According to the developer, Mike Kriozere, One Rincon Hill Tower One sits at around 70 percent sold which would suggest almost no net-new contracts since October of 2008 when roughly 30 percent of Tower One inventory had yet to close.
And according to The Chronicle, said developer “does not plan to pay the $5 million in fees that were central to obtaining city approval to build the high-rise.”
The poor economy has stalled plans to build a second, adjacent tower, and Kriozere said he anticipates that the existing building will lose money. As a result, he does not expect to pay the development fees that would have been spent on things like affordable housing, rent subsidies and job training programs.
“I did not give a personal guarantee that if the building failed to make a profit I would personally write them a check,” Kriozere said. “Any money has to come out of the sale of the units because I’ve made no personal guarantee of anything.”
Kriozere left open the possibility that sales could improve and the fees could be paid, but he was not optimistic.
The question(s) to be answered, were the fees to be paid upon success or simply upon development? And if the agreement was written based on success, who did the writing?
∙ City fees for One Rincon unlikely to be paid [SFGate]
∙ It’s “Official,” One Rincon Hill’s Tower Two Is Indefinitely On Hold [SocketSite]
∙ A Return To Reality For A One Rincon Hill “02” Stack Resale (#2202) [SocketSite]
∙ One Rincon Hill (425 First Street): Secondary Market Stumbles [SocketSite]
What a great morning. Getting back from a gorgeous bike ride around Marin, I lol’d at Joe’s [comment]. And then this on the front page on the Chomicle this morning:
City fees for One Rincon unlikely to be paid
The developer of the new condominium tower that dominates San Francisco’s southern skyline has told The Chronicle that he does not plan to pay the $5 million in fees that were central to obtaining city approval to build the high-rise.
The developer of One Rincon, Mike Kriozere, said that the 62-story skyscraper is only about 70 percent sold and that the condo prices have dropped precipitously since 2007 when they averaged $1.25 million per unit. (Emphasis Added.)
I’m surprised that made it through the censors. Lots of other fun tidbits in the article.
[Editor’s Note: Comment moved from San Francisco Recorded Sales Activity In March: Down 34.6% YOY.]
Daly, ORH, and the developer deserve each other. What a mess.
Perhaps they could have just bought Daly off with one of the Penthouse Units.
Maybe the chronicle wants to stay in business after all 😉
The city should take payment of the fees in kind, that is in the form of units which it could then rent at affordable rents.
This is not a very well written article, as it leaves more questions raised than answered. Has the developer made his other required impact and muni payments to The City? Has he made his other affordable housing fee payments? Is there some kind of mechanism in the contract regarding enforcement in case of default?
I imagine that The City will get its money, one way or another, but these kinds of problems will make the BoS less likely to want to make deals with developers in the future.
Could the city (Daly in this case) have been so stupid as to permit a term stating that these fees are to be paid from profits, which are so easily manipulated? Sounds like that has to be the case, otherwise the developer’s position makes no sense at all.
A lot depends on the organization structure the developer used. If it was a special purpose entity with the sole goal of this single project (a bankruptcy remote LLC), then the city will probably never receive payment.
Glad to hear the parasites might not get their bribes.
Funny how when I build something, I have to pay fees up front. But these developers pay out of profit at the end. Nice.
The city may be able to seize the unsold units at ORH and turn them into the low income housing that it needs.
This would really be a win-win for everyone*. The developer would get to unload units he’s never going to be able to sell, and the city would have a ready place to house released felons: gang members, rapists and the like. It really works for everyone*.
*Except the people who already bought there – but they are already screwed.
No matter what happens, it should be a fun time watching what happens there over the next couple of years. The wheels have clearly come off the “Slap granite and stainless into a HORRIBLE location and get people to pay top dollar for their ‘luxury apartments'” market.
Unbelievable. Only good thing is this likely means we’ll never see built the big banal’s twin.
So if the city seizes unsold condos for payment in kind, what valuation will be used, and will the seizures be “legitimate” comps?
If the LLC, or whatever corporate structure was used that owns ORH, declares bankruptcy, where does the cities claim lie in the order of who gets their money back?
With the caveat that I’m a patent litigator and not a bankruptcy lawyer, NVJ, I’m fairly certain that the answer to your question re claim priority is “impossible to answer without a lot more information.”
Secured creditors go first and if I had to guess I’d say the lenders are at the front of the line (well ahead of the city).
So this guy has just admitted that he’s going to flout his committments by screwing the poor? Charming.
Tax liens generally get all sorts of super-priority in bankruptcy (by statute at the Federal level for USG tax claims), but a key issue is whether a levy is a “tax” or a “fee”.
I’d guess that these developmet levies are not going to pass the smell test as “taxes”. With that as backdrop, I agree with Shza that we’d need a lot more info, but knowing lender covenants I’d bet these development fees are junior. If the city was dumb enough to not collect them up front (as, say, a condition precedent to granting the COO), I’d guess they weren’t smart enough to negotiate any superpriority claim status either.
So, the short answer to where the claims lie? I’ll guess ‘in money heaven’, along with the downpayments of anyone who was crazy enough to get their good cash mixed up in this folly (at those crazy prices). 30% unsold, plenty of the units (anecdotally) purchased by flippers and specs who are renting them out – it’s not hard to see where this is going. 50%+ declines from the peak prices for all but the most desirable units has got to be a base case projection.
As for the prospective use of the $5M – “things like affordable housing, rent subsidies and job training programs” – I’d imagine those uses do more long term harm than good anyway.
The article was not very well written, but the fact pattern is much more clear. The timing of the fee payments and some of the consequences of not paying are clearly set forth in the zoning code that governs Rincon Hill (see section 318) It is a public document.
It is hard to imagine why a Lender, or Investor, or any potential party of interest (other than Kroziere) would allow this to happen. It would appear to be a huge cloud over the project, title., etc.
The project does need a Certificate of Occupancy (from the city) and it does not want a Lien placed upon it ( by the City) –so it is hard to figure out what Krozere is thinking.
So while the City may not be a secured creditor, but they have a huge amount of leverage against those who are.
EH
It’s not the poor who are getting screwed. It’s the freeloaders who were looking for a nice apartment on the cheap. And since they don’t pay taxes, I could care less.
It just shows in hindsight what a poor negotiator Daly is, an experienced person would have had a guarantee.
While the article’s reader comments (and some comments here) show what miserable, hateful human beings live amongst us, there are some valid questions the article brings to mind about public infrastructure in the Rincon Hill neighborhood …
Wow –how are they selling none in like 6 months?
Their sales office tried to hold on too long to those artificially high prices.
still what the hell have they been doing?
More broadly, I’d like to see all these projects go forward but at this rate…who is going to build now. I can see a situation where we start getting those mass developer auctions to unload what the sales offices of these places don’t seem to want to.
Jamie, you are far closer to these issues than I. What is it that drives you to conclude that certain people are miserable, hateful human beings (and to whom do you refer)? From what I can discern, Chris Daly’s extortion tactics are by far the most despicable conduct in this whole story.
On another point, “taxes” are extremely difficult to impose since prop 13 (which was about all sorts of taxes, not just property taxes), so I’m quite sure the funds at stake are “fees” and would not get any bankruptcy priority. It would be great fun to see an eminent domain action flow from this, where “fair market value” is the final determination (the current owners would be better off simply assessing themselves a special HOA fee and paying off the $5M rather than letting this value see the light of day).
the current owners would be better off simply assessing themselves a special HOA fee and paying off the $5M rather than letting this value see the light of day
Agreed, but could you imagine the “response” rate? The building is only 70% sold, so there are only about 250 units or so that could theoretically pay the assessnent. It would be about $20K per unit assuming everyone pays! I bet not much more than 50% of the underwater owners would (or in some cases, even could) pony up. It’ll be a “Miami Mambo” watching everyone limbo lower to duck the charge. And on top of all that, with no tower 2, you have to think HOAs are going up anyway pretty substantially.
A total mess. They should unload the 30% unsold in a bulk sale to a hedge fund/vulture investor who will kick back the $5M to the city. Then they could blow out the inventory and we’d get price discovery.
About the development fees generally, I don’t know where to check and whether this is true, but a comment on SF gate stated that fees to the city for this project were $39.5M, which added over $100K on average to the price of each unit. Nice way to promote “affordable housing” and “rent subsidies” 😉
From the article: “At the time, no one foresaw the economic collapse and its depressing effect on construction loans and investment in new city projects.”
Yup. Nobody could have saw this coming.
It’s inexplicable!
You don’t need to unload it to a vulture fund satchel to get “price disovery”
just do a friggen auction. people will show up and the building will fill up in a day.
that builder sounds like he is still trying to “ride this out” and get the best price he can. i.e. hold out for some suckers. what a tool.
The developer has no motive to seek price discovery when he already knows that the “price” he is going to “discover” means his project is bankrupt.
I’m thoroughly unconvinced that the developer himself is “taking a loss” on this project. Perhaps the books for his LLC show a loss, but only after he’s paid many fees and salaries and whatever else to himself and his associated other business entities.
Since ORH included no BMR’s in tower one in lieu of paying the city a flat fee so that affordable housing elsewhere, the right thing to do would be seize the remaining 30% and turn them in to BMR’s IMO.
The developer sounds so terrible in this interview. It comes off as oh well since I didn’t make a profit I cant afford to pay my dues to the city where I built it. Terrible, tacky, and says a lot about Kriozere.
Jaime:
I know you live in the neighborhood so your comment about how hateful people are is biased and without cause.
Daly tried to extort money, but didn’t know how to do it properly like they do in Chicago or other cities well versed in graft. Now there is nothing wrong with your neighborhood as it looks a hell of a lot better than it did 10 years ago, but you’re not getting a bunch of cash for simply letting a developer bring value to the area like Daly wanted.
Sorry… move on.
I think this is probably just a negotiating ploy by the developer (at least I hope for for the sake of current owners). If the developer can’t afford to pay the 5 million (which in a project this size isn’t that much) he must be having severe money problems. This can’t be good for owners when they have to sell the remaining units at rock bottom prices.
I feel sorry for the owners there, ORH looks like a giant clusterf#&&k.
So does that mean they’ll be desperate enough to get rid of some of that other 30% at more “reasonable” prices.
With all these financial problems, I’m presuming that Tower 2 construction REALLY isn’t happening. I was looking at the previous comments regarding T2 from way back in October, and it seemed like people were thinking that since getting a permit to build a highrise was such a difficult thing to get, that the developer would just hold off on building T2 until the next boom, maybe 5-10 yrs from now. The developer would drag his feet until it becomes profitable for him again. Does anyone have any comments or insight regarding this?
Although all the promised ammenities of tower 2 are basically lost, at least the views would be conserved, right? I may be in the minority, but i don’t need a fancy gym or whatever else they were going to put into tower 2. If i were to look at a place like ORH to live, I would be getting it for the view. If these financial problems translate to them not building T2, it would actually make the remaining units in T1 more appealing to someone like me. Outside of the risk of higher HOA’s, is there something else to worry about? I’m not a real estate person, so is this naive thinking on my part?
Take your pick … whether it is folks saying they hope ORH crumbles in the next big earthquake, people saying that they’re ENJOYING watching the wealth destruction of others (in general) … there’s no redeeming quality to those comments anywhere.
@lmrim, shza at al – who have some interest in the fee issue, fees on development in SF are complex and do not follow a pattern per se.
on housing, over the past several years, most zoning has embodied some form of upzoning (more height) and the city adds fees to the developments in exchange for this “benefit.”
it takes 2 forms (1) more affordable housing and (2) impact fees. the impact fees have a long philosophical backdrop unique to SF but i cant get into that here.
for rincon hill, in exchange for upzoning to tower height of between 400 and 550 feet (generally from hgt of 250 feet), among other things, developers had to pay $11 psf for infrastructure upgrade in the rincon area (paid at building permit) and $14 psf for various community benefits in the SOMA area (paid at completion).
whether this if good, bad, fair, whatever, it was approved by the supes and is law. and every developer, lender and equity investor must understand, one would think, precisely what the requirment are AND would have provided funding for them before construction starts.
Jamie, no one has mentioned earthquake, and while there is a certain lack of sympathy for the developer (suspected of doing well), I didn’t see any lack of sympathy for the homeowners (I am assuming you mean homeowners when you mention others whose wealth is being destroyed). However, let me be the first: These homeowners have purchased the real estate equivalent of an SUV. ORH can ride out any earthquake and is probably the biggest, and certainly the most assertive, residemtial building in San Francisco.
This has nothing to do with aesthetics earthquakes or immature told you sos, this is all about DALY DALY DALY, and this is his legacy. I couldnt be more satisfied. A child in big boy suits.
The angle that no one (who is not an owner in the building) knows about is that this might be a leverage move by Kriozere in order to push the City to become a partial investor in the second tower through the use of Federal stimulus money. He announced last month at an HOA meeting that his company was in talks with the City about this possibility and this could be his way a creating a quid pro quo (i.e., if you loan in with Fed money, I’ll pay the development fees). Otherwise, I agree that it makes no sense because he’s alienating the City and still needs to sell the second tower to try and squeeze out a profit.
I sincerely hope this situation gets resolved quickly. I know of two people who bought in this building….even I was considering a unit this year here (waiting for price to come down a little more). Even though the location sucks (right next to freeway onramp), the building and units are actually very nice.
The biggest problem is not just ORH or it’s developer – it is Chris Daly! He has been running Dis 9 into the ground for years now. Several people (myself included) have tried unsuccessfully to recall him. He is an immature ass who steals from developers, ruins the image of our city and needs to be thrown out (and never seen again!). FYI – he makes a ton of money and lives in a BMR unit in SOMA. WHAT AN ASS!!!!
“The biggest problem is not just ORH or it’s developer – it is Chris Daly! He has been running Dis 9 into the ground for years now. Several people (myself included) have tried unsuccessfully to recall him. He is an immature ass who steals from developers, ruins the image of our city and needs to be thrown out (and never seen again!). FYI – he makes a ton of money and lives in a BMR unit in SOMA. WHAT AN ASS!!!!”
Amen to the above and thank god for term limits. I’m embarrassed to say that I live in his district. This guy actually makes politicians like Nancy Pelosi not seem like a complete nut bag…
This deal that Daly worked out wouldn’t survive a serious ethics investigation anyway.
Make no mistake, this was not money set aside for affordable housing. It was so-called mitigation for the impacts of building ORH, even though the construction site was a dilapidated building and the immediate neighborhood was non-existent. Most of the money had to be funnelled to neighborhood groups (probably in the Mission, not South Beach), that were obvious supporters of Daly. In other words, this was shaping up to be a political slush fund, and nothing more. It set a horrible precedent for doing business in the city.
Correct me if I’m wrong folks, but 1RH got additional zoning benefits for agreeing to the additional affordable housing fee. It was unanimously seen as a win win at the time. They got the benefits and now are trying to reneg on their payment for them. Sorry, but the city should take legal action against the developer and if necessary, the HOA if these fees aren’t paid.
It was unanimously seen as a win win at the time.
uh, no. Many people saw it for the extortion that it was.
“Low income housing is for gang members, rapists and the like.”
Wow. Let me tell you something, “low income” housing programs, the BMR program in particular, is not a giveaway for social deviants. Those that qualify for home ownership opportunities are typically hard working, educated professionals that earn modest incomes (by SF standards). A “low income” home buyer must have impeccable credit, come up with at least 10% down and be able to afford the monthly HOA fee (not discounted for BMR owners).
The program has its flaws, but I don’t know too many former gang members, rapists, etc. that meet the above criteria.
I’m sure Kriozere is trying to work out some deal with the city (which would ultimately involve city and federal taxpayer money). To me there are several clear messages from this project. If the developer (or any entity) can’t pay his bills, then just declare bankruptcy and let the market immediately clear the unsold units. As LMRiM and cooper noted, someone will step up and pay something for these units.
Also, doesn’t it seem that the way this project (and many others) were done is completely unsustainable in the long run? Construction costs are too high given the (free market) demand for the final product. Every cost element needs to take a hair cut (labor, materials, regulatory) if anything is going to be built in the future – unless the taxpayers are forced to foot the bill. These BMR requirements create distortions and disincentives and ultimately do more harm than good. What are the prospects for a rational city government when we keep electing people like Chris Daly? Is there another city in the country where Daly could get elected to any office?
Whether or not one agrees with the fees, it would be a bad precedent for developers to be able to renege on promised fees. First, the city and non-profits that aid the poor need the money. Second, the anti-development folks will have a field day with this. If you want to ensure that height limits are never modified again, and that every new building in SF will be squat and half the height it should be, then applaud the One Rincon developer. Without mitigation fees (even if they are to buy off opponents), and with the ill will created by the One Rincon developer’s bad faith, the anti-development forces will control public sentiment for a generation, with One Rincon remaining a lone reminder in the skyline.
Is there another city in the country where Daly could get elected to any office?
Perhaps not Daly, but corruption comes in many forms. The more typical corruption is pro-business corruption, of which there are hundreds of cases of someone as corrupt as Daly, just in a pro-business way, in cities all across the country.
(Not defending Daly, just saying that someone like, I dunno, Daley, is just as corrupt overall just with different end goals and supporters at the trough)
First, the city and non-profits that aid the poor need the money.
Unfortunately, this is only peripherally related to the poor. Daly and his cohorts NEED the poor to keep getting elected — they’re poverty pimps. It’s all about getting and staying in power. There are already BMR programs, etc in place. This went above and beyond all this to a new level of extortion.
the bmr requirements are such farking bs. they set the maximum income level such that if you are anything below it, you can’t afford to pay HOA+tax in addition to the mortgage; and if u make more then obviously you don’t qualify. even more bizarre is they penalize you for having savings – something like 10% of your savings is computed as part of your annual income – what’s the purpose of this? who the hell falls within these parameters to qualify to buy, without being overqualified or overstretching.
I was on the Bay Bridge yesterday driving back to the city and noticed the building actually doesn’t look too bad despite the awful location. (Personally I think it is 10-15 floors too high.) As someone else noted, why hasn’t the developer been pricing the units to sell? I’m probably being naïve but some cash inflow is better than zero. An aggressive sales effort is required, discounting units wherever possible to move the remaining inventory. (Infinity seems to be doing OK with this strategy so it should work for ORH.)
Also I don’t feel too bad for those who have already closed and are now under water. I can sympathize but they are the same folks who would have gladly taken profits if prices continued to rise. Every RE buy decision has risk and sometimes things don’t work out as expected. You take your lumps and move on. As for T2, that should be left on hold until the next up cycle. There’s already enough SOMA condo supply out there to meet the existing demand.
“Low income housing is for gang members, rapists and the like.”
there is no data that supports this claim, especially in SF, where low income (in relation to BMR) has an equal chance of meaning fireman, policeman, or teacher.
That said:
why bother having the city buy these units and then sell them as BMR units?
why not just sell them on the open market? The open market will very likely give you results similar to “BMR” practice, given the state of the economy.
Unfortunately, as we see daily, America has clearly devolved into a country that does not respect its own contracts. The goal is to milk every person for everythhing, and then to whine if it doesn’t go your way.
Take out a mortgage you can’t pay? You must be a victim. whine for foreclosure moratorium to keep you in “your” house.
give out too many mortgages to people who have no ability to pay it back? that’s ok. take a record bonus and whine to Washington how it was unforeseen.
Take out TARP money that allows you to stay in business, then later find out there may be strings attached? whine that it’s unfair, and that you want to give the money back WITHOUT having to pay the warrants that were in the initial deal.
build an ill-conceived tower in a bad location and try to hold out for prices that are not reasonable? whine that you can’t pay the money you agreed to pay the city.
perhaps Phil Gramm was right, we are a nation of whiners.
There’s already enough SOMA condo supply out there to meet the existing demand.
At existing prices maybe. Drop prices another 25% and more demand will follow. Drop prices by 50% and I’m going to go ahead and guess that all units available in SOMA now would be snatched up rather quick.
I wouldn’t place a bet on “anti-development” folks trumping “save the environment” folks who see a need for high-density housing near our job centers and transit hubs to get people out of their cars and “spare the air.”
the most astute and knowledgeable person on this comment board seems to be Louis, as he gets the facts right on. The fees are set in stone for all to see in the Planning Code, and it applies to all development in Rincon Hill, not just Mike Kriozere. It was not a deal between two parties or a negotiation that Daly and the Mike Kriozere shook hands on. It is the law, and it was signed into law by Mayor Newsom. The facts are not up for dispute. The suggestion by Kriozere that there is any financial circumstance which would alleviate him of his obligation is preposterous. If he doesn’t pay, hefty interest penalties would ensure, follwed by liens against the property. The City will get its money. This is not Chris Daly’s money and never was, for you Daly-obssessed folks can’t see the forest for the trees.
I think the other thing that may be going on here is more in the nature of attorney negligence than anything else. In other words, the language that was drafted to describe Kriozere’s obligation to pay the development fees may in fact entitle him to do exactly what he’s doing. If that’s true, then the reality, we, the residents of SF, are in even worse bureacractic hands than we thought.
I imagine that’s exactly what’s going on here. Kriozere’s lawyers were better than the city’s lawyers and now the city wants Kriozere to pay because he is legally required to do so, but because he has a “moral imperative” to do so notwithstanding the fact that he is following the letter of his obligation. Does anyone have a cop of the development agreement where it references the obligation to pay the development fees?
Sorry SF, but if that’s true, then you lose…..next player please….
The last thing I could ever want my stimulus or tax payer money going to it the building of ORH T2. That’s the craziest thing I’ve ever heard of!
What a great day.
….”I’m going to get really rich,” said developer Michael Kriozere…to the SJ Business journel back in 2005.
Sucka!
Isn’t it ironic that there was an entire SocketSite thread two years ago about whether or not the people who had paid deposits to reside at ORH in SF could wiggle out of their nonrefundable downpayment obligations to screw the evil developer. How many people posted that it would be unethical to do that to the developer?
How the tables have turned completely around! The developer does not seem to have any such moral problems when the shoe is on the other foot!
No offense, anon 1:09, but I don’t think you really understand how an LLC or priority of payments works. The developer can pay himself whatever he wants as long as the invstors ok’d it. He could have made millions from this deal, and even if the development company files for bankruptcy protection it doesn’t mean anything against the salaries that have already been paid. Many people have gotten very wealthy while running other people’s investments into the ground. So who’s the Sucka now?
Re the new headline: “Stimulating San Francisco To “Partner” On The Second Tower At ORH?”
Yeah, I always like to “partner” with other people’s money.
No way in hell should the city bail out this (or any other) failing project: when you’re in a hole, stop digging. Attn. Chris Daly and anointed successors: I live in district 9 and this is a hot button issue for me.
Rincon Hill is firmly in District 6, Chris Daly’s district … not “District 9” However, redistricting comes up to bat in a year or two …. my how the census for zip code 94105 SHOULD look different. In time to save Muni services? nope.
[Editor’s Note: Rincon Hill is within real estate District 9 (political District 6).]
@jamie —
Sorry, I meant d6 (political).
“No offense, anon 1:09, but I don’t think you really understand how an LLC or priority of payments works. The developer can pay himself whatever he wants as long as the invstors ok’d it. He could have made millions from this deal, and even if the development company files for bankruptcy protection it doesn’t mean anything against the salaries that have already been paid. Many people have gotten very wealthy while running other people’s investments into the ground. So who’s the Sucka now?”
Thanks for the lesson, sucka. I know very well how an LLC works but at the end of the day Kriozere would have made a lot more money if the project was successful. So yes, he may have made great money but not nearly as much as he would with a successful project. Now the developer has a huge failure and troubles with the city to deal with.
Speaking of redistricting and census, the federal census is unerway right now. There’s been a census taker working on my street all day. I actually spoke to her. She agreed that SF probably has more people than any of the signs indicate. And said that it is a very difficult city to work within due to the closed nature of some segments. She said that in the end they sometimes need to estimate, and to move on.
Some (if not most) of the anti-Daly comments here are preposterous, ridiculous, and completely uninformed.
Some (if not most) of the anti-Daly comments here are preposterous, ridiculous, and completely uninformed.
Please enlighten us. He’s a hothead and an embarrassment. What has he accomplished for his district (at least those outside the tenderloin)?
missionite – I’ll stand by my comment that there is not another city in the US where Daly could get elected. Maybe he could go back to Havana (where he met his soul mate wife) and run for office – or how about Pyongyang. Not sure about the citizenship requirements – but I don’t think he’d have any qualms about renouncing the US constitution.
i think if we turned this into an anti-Daly thread it would end up being thousands of posts long with MUCH much worse
Michael Kriozere Responds: We’re Planning On Paying Damn It! (And we’re feeling a little better about our two questions above.)