May082013

Irvine’s Great Park boondoggle blows $200 million

What happens when you give politicians $200 million with no accountability? They blow it. So it was with the money the City of Irvine extracted from developers to create the Great Park. So far, the City has brought in about $250 million, yet only about 15% of the park is developed, and what’s out there doesn’t look like $250 million worth of facilities. Most of the money was simply wasted. Irvine taxpayers paid for a park and all they got to show for it is a balloon, over-hyped and over-priced conceptual plans, and a giant pile of runway rubble.

Dream Plan Tests Irvine, Calif., Again

By ROBBIE WHELAN — May 5, 2013, 8:25 p.m. ET

For over a decade, city officials in Irvine, Calif., have dreamed of building one of the most ambitious urban parks in the country. Twice the size of Manhattan’s Central Park, with a massive sports complex, lake and man-made canyon, the Orange County Great Park would reinvent a closed military base and anchor a new city-within-a-city.

Now, as the housing market convalesces, construction is set to begin this month on the first new homes in the Great Park Neighborhoods, a new community adjacent to the park that is set to include more than 10,000 homes.

There is only one problem: hardly any of the Great Park has been built.

Heritage Fields LLC, a partnership led by home builder Lennar Corp., bought the Marine Air Base at El Toro—about 4,680 acres located southeast of Irvine—from the Navy in 2005 and gave more than 1,400 acres of land and $200 million in cash to the city to start work on the park. The land is about 15 miles from the Pacific Coast, off Interstate 5.

The City of Irvine was given $200 million in cash. What we got for this money is of dubious value, and if some private developer would have done it, only a tiny fraction of that money would have been spent.

Lennar then began working on its plan to build thousands of homes and millions of square feet of retail space in nearby Great Park Neighborhoods. But the plan to build housing was put on ice after Lehman Brothers Holdings Corp., the project’s main lender, failed in 2008, and the housing market crashed.

In the meantime, the city spent the $200 million Lennar gave it, as well as about $50 million generated by leases on the land at the former base, on concerts, fairs, architectural design, a free hot-air balloon ride attraction and some construction. So far, only a fraction of the park is developed.

The architectural design fiasco was an enormous waste of money. The city spent tens of millions to get big-name designers from around the world to submit design concepts. Given the huge reservoir of design talent located in Orange County, this worldwide search was a colossal waste of money. The only thing it served to do was stroke the egos of the City Councilmen and line the pockets of the far-flung designers.

The previous leadership focused on drawing people in for temporary events at the park, not on lasting infrastructure and amenities, said Jeff Lalloway, a city councilman who also serves as the park’s chairman. “I want to actually build things at the park—amenities, so that people can come in and do stuff on a Sunday afternoon,” he said.

Let’s hope he does what he says he will do. It would be a tremendous improvement over the track record of his predecessor.

Larry Agran, an Irvine city councilman who headed up the park’s board of directors from 2004 to 2010, defended the park’s progress, saying about 15% of the park’s acreage is developed, including 100 acres leased to a private farming concern. He noted that about 1 million people visit the park each year. “Part of our vision was not to wait 15 or 20 years to build the elements of this park then invite people in, but to build and activate this park simultaneously,” Mr. Agran said. “The real metric that counts is how many people come to the park and enjoy its concerts and festivals.”

Pissing away money on special events does not justify how the money was spent. Another huge source of waste is the $15 to $20 million spent each year on administration and operations. Administration and operation of what?

In June, when its fiscal year ends, the park is expected to show about $20 million in funds remaining, said Christina Shea, a former Irvine mayor who was re-elected to the city council late last year.

“It just has become a really devastating project,” she said. “How did we bring in $273 million, only have about $20 million left, and still have so little to show for it?

A very good question. I hope she uncovers an answer.

The park’s slow progress has sparked a nasty fight in Irvine’s City Council, with Ms. Shea and others calling for a full accounting of how the money was spent. In November, a Republican majority took control of the city council after running on a platform that included building more at the Great Park.

The main reason the Republicans took over is because Democrat Sukhee Kang was crazy enough to run for the House of Representatives in what’s ordinarily a very safe Republican District. He lost. With one of the three main Democrats not running for City Council, the Republicans defeated his weak replacement.

In the latest twist, Emile Haddad, chief executive and controlling partner of FivePoint Communities Inc., the neighborhood project’s master developer, last week offered the city another $170 million in cash and future bond revenues to develop the park himself. The city council is reviewing his proposal.

Mr. Haddad said in an interview that with the funds he’s offering, he could develop 65% of the park, including removing its concrete runways, greening and landscaping a large portion of the park, and building a sports complex with dozens of athletic fields.

Cities are not meant to play developer. And these guys want to build something twice the size of Central Park,” he said. “I think they’re going to have to have the private sector’s help.”

The City spends $200 million and gets nowhere, and a private-sector developer offers to spend $170 million to get most of the work done. Hmmm ….

As part of Lennar’s agreement with the city, it committed to build hundreds of millions of dollars in infrastructure, including roads and sewers, that the park and the residential development would share.

The city last month approved a plan to use special taxing districts to issue bonds tied to property taxes on the homes. That revenue is expected to pay for the park’s maintenance.

So the City created a CFD district to charge everyone local high Mello Roos fees to pay for maintenance. Ordinarily, Mello Roos is a temporary fee used to pay bonds on infrastructure. The Mello Roos imposed on these new homeowners will never go away if they are paying for maintenance. Of course, most people don’t realize how they are being ripped off, so the City quietly passed the tax measure.

Lennar purchased the Great Park land using $775 million in debt from Lehman Brothers. The builder then transferred responsibility for the park project to Mr. Haddad’s company. Mr. Haddad, a Lebanese-born businessman who once served as Lennar’s CFO, is credited with helping build Lennar’s business in California. Lennar retained ownership of about 60% of Mr. Haddad’s company.

In the wake of Lehman’s closure and the housing bust, Mr. Haddad was able to restructure his debts in late 2010.

The Great Park land purchase was one of the worst land acquisition deals of the housing bubble. The LLC Lennar and Lehman funded flushed overpaid by several hundred million dollars.

Now, with the home market in recovery, Mr. Haddad is building. Last week he announced eight builders—including Lennar, K. Hovnanian Homes, William Lyon Homes and Pulte Homes —have purchased land in the Great Park Neighborhoods and plan to start work this month on the development’s first 726 homes.

“I’m confident that at the end of the day, this park will be built,” Mr. Haddad said in an interview. “But the real point is, the park is not going to have any impact on the residential portion’s success. Other builders sell homes all day long around us without the park being built.”

He has a point. The Great Park is not an amenity driving home sales. Right now, homebuilders are the only reliable supply available, and that’s what’s driving home sales.

In early 2012, the Great Park was in trouble. With the elimination of community redevelopment agencies, the OC Great Park may have lost its funding. Fortunately for proponents of the park, the housing market bottomed, and the builders became interested in getting to work again. Let’s hope the City Council doesn’t blow it this time.