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Commentary on the RVSD land disposition at Larkspur Landing

On September 30th, the board of the Ross Valley Sanitary District (RVSD) heard a presentation by real estate consultant Century Urban, who has been retained to help RVSD evaluate their options in the disposition of the 10-acre parcel of land they own at 2001 Larkspur Landing Circle, in Larkspur. That parcel, just to the east of the Country Mart shopping center, was recently given a clean bill of health by the EPA, following a remediation of PCBs from the soils.

At that virtual hearing, CVP made comments, skeptical of the assumptions and recommendations made by Century Urban. The letter below is our followup to those comments. The Century Urban presentation is attached, below, for reference.

Dear RVSD Board:

I’m writing to memorialize the comments I made at the GoToMeeting hearing on September 30th, and to make additional comments about the presentation made by Century Urban, “Conceptual Approaches to Disposition of the Larkspur Landing Property.”

As a 501(c)(3) nonprofit organization, Community Venture Partners’ primary mission is to work for government transparency and assist decision makers in achieving “community supported and community serving” development solutions. My comments are made in that vein, without bias as to the outcomes of any particular proposal.

I apologize in advance for the length of this letter. However, as someone who has been in the real estate and development business for over 40 years, in my opinion, the presentation made by Century Urban was overly-simplistic regarding the facts and circumstances surrounding the disposition options for the Larkspur Landing parcel.

I think we all agree that RVSD has two primary goals in this endeavor.

(1) To achieve a fair and reasonable return on behalf of its ratepayers; and

(2) To act as a good “public citizen” and member of the Larkspur community, to ensure that its decisions result in public benefits and avoid significant negative impacts, e.g., pollution, traffic, parking, school capacity, etc.

I ask you to please consider the following:

Parcel Subdivision Map:

The subject parcel is not currently subject to a subdivision “map.” All previous maps have either expired or been vacated. This was in part a consequence of RVSD’s comment/request to the Larkspur General Plan Update Committee, dated May 16, 2018, requesting that the existing map be vacated to allow a future development more flexibility in land planning. Any development proposal will be subject to a new mapping and approval process.

Zoning and Planning:

The parcel has some entitlements of record, provided a developer wants to build exactly what the developer proposed in 2007. However, this is unlikely and the parcel’s zoning may end up being modified, when the new General Plan Update process is completed and a revised zoning ordinance is finalized, sometime in 2021. At this time, it appears that the potential zoned uses will remain essentially the same for housing and hospitality.

The existing requirements for dedicated “open space” in the northeastern section of the site, for an east-west connector road across the site, and for a minimum of 126 housing units on the site (per Larkspur’s state-certified Housing Element) are somewhat immutable. The City also continues to express the aspiration for a hotel to be located somewhere on the site.


Century Urban commented that development on the site was subject to a Mitigated Negative Declaration. However, that MND was part of the previous development proposal approval, which has expired. Any new development will be subject to a new CEQA process, including a scoping session and an Initial Study, which will determine what the needed CEQA assessments/studies/process will be (i.e., MND, EIR, or amendments), regardless of whether development proposal is identical to 2007, because there have been significant changes in circumstances (e.g., new data on sea level rise, air quality due to increased traffic, etc.).

Survey and Site Appraisal:

Obtaining a site survey and land appraisal, as suggested by Century Urban, is highly recommended. As noted in my letter to the RVSD board, on August 27, 2018, the property is commonly referred to as a “10-acre” parcel, or a “10.7-acre” parcel (by Century Urban). However, its size is reduced for practical and appraisal purposes, by the following facts.

Based on these conditions and circumstances, the actual developable area is approximately 8.2 acres.

Ground Lease vs. Outright Sale:

Summary of Issues:

Century Urban stated, categorically, that entering into a ground lease with a developer was “less risky,” had significant “benefits,” and was ultimately more profitable than selling the land, outright (see page 14 of their presentation).

As I’ve stated, I respectfully disagree. My comment remains that the risk/reward evaluation of any transaction all depends on the specific terms of the “deal.” And I would go so far as to say that in the majority of cases, the opposite is true.

The analysis Century Urban presented failed to consider all the factors that come to bear in a balanced and realistic way. There are considerable risks and potential liabilities in being a lessor vs. being a seller that were not discussed.

The discussion below considers the following when comparing a ground lease to a land sale:

1) Century Urban’s assessment of the “benefits” of a ground lease is inadequate to accurately assess RVSD’s risk/reward;

2) The potential negative consequences of a ground lease transaction, have been understated;

3) Century Urban’s financial analysis ignores the time value of money, sale proceeds reinvestment returns, and internal rate of return assessment;

4) Affordable housing and Low Income Housing Tax Credits (LIHTC) are minimized under a ground lease;

5) The claimed “benefit” of “discretionary approval over entitlements,” under a ground lease transaction, is misleading;

6) The “benefit” of “leveraging developer expertise,” under a ground lease transaction, is of little value in this situation;

7) Can RVSD lease part of the site and sell another part? and

8) The impacts of new state housing laws.

1. Century Urban’s general assessment of the “benefits” of a ground lease is inadequate to accurately assess RVSD’s risk/reward

Century Urban notes the following as benefits of a ground lease.

“Generate annual revenue without expenditure of at risk capital and burden of property management.”


“…at lease term end, vertical improvements revert to land owner, ground lease is extended, or new master lease is executed.”


“Ability to use developer debt and equity financing to avoid encumbrance of balance sheet.”

This all sounds very positive, but it fails to explain that all of these outcomes are only possible if the overall financial value, lease terms, and assumptions about future markets and events are perfect. It is advisable to carefully consider the following:

Although RVSD may not be liable for “at risk” capital or property management, as the owners of the property, they are certainly at risk for the consequences of negative events, over time, such as

Their chart on page 19 (see the Century Urban presentation) dramatically understates these risks by saying that RVSD’s “long-term commitment” risks are “only as a ground lessor,” without explaining the true nature of those risks. They only mention, in passing, that the

“Developer's maintenance of physical improvements in later years of ground lease term should be monitored.”

But, what if that monitoring of maintenance shows it’s being poorly maintained? What is the actual remedy? To try to terminate the lease? To attempt to extract more money from operators or lessees who may be teetering on default?

Secondly, when contemplating the outcomes of a long-term ground lease (99-years was suggested by Century Urban), the benefits at the “lease-term end” are completely unknowable and the improvements are more likely to be of zero value (physically or functionally obsolete) or even a liability.

The suggestion that there is anything predictable about the value of the “vertical improvements” reverting to the owner on a 99-year or even a 55-year lease (the minimum required for HUD affordable housing Low Income Housing Tax Credits lending) is specious. With the rate of change we are currently experiencing, one could dare say that even a 30-year lease carries significant risk in this regard. To claim this a “benefit” is false.

For example, how would RVSD feel, today, if it had agreed to a ground lease for a new office building development, three years ago, a project that would most certainly be under considerable insolvency pressure, today?

Finally, to suggest that under a ground lease, RVSD gets “the ability to use developer debt and equity” makes no sense in this situation because RVSD does not intend to occupy the buildings being developed.

At best, the assumptions that Century Urban is basing its recommendations on are extremely optimistic and assume only the most positive outcomes and negotiated terms and conditions of the ground lease agreement, including an uncanny ability to predict future events, the actions of markets, the functional and economic obsolescence of various land uses, and a perfect ability to foresee 99 years into the future.

In addition, an outright sale is the simplest transaction to value accurately. The “highest and best use” of the property can only be known and priced with some certainty, today. It becomes increasingly unknowable (risky) the further one goes out into the future. But a ground lease requires all those future assumptions to be made today.

A ground lease puts the onus on RVSD to be extremely knowledgeable about all the potential variables and the ability to predict the future. Conversely, if a seller gets fair value on their asset and a sale contract is properly written, a sale puts all the future risk on the buyer.

2. The potential negative consequences of a ground lease transaction, have been understated

In the years following 2008, some property owners entered into ground lease transactions to generate cash flow, because they did not want to sell their real estate at a discount. One of their assumptions was that real estate would take a long time to come back but that all the government stimulus might cause inflation in the economy, making interest rates rise. To hedge against that, lessors included payment escalation clauses tied to either a government inflation index (CPI) or a rate index such as LIBOR (the London Inter-Bank Offered Rate).

But, what happened? Remarkably, the exact opposite of the conventional wisdom. Real estate values came roaring back, while inflation didn’t show up at all and interest rates continued to fall, driven into inflation-adjusted, negative territory by the Federal Reserve and US Treasury.

This left those lessors locked into a long-term lease with a poor relative rate of return, while the value of their property soared. They now had an asset that they could neither monetize nor sell for anything close to its market value, because it was “encumbered” by a poorly performing long-term lease.

Future risk/reward simply cannot be assessed using the methods Century Urban has presented.

3. Century Urban’s financial analysis ignores the time value of money, sale proceeds reinvestment returns, and internal rate of return assessment

In real estate investment, there is only one metric that really matters: the Internal Rate of Return (IRR) on capital. IRR, also referred to as a discounted cash flow analysis, considers all factors in a transaction, including the present cost of capital, the “time value of money,”, tax consequences, the effects of installment payments, the timing of revenues received, the income/expense flow in and out of the property, the assumptions about equity appreciation and inflation, and other such impacts on returns.

Consequently, only IRR can accurately compare different types of investments (real estate, securities, businesses, whatever) in a way that exposes the false assumptions of both buyers and sellers. Only an IRR analysis can accurately determine which of two competing offers--a ground lease offer or an outright sale--offers the highest return for RVSD.

The Century Urban analysis completely ignores IRR and discounted cash flow considerations. It assumes all sale proceeds either go into a zero interest rate account or simply vanish off the RVSD balance sheet, rather than producing future investment returns or appreciation of replacement assets. In my opinion, Century Urban’s financial analysis is generic to the point of being of little value in this particular situation.

A seller has to ask what they could do with the proceeds from a cash sale, today, and what re-investment rate of return that might produce, versus a stream of income over time and the inflation adjusted, future value of that land. The difference can be significant and is part of the risk/reward and cost/benefit of any transaction.

In other words, if RVSD takes the cash from a sale and invests it, with the leverage of a low interest rate mortgage in another property (e.g., Anderson Drive) and/or uses it to lower its debt service or improve operations, resulting in an increase its net revenues and its ability to raise rates, those benefits and future revenue streams must be included in any calculation of return on investment and risk/reward analysis of a sale versus a ground lease.

Only a comprehensive IRR analysis can determine this.

By classifying the “recurring revenue/cash flow of a sale transaction” as “none” and the “value generation and value upside” as low, as the Century Urban analysis does on page 19, it completely ignores these future returns and so, fails to accurately compare them to the ground lease financial outcomes.

4. Affordable housing and Low Income Housing Tax Credits (LIHTC) are minimized under a ground lease

A significant portion of the property is designated for housing in the City of Larkspur’s state-certified (HCD) Housing Element. It presently requires a minimum of 126 units with a percentage of the units being “affordable” under state-mandated guidelines.

LIHTC regulations provide a 4% tax credit on land acquisition and related costs. This tax credit is critical to making any affordable housing project “pencil.” A ground lease transaction denies the developer access that capital. This issue alone makes a ground lease inappropriate for this site.

5. The claimed “benefit” of “discretionary approval over entitlements,” under a ground lease transaction, is misleading

The chart on page 19 of the Century Urban presentation states that RVSD’s “level of control / major decision approval rights” are low for a sale but greater for a ground lease.Century Urban makes the assertion that the “benefits” to RVSD of a ground lease vs. a land sale is that with a ground lease, RVSD can

“Structure privatized transaction that preserves discretionary approval over project entitlements.”

This contention is false. RVSD has no control of property entitlements. All things being equal, the amount of control RVSD has over what will be built is exactly the same for either a sale or ground lease.

The City of Larkspur has the sole authority to determine what will be allowed, approved, and permitted on the site. Century Urban’s contention that a ground lease conveys greater control to RVSD than an outright sale, is fallacious. However, RVSD fully controls what developer and which development proposal they enter into an agreement on, regardless of what type of transaction.

As you know, RVSD is not required to take the highest monetary offer and can use a wide variety of criteria, including assessing the proposed development’s support from and public benefits to the community (in its role as a member of the Larkspur community), the perceived time to entitlement and approvals, and other terms of the transaction, when choosing a successful bidder or lessee.

However, if Century Urban is suggesting that RVSD add greater restrictions on the site’s uses, than presently exist under Larkspur’s zoning and regulations, then RVSD must assess how this could (1) decrease the value of the property, and (2) run afoul of a myriad of state laws, including state housing laws.

Under a ground lease, RVSD can certainly require approval of any future entitlements, changes of use, or other types of renovation or rebuilding on the property. But they should be cognizant that this will decrease the value of the overall transaction.

The market is very efficient. Every “benefit” to one party is potentially a “liability” to the other. Conditions and restrictions placed on a developer, in addition to existing state and local codes and zoning, will result in a decrease in the developer’s options and therefore typically decrease the overall value of the transaction. And as Century Urban correctly notes, “Select developers will not enter into ground lease transaction structures, which may limit developer interest.” This is also true of lenders.

The path to entitlements to develop this property is already fraught with considerable uncertainties such as the lack of infrastructure (raw land), state and local regulatory variables impacting zoning and density and statutory deed restrictions[1], the current instability in the real estate markets, the changing lending environment, rising construction costs, and more.

It is axiomatic that the more layers of negotiations, approvals, conditions, or other variables, such as partners or shared decision-making, that exist in a real estate transaction, also increase developer risk and therefore the lower the value of the property.

This would suggest that RVSD concentrate on removing as many unknowns and contingent liabilities as possible in order to obtain the best return and outcome for its ratepayers and the community.

6. The “benefit” of “leveraging developer expertise,” under a ground lease transaction, is of no little value in this situation

The Century Urban report contends that RVSD will benefit using a ground lease because they can

“Leverage management expertise and execution capabilities of developer with successful track record.”

But, since RVSD does not end up owning the buildings nor can it reasonably control future ownership, this claim makes no sense in this situation. This would only be of benefit if RVSD intended to occupy the buildings being built, and we know that is not the case.

7. Can RVSD lease part of the site and sell another part?

This question was raised by a board member. This assumes two transactions with two different parties. The answer is, yes, but that requires RVSD to assume the position of being the master developer of the site, fronting pre-development costs (mapping, CEQA, etc.), and potentially having to manage and front the costs of all the horizontal development (underground utilities, grading, roads, etc.).

Even if RVSD could manage to negotiate some type of shared cost arrangement, it would expose RVSD to direct liability for the work. For example, if RVSD is involved in the design, construction, or financing of the east-west access road, what future liabilities does that pose?

It also fails to consider the importance to a potential developer to have the ability to master plan the site, to protect their investment. The value of the RVSD parcel is its size. It offers a buyer the opportunity to develop at enough scale to create a marketing “identity.” That includes conformity of the architectural design, protection of views, coordination of infrastructure development, and otherwise maximizing the financial returns.

The importance of this should not be under-estimated. Splitting up the site for multiple owners, developers, or lessees, could decrease its value, dramatically.

8. The impacts of new state laws

The legislative landscape in California, of late, has become an increasingly complex labyrinth of legally untested and potentially contradictory new laws. It would be advisable for RVSD to extricate itself, as much as possible, from any arrangements, timelines, or commitments that involve housing or mixed-use development.


The Century Urban presentation was a good start. But the challenges involved in the future development of the Larkspur Landing property suggest that a risk/reward analysis of entering into a ground lease vs. an outright sale must include all relevant circumstances and factors in order to determine which method best meets RVSD’s primary goals.

Thank you in advance, for your consideration and the opportunity to submit comments.


Bob Silvestri

Community Venture Partners, Inc.

[1] HUD and LIHTC requirements can include deed restrictions on future rental rates and sales to preserve prescribed housing affordability.

Bob Silvestri is a Marin County resident and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded only by individuals in Marin and the San Francisco Bay Area. Please consider DONATING TO CVP to enable us to continue to work on behalf of Marin residents.