said he intends to finally realize the city's longtime vision of turning the former industrial hub into a major extension of downtown.

Sacramento's dormant downtown railyard is on the verge of changing hands again – this time to a local developer who said he intends to finally realize the city's longtime vision of turning the former industrial hub into a major extension of downtown.

The investment company that owns the yard revealed Monday it is in final talks to sell the property to a group led by Larry Kelley, who built the Stanford Ranch community in Rocklin in the 1990s and turned the former McClellan Air Force Base into a successful business park in the 2000s.

A spokesman for Inland American Real Estate Trust, the Illinois-based investment company that took control of the railyard three years ago via foreclosure, told The Bee on Monday that his company had conducted a series of quiet talks with more than a dozen potential "master developers" before choosing Kelley's group, Downtown Railyard Venture, LLC.

"We have been clear from Day One we are not developers," Inland spokesman Jared Ficker said.

Inland took over control of most of the 240-acre railyard when former owner Thomas Enterprises defaulted on a loan from Inland. Inland officials have worked with the city since then to build infrastructure in the railyard, including street extensions that will open the site for development. This week, workers were paving ramps to the two new bridges that will someday carry Fifth and Sixth streets into the railyard.

"We have hit a stage where it is appropriate for a master developer to come in and figure out their vision," Ficker said.

Ficker cited Kelley's experience building housing in Rocklin and industrial redevelopment at McClellan.

He declined to say which other companies were in the running, but said they included national firms, some California-based companies and some from the Sacramento area.

Ficker and Kelley said their companies have not come to terms on details of a sale, or a price, but said they both hope to see a final deal signed within six months.

"My goal is to be owner of the whole site," Kelley said. "There is a lot of work that has to be done. It is everybody's good faith and intention to reach the finish line."

Kelley said he and four partners made their pitch to Inland two months ago, attracted by the site's potential, its central position in the region, and the possibility that it can be developed in cooperation with a planned sports and entertainment arena a few blocks away at Downtown Plaza.

"It is an important project for the community," Kelley said. "It is a critical part of downtown to be developed."

Kelley is one of a handful of local investors who recently pitched in to help buy the Sacramento Kings and keep them in Sacramento.

He said he would expect to build housing, offices, retail and entertainment venues at the railyard but said he will let the market, as well as city officals and residents, help his group decide over time what gets built.

"We are just getting into it," he said. "It is going to be a dynamic process."

Several community leaders hailed the potential sale as a major step forward in the city's difficult, yearslong struggle to turn the shuttered railyard into an addition to downtown. In 2007, the city adopted an ambitious plan for the railyard that envisioned more than 10,000 housing units, avenues lined with stores and upstairs apartments, office towers, hotels, a public market and a cultural and entertainment district centered on the historic railroad shops.

"Larry and his team have the vision and expertise to transform the railyards into something Sacramento deserves," Mayor Kevin Johnson said in a press statement Monday. "The timing of this agreement could not be better, as it allows us to completely reshape downtown Sacramento with both the arena project and now the railyards."

The city will remain owner of roughly 30 acres at the south end of the yard, including the I Street train depot area, which eventually will be expanded into a modern transit center.

Rep. Doris Matsui, D-Sacramento, issued a statement Monday saying "this agreement will move us toward a Sacramento railyards that will be true to Sacramento's unique history, blending (the planned transit station) museums, and the riverfront with new businesses and residents."

The 68-year-old Kelley has built a distinctive track record since his arrival in Sacramento from Texas nearly 25 years ago. Kelley developed the 3,500-acre Stanford Ranch subdivision in Rocklin in the 1990s, part of which he still owns.

He made a bigger mark in the 2000s, when he headed a group that bought and redeveloped the 3,000-acre McClellan Air Force base into a business park after the Air Force closed up its operations there.

Kelley would be the third private developer to take a shot at the railyard in the last decade. Millennia Associates of Southern California signed a deal in 2002 with then railyard owner Union Pacific, and said it hoped to be building by 2005. Millennia's successor, Thomas Enterprises of Atlanta, invested millions of dollars in the site but was forced out after suffering huge losses during the recent recession.

Should it take control of the site, the Kelley group likely will be in a much stronger position than those earlier developers, benefiting from millions of dollars worth of contamination cleanup and infrastructure work done in recent years.

But the railyard, touted as the biggest current downtown redevelopment opportunity in the country, is not completely clean, and there may be more ground contamination issues ahead.

Earlier this month, state environmental officials approved an estimated $20 million toxic cleanup plan in the locomotive shops area proposed by former site owner Union Pacific. That cleanup plan is silent, however, on who must pay for any unexpected contamination found on property in the future.

Inland and Sacramento city officials contend that UP must pay for any future toxic cleanup. But UP officials disagree with that contention. UP could not be reached for comment Monday evening.

Inland spokesman Ficker warned that potential developers and builders may shy away from investing in the railyard, fearing they might have to pick up the tab if more toxic substances are found on the parcels they plan to develop.

Kelley said on Monday that he will seek to talk with both the state Department of Toxic Substances Control and with Union Pacific prior to signing a final sales agreement with Inland.

"That is one of those things we have to get into in detail," Kelley said.

Call The Bee's Tony Bizjak, (916) 321-1059. Follow him on Twitter @tonybizjak.

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