Smart investment or spending money it doesn’t have? City looks to buy downtown block

The City Council is expected to vote Tuesday on whether to spend $3.1 million to buy an entire downtown block that officials say could one day play a pivotal role in revitalizing the city center, though the mayor has strong reservations about the proposal.

The block is bordered by Ninth and 10th streets and E and F streets. The property is home to nine businesses, including El Sol restaurant, SmogTech, Stonehenge Indoor Climbing Gym, Three Rivers Christian Fellowship and Earl Scheib Paint and Body. A city report says Modesto has no immediate plans to remove the tenants if it purchases the property and would collect rent from them.

The approximately 2.75-acre property is owned by Victor and Iris L. Martinez, trustees of the Martinez Trust. The city report says Modesto considered purchasing the property for $2.5 million in 2015, but could not reach a deal with the owners.

The report says the property is close to key downtown maintstays, including the Gallo Center for the Arts and the proposed Altamont Corridor Express train station and could be redeveloped to include high-density housing, private and nonprofit businesses, a public safety campus and other government services.

The deal is not final even if the council approves it Tuesday.

Modesto would have 120 days to conduct its due diligence and can back out during that period. Community and Economic Development Director Cindy Birdsill said Modesto would not need a reason to back out of the deal.

A city report says the due diligence includes inspecting the property, engineering and environmental studies, reviewing the tenant leases, and having the property appraised. The report says the $3.1 million purchase price stays the same if the appraisal comes in higher, but the city and property owners may negotiate a new price if the appraisal comes in lower.

The report says Modesto’s only costs during due diligence would be about $10,500 for an appraisal and environmental studies.

Modesto would pay for the property by borrowing $3 million from its fleet operating fund and taking $100,000 from the money it has received from the state project to build a new downtown courthouse. But half of the $3 million came from the city’s general fund, according to interim City Manager Joe Lopez. That’s critical because the council has wide latitude in how it spends general fund dollars, which can be used to tackle deferred maintenance, helping the homeless, improving city parks and other purposes.

City departments pay into the fleet operating fund. Lopez said the fund has about $7 million in it, with half of that from the general fund. The fleet fund has a large balance because it collected money to build a maintenance facility, which has not been built. Lopez said the council will discuss the fleet operating fund and the facility this year.

Modesto would pay back the $3 million loan with interest over 20 years from tenants’ rent. The report says the net rental income is sufficient to pay back the loan but acknowledges that does not “account for unforeseen maintenance costs and potential vacancies” and it is “staff’s intent to make debt service payments without the use of General Fund resources for as long as possible.” Modesto could roll the loan into the amount that is borrowed to redevelop the property, according to the report.

The City Council has discussed this proposal in closed session and it has enough support from council members for it to come to a public vote. But Mayor Ted Brandvold is not among the supporters.

“I’m concerned that we don’t have $3.1 million sitting around for this type of purchase,” he said. “We’ve got many other things we could spend the money on. We’ve got retirement (pension) promises, a homeless problem, we’ve got many things.” He also questions how Modesto has not fixed the leaky roof at Fire Station No. 1 yet it has the money to buy a downtown block.

Brandvold said Modesto does not have the expertise to be a landlord, and the city does not have a well-thought-out plan for redeveloping the block. “I’m concerned we are getting into property ownership and management and this not what cities do,” he said. “We don’t have a good history of money-making ventures in this city. We subsidize the civic center (Modesto Centre Plaza).”

Councilman Mani Grewal said he understands the mayor’s concerns and the need for the city to be fiscally responsible. He said the council has shown that it is fiscally prudent through such actions as increasing general fund reserves from $3 million to nearly $16 million. But he said the city also needs to make smart investments that improve Modesto and this purchase could be one of them.

Grewal said downtown is coming back, the property has potential and what the current owners charge in rent is below market. He stressed the city could walk away from the deal if the due diligence turned up problems. He also wants Modesto to talk to its downtown partners during the due diligence period about how the property could be redeveloped. “It would be irresponsible of us if we didn’t (consider) the opportunity to purchase an entire city block,” he said.

The council meets at 5:30 p.m. in the basement chambers of Tenth Street Place, 1010 10th St.

This story was originally published September 4, 2017 at 2:32 PM with the headline "Smart investment or spending money it doesn’t have? City looks to buy downtown block."