Friday, May 9, 2008
New CHP HQ takes U-turn - Developers frustrated
Sacramento Business Journal - By Michael Shaw
Dennis McCoy | Sacramento Business Journal
CHP is reportedly in negotiations with the owners of the Continental Plaza.
Despite legislation tailored to bring a California Highway Patrol headquarters to West Sacramento, the new central command could be going to Sacramento instead, leaving some frustrated developers in its wake.
A new home for 900 employees consolidated from the agency's 1st Avenue headquarters and other scattered offices was supposed to be a done deal by December. Choices were narrowed last year to three sites in West Sacramento and one in Natomas.
But after several months of negotiations and a call for developers to resubmit proposals, the state and the original group of finalists couldn't reach a deal.
"They came out with champagne tastes, and they don't even have a beer budget," said developer Dan Ramos, whose Ramco Enterprises Inc. was one of the four original finalists. Others echoed Ramos' sentiments that the state's call for an environmentally friendly building with expensive features didn't square with the money it can spend.
Now, West Sacramento's loss could be a gain for the earthier Richards Boulevard area, where the state and a landowner are negotiating a deal, according to several real estate sources. The site is the decades-old Continental cannery on 7th Street north of Richards Boulevard, which had been leased to the state Department of Health Services until the department left for the new East End Complex in midtown several years ago. The 275,000-square-foot cannery was refurbished in 1990 and named Continental Plaza by Grove Investments of Costa Mesa. It has been vacant since the state left.
The Department of General Services, which handles the state's real estate needs, confirmed it is negotiating with a single landlord but declined to identify the party.
"We don't have a solid timetable right now," to complete the deal, department spokesman Eric Lamoureux said.
Messages left for representatives at Grove Investments were not returned.
A 'broken' system
Richards Boulevard is a largely industrial area that's looking to burnish its image. Steve Goodwin, a partner in the Township 9 mixed-use proposal for 3,000 homes located next door to the possible CHP site, said putting the headquarters there could give the area a boost.
"It helps everybody," he said, referring to those with a stake in the River District. "We're starting to see a lot more activity. ... This would put almost 1,000 jobs next door."
According to Ramos and other developers, the Department of General Services' initial request issued last year appeared to be tailored for an existing campus of buildings owned by developer Harsch Investment Properties Inc. of Portland, Ore. That campus was just south of the agency's training academy in West Sacramento.
Jordan Schnitzer, president of Harsch, said the company was able to offer a rate of $2.47 per square foot, which included $43 million in tenant improvements so the buildings there would meet the "green" features the state wants. But the offer was declined, and subsequent negotiations collapsed.
"We've done five deals with the state before," he said. "I think the state's expectations were unrealistic of what the market will bear. We had our target rent, and the state had their target rent. Our proposal was the most cost-effective."
Ramos said his team knew that the state had the Harsch site as its top choice but wanted to offer an alternative in the form of a newly built complex near Raley Field in West Sacramento's Triangle area.
Ramos said the rent for the proposed building came in at $3.65 per square foot for "usable area" -- how the state measures leasable space, discounting any space that isn't directly used for work, such as kitchens, bathrooms and hallways -- which compares to about $3.25 a square foot in rentable area (how the private sector measures office space). That rate was also apparently too much for the state's budget, he said.
But Ramos said the rate could have been more favorable if the state wasn't hamstrung by its own rules dictated by the Department of Finance when it comes to leasing property. His frustration came not from the state's negotiators, but from those rules. For example, the state's request of a 10-year lease is shorter than lenders want, he said. A much longer lease, say 20 years, allows for more favorable terms from the capital markets and a lower lease rate. The rate would also improve if the state was interested in owning the building following a lease.
"The system is broken," he said. "Look at how the private market operates in the real estate world. The state isn't playing to its strengths here."
Competition started last year
The other original finalists for the headquarters were Fulcrum Property Group, with a proposed building also in the Triangle, and the Natomas Gateway Tower, a new 12-story office building now under construction. Representatives from both entities declined to comment.
Officials at the city of West Sacramento said they were unaware of the state's plans.
The competition to house a new headquarters began last year, when the state put out a request to consolidate the CHP offices that are spread around town into one location capable of accommodating about 300,000 square feet.
That request called for "state-of-the-art, energy-efficient features and sustainable building measures." The building is supposed to meet the "silver" standard in Leadership in Energy and Environmental Design criteria from the U.S. Green Building Council, whether it was to be a new building or the conversion of an existing one.
If the state does choose the Richards Boulevard site, it is unclear if it will still demand such stringent environmental standards and what it would cost to meet those standards.
Gov. Arnold Schwarzenegger signed a bill in June that expanded the area in which a new headquarters could be located to an area within 20 miles of the Capitol.
If negotiations work out at the Richards Boulevard area, it will be a little more than a mile away.
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