Business & Real Estate

Deal in works to salvage Sacramento’s stalled 700 K Street project

Sacramento’s plans to revitalize the 700 block of K Street, stalled for a year by a dispute between the city and state, may soon have new life.

In a deal brokered by state Senate President Pro Tem Darrell Steinberg, the state has tentatively agreed to allow the city to take control of the property, and the city in turn will drop a lawsuit against the state, said city and state representatives.

If a deal is finalized, the city and a group of local developers say they will renew plans for a $48 million renovation of the dilapidated storefronts on the south side of a core downtown block. The plan includes 137 affordable and market-rate apartments above and behind a row of new stores, restaurants and a music club.

State officials essentially froze the project last year, asserting that the city and its developers did not have their final financing in place before the deadline for closing down redevelopment projects in California. The state revoked its redevelopment law in 2011 and dissolved local redevelopment agencies.

That law eliminated the ability of local governments to divert property tax dollars for redevelopment projects. Most of that money now goes to schools. City officials, in a Sacramento Superior Court lawsuit filed last year, contended they had a deal and financing in place for the K Street project, and so had a right to go ahead.

According to potential settlement terms, the city will forgo $2.6 million of the $3.6 million in redevelopment funds it originally had expected to use for the project. The state will forward the remaining $1 million in redevelopment funds to the city.

Steinberg said he stepped in to help negotiate a resolution, fearing the project otherwise would be stalled in court for an extended period.

“This is something to celebrate,” he said. “It is a major catalyst for K street and the downtown. I’m pleased to be in a position where I can help my city.”

Sacramento City Manager John Shirey, the former head of the California Redevelopment Association, said the court on Friday gave the city and state 30 days to finalize a settlement. The City Council will have to agree to the deal. Shirey said the city also would have to sit down with the project development team to review the financial arrangements.

“We would hope to have the project underway by end of the year,” he said. “This is great news for us. The timing couldn’t be better. We’ll have a new development on K Street at about the same time as a new arena.”

The project site on the 700 block of K Street is a quarter-block from the new Kings arena soon to break ground on the 500 and 600 blocks at Downtown Plaza. Preliminary work has begun at the arena site.

State Department of Finance spokesman H.D. Palmer said his agency representatives cooperated with the city in presenting the outline of a deal to the court on Friday, characterizing it as a “framework for a settlement.”

The two sides do not appear to be in accord on one point. In an email to The Bee, Palmer said the parties agree that the city’s K Street project is not an “enforceable obligation,” or, put another way, it did not have funding finalized before the redevelopment cutoff date. However, Leslie Fritzsche, the city of Sacramento economic development manager, said Friday that the city still asserts that the project development agreement and financing plan did meet legal deadlines. She said the disagreement with the state on that point is not expected to derail a final settlement.

The state is involved in numerous similar lawsuits with cities involving the question of whether redevelopment projects were far enough along the pipeline to be enforceable obligations. Palmer said state attorneys believe the potential agreement with Sacramento is unique and is not legally precedent-setting for other cases.

Bay Miry, a principal in the development group chosen by the city to build on the block, said he is pleased the city and state appear to have an agreement, and is eager to relaunch the project. Miry’s group, called the 700 Block LLC, is a partnership of two companies, CFY Development and D&S Development. The group won a city bid in 2010 to develop the property. It initially agreed to buy the site from the city in exchange for a $3.6 million city development loan. Miry agreed with Shirey that the city and developers will need to review the project’s financial terms before moving forward.

“We still have some work to do with the city, but we are still 100 percent committed to get this done,” he said. “It is an exciting time, to say the least, in Sacramento.”

City Councilman Steve Hansen, who represents downtown, called the settlement “huge.”

“We spent so much time and energy over the years assembling this property for development,” he said. “The 700 block is one of the final (undeveloped) blocks between the arena and 10th Street,” where prior redevelopment efforts have turned the west end of K Street into a lively entertainment area.