Sale of key Santa Rosa housing development site collapses

A developer has walked away from the most eagerly anticipated new housing project in Santa Rosa, a major setback in the city’s bid to add hundreds of badly needed apartments beside the downtown train station.

The decision by the Santa Clara-based ROEM not to move forward with the project was a blow for Santa Rosa and Sonoma-Marin Area Rail Transit officials, who had high hopes for swift construction of the $70 million mixed-use development.

It also triggered a round of finger-pointing over who was responsible for the collapse of the deal, with SMART officials saying the developer wasn’t serious and the developer calling the SMART board unreasonable.

“It’s a huge disappointment,” Santa Rosa Mayor Chris Coursey said, noting that the project had been under consideration since mid-2016. “That’s two and half years that’s been lost on a very dearly needed project in Santa Rosa.”

SMART owns the vacant 5.4-acre property in Railroad Square just west of the downtown rail station. For years, the site and neighboring former cannery property have been eyed for a mixed-use development that could help revitalize the city’s economy, provide needed housing downtown and boost train ridership.

Ambitious plans for a food and wine center and housing in the late 2000s fell victim to the recession. Subsequent efforts by John Stewart to develop the cannery site separately have gone nowhere, with the spot being used in recent years to stage plays, with the brick cannery walls as a backdrop.

Then in mid-2015, with completion of the initial 43-mile operating segment of the rail line on the horizon, SMART invited developers to share their visions for the property. Five did, and a year later, ROEM was the last one standing.

The company made a splashy presentation to the City Council, calling for 268 units of market-rate and affordable housing, retail spaces focused on food and wine and a public plaza. Council members were giddy and residents and rail supporters thrilled.

But SMART and ROEM had yet to agree on terms. That took more than a year. On Sept. 1, 2017, ROEM agreed to buy the land for $5.75 million.

The sale agreement was structured with payments required at key junctures over 28 months, a structure designed to motivate ROEM to move the project forward quickly, Farhad Mansourian, SMART’s general manager, said at the time.

The first refundable payment of $75,000 was made by ROEM on or around Sept. 1. A second payment of $100,000 was due Dec. 31.

But in November, ROEM asked the SMART board for an extension of this second deadline for 90 days, said Alex Sanchez, a vice president of ROEM, which has built more than 3,000 units in more than 30 projects in the state since 2000.

The company wanted additional time to complete its analysis of the complex title history for the property, which stretches back more than 100 years, and its environmental issues, which include a history of contamination, Sanchez said.

“We didn’t have sufficient time to explore the condition of the property,” Sanchez said.

But the SMART board, in a closed-door meeting, rejected the request, feeling the developer wasn’t demonstrating commitment to the project, said Windsor Councilwoman Deb Fudge, chairwoman of the SMART board. “They weren’t willing to invest another $100,000 and that really spoke volumes,” Fudge said.

The company had essentially locked up the property for four months with no additional money at risk, since the initial $75,000 was refundable, she said. It was asking to tie up the land for three more months risk free, Fudge said.

That didn’t strike the board as the action of a developer who shared the board’s urgency in getting the project on track, she said.

“I’m not sure where the cold feet were,” Fudge said. “They didn’t look serious when they wouldn’t put the next deposit down.”

Mansourian said he does not question the company’s abilities or integrity, but said ROEM wasn’t demonstrating a commitment to moving forward.

SMART was “adamant” that construction get underway quickly and “a developer not lock up this property for multiple years with no or minimal progress,” he said.

Negotiations broke down for a period in June 2017 over whether ROEM was moving quickly enough, he said. They got back on track after ROEM agreed to strict timelines, he said.

But the company never filed any permit applications with the city, Mansourian said. Nor was it willing to adjust its plans in response to the October wildfires, Mansourian said.

He said he asked ROEM officials about accelerating the timeline to get the project underway given the critical need for housing following fires that destroyed 5,130 homes in Sonoma County.

“They were not serious,” Mansourian said. “At the end of the day, the developer had to put up money and they decided not to.”

Under the circumstances, however, ROEM felt a three-month extension was reasonable, Sanchez said.

The company had hired a title company but it needed more time to untangle the 21 different claims on the title for the property, including easements from entities that didn’t even exist anymore, he said.

“It’s hard to finance a project when you can’t tell the (lender) what are the boundaries of your property,” he said.

They also needed more time to fully understand the environmental contamination on the site, Sanchez said. The company hired an environmental engineering firm that identified the former railroad yard’s history of contamination and suggested a more extensive analysis, including at least 40 new soil samples, according to a letter Sanchez sent to SMART.

Without clearly knowing what it was buying, the company could not justify moving forward, Sanchez said. He noted that the company did not ask for a change to the ultimate escrow closure date or sale price of the property.

The spike in building costs or shortage of labor some builders have expressed in regards to the rebuilding effort played no role in the decision, Sanchez said. Nor did Santa Rosa’s requirement that 15 percent of the units be affordable, he said.

The company worked closely with city planning staff to find ways to increase the density of the project, pushing the latest version of the plan to 321 units, 48 of which would have been affordable, he said.

Sanchez praised city planning and other staff as professional and helpful in sharing insight into the requirements of the planning process, and said the company was “on board all along” with the affordability component of the project.

“We are obviously very disappointed that we could not work at this location at this time,” he said.

David Guhin, Santa Rosa’s director of planning and economic development, said he felt the developer gave every indication they were serious about the project. City staff met with ROEM officials many times and they appeared to be moving diligently forward, calling the company’s other developments “pretty impressive,” he said.

“Based on their questions and the work they presented to us, we felt it was moving along for such a complex site,” Guhin said. “We were excited about what they were bringing to the table.”

But other SMART board members did not have that impression.

“I haven’t seen anything moving forward,” said Sonoma County Supervisor David Rabbitt.

While the steps ROEM cites may sound like progress to the public, they don’t sound like it to him.

What happens next is unclear. Mansourian said he planned to meet with the Santa Rosa city manager to discuss next steps, including coming up with a process that is “more refined and robust.”

Fudge said she is confident that another developer will step forward to complete the project, which she said is “extremely important to ridership” on the SMART line.

“Santa Rosa is the jewel of the line and we’ve got an empty lot at one of the stations,” she said.

Coursey, who used to work for SMART as a spokesman, said he is eager to better understand what went sideways. One thing, he suspects, is that the SMART board might not have heard multiple points of view on the issue.

“I think the decision was made because the only perspective that was made to the board was Farhad’s perspective,” he said.

In recent years, Santa Rosa, the largest city on the line, has not had a seat on the 12-member SMART board, which has struck some as unfair. Coursey asked for a seat last year but instead Fudge was reappointed.

“Sometimes it feels like SMART does not feel the urgency around developing that property that the city of Santa Rosa feels,” he said.

You can reach Staff Writer Kevin McCallum at kevin.mccallum@pressdemocrat.com or 707-521-5207.