May 23, 2013 -- As Redevelopment Agencies (RDAs) unwind throughout California, the State is threatening to force Santa Monica to sell part of a once-in-a-generation “dream site” in the heart of Downtown.

As part of the dissolution of RDAs, the State Department of Finance (DOF) is expected to review -- and possibly force the sale of -- properties bought by the now-defunct agencies, including half of the three-acre site between Fourth and Fifth Streets south of Arizona Avenue owned by the City.

AB1x26 -- the law that dissolved RDAs -- requires that assets of former RDAs be sold in order to pay off the agencies' obligations or to funnel the money back into county coffers.

But the DOF could be faced with a difficult task if it tries to force the City to sell a prime piece of real estate Council members have called a “dream site” that offers a once-in-a-generation opportunity to develop a large parcel Downtown.

An analysis of sale documents obtained by The Lookout under a Freedom of Information Act request found that a number of legal entanglements could make it difficult to find a buyer for the site, which was transferred to the City in anticipation of the demise of the State’s 400 RDAs.

When the City's former RDA bought two separate properties along Fourth Street in 2010, it agreed to pay out the $42.5 million to the six sellers -- two private trusts and four nonprofits -- over 32 years, according to the sales documents.

According to sources familiar with the sale, the payments were structured at the sellers' request in order to avoid taxes on lump-sum payments. The payment structure could prevent the DOF from forcing the City to sell the properties, since little cash would be left over to pay for the former RDA's obligations.

“It would be difficult to sell the property,” said Director of Housing and Economic Development Andy Agle. “The mortgage is going to affect how a buyer considers the value of the property,” he said, adding that the terms of payment could lead to buyers undervaluing the property.

In addition, “the sellers' have the right to approve any transfer of the property,” Agle said. “If they had any concern that their payments would not be made by a new buyer,” they could contest the purchase, he added.

Still the DOF reserves the right to review properties that were transferred from the RDA to the City.

When the City learned about Sacramento's plans to dissolve RDAs as part of the governor's efforts to balance the State budget, it transferred ownership of the site to the City.

After the property transfer, “The (Redevelopment) Agency would reimburse the City for lease payments,” according to a source familiar with the sale.

The first payment on the property was just over a quarter of a million dollars, documents show. But that payment will soon rise to about $4 million a year, according to the payment schedule.

The State DOF has approved former RDA funds for those payments for now, but that could change, officials said.

If so, the City would likely have to pay out of its General Fund to make good on the contract. That is, unless the City can find a developer to sub-lease the property and subsidize the annual payment.

Developing the property has always been the plan. Last April, the City Council voted unanimously to seek developers to turn the parcel into a town square of sorts Downtown, with public spaces.

City officials undertook a lengthy public process to obtain public input on what should go on the site. The site is one of five “opportunity sites” Downtown that City planners are proposing should have height and density restrictions determined on a case-by case basis by the Council.

In April 2012, City planners reported to the Council that the public wanted a mixed-use development with an animated ground floor that includes residential, retail and possibly offices and ample public space, with plenty of public parking.

Most of those who weighed in also want to make sure that any development on the site would retain the annual ice skating rink.

But things have been on hold as the City waits to see how the property reviews by the DOF unfold.

City officials maintain that the County and other taxing entities stand to make more money in the long run by letting the City develop the property.

“It's my sense that both the rents associated with the long-term lease element as well as the taxes would be beneficial for the taxing entities,” Agle said. “If there was a long-term ground lease, there would probably be some sharing of those ground rents among the taxing entities.”

If the City is able to hold on to the property, it would be able to leverage more community benefits from anyone who leases it for development, City officials said.

Agle pointed to the Civic Center Village development, which is built on City-owned land leased to a developer for 99 years.

The City was able to leverage the lease to get the developer to build 160 affordable apartments in the development, he said.