MOORLACH UPDATE — California Real Estate Journal — November 12, 2009

The California Real Estate Journal did a nice job of covering the pending O.C. Fairgrounds sale from a professional perspective. 

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State Seeks Blue Ribbon from Investors for O.C. Fairgrounds
RFP for 150-acre Costa Mesa site raises rezoning, revenue-sharing questions as city seeks to gain control in public auction

By JULIE NAKASHIMA

CREJ Staff Writer

Strapped for cash, California is hoping to harvest a bumper crop from the sale of the Orange County Fairgrounds in Costa Mesa.

Per its recently released request for proposals, the state is requiring that the 150-acre property continue to be operated as a fairgrounds through next year’s fair, slated to end in August 2010. But nothing in the request requires that the site remain fairgrounds thereafter, which has officials in Orange County and Costa Mesa concerned. The city is supportive of the sale of the property, which is owned by the state’s 32nd District Agricultural Association, because it sees an opportunity for the fair and expo center to be operated locally, according to Costa Mesa City Manager Allan Roeder.

"Of course, it would also allow for closer regulation by the city, because as a state facility it is largely outside of the city’s jurisdiction," Roeder said. "But we see the sale really as a local control matter. If a prospective bidder wanted to utilize or develop it in any other fashion, that would be strictly opposed by the City Council and by the community."

The local control issue was evident when the city tried unsuccessfully to have the sale include a caveat that the property remain and function as a fair and event center. On July 28, before the issuance of the RFP, the Orange County Board of Supervisors passed a resolution stating that it supports Gov. Arnold Schwarzenegger’s proposal to sell the fairground, but only to a local government agency or local nonprofit that would continue to use it as a fairgrounds, event center and equestrian facility.

According to real estate market watchers, however, the real value of the property for investors would come from changing the use, which might be difficult to accomplish with local interests aligned with maintaining the site’s use as a fairgrounds.

Orange County Supervisor John Moorlach, whose Second District encompasses Costa Mesa and the fairgrounds, said that if the property’s use was changed, the state would participate in any revenue sharing.

"Would the city be willing to rezone that property for something other than its current zoning?" Moorlach asked. "We think that’s highly unlikely."

At the same time, he said that anything is possible a few years down the road. Theoretically, a developer could come in with an alternative proposal and have the ability to spend enough money to convince three of the five City Council members to go along with its plans.

"In the current structure of this deal that could happen," Moorlach said, "but it’s our desire as the Board of Supervisors to keep the fair a fair."

Roeder said the city has been in touch throughout this process with the state’s Department of General Services, which is managing the sale. The department included information the city provided in terms of land-use and local regulations and restrictions on the prospective use of the property.

"As you might expect, there’s quite an array of regulatory and, in some cases, court-ordered restrictions on the use and operations of the site, so we wanted to make sure prospective bidders understood that going in," Roeder said.

 

For example, prohibited uses include hospital, medical office, hotel/motel, department store, supermarket, liquor or convenience store, and car dealership.

Roeder noted that the state, particularly the Department of General Services, has different objectives from those of the city.

"The Department of General Services’ priority is to get the state of California as much money from the sale of the property as possible," he said. "Our goal is to retain the Orange County fair and expo center. Those two things may not be mutually exclusive, but they are in contrast with one another."

Redevelopment Restrictions

The site is designated as fairgrounds in the city of Costa Mesa’s General Plan, and zoned for institutional and recreational uses. Roeder doesn’t think it’s likely that someone would come in and try to rezone the property and redevelop the site.

"They would have to go through a lengthy process including the environmental process," Roeder said. "I just don’t see that occurring. There is tremendous community support for the Orange County fair and expo center."

The state is the lead land-use authority for the property as long as it is state-owned, but once a private entity takes title the city of Costa Mesa will become the lead land-use authority.

According to the city, if the property is sold to a non-fairground operator that wished to pursue an alternative development plan, the city would require various discretionary approvals, including a general plan amendment screening request, general plan amendment, rezone, master plan and subdivision map, along with appropriate environmental documents such as a mitigated negative declaration or environmental-impact report.

Located off the 55 freeway, the property consists of about 150 acres bounded by Arlington drive to the north, Newport Boulevard to the east, Fair Drive to the south and Fairview Road to the west. The surrounding land-use designations include public/institutional, low-density residential, high-density residential and neighborhood commercial. Costa Mesa City Hall is located across the street from the fairgrounds’ main entrance.

The fairgrounds’ real property inventory includes a number of site-specific structures, such as equestrian centers, horse stables, livestock barns, exhibit buildings and food stands, as well as the Pacific Amphitheatre.

According to the RFP, the state intends to have opening of bids and auction on Jan. 14, 2010, with state review and recommendation, execution of a purchase contract and opening of escrow following through mid-March. Escrow is estimated to close between May and September, with the buyer taking control of the property on Oct. 1.

Bids are due Jan. 8, according to Eric Lamoureux, a spokesman for the Department of General Services. He said the state has no way of knowing whether the sale would create development opportunities, although he said it is requiring a profit participation agreement in the form of a deed restriction in the event all or a portion of the site is no longer used as a fairgrounds and events center.

"Right now, what’s paramount to us is that we pull whatever revenue we can from this sale to help offset and shore up other budget items here in Sacramento," Lamoureux said.

The fairgrounds facility operates year-round, hosting more than 100 events annually. The subject of selling it off has come up several times in the past.

"Every time the state has financial problems, they want to sell the fairgrounds," Moorlach said.

Roeder said the topic of selling off the fairgrounds came up in 1999 and again in 2003. That was part of the motivation this time to support the sale, he said.

"Even if the state budget happens to get balanced in some other fashion, we think it will continue to come up in future years," Roeder said. "Selling off assets doesn’t fix the underlying problem with the state budget. With the sale of the property, we take that issue off the table."

Maximizing Value

Assuming a stabilized economy and reasonable demand, the property should be highly desirable, according to investment specialist Rob Socci, an executive vice president with Voit Real Estate Services’ Commercial Brokerage division.

"There’s very few large pieces of land like this left in Orange County," Socci said.

He noted the fairgrounds site has attracted interest from a number of private investors, including reportedly AEG, owner of the Staples Center in downtown Los Angeles. But placing a value on the property won’t be easy. Socci said he has heard various estimates ranging from $20 million on the low end to more than $200 million.

In order to maximize the value of the property, Socci said it would need to be rezoned so that it could be developed with residential, retail or other recreational uses, or the operations of the fairgrounds would have to be changed to generate more income.

"If the city were to say, ‘We’re OK with 500 townhomes there and a thousand apartment units and we can do a shopping center,’ that would increase the value tremendously," he said. "If the city is hell-bent on keeping the use as a fairgrounds, it really hamstrings the value."

The existing fairgrounds board has formed a foundation to put together a bid to acquire the property. This new entity would include six members of the existing fairgrounds board and has given two seats to the Costa Mesa City Council for appointment and two seats to the Orange County Board of Supervisors for appointment.

Moorlach said he’s not privy to how the foundation would finance a transaction but speculated it would be similar to a leveraged buyout – taking the income stream that it’s generating now, hypothecating that income stream and borrowing against it.

"Assuming that the foundation would be the winning bidder, that would give us an opportunity to participate with our appointments to make sure it stays a fair," Moorlach said. "The fly in the ointment is if someone else comes in as a higher bidder and becomes the final winning bidder."

Previously, alternative uses not specifically linked to the use of the site as a fair and expo center have been rejected, according to Roeder.

"We certainly understand that for the fairgrounds to be successful long-term, it has to change and evolve based on customer need and market," he said. "In terms of any prospective commercial or retail use, when that subject has been brought up in years past, which it has on any number of occasions, from hotel to off-track betting to retail fast food, those uses were all very much opposed by the city and community."

A certified public accountant by profession, Moorlach said if he were calling the shots for the state he might do a long-term lease and keep the land. Unlike county fairs that depend on public subsidies, he said the Orange County Fair generates enough revenues every year to be self-sustaining. Profits are used for improvements, reserves and other needs.

He said it’s a revenue-neutral asset because the money that’s made at the fair stays at the fair and does not contribute to the state’s general fund.

"Why not let it go free and get your cash and move forward?" he asked. "That’s worked successfully in L.A. County and in Alameda County. We have good models of a nonprofit running and owning the fairgrounds and being successful at it."

– E-mail Julie_Nakashima@DailyJournal.com

INVITATION – SATURDAY, NOVEMBER 28 – LIMITED CAPACITY

Our Fairview Park and Tustin Blimp Hangar outings were a blast.  Our next outing is on the Saturday after Thanksgiving.  We’re taking a morning hike.

The hike date and description are now up on the Irvine Ranch Conservancy website to view. 

Saturday, November 28th at 9:00 a.m. for 3 hours. 

We’ll hike 6 miles round trip from Limestone Canyon to Dripping Springs, with 475 feet of elevation change, and is described as a nice, leisurely stroll.

 

Because this schedule is viewable by the general public, the hike currently shows as FULL, so that random people won’t try and sign up.  It’s not full. 

If you wish to sign up for the hike, please contact the Irvine Conservancy directly by phone and ask for Meghan Sherburn, at 714-508-4767, and give her your information.

They will enter your reservation into their computer.  This is how they do it with hikes that are open to select groups only. 

The website will then generate a confirmation to you by email that will allow you to verify your information and be reminded of the hike.  It will also generate an e-mail if our hike needs to be cancelled due to weather conditions (Santa Ana winds or rain).

It will also pre-print the liability waiver, with all the names on it, so on the morning of the hike all you have to do is sign it and we’re off!  

 

As soon as we hit our capacity we may have to close registration.  Consequently, only register if you are really going to join us.

 

The web address for the description of the hike is:  http://www.irvineranchwildlands.org/activities/index.asp?col=&srt=&area=&pn=6&month=11&year=2009.

 Mike O’Connell, Executive Director of the Irvine Ranch Conservancy will be leading our group.

 


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Michael O’Connell
Executive Director
Irvine Ranch Conservancy
moconnell@irconservancy.org
Phone 714.508.4750 • Fax 714.508.4770
4727 Portola Parkway • Irvine, CA • 92620-1914

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