Sunday, December 26, 2004

Mountain View nixes giant housing project

By Sharon Simonson, MSNBC
SILICON VALLEY/SAN JOSE BUSINESS JOURNAL
Updated: 7:00 p.m. ET Dec. 26, 2004

Greenbriar Homes Communities Inc., a private Fremont-based home builder, has withdrawn its request to convert more than 1 percent of Mountain View's land mass from sparsely occupied industrial space to housing.

The company's decision, announced in a recent letter to the city, was precipitated by a meeting during which city executives told Greenbriar that the community development department and other city staff were increasingly persuaded that the conversion was not a priority, did not make sense for the city's long-term interests and would not receive staff backing.

The deal's collapse means the city of Mountain View -- with 100,000 workers and only 73,000 residents -- will not gain more than 1,300 proposed new homes.

It also means that Equity Office Properties Trust of Chicago, a major Silicon Valley property owner with about 250,000 square feet of industrial buildings in Mountain View, will not sell the buildings or the nearly 25 acres beneath them to Greenbriar.

Greenbriar -- led by its well-known founder, Gilbert M. Meyer -- had executed options and formal agreements to buy the eight EOP properties and another nearly 25 acres nearby in anticipation that the city would approve its application, says Chris Twardus, a Colliers International land broker. It was looking to acquire another 26 acres in the same area. Mr. Twardus did not disclose proposed purchase prices.

So confident had Greenbriar been of its Mountain View plans that it had contemplated buying the land outright, a nearly unheard-of move for housing developers, which prefer to option development property until they have city approvals in hand.

The withdrawal and the staff reaction to the Greenbriar proposal highlight the flood of similar applications that Mountain View has received in recent months. Though the Greenbriar request was exceptionally large, Community Development Director Elaine Costello estimates that as many as four requests a week to re-dedicate industrial land to housing arrive on Mountain View's doorstep . Staff members are so deluged that they are now seeking council direction on how to prioritize those requests.

Without such direction, "We are going to be working on ones that don't have much promise while others that may have more promise wait," Ms. Costello says.

The economic forces underlying the proposed changes are the housing market's continued strength, driven by still-low mortgage interest rates, and the commercial real estate market's prolonged and deep weakness. Tepid commercial demand has left 45 million square feet of offices and research and development buildings vacant valleywide. That's more than 20 percent of the region's entire office and R&D stock.

The value of industrial land now sits at about $20 a square foot, or less than $1 million an acre. Meanwhile, Silicon Valley land zoned for residential use is selling for $65 a square foot, or $2.8 million an acre, rising in the last six months to $90 a square foot in a few cases, or nearly $4 million an acre, Mr. Twardus says.

Despite the homebuyer demand driving those dynamics, and the Bay Area's continuing shortage of moderately priced housing, cities have been reluctant to relinquish their industrial land, fearing it will undermine their long-term tax bases.

That balancing act is further complicated in Mountain View because conversion applications fall disproportionately on the city's planning staff for processing. That staff has been reduced 25 percent in the last four years as the city's annual operating fund revenue declined from $83 million in fiscal 2000 to an estimated $72.5 million this year.

In response, the city is requiring applicants for conversions to pay for all the planning work required. Pennsylvania home developer Toll Brothers Inc., for instance, is seeking permission to build 631 new homes on 25 acres previously used by Hewlett-Packard Co. The cost of processing that application is estimated at $400,000 and will probably rise.

Even with the consultants the money is used to hire, city staff still must oversee the process.

Mountain View affordable housing advocate Roy Hayter says the Toll Brothers petition, which has elicited enormous neighborhood interest and, in some cases, outrage, is soaking up so many city resources that it is eclipsing all other emerging housing opportunities in Mountain View.

"It's the only issue in Mountain View right now, and it could go on for years," he complains. "The neighbors have no incentive for a decision. It's a filibuster approach."

City staff, including City Manager Kevin Duggan, says the relationship between the Toll Brothers application and staff's reaction to Greenbriar is a limited one. He does acknowledge that the Toll Brothers request is more time consuming than anticipated.

However, current city "workload" was a factor that city staff cited in rejecting Greenbriar's request, according to at least one source.

"We are very much in favor of seeing additional housing," Ms. Costello says of the Greenbriar proposal, "but good planning is about finding good sites for uses."

The proposed site, she says, represents some of the city's better industrial property. With 76 acres, it has about a million square feet of industrial development, which in the future could provide expansion space for growing companies. In the past, she says, businesses have sought that type of location.

Still, it's easy to see why Greenbriar would have seen the site as a good conversion candidate. It estimates that industrial buildings are about 50 percent vacant. If accurate, that's roughly twice the vacancy rate of Mountain View's 13.5 million square feet of R&D stock overall, according to BT Commercial Real Estate's most current numbers.

The buildings are generally older and, some could argue, will soon be obsolete. In recent years, they've also produced relatively little revenue for the city. Annual sales tax from businesses in them have fallen from $680,000 in 2000 to $152,000 in 2003. Property taxes have declined less but are estimated at $267,000 this year compared to their peak of $350,000 in fiscal 2002, according to Mountain View Finance Director Robert Locke.

Mr. Locke says the higher density of proposed housing development would almost certainly produce more city revenue than the relatively low-density R&D there now, largely because of Proposition 13, which suppresses taxable value when properties don't change hands.

But, he says, the issue isn't really revenue.

"The issue is on the expenditure side," he says, "and that's much more difficult to predict."

"If there are new roads built, what's the city's ongoing maintenance cost? If there is a park, depending on the arrangement with the developer, we might have to maintain that. And there is police and fire," he says.

Mr. Meyer did not return calls for comment. Mr. Meyer is the founder and former executive chairman of AvalonBay Communities Inc. of Alexandria, Va. Avalon owns 38,000 apartments in various U.S. markets, including many in Silicon Valley.

Scott Jacobs, a principal with Menlo Park-based Landbank Investments, expressed surprise that Mountain View did not evaluate Greenbriar's request more thoroughly.

Landbank has a partially occupied 67,000 square-foot building in the Mountain View area that would have been redeveloped. It is the only building in his company's portfolio of the same vintage -- the rest are in Sunnyvale -- that isn't occupied, he says.

"It seemed like you had a very confident builder in Greenbriar who has built in the city of Mountain View before," he says. "It seemed like a very positive project turning some older office/R&D buildings to good use, and there is a housing shortage. I just think it's rare to find an opportunity where you have a number of empty buildings right next to each other and someone with deep pockets and vision.

"I understand the city of Mountain View's desire to keep its industrial space," he adds. "Everyone wants to believe that there are 15 more Googles ready to burst on the scene, but how long is that going to take?"

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