Modesto apartments come at costly price to taxpayers

jnsbranti@modbee.comAugust 31, 2013 

Modesto's newly opened Archway Commons is being promoted as an affordable housing project for low-income families that will help revitalize a blighted neighborhood near downtown.

But after seven years of government planning, the $21 million taxpayer-subsidized complex contains only half as many apartments as the public was told to expect and at a per-unit cost far above what Modesto's single-family homes cost.

The project isn't finished, but the first tenants moved in last week. The rest will arrive this fall, once all apartments are complete.

High land costs, contaminated soil and complicated government financing requirements pushed up expenses and delayed completion of the Carver Road project.

A Modesto Bee investigation into why Archway Commons cost so much and took so long found:

• Modesto's Redevelopment Agency paid private investors far more for the property than its fair market value in 2009. (Comparable land costs, Apartment cost comparison)

• Despite the rapidly declining real estate market at the time, city officials did not get a current appraisal of the land's worth before making their closed-door deal.

• The private investors who financially benefitted from the deal bought that land just one day before the project's developers — EAH Housing Inc. — announced that's where it intended to build Archway Commons.

• Taxpayer funds were transferred to EAH Housing to settle a private contract dispute it had with those land investors.

• The land bought from those investors turned out to be contaminated with arsenic, triggering $500,000 in cleanup costs for Archway Commons.

• Two months after buying the investors' land, Modesto's Redevelopment Agency bought adjacent property from a church for less than half as much per square foot.

Taxpayers are financing nearly half of Archway Commons' $21 million development tab. Most of the rest of the project's expenses are being financed by companies and high-income investors who will benefit from special federal and state tax credits.

Archway Commons will end up costing about $100,000 more per apartment than what taxpayers were told to expect three years ago.

In November 2010, city officials said the project would create 150 rental units for $26.2 million. That would have been just under $175,000 per apartment.

Now, only 76 units are being built, at a cost of more than $276,000 per apartment.

Archway Commons is costing nearly $273 per square foot to complete, which is more than double the square-foot price of most Modesto homes these days.

Avena Bella, a similar project in Turlock with public financing, is costing about $246,000 for each of its 80 units. The Turlock project's cost is $196 per square foot.

Both Archway Commons and Avena Bella are being developed by the nonprofit EAH Housing. Both are backed by funding from city redevelopment agencies and state and federal tax credit programs.

The Modesto project includes one-, two- and three-bedroom apartments. The Turlock project is all two- and three-bedroom apartments.

Different construction firms and building designs were used, but that doesn't appear to be the major reason Archway Commons is costing so much more than Avena Bella.

Land costs and arsenic contamination are mostly to blame.

On April 28, 2009, the Modesto City Council used Modesto Redevelopment Agency money to buy land for Archway Commons. The city paid landowners well above the market value for their property near Carver and Ninth streets, according to appraisals showing what comparable prices were at the time.

'Worth paying more'

City officials defend their decision.

"Did we pay more than the appraised value? Yes, we did," said Mayor Garrad Marsh, who was a councilman at the time of the land purchase. But "there were factors that made it worth paying more than the appraised value," Marsh said.

The Carver Road site was the city's desired location for a subsidized housing project, he said, because it was near downtown, large enough, close to public services and in a blighted neighborhood that needed to be cleaned up.

"All those trailers out there looked like hell for our city," said Marsh, noting that the site previously was used to store large, modular buildings. The mayor said he couldn't recall the details of negotiations for the land. "We went back and forth several times trying to get a number that was acceptable (to both the city and the landowners)."

As is typical for land purchases, the council's deliberations were done in closed session, with no opportunity for public input. The city paid $3.5 million to Modesto investor/developer Paul Draper's 4701 Stoddard LLC and his Turlock partner Sylvia E. Cox for the 6.5 acres where Archway Commons now sits.

Draper and Cox collected an additional $460,000 in contract extension fees, deposits and "settlement" funds from Archway Commons. According to EAH Housing, that additional money also came from Modesto taxpayers.

Draper and Cox ended up receiving $3,960,000 from the April 2009 purchase. That worked out to $14.07 per square foot for their land.

Draper and Cox collected $1,144,291 more for the land than what they had paid for it in March 2007.

EAH Housing told The Bee that Draper had threatened to sue EAH for not paying an even higher price for the land. So to help EAH settle that private contract dispute with Draper, EAH said Modesto's Redevelopment Agency gave it $200,000.

"I would have loved to have had that money to spend elsewhere," said Felix AuYeung, who is overseeing the Archway Commons construction project for EAH Housing. "But it ended up in Draper's pocket. None of us are happy about how Draper made out from this deal."

Repeated attempts by The Bee to reach Draper and Cox for comment were not successful.

Church land obtained for far less

What the city paid Draper and Cox for the land was more than twice as much per square foot as it paid for adjacent property two months later.

In June 2009, the city paid $480,000 to Central Valley Christian Fellowship for a 1.84-acre parcel behind its Carver Road church. That amounts to $5.99 per square foot for the church's land, compared with the $14.07 spent on Draper and Cox's land.

"We weren't in it really for the money," said Phil Ruth, secretary/treasurer of the church's board of directors. Ruth said his church, now called Destiny Christian Center, did not know the adjacent landowner had been paid more than twice as much per square foot. "That's a surprise to me," he said.

Ruth said he also was not aware the city had obtained an appraisal showing his church's land was worth substantially more than what the fellowship was paid.

Public agencies typically get a professional appraisal to determine what property is worth before buying it. Modesto officials got one in August 2008 for both Draper and Cox's land and the church's parcel. That appraisal determined both properties were worth $11.08 per square foot.

Veteran Modesto appraiser John Hillas said what the city paid Draper and Cox for the land does not sound logical, especially considering the eight-month delay between the appraisal and the purchase.

"Modesto property values began falling in 2007, but after August 2008, when capital markets collapsed, commercial property values absolutely fell like a rock," said Hillas, who was not involved in the Archway Commons deal.

Modesto's real estate crisis was well known at the time, according to Hillas, who is managing director of Valbridge Property Advisors Hulberg & Associates.

"One would think a public agency purchasing land for public use with public funds would have checks and balances in place … and that includes getting current appraisals," Hillas said. "What were they thinking?"

City official won't respond to questions

Modesto's closed-door negotiations for the Draper and Cox land were led by City Manager Greg Nyhoff and Julie Hannon, who was acting director of Modesto's Parks, Recreation and Neighborhoods Department.

"The city acted in accordance with the law," Hannon wrote in an emailed response to written questions from The Bee. She would not agree to an interview for this story. "Negotiations on this project took place over a matter of many months, with clear direction given to … Nyhoff and myself by the (Redevelopment) Agency in closed session. Thereafter, those negotiations culminated in the agreement on the land purchase."

Hannon did not answer The Bee's questions about what justification the city had for what it paid Draper and Cox for the land in 2009.

The city had hired Modesto appraiser Gary N. Curtis in August 2008 to determine the property's fair market value. City staff members instructed Curtis to value the property as if it already had been annexed into the city and rezoned for apartments, even though it was unincorpo-rated industrial land at the time.

Curtis' appraisal also was based on the assumption the land was contamination-free. To appraise the property, he used data from comparable vacant apartment land sales during 2006 and 2007 in Stanislaus County.

Curtis determined that as of Aug. 16, 2008, Draper and Cox's 6.46 acres were worth $3,118,350 and the church's 1.84 acres were worth $881,650. That was $11.08 per square foot.

In making his calculations, Curtis did not factor in any decline in market values from 2006 to 2008, despite the region's collapsing residential real estate prices.

Had Curtis ignored the peak-of-the- market 2006 land sales and used land sales only from 2007 and early 2008 for his comparisons, the Carver Road property's mid-2008 appraised value likely would have been about $9.25 per square foot.

That would have put the value of Draper and Cox's land at $2.6 million and the church property at about $741,000.

Had the city obtained a fresh appraisal in early 2009, comparable apartment land sales likely would have shown the property's value was even lower.

The Bee found four comparable sales of vacant land zoned for apartments between January 2007 and January 2009 that city officials could have considered in spring 2009 to determine the fair market value of the Carver Road properties.

Had the city paid Draper and Cox a price similar to what those four parcels sold for and not paid the investors extra money to avoid a lawsuit or to extend their contract, taxpayers could have saved more than $1.36 million.

Not doing so added $17,900 to the cost of each Archway Commons apartment.

"I don't know if those (land) comps were available to us at the time," Marsh said. "Those weren't the calculations that were given to us."

Curtis lost his appraiser's license in 2011 because of alleged violations involving other appraisals. But if Curtis' appraisal for the city had any flaws in it, ultimately that did not matter because city officials ended up ignoring his appraised values.

Instead, all seven Modesto council members decided to pay Draper and Cox $12.48 per square foot — or $3.5 million — plus an additional $460,420 for a total $14.07 per square foot. And they decided to pay the church $5.99 per square foot — or $480,000.

'Take it or leave it'

Why were Draper and Cox paid so much?

"In real estate, property is worth what people are willing to pay for it," said Councilman Joe Muratore. City officials tried to get Draper to lower his price, Muratore recalled, but "he stuck to his guns, said take it or leave it, and the city took it."

Muratore wasn't elected to the council until after the land was purchased, but he was involved in the deal because he worked for Draper during 2006 through 2008.

Muratore currently is a partner in a couple of companies with Ryan Swehla. In late 2006, Swehla worked as a consultant for EAH Housing, which was looking for Modesto land on which to build government-subsidized apartments.

Questions have been raised about the timing of Draper and Cox's March 2007 purchase of the Carver Road property. One day after they bought that land for $2.8 million, EAH notified Modesto officials it wanted to buy the property for Archway Commons.

EAH ultimately planned to use taxpayer funds to pay for that land.

"It wasn't nefarious or unethical," Muratore said of his boss's 2007 land purchase. "It was a clean transaction."

As Muratore remembers it, he and his childhood friend Swehla "were sitting in a coffee shop" when "this idea popped up" about EAH building its apartments near Ninth and Carver.

LLC had option to buy

Muratore said Draper and Cox already had an option to buy that land from its owners, the W.L. and S.E. Sweeley Trust. Muratore said Draper was looking for suggestions on what could be done with that land, so he told his boss about the EAH project.

"I do remember (Draper) meeting with the city in advance to talk about the feasibility" of putting the EAH apartments on that site, Muratore said. He said those conversations were before Cox and Draper's 4701 Stoddard LLC bought the land.

Muratore said he did not get any commission or bonus for helping with that land deal.

Swehla said he didn't get any extra commission or bonus from the land transaction, either. He also defends the deal.

"We knew this was the best, most suitable and cost-effective site available within (Modesto Redevelopment Agency boundaries)," Swehla said. Several other sites were considered, but "we kept coming back to the Ninth and Carver site for several reasons."

By choosing that previously unattractive site next to Highway 99, Swehla said Archway Commons is helping "bring about real redevelopment and revitalization."

He said the apartments will improve Modesto's image because they can be seen from the highway, which is traveled by more than 120,000 vehicles a day.

Swehla also defended the price Draper and Cox received for their land. His accounting of the 2009 land deal differs from what city officials say happened.

"The price paid was not way above market at the time, but it was negotiated near the peak of the market," Swehla wrote in an emailed response to The Bee's questions. "The price was agreed upon at the beginning of the contract in good faith."

Swehla apparently was referring to a contract that EAH Housing had negotiated privately with Draper and Cox in June 2007. But that $4.2 million deal (worth $14.93 per square foot) was never completed, and the city of Modesto was not obligated to pay that price.

Modesto's City Council/Redevelopment Agency publicly voted on April 28, 2009, to buy the Draper and Cox property. City officials, however, have not answered The Bee's questions about exactly when they agreed to the land's purchase price.

What is known is that on Oct. 31, 2008, Draper sent a letter to the city formally declining Modesto's purchase offer. Draper's letter said the offer "appears to be based upon an appraisal" that had been prepared Aug. 26, 2008. That would have been Curtis' appraisal.

A Modesto city staff member later placed a sticky note atop Draper's letter, identifying the document as being: "Rejection of first offer $3,118,350."

That indicates the land purchase had not been agreed to before November 2008, giving the city an opportunity to stop the process and walk away.

EAH Housing's AuYeung said that throughout 2008, Draper kept pushing the nonprofit agency to buy the land at the $4.2 million price it had negotiated in 2007, even though property values had declined because of the real estate crash.

"Draper threatened to sue us, claiming there was a breach of that contract," AuYeung said. "It was Draper's contention he was due that money."

AuYeung said that by late 2008, EAH Housing already had paid Draper and Cox $260,420 in deposit and contract extension fees for the land. To enable EAH to avoid litigation, AuYeung said Modesto's Redevelopment Agency agreed to buy the land from Draper and Cox and to transfer $200,000 to EAH so the nonprofit could give that money to Draper and Cox as a "settlement."

The land's price wasn't the only thing that added to the cost of Archway Commons.

After the city's purchase, the Draper and Cox property was found to have more arsenic in the soil than is allowed by law for a residential development.

So $500,000 — or $6,579 per apartment — had to be spent cleaning up the contamination. Truckloads of tainted dirt had to be hauled to an out-of-county toxic disposal site before the family apartments could be built.

That process delayed construction by about three months, according to AuYeung. He said Archway Commons LLC got stuck paying for the arsenic cleanup. Because Archway Commons ended up having enough money to build only 76 apartments rather than the 150 originally planned, it bought just 5.1 acres of the 8.3 acres the city had purchased for the project.

Builder ends up with only part of property

On paper, the city sold that land to Archway Commons in May 2012 for $2,461,000. That was $11.01 per square foot.

But the city also loaned Archway Commons enough money to cover the land's purchase, so no cash changed hands.

Before buying that land from the city, Archway Commons LLC got its own, independent appraisal of the property's value. That appraisal determined the land was worth $9.25 per square foot as of January 2011.

Archway Commons, however, agreed to buy the land from the city for more than its market value. All the land it bought was from the Draper and Cox property.

The city still owns the remaining 1.37 acres of the Draper and Cox land, plus all of the church property it purchased. City officials said they hope that someday enough funding will be acquired to build more apartments on the vacant land.

Modesto officials acknowledge the city already has contributed $8,132,290 toward the Archway Commons project, including the value of assorted building fees it did not collect.

The city allocated an additional $1 million from a federal housing program to the project.

Of that $9.13 million total, about $8.2 million is in the form of 55-year "soft loans" at 3 percent interest.

Unlike a conventional loan, payments on these city loans have to be made only after all the project's ongoing expenses are covered. So during years when the project doesn't make enough money, loan payments don't have to be made.

One thing that should help Archway Commons be profitable is that it will not have to pay property taxes.

If the housing project were taxed like privately owned property, the $21 million apartment complex would have to pay about $210,000 per year (1 percent of its value) in property taxes.

Archway Commons will be exempt from paying those taxes.

Bee staff writer J.N. Sbranti can be reached at jnsbranti@modbee.com or (209) 578-2196.

• • •

ARCHWAY COMMONS AT A GLANCE:

• 1101 Carver Road near Ninth Street, Modesto

• 76-unit apartment complex for low- and moderate-income renters

• First 32 units opened Tuesday, with additional units opening this fall

• Total cost: $20,987,676

• What was built: One-, two- and three-bedroom apartments, a central clubhouse and community center, swimming pool, tot lot, barbecue area, resident garden area, open-turf playing fields and a computer learning center

• Who will live there: Residents who earn 30 percent to 60 percent of Stanislaus County's median income

• What rents will cost: $377 to $800 per month, based on each family's income and apartment size

Construction project's funding sources:

• $10,768,256 — Funds from investors, who will receive state and federal tax credits

• $8,132,290 — City of Modesto, including value of loan and deferred fees

• $1,000,000 — Loan from city of Modesto, using money from federal program

• $592,000 — Loan from Chase Bank

• $352,866 — Stanislaus County deferred building fees

• $142,264 — Assorted sources

Information on how to get on tenant waiting list is available at www.eahhousing.org.

• • •

Here's who was involved in Modesto's Archway Commons land deal:

• The 2008-09 Modesto City Council/Redevelopment Agency: former Mayor Jim Ridenour, current Mayor Garrad Marsh, Councilman Dave Lopez and former council members Brad Hawn, Will O'Bryant, Janice Keating and Kristen Olsen

• Greg Nyhoff — Modesto's city manager

• Julie Hannon — Then-acting director of the city Parks, Recre-ation and Neighborhoods Department

• EAH Housing — A nonprofit San Rafael agency that builds and manages government-subsidized housing complexes for low- and middle-income renters. Felix AuYeung has been managing its construction of Archway Commons in Modesto and Avena Bella in Turlock.

• Paul Draper — The principal investor in 4701 Stoddard LLC, which owned an interest in the Carver Road land where Archway Commons was built. Draper also runs Centerra Capital in Modesto and numerous other limited-liability corporations.

• Sylvia E. Cox — A Turlock resident whose trust owned an interest in the land where Archway Commons was built

• Joe Muratore — Worked for Paul Draper's Centerra Capital from 2005 until December 2008, during which time he oversaw efforts to get the Carver Road land annexed into the city. Mura-tore co-founded Sentinel Rock Realty Trust in 2009 and later NAI Bench-mark. He was elected to the City Council in November 2009 and has abstained from votes involving Archway Commons.

• Ryan Swehla — A Modesto real estate broker who served as a consultant for EAH Housing during 2006 through 2009. He worked for Centerra Capital for 10 months during 2005 and 2006. Swehla co-founded Sentinel Rock Realty Trust in 2009 and later NAI Benchmark.

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