City Beat

K Street project threatened as state withholds redevelopment money

Sacramento’s K Street is suddenly facing another challenge.

Work on the blighted 700 block of downtown’s main thoroughfare is in peril after state officials ruled the city cannot hand over city-owned properties or grant $3.6 million in redevelopment subsidies to the developers seeking to remake a row of empty storefronts into housing, boutiques, restaurants and a live music hall.

The Sacramento City Council gave its approval Tuesday night for the city attorney to file a lawsuit in Sacramento Superior Court challenging the decision, which city officials fear will block a project that just months ago seemed to finally be taking off.

“The project once again has stopped,” said City Manager John Shirey.

The battle stems from the state Department of Finance’s determination in June that the city and the development team behind the 700 block project had not met a list of deadlines to secure federal tax credits and other financing. Redevelopment funds slated for the project weren’t allocated before the city’s agreement with the developers expired, prompting the state to argue that the money should revert to local governments and schools, as required by a 2011 law that eliminated the ability of local governments to divert property tax dollars for redevelopment projects.

The future of nine properties the city had agreed to grant to the developers is also unclear.

State finance officials said that because the properties were purchased by the city with redevelopment money, the parcels can’t simply be gifted to a developer. Instead, the city would be required to sell the parcels through a deal requiring the approval of other entities on an oversight board, including Sacramento County, and local school and community college districts. That deal would then need the further approval of the state Department of Finance.

City officials contend they preserved the development’s funding plan by extending the project’s development agreement in December, allowing another year for the building plan to take shape and secure financing. State officials argue the city did not have the authority to grant that extension and that the agreement – and the city’s right to spend redevelopment dollars on the project – expired in June.

“The agreement collapsed under the weight of its own conditions,” said state finance spokesman H.D. Palmer.

City Attorney James Sanchez said the city did have a right to grant the extension, saying the original agreement signed with the developers in June 2011 included an extension clause.

“This has been a project that has experienced unavoidable delays,” Sanchez said, arguing that the 2011 dissolving of redevelopment agencies complicated the timeline. “We have a developer who has invested at least $1.5 million in the project already, and we’ve done everything the law says we should do.”

In its lawsuit, the city argued that the developer “will be unable to complete the project, the city and taxing entities will lose the benefit of a $48 million public/private partnership project, and the developer may seek damages from the Successor Agency (the city) under the (development agreement) in an amount in excess of $1.5 million.”

Bay Miry, whose D&S Development is working with CFY Development on the project, said in an email that, “Our team still remains 100 percent committed to the project and focused on its immediate completion. However, given the pending litigation between the city and state, we cannot comment with any further detail.”

Palmer, the state finance spokesman, said the state could not alter its enforcement of the 700 block of K Street deal simply because of the impact the project might have on the yearslong effort to revamp a blighted stretch of downtown.

“We review all of these cases by the same yardstick,” Palmer said.

Shirey, the former head of the California Redevelopment Association, was critical of that stance.

“The state is not looking for ways to help cities transition from the days of redevelopment to post-redevelopment,” he said. “They’re looking to penalize and grab money anywhere they can, and it doesn’t matter that the project is in the state capital in the shadow of the Capitol.”

This spring, city officials and the development team began describing work on the project as imminent. Following a key City Council vote to provide financing for the housing portion of the block, Shirey exclaimed, “This project is real now.”

In the months that followed, the developers began demolition of the properties and started asbestos cleanup, city officials said in the lawsuit. Commercial tenants were lining up, including a live music venue at the corner of Seventh and K and restaurants with both street-side and rooftop seating.

In addition to the entertainment and dining venues, the plan also calls for 137 units of housing, most situated within a new five-story building that would provide sweeping views of the downtown skyline and Capitol.

Financing for the plan was also coming together. The developers were granted $8.5 million in federal and state low-income housing tax credits in August, according to the city’s lawsuit. Later this month, $18.3 million in bonds to fund affordable housing at the site were expected to be approved by the state, the city said.