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Lennar's investment in the first phase are its predevelopment costs – including paying the city's redevelopment bills for some four years – valued at $20 million. The developer is scheduled to make back that investment, plus another $14.2 million in profit. City officials have repeatedly said that the developer's profit is based on the risk Lennar took in paying out predevelopment costs before the land was even available. "Lennar has taken a risk for property that is not owned by the city and has really shown a commitment to the city and the people of Bayview-Hunters Point by putting up money," says Lennar spokesman Sam Singer, whose firm represents the developer in San Francisco.
But Lennar is developing land it did not have to buy. And more than half of construction costs for infrastructure in the project's first phase will be financed through public bond sales, according to city officials involved in the deal. More than $13 million of Lennar's $20 million investment in the project was generated at Lennar's discretion, and $10 million will be refunded to Lennar/BVHP from bond funds before construction ever starts. Meanwhile, Lennar holds an exclusive right to develop the city's property – a potentially lucrative right that has not been assigned a monetary value during consideration of the deal.
Under the first-phase contract now under consideration, Lennar will also be protected from liability for any unforeseen environmental problem that may arise during or after building at the shipyard. Federal law dictates that the Navy is required to clean up any environmental problems on the property before it's transferred, as well as anything found later. But Lennar/BVHP's deal with the city also includes a $150 million private environmental insurance policy, to cover interim costs, should there be a toxic surprise, with the Navy not immediately responsive. The nearly $700,000 premium for the insurance is to be paid for out of proceeds from the sale of shipyard land before the profits are dispersed.
So with environmental risk largely eliminated, and with a profit guaranteed once the first-phase land is sold, and with the option to buy first-phase land, build houses there, and then sell them, it would seem that Lennar faces only one major financial risk in regard to the shipyard deal: Lennar, one of the nation's largest developers of homes, may lose money if it can't build and sell homes for a profit in a city with a severe housing shortage.
If the Phase 1 deal seems designed to insulate Lennar/BVHP from most financial risk, it poses a large potential risk to the city. Nothing in the present agreement prevents the developer from "cherry picking" the best parts of the shipyard land for development and leaving the rest. Lennar continues to hold an exclusive negotiation agreement that precludes the city from entertaining other development proposals, but the present development agreement only covers the first phase of the project.
In other words, Lennar is legally free to build and sell homes on the cleanest part of the base and then walk away from the rest of the project, leaving the city with no developer for areas that are designated for commercial and light industrial use -- that is to say, the areas that will bring permanent jobs. Lennar says it intends to develop the shipyard for the long haul.
"We believe ultimately that your partners are going to act in good faith," Singer says. "We believe that the Navy is going to act in good faith and clean up the land, and that the city will continue to participate, and so will we, even though this has been slower than we would like to have seen, certainly slower than the city and the neighbors would have liked to have happened."
Others, though, question whether Lennar is getting too much in the deal, and whether the claim that the developer has endured great risk is not greatly exaggerated. "The argument is kind of compromised," notes Eve Bach, a lawyer with the ARC Ecology environmental group. "We're down to a much smaller amount of money that they're putting up [than if the developer fronted construction costs]. The question is, how much is the city paying to get this front-end capital, and how does that compare with what they could borrow?"
Back in 1993, the Hunters Point Shipyard Citizens Advisory Committee issued a list of priorities for developing the former shipyard. Nearly all of them had to do with jobs. Employment, in fact, is a common concern among communities where hundreds or thousands of jobs evaporated when the military closed up shop.
For example, Sacramento County turned its former military bases into industrial parks, including an airport and a technology campus, as the military was cleaning them up. "Replacement jobs is number one," says Sacramento Economic Development Director Paul Hahn, whose city has seen three military bases close, including McClellan Air Force Base, which employed some 12,000 civilians. "You have to look at what they [the military] did, and what is the contamination, and what are the facilities, and come up with a re-use plan that makes sense.
"Industrial and commercial development came first, and housing came second. First and foremost, the county was focused on trying to get jobs."