SUPERBLOCK Mismanagement Could Cost You and LB $26m

(The SUPERBLOCK as it stood in July)

UPDATE 10/20:  Read City Manager Theofan’s response to this post here

I talked a few days ago about the precarious financial situation the City is in – that our possible few million dollar surplus could actually not exist, or that it could easily disappear if unforeseen expenses popped up?  Well, doomsday for Long Beach, and you the tax payer,  may be approaching, and it all has to do with the SUPERBLOCK.

The SUPERBLOCK, once upon a time, was the Long Beach Hotel – the birthplace of all of Long Beach and the City by the Sea.  That burned down, and yada yada yada, the lot remained abandoned and unused after a number of other projects came, burned down, and left.  We talked about the WWII defenses that were built there here, and documented some of the other building that burned to a crisp.

Well, in the ’90s, the then near-autocratic City Council started getting serious with finally developing what had long been an unbuilt lot.  If you think LB politics are bad now – you just wouldn’t believe the way the administration back then was talked about.

The story of the SUPERBLOCK is comically complicated so I’ll borrow from Marc Ferris at the Real Deal

Through the 1990s, the empty Superblock symbolized the inability of a public and private partnership to turn a parcel of land fronting a pristine beach into a profitable property.

In the late ’90s, when the long-time Democratic regime was being challenged by new “Republicans,” there were all sorts of gripes.

But despite some obvious improvements in government-no-tax-increase budget, closing the incinerator plant, increased parking and the county’s first skateboard park-critics find much to harp on. This includes hefty increases in garbage and water fees, … support of a controversial expansion of a two-screen movie theater to seven screens with no added parking (I’ve got to laugh at this one as this clearly was a non-issue over the last 10 years), and failure to do anything with the city’s proposed waterfront “superblock” of hotels, restaurants and theaters.

And now, back to the Real Deal’s summary

In 2001, the New York Times reported that the city had selected the Parkoff Organization of Great Neck as the preferred developer. The company proposed a 218-room hotel, spa, restaurant, retail and conference center, but failed to raise the $50 million it needed in the year-long time allotted and forfeited its $150,000 deposit.

In order to facilitate development, the city initiated eminent domain on all 13 lots that comprised the property the next year.

In 2001, the city chose Shore Development, a subsidiary of Philips International Realty, to build on the parcel.

Per its agreement with the city, Shore will pay $26 million to the former owners. Negotiations, including payment for capital improvements and the existing right of way on Shore Road, are done, Eaton said.

That original eminent domain move condemned about half the property that made up the SUPERBLOCK, which was owned by Sinclair Haberman – who promptly sued the City.  His suit – as is standard in condemnation cases – goes “you didn’t give me enough money for my land that you took.”  City: “No, we gave you the right amount based on our appraisals.”  Him: “No, my appraisals are higher.”

In 2005 the City sealed the deal with Philip Pilevsky of Philips International.

This quote struck me as particularly ironic.  The newish City Manger at the time, Charles Theofan, said referring to the SUPERBLOCK development: “‘Not to sound any bravado here, but nothing can stop us now.”

Then in 2007, as development looked like a sure thing (and we hadn’t even thought about the folly of mortgage-backed securities, Fannie and Freddie weren’t household names, and TARP was something that you used when it rained) the City used eminent domain again.

According to Newsday: “The City of Long Beach used eminent domain to condemn six acres of vacant privately-owned land in 2007. The City paid $39 million for the land using the developer’s money. Within weeks of taking title, Long Beach transferred ownership to the developer. ”

Then, Shore Development filed for bankruptcy and effectively vanished, walking away from the whole project, and may have set off a chain of events that will get you in your wallet.

That $26 million that was discussed in 2001, is now the liability The City faces a $26 million liability in two civil suits against the City which is confirmed by a third suit filed in February against the developers, just recently disclosed by Long Beach’s corporate counsel.

UPDATE 10/20: City Manager Theofan corrected me here.  I mistakenly thought the 2001 $26 million figure was the same as the $26 million discussed in these suits.  The two numbers are not connected, and the fact that they are both $26 million is only coincidental.

Basically, the way I read the lawsuit as filed by the City, there are three main things the City is arguing.  First, the defendant (who actually includes a number of different entities, but basically all track back to  Philips International and owner Philip Pilevsk) and through its subsidiaries did not develop the SUPERBLOCK as promised.  Second, Philips – and through their subsidiaries – did not fork over some of the money they were supposed to to cover the condemnation settlements.  And finally, because Philips created a whole bunch of shell corporations, effectively moving any real legal liability farther and farther from anyone that actually has any assets, they’ve left the City and the tax payer (that’s you) completely exposed.

I think this quote from the 2005 Times article might really sum up the irony better than Alanis Morrissette ever could by another new member of the City Council:

”The Long Beach taxpayer would have been on the hook,” said Mona Goodman, a Republican City Council member elected two years ago on a platform of limiting development. ”Now we are finally going to be able to realize this project, but in a very scaled-down way that is beneficial to the public.”

Section 120 of the recently disclosed February 2011 suit confirms the risk the City faces:

“As a result of the failure of any of the defendants to defend, settle, or prosecute any of the claims in two outstanding valuation proceedings still pending against the Plaintiff [that’s Long Beach], the Plaintiff City is currently exposed to significant liability in the amount of $26 million dollars.

Now this lawsuit was filed in February, and confirms that there are at least two pending cases against the City that I can’t find disclosed anywhere else (whether by the City or in the local media).

Further, section 60 highlights the fact that there has been some sort of litigation going on for nearly 10 years with the Haberman family related to the condemnation costs.

And the Times comes through again with more prophetic words:

Sinclair Haberman, the owner of about half of the property since 1993, sued the city in 2003 in an unsuccessful attempt to block condemnation. Mr. Haberman had contended that condemnation was unwarranted because he was prepared to develop the property.

Jacob Haberman, Sinclair Haberman’s father and a lawyer in the case, said a separate case remained in the state courts. In it, his son is seeking damages from the city for taking his property for a 10-year period, during which, he contends, the city improperly thwarted his efforts to develop.

Jacob Haberman said the family supported the revised project as long as the developer picked up all costs, including those that could result from the pending case.

Again, in 2005, the City knew the possible liabilities they were facing.  In the Times they said:

“City officials said under an amended contract of sale the developer would pay the full value of the property set by the courts in a condemnation proceeding. They said that amount might be in excess of $20 million

What does that mean?  The City Manager Charles Theofan,  in 2005, had already realized that if the deal went bust, any additional costs incurred by the lawsuits that were already filed would be at the taxpayers’ expense.

And in yet another quote that I’m sure the current City Manger would love to  have told himself not to say, he confirmed to the Times that: the developer was ”not assuming liability for that case.” He said the city would be liable for any award if the Habermans won. 

And now let’s get to the nitty gritty, what does this mean?  The City is on the hook for $26 million if they can’t get it out of the developer that has since flown the coop.  What is $26 million?  Well in a budget of around $85 million, $26 million works out to be about a 1/3 of the total revenue the City makes in an entire year.

The City surplus was around $5 million in 2007, down to $3.7 million last year, and another million dollars was just hacked off it to cover revenue shortfalls.  One is lead to believe then based on that downward revenue trajectory, the surplus could be gone when audits come back this year.

If these lawsuits are not settled on the side of the City, that 25% tax hike that’s always being babbled about will look like the good old days.

This February lawsuit is looking a bit like a knee-jerk response to the series of lawsuits that are ongoing against the City in light of the realization that there will be no progress on the SUPERBLOCK and the civil suits are winding down.  The City is suing Philip Pilevsky and his shell-corp of Shore Development (which was created in standard fashion to insulate Philips international (the big fish) from any legal liability if things went sour) in an effort to raise funds to differ the mounting condemnation costs.  Shore Development, of course, went bust and has no funds.

I’m an unabashed proponent of development.  And I know a lot of people that read this blog agree with me – obviously within reason and based on transparency.  I want the SUPERBLOCK built on.  I want new shops and new restaurants, and another hotel to keep the Allegria honest.

When some members of the City Council involved in these deals were elected, they had a platform against “overdevelopment.”  Instead of protecting the City from “overdevelopment” (whatever that is), they seemingly entered a boneheaded deal, and got conned by real estate tricksters, all the while, the City and the taxpayers were left “on the hook.”

Worst case scenario?  The City has to pay, for years likely, $26 million to a guy they may or may not have screwed out of his property and cash.  More realistic?  This drags on for years more, with continued mounting legal costs for the City, eventually ending in out of court settlement that costs the City, while totally blocking any SUPERBLOCK development for years more.

Again, the issue boils down to a total lack of transparency – did anyone have any idea these sorts of suits were pending against the City, am I just that out of the loop?  Further, another issue could be politicians running under one platform (avoiding overdevelopment) and then making seemingly nonsensical development decisions when they are the ones in charge.  If I get any updates as to the status of this case, or any of the other cases that are confirmed in the lawsuit, I will be sure to post them.

Are you having trouble sleeping?  You can read the entire February lawsuit here.

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