The Art of the Municipal Deal

The Art of the Municipal Deal
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Attending the US Conference of Mayors in January, I was struck by one particularly distressing and costly observation. Local governments are great at doing any number of things, from providing public safety to creating and maintaining infrastructure and – in some cases – engaging in urban planning. But there is one pursuit in which cities seem to falter like rank amateurs: deal making with developers.

In negotiating contracts with suppliers, municipalities are sometimes very cost-conscious, leveraging volume – and ideally partnering with other municipalities – to make good deals. The idea, of course, is all about cost savings for all of us – the taxpayers.

But across the table from developers, cities have about as much chance at success as Harry Frazee at a Vegas roulette table. To paraphrase a Swedish expression, developers routinely wipe the floor with cities.

Beverly Hills itself has had an unenviable history of being on the wrong side of a good deal, although we have advantages which other cities don’t. Nevertheless, we were routinely getting our clocks cleaned each time we entered into a development agreement. Here’s just one example:

Around nine years ago, a developer, George Comfort & Sons, proposed a building which would have exceeded the permissible height and density allowed by the City’s General Plan. The Beverly Hills General Plan envisions the City as low-rise, human-scale and livable and, as such, commercial development is limited to 3 stories and a height of 45 feet, along with a floor-area-ratio (FAR) of 2:1 (so if a lot is 10,000 square feet, the maximum allowable total square footage of a building would be 20,000 square feet). When Comfort purchased the lot, they were fully aware of the zoning and the size of the building they would be permitted to construct, along with the parking requirements.

Yet they applied to build a 6 story building under the pretense that the William Morris Agency, long a staple of the Beverly Hills entertainment industry, would otherwise move out of the City. By the time the dust settled and the deal was negotiated, Comfort got to build a 6 story, 88 foot tall building with an FAR of 3.6, or 77,000 additional square feet to which they were not entitled to build by right. In other words: the real estate version of alchemy, of turning literally nothing into the gold of Beverly Hills’s Golden Triangle.

What did the City of Beverly Hills get out of it?

It should be noted that cities face considerable disadvantages and a stacked deck in negotiating with developers. In Beverly Hills we have to deal with a raft of ex-mayor lobbyists who regularly represent developers in dealing with the City to make a deal. When developers are permitted to build above and beyond what the General Plan allows, they can be required to enter into a development agreement which provides public benefits. After all, if the City is creating preconditions which allow the developer the ability to increase its profits disproportionately, the public should have a right to benefit.

In the case of the Comfort deal, which effectively doubled the value of the property, worth tens of millions of dollars, if not nine figures, the City of Beverly Hills got $375k and an unenforceable promise that the William Morris Agency would move into the new building, thereby remaining in Beverly Hills. When the City’s Planning Commission asked for a written covenant ensuring that William Morris would actually move into Beverly Hills and a requirement that 70% of the building’s use remain entertainment-related in perpetuity, they were shot down by the Council, led by councilmember Linda Briskman. “Of course, William Morris is going to move in,” she said (in paraphrase). “We don’t need no stinkin’ covenants.” And so there were no contractual assurances that William Morris would actually ever move into the building which was supersized so they would stay in Beverly Hills. As it turns out, William Morris never did move in to Comfort’s building.

Would you be really surprised to note that the lawyer representing the developer was ex-mayor Mark Egerman, a close friend, ally and former colleague of Linda Briskman? A great deal for his client turned out to be a terrible deal for the City he had previously led as mayor.

Of course, other cities can add their own chapters to the book, “The Art of the Bad Deal.” Just last year, the city of Anaheim granted a developer – none other than Disney itself – a rebate of 70% of bed tax revenue for 20 years. It was corporate welfare to the tune of some $280 million in taxpayer money. As if without the corporate welfare, Disney would have built a luxury Disneyland hotel elsewhere. As I wrote at the time, the notion of “the Disneyland hotel of Tustin” is even more absurd than “the LA Angels of Anaheim.”

And yet despite the best efforts of Anaheim’s principled Mayor Tom Tait to put his residents first – quite rightly, he felt that the residents of Anaheim could use the tax income more than Disney – Disney ended up getting their $280 million in corporate welfare. No, it wasn’t an ex-mayor lobbyist/land use lawyer (though Anaheim’s ex-mayor lobbyist Curt Pringle does seem to have his tentacles entwined in various schemes when private profit is pitted against civic interest), it was three out of five councilmembers who chose to put Disney’s financial interests above the interests of the taxpayers and residents of Anaheim. Disney first. Residents last. Would you be really surprised to note that the three councilmembers who betrayed their own residents had been heavily supported in their election campaigns by Disney?

It is against the background of cities’ clocks being constantly cleaned that we entered into negotiations last year with the Wanda Group, which proposed converting an entitled project from an all-condominium development, to a mixed use project with a hotel and condos.

As a vocal critic of bad municipal deals in the past, including the William Morris scam and the Disney luxury hotel caper, as mayor I was determined to negotiate a public benefit for Beverly Hills which would reflect the value the City was creating for the developer. Along with Councilmember Lili Bosse, I created an ad hoc negotiating committee which ended up negotiating what is indisputably the best development agreement in the history of Beverly Hills and possible one of the best agreements negotiated anywhere in the US between a municipality and a developer. In contrast to the $370,000 chicken feed Beverly Hills received for the William Morris project, we did a deal which will bring the City an estimated $820 million over 30 years, including $60 million in up-front fees.

That’s right: the better part of a billion dollars.

It’s true, I have a background in negotiation: I spent years negotiating film rentals with European exhibitors, who are among the roughest, toughest customers anywhere. While that skill set certainly came in handy, our recipe for success wasn’t really based on anything other than our desire to do right by our City, by our residents, our understanding of the project and the developer and our willingness to walk away from any deal which did not adequately reflect the value the City was helping to create for the developer. And the results seem to be somewhat unique within the world of municipal dealmaking.

While, as in all our endeavors, our goal is to set an example of good municipal government, it’s easy to understand why cities throughout the nation are leaving hundreds of millions of dollars on the table. That’s potential taxpayer money which could be used to fund municipal services and to improve the lives of the residents. That’s money which could be used to help our homeless, to create green space or to increase our mobility options. Yet cities simply do not have the discipline and/or intestinal fortitude to match the (in the words of a former Council colleague) “flesh eating shark” negotiators on the developer’s side of the table. Never mind the influence of the ex-mayor lobbyists and councilmembers bought-and-sold by the developers who are unable to put the residents first.

The first step towards better deals for cities is self-awareness and a newfound confidence in the value which cities can create for developers. Don’t get me wrong, I’m not suggesting cities sell themselves out and violate their general plans for a payday if it doesn’t make sense for future development. But in those cases in which the developments do make sense, cities need to get into the habit of making good deals.

Good municipal deals would ultimately be good for everyone: for cities, for their residents, and, yes, even for the developers themselves. Because strong, fiscally stable cities can provide residents and businesses with needed services. Strong cities are the basis for a quality of life which creates the preconditions for the developers themselves to be successful.

Now, once cities around the country start making those good deals, if we could only learn to do a better job of providing the best value for those taxpayer dollars…

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