I was asked to share the following letter to iStar:
As a lifetime Long Beach resident, I want to let iStar know that you’re marketing the Wayfarer project to the City of Long Beach, and it’s residents, in a totally misguided manner. I have a background in structured commercial mortgage credit and currently work at redacted, so I’m pretty knowledgeable on commercial real estate and finance in general.
Long Beach is an extremely proud, tough, middle/working class neighborhood, where everyone knows everyone (sounds cliché, but quite true in this case) and most families have ties to the City that date back generations. People here love to work hard and play harder, always have and always will. That said, life has changed in the community over the last 5-6 years. Aside from the general economic malaise felt globally, the town was hit by back-to-back hurricanes in 2011 and 2012, the latter of which (Sandy) leveled people’s homes left and right. The City has since clawed back quite nicely, but many households were unable to cope with the financial burden of razing and rebuilding their homes and opted to leave for cheaper municipalities. This left a void that has been filled with developers and newcomers, building brand new three story houses and subsequently raising surrounding home values. While that is always pitched as a good thing, we both know this raises property taxes, which are wealth and not income taxes (i.e., taxes on the asset increase while incomes remain stagnant). This has left a City, which is so profoundly proud of its working class, beach-themed, fun-loving heritage, desperately trying to defend that very heritage (and citizens themselves) from being pushed out of our City in favor of over-commercialization and dilution.
iStar, perhaps wittingly or unwittingly, has made itself the posterchild of everything the citizens of Long Beach are trying to fight. The PILOT in and of itself isn’t the true problem here. The problem is that the citizens of Long Beach don’t feel (with good reason) that the deal is advantageous for them. iStar needs to offer the citizens something directly, something which has yet to happen. That land has been undeveloped for decades and everyone wants to see something go up there. That being said, oceanfront property is obviously the City’s largest and most valuable tangible asset. The citizens are more than open to making mutually beneficial deal, but you’ll be hard-pressed to pull one over on this community. You’ll need to think outside of the box and engage the locals (and neighborhood civic associations) directly if you want this deal to go through. Some food for thought:
- The City has included a new 4.34% tax in its 2016-2017 budget to pay for a decade old settlement regarding the same exact property you plan to develop on. The total paid out thus far to the plaintiff in the case was $18.1m, financed with 86% debt and 14% cash. It could reach as high as $20.5m when all is said and done. It would be an extreme gesture of good faith on iStar’s part to purchase and retire the issue, thus eliminating that tax increase for the citizens. If you think about it, they perceive that as a tax on the property they must pay, while you develop the property tax free for twenty years (almost like being taxed twice). Using a conservative estimate, that would add about 6.3% to the development costs of the project. The financing for this project will ultimately be structured into a AA tranche of some JPMCC CMBS deal anyway, so why not just do it.
- A Long Beach Infrastructure Trust couldn’t hurt, either. The hurricanes, coupled with freezing winters and hot summers, have wreaked havoc on the City’s infrastructure. If iStar were to donate funds for the trust in exchange for at least an income tax moratorium on the citizens, I have a hunch everyone would be much more receptive to your project. It would take some work with the City Council to determine the figures, but even coming to the table shows good faith on all parts to strike a deal.
- As mentioned above, many families have struggled to claw their way back after Sandy. If iStar were to structure a grant program for individuals to actually repair their homes, ReFi mortgages, etc., the community at large would take note. One thing Long Beachers preach and practice is taking care of their own. If you want to be part of that community, you’ll need to adopt that lifestyle view.
Thank you for your time and consideration,