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Flurry of Lawsuits Expected as California RDA Dissolution Continues

LOS ANGELES — More than a year has passed since a California Supreme Court ruling set in motion the dissolution of the state’s 420 redevelopment agencies.

The wind-down process remains a complex and painful one for the cities and counties who took on the role of successor agency.

Just a week before the Dec. 29 anniversary of the ruling, the state’s Department of Finance sent out letters denying funding to 240 successor agencies who had filed appeals on earlier rejections. It also sent out 120 letters regarding disputes on funding left over from affordable housing programs.

The agencies were dissolved under the terms of a law passed in 2011, along with a companion bill that would have allowed RDAs to stay alive if they shared revenue with the state.

The state Supreme Court struck down the companion bill in late 2011; the dissolution of every single redevelopment agency was something of an unexpected consequence.

Since then, documents submitted by the agencies have been reviewed to determine which obligations of the old RDAs are valid and need to be honored by their successors.

The denials impacted two football stadium proposals as well as affordable housing projects up and down the state.

One denial involved an appeal on funding for a new San Diego Chargers football stadium in downtown San Diego, and another appealed $30 million for a new San Francisco 49ers stadium, that is already under construction in Santa Clara.

The dissolution has already resulted in 30 to 35 lawsuits from developers and one from bond insurer, Syncora Guarantee, said Dan Slater, a partner with Costa Mesa, Calif.-based law firm, Rutan & Tucker LLP.

A hearing in a lawsuit brought by the San Francisco 49ers against Santa Clara County in June will be heard in Sacramento County Superior Court on March 22.

Syncora’s lawsuit, also headed for a hearing in Sacramento County Superior Court in March, claims dissolution of the redevelopment agencies is unconstitutional because it impairs contracts by eliminating tax increment, the security backing bond contracts, Slater said.

Slater and Bill Ihrke, also a partner with Rutan & Tucker, expect a flurry of lawsuits to spring from what Slater called the DOF’s “unreasonable determinations that certain contracts are not enforceable obligations.”

“It also seems as if the way to get the state’s attention is to file a lawsuit when these issues should have been resolved by the DOF,” Slater said.

Under the language of the legislation, “enforceable obligations” are contracts entered into by the former RDAs that the DOF determines the successor agencies can pay. For instance, the DOF denied most of the loans cities made to their RDAs for projects creating shortfalls in city budgets.

Some cities had partial success on appeal. While San Diego’s stadium plans were dashed, the city did receive $30 million of the $76.6 million it requested on appeal.

Letters sent to successor agencies by the DOF are posted on its website.

The appeals process outlined in AB 1484, clean-up legislation passed in June 2012, allows successor agencies the right to meet and confer with the Department of Finance to appeal determinations on tax increment money that once went to fund redevelopment agency activities.

Of the 420 successor agencies, 240 requested meet and confer sessions after DOF ruled on their Recognized Obligation Payment schedules, said H.D. Palmer, a Department of Finance spokesman.

Now that the state has gone through three rounds of ROFs, and there is a clearer sense of how strictly the state is reading the process and whether developers’ deals will be approved, more lawsuits are likely, said Cecilia Estolano, a former Community Redevelopment Agency-Los Angeles head and partner with the consulting firm, Estolano LeSar Perez Advisors LLC.

“Now is the time for them to decide if it’s a better recourse for them to consider litigation,” Estolano said. “We’ve advanced pretty far along, so this might be the time that some of this will shake out.”

Slater and Ihrke have filed two lawsuits for clients since the letters were issued in mid-December.

One Slater’s firm filed on behalf of be.group, a senior housing developer that had a $1.5 million agreement with Duarte, Calif. has been resolved already. The state attorney general’s office, which represents DOF in the lawsuits, reversed the state agencies decision, Slater said. The victory also salvaged $7.7 million from U.S. Housing & Urban Development for the 43-unit senior housing project that would have been lost.

Rutan & Tucker also succeeded in getting a temporary restraining order for CRFL Family Apartments, an affordable housing developer, against the Department of Finance following the denial of payments on a $15 million loan from Oxnard, Calif’s successor agency.

Even though the process is a year out, Slater and Irke said the process has not become smoother.

State officials have been consistent in approving funding to pay bond payments, but the state’s process has resulted in cash flow problems for cities acting as successor agencies that led to missed bond payments, Ihrke said.

The state also has taken the position that proceeds from redevelopment agency bonds issued between Jan. 1, 2011 and June 2011 when legislation eliminating the RDAs passed can’t be spent.

“At the time, many 2011 bonds were issued there was no RDA dissolution legislation before the legislature,” Slater said. “The state can’t retroactively impair lawfully issued bonds.”

Slater and Ihrke called the state’s take on this disheartening, unlawful and likely to be litigated.

In that six month period, they said at least 20 bonds were issued representing tens of millions of dollars.

By not allowing the successor agencies use the proceeds for those bonds as intended violates convenants.

Attempting to pay the bonds back early could result in violations of bond covenants.

“There is also the issue of them becoming hedge bonds if they are not used in the way they were issued,” Ihrke said. “There is also the issue then of whether tax exempt bonds become taxable.”

Even though last summer’s clean-up legislation was designed to prevent it, there will likely be a fire-sale of properties purchased by the defunct redevelopment agencies, said Larry Kosmont, president and chief executive officer of Kosmont Cos., a Los Angeles-based real estate and economic development firm.

Under the legislation, successor agencies will start submitting their property management plans to the state. Those plans were supposed to allow for management of properties, so that the properties would not end up being sold for less than market value, Kosmont said.

But he suspects that successor agencies will dispose of many properties in mid-2013 to 2014 resulting in thousands of properties being sold in a short amount of time.

“This is like the housewives of Miami, the housewives of Atlanta and now we have the housewives of New York,” he said.

Kosmont compared the drama created by each phase of the dissolution process to a reality show.

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