In 2009, it would have been difficult to find anyone who wanted to build in downtown Oakland, Calif. The capital markets had fallen apart, unemployment was rising, and the city had its own distinct issues that could scare even the most steadfast of developers.
“On the surface, everything looked like a mess,” says Frank Middleton, director of the West Coast division of Atlanta-based Wood Partners. “Oakland was portrayed as a war zone by the national media. The analysts’ reports were saying the market was saturated.”
But Middleton was determined to redevelop City Walk, a shrink-wrap-covered, partially finished mixed-use project in the heart of downtown Oakland. This was despite the economic problems plaguing Oakland, the broader capital markets collapse across the country, and even challenges internally at Wood.
Getting a project to the finish line in the past couple of years is not easy, though. Since closing in September 2009 in hopes of bringing the project to completion, Middleton has had to show his company—and its partners—that there was hidden demand for the project (which became rebranded as the Domain at Alta), that the construction issues presented by the project were manageable, and, most importantly, that securing debt and equity for the deal would be possible.
Middleton wasn’t the first developer with a vision for the site two blocks from Oakland’s City Hall. In fact, Olson Co., a developer out of Seal Beach, Calif., bought the site from Oakland’s redevelopment agency in 2004 for $8.7 million. In 2005, it began construction on a 264-unit apartment and retail project. In 2007, its contractor declared bankruptcy.
Liberty Mutual, the surety company, paid off the lender, Wells Fargo. Olson then paid down Liberty Mutual for the project and decided to sell the partially completed property. In September 2008, Olson went to Colliers International to broker the deal. Eighty different groups signed confidentiality agreements. Wood won the project at $5 million after other bids fell through. Many other bidders wanted to tear the project down, use the garage, and wait for the market to come back to rebuild it. “There were all of these engineering reports that said there were problems much larger than they actually were,” Middleton says.
Though Olson accepted Wood’s offer, the developer had to close within 30 days. That meant Middleton’s team had 30 days to scour through engineering reports on the project and determine the best course of action to move forward. “We got in and tore apart all of the documents and started weeding down to a real story,” Middleton said.
For instance, the reports said the steel-frame structure wasn’t sound. Testing found that this wasn’t the case. Middleton, in fact, thought the frame was an advantage because it meant a reduced chance of mold. Wood brought in experts from Florida, Texas, Atlanta, and California to understand the warranties on the project and inspect the integrity of the construction.
“We have a very qualified risk manager,” Middleton says. “The construction guys came in and did due diligence down to the tolerance of how this thing was put together in working with the engineers.”
Finding the Market
Getting comfortable with the physical structure was one thing. Getting comfortable with the market presented its own set of challenges. Middleton had actually planned a family vacation to Brazil in the summer of 2009. But when the Oakland deal became a reality, he had to pull out of the plans. “I stayed back for six weeks and just went through an intense level of due diligence,” he says. “I was breaking apart the analysts’ reports, much like the construction guys were breaking apart construction reports.”
The first step was checking out the competition. Analysts predicted that another 3,500 units were coming online in Oakland, but Middleton was skeptical of those numbers. “I got out on the ground and saw that some of the projects we thought were under construction were not,” he says. “They might have been moving dirt, but they weren’t going vertical.”
Supply was one issue, but demand was another. Though Oakland was struggling in some submarkets, Middleton discovered that the area around the Domain at Alta was flourishing. “While the world was going into crisis, there were restaurants and clubs opening up in Oakland’s Uptown,” he said. “I went into the bars and talked to people who were leasing in the area and found a countertrend going on.”
But Middleton needed data to back his anecdotal nightlife research. He churned the Bay Area Rapid Transit (BART) ridership data to find the stats he needed. “I found out that there were a ton of people coming into Oakland at night and leaving on the last train or before the night was over because they weren’t living there,” he says.
What Middleton ultimately realized was that Uptown was being fueled by a crowd coming in from other neighborhoods who simply wanted to patron the city’s bars and restaurants. Those are the types of people who could be convinced to live there, if they had solid apartment options. “While the news was casting a pretty dim light on this area, a lot of people were out having fun and going to these new clubs,” Middleton says. “It didn’t come across as a threatening environment.”
Closing the Deal
Wood Partners was sold on the deal. But time was of the essence, and to bring things to the finish line, it needed an equity partner. Wood talked to a number of people, but they needed too much time for due diligence.
Enter Boston-based Berkshire Realty Development, part of Berkshire Property Advisors. “We realized that capital was taken out of development in the country,” says Frank Apeseche, managing partner and CEO of Berkshire. “So we looked for different opportunities.”
In July 2009, many of the key players at Berkshire flew out to Oakland to get comfortable with the deal, the market, and Wood Partners. “We acted as if all reports were 100 percent accurate,” Apeseche says. “On the face, the reports were scary. We started doing our own testing and found that the reports were not accurate.”
Berkshire eventually contributed 90 percent of the equity. Apeseche says Berkshire needed to feel comfortable that it could finish the project itself if Wood ran into issues. “We came in and said, ‘OK, if the typical structure we like to cut with our local operating partner doesn’t work, can we step in and take over?’” he says.
But for the most part, the Wood-Berkshire pairing made a lot of sense. “They’re developers, and we’re developers,” Apeseche says. “We speak the same language.”
The plan was to finance the construction and get long-term financing after the project was built. So essentially, Berkshire would provide the equity with the intention of self-financing it in its entirety, since there was no construction loan market in 2009. But after the deal was struck, the market changed once again. Construction debt came back, so American National Insurance Co. stepped in to provide a $26.5 million construction loan.
The city of Oakland, which had been supportive throughout the process, helped further push the project over the edge in April 2010. Together, Oakland and American National Insurance Co. covered 60 percent of the cost.
“[Oakland] provided $5 million in debt,” Apeseche says. “They added some leverage that we needed to get us over the hurdles.”
Now that Wood and Berkshire have crossed those hurdles, the Domain at Alta is well underway. When completed in June 2011, the 264-unit project will boast, among many amenities, yoga and Pilates rooms, a private bike repair shop, WiFi café, community kitchen, and rooftop deck.
“The challenge going forward is to take all the market knowledge we have gained through this process and match it up with a design that people in Oakland will respond to,” Middleton says. “Today, we’re digging for something different to attract a younger, more active demographic. It won’t be as predictable [as what’s currently on the market]. We’ve spent time looking at where young professionals hang out in Oakland, the places they feel comfortable, and we are rolling that into our design.”