Professional Analysis: Nine Reasons Why The Monster Mall Will Not Happen


From TOM ANDERSON
Ukiah

[Please VOTE NO ON MEASURE A because a yes vote puts the property up for grabs, under the initiative's unlimited use, to any buyer. That, in my opinion, is what DDR is hoping for and what its initiative is all about. The property is worth a lot more money as a slice of the old Wild West than as constrained by the general plan's industrial use restrictions. -TA]

Analysis: Nine Reasons Why Mendocino Crossings Could Not Happen Even If Local Residents Approved It.

1.  FUNDING IS MORE COSTLY NOW THAN IN THE RECENT PAST

Relative to return on an investment, funding for commercial development is far more costly now than two years ago. Funding exceeds residential income, and is just starting to exceed commercial income.

Example: In mid-April 2009, Frank Lembi, the largest owner of apartment buildings in San Francisco, with 300 apartments comprising 8,000 residential units, deeded back 50 apartments, totaling 1,500 units, to his institutional lender, UBS. The bank now owns the units and will take a major loss because interest payments are about twice current rental income.

While, residential rents have already declined, rents for commercial properties don’t start declining in a recession for a year or two after the downturn. That years-long commercial decline has just begun.

2. MALL OWNER’S BANKRUPTCY WEIGHS ON DECLINING VALUES

With commercial property values just starting their slide, debacles like the recent bankruptcy of General Growth Properties, the nation’s second largest shop­ping mall owner, will only reinforce the substantial decline of commercial real estate values. The bankruptcy especially relates to malls as an investment.

3. COMMERCIAL/INDUSTRIAL LAND VALUES HAVE FALLEN 60%

Commercial and industrial land values in California are now at about 60 percent of their value two years ago. Funding a major commercial devel­op­ment must be based on today’s depreciated values. Where land value no longer provides enough collateral for a construction loan on a project this large, the developer would have to provide additional cash.

4.  LENDERS NOW REQUIRE 50% MORE COLLATERAL FROM LAND

To qualify for a loan a little over a year ago, a commercial developer in California needed a land value worth at least 20 percent of the project’s value. On about January 9, 2009, the qualifying ratio for office buildings, retail stores, hotels, apartment buildings, and condominiums rose to 30 percent.

5.  UKIAH LAND VALUE TOO LOW FOR LOAN OR PROJECT

Based as it is on deeply depreciated comparable commercial properties in Mendocino County, the Masonite site’s appraised land value will not provide the needed 30 percent of development cost for a profitable undertaking. Merely approving the development by ballot initiative does not mean the project can or will ever be completed.

6.  PROJECT HAS HIGH SITE PREPARATION COSTS

The Masonite site’s rolling topography increases costs for level building pads where construction is likely. It means either removing soil or compacting land-filled areas every six inches, which first needs initial soils testing, engineering, and costly mechanized preparation.

7. UKIAH IS NOT A “STOP OVER” COMMERCIAL DESTINATION

Although there is heavy commercial traffic along Highway 101, where the Masonite site is located, Ukiah is a one-day pick-up and delivery run, not a stop-over site for deliveries and customers. Stop-over status adds about four percent to commercial real estate value, which can be significant. Without it, Ukiah lacks the population base or flow of transients to justify a large com­mer­cial project. Residents and tour­ists are its only market. That is why businesses like Office Depot could not survive here even in good times and why motels in the Redwood Business Park have low room rents.

8.  LENDERS DISQUALIFY COUNTIES UNDER 100,000 POPULATION

Under current loan requirements and at current interest rates, lenders will not finance major commercial construction in any California county with fewer than 100,000 residents, even if it is the largest project within 100 miles. This especially applies to Ukiah, 60 miles away from a large mall in Santa Rosa.

9.  POTENTIAL BACKERS WILL SEEK BETTER OPPORTUNITIES

Investors, a source of funding that could make up for the shortage of land collat­er­al, can now purchase existing commercial properties below the cost of building a new one. This will be so for at least the next three years. Backers who might have under­written this project will most likely move on to purchase exist­ing properties.

Taking everything into account, it is financially unreasonable to embark on a commercial project on the Masonite site. Its highest and best use under prevailing conditions is what current zoning allows: an industrial use.

The last thing Mendocino County needs is a proposed project that will never be completed. The developer’s proposal, in my analysis, fails as a qualified endeavor even for its own investors. I do not see it as a project in which a prudent outside investor would participate.

In conclusion:

THIS PROJECT WOULD BECOME A FINANCIAL LOSS FOR THE INVESTORS AND ANY INSTITUTIONAL LENDER INVOLVED.

KNOWING THIS, NEITHER THE DEVELOPER, INVESTORS, NOR LENDERS WOULD REALISTICALLY CHOOSE TO UNDERTAKE IT.

Anaylsis by Trent Jason, advisor for many years to a small group of real estate in­vestors for whom he lost “not a dime” and made “very substantial gains.”
~
[I sent this out originally about six months ago, and the commercial economic situation has deteriorated substantially since then. Commercial mortgages have just begun to unravel. Buyers have been walking away from mortgages on multi-million office buildings and hotels in L.A. and San Francisco, and elsewhere in the country. Major commercial banks have been failing, and about 400 more commercial banks will most probably fail in the next year. Further, there is one more class of "creative" residential mortgages that will go into default in the coming year. (I was born in 1936; seems like this is where I came in.) Local commercial properties have probably declined 50 percent from their 2007 values. Lenders still require 30 percent collateral as far as I have noticed, but it takes much more property to make up the 30 percent. If anything, the reasons why there will not be development on the Masonite site are greater now than six months ago, and that won't change for the next three to five years if experts' predictions are accurate. -TA]
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2 Comments

These arguments are right on. But … If measure A passes, the Masonite property will increase in sale value. This, I conclude, is what DDR is about. They have no intention to build. On the other hand, might Wal-Mart become a customer for the property?

I agree with you, Don. DDR will sell the property once they get developmental rights. In the old days, developer-types viewed the hinterlands as long-hanging fruit, an easy kill. Them days are long gone.

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