HMB will owe a lot less than $18 million if AB1991 fails


Posted by on Mon, April 28, 2008

How much money will Half Moon Bay lose if AB1991 fails to pass? If you answered $18 million, you’re way off. Let’s see if we can estimate the city’s net cost of paying $18 million, taking possession of Beachwood, and developing the land within the law. This analysis is based on public information as well as private conversations with people familiar with local development.

How many many buildable lots are there?

The last time they looked at it, the Coastal Commission approved 19 houses on Beachwood. This month, Coastal Commission executive director Peter Douglas said "It may be possible that a higher number of homes could be approved there,"—suggesting that more homes could be built on site if some sort of mitigation were to take place. So, at least 19 homes could be built, and the Coastal Commission has suggested elsewhere that with mitigation it could be 30.

What is each lot worth?

In his decision, Judge Walker used a 2006 value of $443,000 per lot ($36.8 million divided by 83 lots).  That’s for a relatively large development in 2006 and the judge was clearly in mood to favor the plaintiff, so let’s call that the crazy top end of the range.

However, this would be a smaller development that is likely have to a view of open space and hills, and not part of some maxed-out development that is looked down upon by a reconfigured Pacific Ridge. That is likely to increase the value of the homes.

More realistically perhaps, residential lots in this part of Half Moon Bay can sell for about $375,000. You’d need to subtract about $60,000 for building streets and sewers. But, if the city packaged the deal nicely and the buyer knew they’d get some special consideration from the city and maybe even the Coastal Commission, which could easily be worth $50,000 to a risk-averse buyer.  With a 20% margin of error either way, the value of the lots is $292,000 to $438,000.

Hang on, that’s a lot of assumptions!

Yes it is. The city of Half Moon Bay probably has a better estimate. It makes no sense that the city would negotiate this settlement without some idea of the value of the land. They’re not talking, so we have to guess.  This is my guess.

So, what’s the bottom line?

The city should be able to gross at least 19 x $292,000, or about $5.5 million, and at most 30 x $438,000, or about $13 million. That means that the net cost to the city could be in the neighborhood of $5 to $12.5 million, and not $18 million.

That’s still a lot of money!

Yes, but we’ve now cut the city’s liability in half. The big question is: What does the city believe the value of the land to be and why aren’t they telling Sacramento?

I agree with you in that something should be done with Beachwood.  The big question is what and by whom.

Assuming that AB 1991 is defeated then HMB needs to come up with $18 million in cash.  Beachwood might be an appealing source of cash to pay down the debt but you first have to settle the debt before you can sell it off.  People kind of frown upon selling something they don’t own yet.

The City would maximize their revenue if they played local developer.  But that takes experience and money to develop the infra-structure.  And I’m sure all the environmental reports take time and money too.  As well as the permit nightmare that the new owner is going to face.

So while in theory,  it seems like a great idea. The reality is that it will take millions of dollars to develop and years more of time.  And whoever buys this is assuming the worst case scenario in terms of development to see if it pencils out.  If the new owner can squeeze out a few more lots,  that the gravy and his just compensation for taking on this risky project.

Yes, this would be a complex transaction and the timing would be difficult.  But the city must have given some thought to this. A big part of why they hired Orrick in the first place was their municipal finance expertise.

We have to believe the city has a contingency plan, but they won’t tell us or the legislature what it is. They’re treating AB1991 as a hostile negotiation, not a partnership.

I am curious whether there is any longer any basis for the City maintaining any level of confidentiality at all with respect to its deliberations, correspondence, etc., now that the Beachwood settlement is final, and there is no longer any litigation related to it.

The documents from both firms hired should now be made available, and the entire matter opened to scrutiny.  The City Council members have made the City’s decisions, and the public deserves to learn the facts and their thinking.  As a city, we are apparently employing lobbyists at both the state and federal capitols, and we no doubt have generated and have received all kinds of interesting and useful correspondence.  If nothing else, we now at least should have considerable expert advice on the matter of bankruptcy, which still may loom over us (though at $18 million, it probably is less than it was at twice that figure).

Hal M. Bogner
Half Moon Bay