Sacramento already overpaid for $18.5M building on K Street. Here’s why that cost might tick up
Sacramento taxpayers could ultimately be on the hook for $300,000 annually to pay for the management of the three-story K Street building that the city overpaid for in 2023.
The Sacramento City Council has included this as part of its consent calendar, a group of bundled items typically approved unanimously without debate, for Tuesday’s session beginning at 5 p.m. It will also will also address the budget and the city’s $66 million deficit.
The consent item includes the details of the agreement related to 827 K St., also known as the Hale building, which was the subject of a Sacramento Bee investigation in March that found the city overpaid for it. The $18.5 million purchase last year of the nearly 150-year-old building was a key element in settling a 2016 lawsuit over a proposed 16-pump gas station. Developer Paul Petrovich wanted to place the gas station in his Crocker Village development in Curtis Park, but the council had denied him.
City Councilwoman Katie Valenzuela, who represents downtown, said that she was not asking that the building management agreement be pulled off the consent calendar but said she is “troubled” because the item is presented “opaquely, kind of like this whole thing has been.”
She said she is asking the city manager or his staff to explain the city’s strategy. In response, Swanson said, “The City Manager is responsive to the City Council and the direction they provide.” Swanson added, “If this is a topic that the City Council would like to engage in more imminently, it can direct the City Manager to develop and provide a report on the process for Council to discuss.”
The staff report accompanying the agreement states that the city has paid $58,362 to the Housing Authority of the City of Sacramento to manage the building since it took possession in December. The city estimates an annual cost to the city of $57,000, above and beyond the revenue the building generates. Total annual building expenses are estimated to be $401,000.
The management agreement is one of 22 on the consent calendar and is labeled “Administrative Services Agreement with Housing Authority of the City of Sacramento for Property Management Service.”
“We have lots of agreements with the housing authority,” Valenzuela said. “But then I noticed the address, and I realized, ‘Oh, it’s that building.’”
Multiple real estate experts said “that building” was overvalued by as much as $9 million.
One broker with knowledge of downtown, who asked not to be named because they do business with the city, said the price was out of line.
“The price the city paid was a joke, relative to value.” the broker said. “The city clearly felt they were in hot soup, and had to compensate Petrovich, and was looking for ways to bury millions of dollars. They easily paid 50% over market.”
City spokesperson Tim Swanson said, “the consent item on the June 11 agenda involves the day-to-day management of 827 K St., not an overall plan for the building. The City continues to explore its options for best uses of the property to support City goals and objectives.”
The initial agreement for building management services is until Jan. 31, 2025. The agreement also states that the agreement can be extended by “mutual agreement of the parties.”
The city says in its request to approve the management contract that it is projected that the Hale building is running $57,000 in the red. The cost to taxpayers could skyrocket by at least $300,000 per year, without further council approval. That could happen if the one remaining major tenant in the building vacates, which it has the option to do in June of next year, or if building upgrades are required and the city approves them.
At the time the city manager’s office asked the council to approve the settlement with Petrovich in July 2023, a staff report claimed rent revenue from the tenants of the building was $1.74 million. Commercial real estate values are largely derived from expected revenue.
But by the time the city took over the property, $1.4 million in revenue had evaporated. Petrovich was one of the tenants and was paying himself $664,232 through two different corporations, a common and legal practice for commercial real estate owners. Another tenant, Skyslope, negotiated a rent cut by nearly half, further reducing revenue.
Things are tough enough downtown that Anthem Properties, which manages a new luxury apartment building downtown, is giving away up to 10 ground-floor retail spaces for free for a year. The company’s apartments at 1010 11th St., about two blocks from the Hale, are 70% occupied — but leasing the ground-floor retail space was going nowhere, “so we got creative,” company representative Elisha McCallum told The Bee.
McCallum said Anthem is teaming up with a Downtown Partnership of Sacramento program called Calling All Dreamers, which offers entrepreneurs start-up funding, and is also in talks with other entrepreneurs.
So will the remaining tenants at the Hale stay? The city says the current revenue for the building is $344,000 with expected expenses to maintain and manage the building of $401,000.
But if Skyslope takes advantage of a clause that allows them to exit the lease without penalty on June 30, 2025, the city would lose over $300,000 in revenue, causing the cost to taxpayers to soar.
