Five Syllable City

The government bailout trend sweeping the globe reached Atascadero last week. The developers of the Colony Square project, Jim Harrison and Peter Hilft, are looking to the city for financial assistance to enable them to proceed with their stalled job. You may recall that, at the city council meeting on May 27, the council refused a request by the same developers for a direct cash investment by the city (in a decision with which I agreed; see June 3 posting entitled “Speaking of ‘Catalyst Projects’”). Returning at the December 9 city council meeting, Jim Harrison presented a new request for financial assistance from the city, this time for 1.5 million dollars which the city would put at risk in the manner of a guarantor. With that amount posted as cash collateral by the city, the project would apparently qualify for approximately 9 million dollars in bank financing that the developers need to proceed with phase one of the project-the phase that includes the movie theater. In accordance with the staff recommendation, the city council, acting as the Redevelopment Agency, unanimously authorized the staff to go ahead and attempt to conclude terms on which the transaction could proceed.

It is hard not to be biased in favor of action to get the Colony Square project moving. We are all anxious to cover over the excavation scar that the project has put on the city’s face at its busiest and most prominent intersection. It would also be difficult to find anyone in Atascadero who does not want to get the movie theater up and running in the downtown area. Having a multi-screen cinema back in operation would provide a major psychological lift for the people of Atascadero; during my recent campaigning activities, one of the most frequent questions I heard was directed to the subject of when Atascadero will have a movie theater again. A multiplex will also bring immediate economic benefits to the city by attracting people into the downtown area who will become potential customers for shopping, snacking and dining establishments there. Given these realities, I am, like most Atascaderans, favorably predisposed toward any initiative aimed at getting the movie theater promised by Colony Square built as soon as possible.

Still, we cannot let our enthusiasm about this endeavor blind us to financial reality and the need to make sure that our interests are protected. However anxious the city council and staff may be to see phase one of Colony Square move ahead, they should not lose sight of their responsibilities as fiduciaries for the citizens of Atascadero. Just as the federal government should not be unconditionally handing out money to failing private enterprises in its bailout activities, the city should not be unconditionally committing its funds, or taking any more risk than absolutely necessary, to aid this undercapitalized private sector project. Atascadero cannot afford to lose 1.5 million dollars, especially in this time of financial hardship, when the city is suffering from severely declining tax revenues and is living off of its reserves. The point is that, even though we all want a movie theater back in town as soon as possible, we must remain mindful that this is a business transaction involving a request by private developers for a large amount of scarce taxpayer money. City officials should pursue the transaction in a prudent, businesslike manner, solely for the benefit of the people of Atascadero.

Let me now address the proposed terms of the transaction from the perspective of one who has been involved in dozens of secured bank financings, as both an attorney and a principal. With regard to the transaction terms, assistant city manager Jim Lewis was careful to say at the December 9 council meeting that the deal points remain to be worked out. Still, he offered us considerable detail about how he expects the transaction to proceed. The way that he explained it, the city’s 1.5 million dollars will not be drawn down by the bank lenders unless and until there is: 1) a default by the developers in repaying their bank loan, and 2) a deficiency in satisfying the loan from the proceeds of a post-default sale of the project.

In assessing the city’s risk in this deal, while it is not unrealistic to foresee that the first condition will materialize, and that the inadequately capitalized developers of the Colony Square project will default in repaying the bank loan, the second condition appears less likely to occur. If the current appraised value of over 13 million dollars is to be believed, a post-default sale of the project should be expected to yield enough for the banks to cover the 9 million dollar amount of the loan without any need to draw against the cash collateral being put up by the city. Of course, appraisals are not always entirely reliable, even in the best of times; in this period of declining commercial property values, this appraisal should be carefully scrutinized to make sure that it is impartial and is based on realistic market analysis.

If the project appraisal is trustworthy, and if the default procedure is as Mr. Lewis expects, then the risk of the city having its 1.5 million dollars taken by the banks should not be unacceptably large. Nevertheless, provision for that contingency has to be made in the contract documents, as it has to be spelled out what exactly will happen if the city’s money is applied to satisfy the developers’ indebtedness to the banks. On that point, if there is a default and the city’s cash is taken, it would be advisable for the city to have the option of either: a) accepting a carried interest in the project, on terms to be spelled out in the documents but which include the right to force a sale of the project to replacement developers if the banks cannot or will not require such a sale; or b) obtaining indemnification from the development company, Mr. Harrison and/or Mr. Hilft, for any and all amounts taken from the city’s cash collateral in reduction of the developers’ indebtedness. With that kind of provision having been made, the city’s exposure to the risk of losing its money and having this project fail will at least be minimized, if not eliminated.

Let me add that the default procedure described by Mr. Lewis in his presentation at the city council meeting is unlike any that I have encountered in many years of involvement in secured bank financings. Invariably in my experience, when there is a default on a bank loan secured by both cash and real property, the banks draw down the cash collateral first, before they resort to the cumbersome, expensive and often unpredictable process of foreclosing on and selling the real property. So if this deal is structured in the way Mr. Lewis said it will be, it will mark a departure from typical bank lending practice. Perhaps the banks are willing to make such a departure in this case due to the fact that they are providing the loan under the Community Reinvestment Act of 1977, or maybe because a municipal corporation is the party posting the cash collateral. In any event, let us hope that this is the way the transaction will actually be arranged, and that the city’s cash will not be touched unless and until a bank-forced sale of the project results in a deficiency in satisfying the loan. If not, then the city’s pledged cash collateral will be subject to seizure promptly after a default by the borrowers in repaying the loan. In that situation, it will be even more important for the city to have reserved as many rights as possible in the event of a default, to protect against the risk of loss of the taxpayers’ 1.5 million dollars and collapse of this project.

With the proper protections in place, this transaction will be a benefit to the entire community. I encourage our fiduciaries to go forward with it in a cautious, businesslike way that minimizes exposure on the part of the city.

Last Friday, December 5, it was announced that the city of Atascadero’s appeal to FEMA had been decided. The city had appealed FEMA’s initial determination to pay only about 15 million of the approximately 26 million dollars claimed to rebuild the Rotunda building. In its ruling on the city’s appeal seeking more than 10 million dollars, FEMA agreed to grant only about 166,000 dollars more. That outcome obviously represents a setback. It is but one battle, however, and certainly does not spell defeat in the overall campaign to secure federal funding for the restoration of the Rotunda.

As I said at the city council meeting on December 9, the impending arrival of the new administration in Washington brings with it additional opportunities for the city to get federal support in rebuilding the Rotunda. According to news reports, the infrastructure program planned by the Obama administration will make funding available for the retrofitting of public buildings, particularly for the purpose of equipping them with more efficient heating and cooling systems. Through this program Atascadero ought to be able to find money to fund the work needed on the Rotunda’s HVAC system, for which FEMA has denied about 4.3 million dollars sought by the city. The rest of the infrastructure program should be studied as well, to find out whether the program offers additional prospects to obtain federal money to use in reconstructing Atascadero’s Rotunda building.

Similar funding opportunities might also be found in the Obama administration’s proposed economic stimulus program. Since the program contemplates supporting public works projects which are likely to boost economic activity and promote growth, the Rotunda project would seem to be a strong candidate for inclusion. Rebuilding the Rotunda, especially as some kind of attraction, will draw pedestrian traffic into downtown Atascadero and give a big boost to the effort to redevelop Atascadero’s central business district. Based on this, a cogent argument can be made that reconstructing Atascadero’s historic Rotunda building is a classic example of a public works project that deserves federal support as part of the economic stimulus program. On that topic, during the county board of supervisors meeting on December 9, it was mentioned that Senator Barbara Boxer had asked the supervisors for a list of projects in San Luis Obispo county that would be good candidates for inclusion in the stimulus program. In responding, the county should put reconstruction of the Rotunda building at the very top of its list. Not only will the project provide needed stimulus to economic activity in Atascadero, but it will also preserve one of the county’s most distinguished historic structures.

After I made the preceding points at the December 9 city council meeting, the city manager responded with assurances that the staff is on top of these matters and is in the process of preparing to pursue funding for the Rotunda project from the federal infrastructure and stimulus programs. In that regard, we need to strike while the iron is hot. Upon the arrival of a Democratic administration in the White House, the California congressional delegation will become more influential than it has been in years. Before they get too long a list of other requests, both of California’s Democratic U.S. senators, and possibly the Speaker of the House, should be made aware of our very worthy public building project in Atascadero and asked to lend their support to its inclusion in the infrastructure and stimulus programs. Assistance should also be sought from Representatives McCarthy and Capps. The point is to pursue these promising federal funding possibilities assiduously, and not leave all of our eggs in the FEMA basket, in the quest for financing to restore the Rotunda.

Returning to the subject of the FEMA appeal, l cannot fairly assess the merits of a second level appeal because I am not privy to all of the details about the factual and legal bases for the claim. In any event, the city manager reiterated the other night that it is his intention to take the appeal to the second and last level within FEMA. He said that the unsuccessful outcome at the first level was not that surprising due to the fact that the individuals who decided the appeal were also involved in the decision being appealed from. At the next level, however, the appeal is supposed to be adjudicated in Washington by a different group of FEMA officials. Based on this, the city manager believes that there is hope for a different outcome at the next level.

Even within FEMA, though, we should not rely entirely on the appeal. As I suggested at the council meeting on Tuesday night, the city should augment the ground war which the appeal process represents with an air war that involves trying to win over FEMA officials at higher levels. With Janet Napolitano becoming the new Secretary of Homeland Security, presumably a new Administrator of FEMA, and possibly other new appointees, will be coming into FEMA. Atascadero can make a strong case to the higher officials that the earthquake which struck our area in December 2003 inflicted major damage to our community by the destruction it caused to our signature building in the heart of the city, and that communities in our position must depend on FEMA to help us recover from such natural disasters. In the current environment, that argument should derive additional resonance from the reality that by helping Atascadero rebuild the Rotunda, FEMA will be doing something that promotes the administration’s objective of stimulating economic activity.

So the setback represented by the decision on the initial appeal to FEMA is far from a fatal blow to the efforts to fund the reconstruction of the Rotunda. At this point, however, we need to adopt a two-track strategy. On track one, relating to FEMA, we should take what happened on the first level appeal and learn from it in refining and improving the arguments to be presented at the second level. At the same time, we should initiate efforts to present our persuasive case for support to higher-ups within FEMA. On track two, outside of FEMA, we need to seek federal funding for the project from the incoming administration’s infrastructure and stimulus programs. The bottom line is that Atascadero has a compelling rationale for requesting federal support for the reconstruction of the historic Rotunda building. We just need to pursue the matter vigorously at all levels and by all available means.

The third Atascadero Art Tour will be held on Friday, December 5, beginning at 5:30. The event is centered in the downtown area. It showcases the work of some of the many artists who reside in Atascadero. Originated in 2008, this is an event of today and tomorrow, and not a hand-me-down from prior generations. For those who might be wondering, it shows that that some new things really are happening in our city.

I was out of town in May when the first Atascadero Art Tour was held. In September, I was glad to be available to participate in the second such event. My experience on that Friday evening came as a delightful surprise. There was street life and energy in the downtown area. Numerous establishments had remained open and were displaying various works of art by local artists. Groups of people were wandering from place to place on foot, checking out the art, enjoying wine and other refreshments, as well as each other’s company. Afterward a group of us had dinner at the restaurant in the Carlton, which was packed and buzzing with activity. The whole experience provided a glimpse of what is possible if more attractions are brought to Atascadero’s downtown to draw activity into the area.

The December 5 version of the Art Tour will take place alongside Main Street’s wine and wassail gathering and the city’s tree lighting ceremony. Together the three events should produce a level of activity and festiveness that promise to add up to a special evening for Atascadero’s downtown area and cultural community.

The Art Tour is the kind of event that deserves encouragement, support and participation. It is high-minded, youthful and forward-looking in its orientation. It also represents an example of Atascadero embracing the twenty-first century. Heather Young Curry’s resourcefulness in creating and organizing the Art Tour exemplifies the kind of initiative that Atascadero needs. Let’s reward her effort by turning out and participating. If my last experience is any indication, it will be a source of civic pride for all, as well as a real good time.