How Arroyo Grande blew a million dollars

October 25, 2010

By KAREN VELIE

At the same time the Arroyo Grande City Council was looking to reduce the deficit by cutting money from after school programs and law enforcement, the Council voted to pay almost twice the current market value for the empty former Farm Credit building – approximately $1,000,000 too much, according to a handful of local appraisers.

City officials have repeatedly told the media that the recent purchase of the Farm Credit building at 300 Branch Street “will cost the city $1.2 million.” However, the cost of purchasing the building is over $2 million, according to the purchase agreement.

In addition, the costs of bringing the building into code compliance with remodeling to suit the city needs increases the cost closer to $3 million.

Following are the estimated costs.

•    $2,020,000    Purchase price of the Farm Credit building.
•    $75,000          Approximate rent and expenses paid by the city during the escrow period for   an empty building.
•    $120,000        Elevator installation, per city estimate.
•    $60,000          Fire sprinkler installation, per city estimate.
•    $475,000        Remodel, design and ADA requirement costs.
•    $ 55,000         Estimated contingencies, legal fees, etc.

$2,805,000   Total projected costs for completed facility.

Why the City overpaid by $1 million

In 2008, Farm Credit put the property up for sale. And while some city officials thought it would be a great place to move city hall, they knew it might sell to someone else before they could get council approval.

City Manager Steve Adams wanted to move city hall into the Farm Credit building and had ordered appraisals of city owned properties that could be sold or traded to facilitate the deal.

Even before developer Nick Tompkins purchased the Farm Credit Building in 2008, city staff had begun putting together a package for a future swap with Tompkins that included a $1.2 million in cash plus two existing buildings and a parking lot owned by the city.

In Oct. 2008, Tompkins purchased the building for $2.4 million from Farm Credit, a number that numerous real estate professionals said was well above the then current market value.

At the time Tompkins purchased the Farm Credit building, Adams said the city was already in discussions with him to purchase city properties through a combination of money and trades. Some city officials and residents contend that Adams and Mayor Tony Ferrara had prearranged for the purchase of the Farm Credit building through a combination of cash, swaps of property and future entitlements Tompkins would end up with.

The purchase price of the Farm Credit building was based on Farm Credit’s own appraisal done by employee Richard Mercier. While appraisers generally use recent sales that are in the same area, in this instance, some of the sales were from 2007 and most of the “comparable sales” were properties in other cities.

Mercier refused to comment on why he used 2007 comparables for his employer’s property.

A few months later, under city staff direction, the proposed purchase and trade of the building came in front of the city council. Mayor Tony Ferrara spearheaded the attempt to facilitate the trade with Tompkins.

Some city officials and residents think that the impetus behind overvaluing the Farm Credit while undervaluing the city’s properties was in order to push the deal through so that a proposed pedestrian square called Centennial Plaza would be in place by the city’s 100 birthday.

The deal included Tompkins receiving an entitlement allowing him to reallocate a portion of Short Street into outdoor dining.

Despite the loud warnings from City Councilman Chuck Fellows, who stepped off the podium and spoke as a citizen about the purchase, the City Council voted 3-2 in March 2009 to purchase the building.

The second appraisal, obtained by the city, was not the standard MAI appraisal required by banks. Instead, the city chose to use a “short form appraisal” done in Jan. 2010, which is highly unusual, given it was a governmental purchase of a multi-million dollar commercial property.  In addition, the city also failed to require a second “current appraisal” – which was strongly suggested at the time by Fellows, who is the only city councilman with a professional real estate background.

The 2010 appraisal written by Anderson and Company uses the sale of the Farm Credit building in 2008 as its number one comparable. The appraisal fails to mention the continuing collapse of the commercial real estate market or provide an income approach appraisal.

There are three ways to do commercial appraisals, comparison, income and replacement cost. Typically the three methods are correlated in an appraisal to determine the value of the property.

Currently, because of a lack of comparable sales, the most common methods are the “income approach” and/or the “replacement cost approach” according to several appraisers.

CalCoastNews spoke with more than a dozen real estate experts including appraisers and brokers. The general consensus was that at the time of sale “as is” value of the Farm Credit building would be approximately $1,026,000 based on a combination of appraisal methods.

Based on the income method, our consultants said that the building would command a rent at the time of sale of approximately $1.25 per square foot, in its present “as is” condition. Based on net income of approximately $6,500 per month the building would bring in $81,000 annually. At the average current capitalization rate of 7.5 percent, this would equal a market value of $1,080,000 at the time of the sale.

“I would prefer not to comment at this time,” Gail Anderson, an appraiser with Anderson and Associates, said when asked why he used an appraisal from 2008.

Councilman Jim Guthrie said he believed the building was worth $2,020,000. He said he believes that offices in the village are renting for $1.75 a square foot as part of the reasoning behind the buildings price.

However, most properties in the area at the time of sale were renting for a $1 to $1.25 a foot.

Adams said the goal of the city has been to keep city hall in the village and believes that this purchase saved the city money.

“The most important thing is the final agreement is much cheaper than our other options,” Adams said.

However, some local residents contend that cheaper options existed such as expanding the old city hall building or moving city hall out of the village.

Earlier this month, city officials announced that they had rented the old city hall building, which sets next to the former Farm Credit building, for less than a $1 a square foot for 2011 to Re/Max Del Oro. On the other side of the Farm Credit building, the building is offering office space for $1.10 a foot.

“I am not in a position to doubt the appraisal,” Guthrie said. “If it turns out we were wrong, Tompkins said he will buy back the property.”

Tompkins agreed he would buy the property back from the city for $2.1 million in the future. However, according to the purchase agreement, the city would not be reimbursed for the costs of the extensive remodeling and improvements made by the city.

“The bottom line is this is a gift of taxpayers’ monies,” said a local appraiser who asked to remain unnamed to protect his business interests.