Buyer backs out of multi-million dollar Chanate Road deal with Sonoma County

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The leading bidder for a 72-acre Santa Rosa site slated for affordable housing has pulled out of the process amid worries about prolonged delays from litigious neighbors and the two-step, county-city approval required to build up to 750 units on the former county hospital complex.

California Community Housing Agency, a public entity that taps into the municipal bond market to craft affordable housing projects across the state, told Sonoma County officials Tuesday afternoon it was dropping its bid to buy the Chanate Road property.

The news, confirmed by multiple county officials, comes a month after the agency and its partners were tapped as the leading bidders, with a complex proposal that promised the county a share of the equity in the project, as well as the option to acquire the property and re-sell it 15 years later while cashing in on market-value increases. It would have given the county a $5 million advance on the equity as well.

The developer’s exit delivers another blow to the county’s yearslong attempt to offload the sprawling former health care campus for redevelopment as housing. Both the withdrawn bid and a preceding proposal put forward under a controversial failed sale to a local developer two years ago stood to be the single largest housing project in Santa Rosa in a generation.

The setback comes just days before the Board of Supervisors was set to vote Tuesday on a staff recommendation in favor of the California Community Housing Agency acquisition. That hearing, initially set for July 23, was twice delayed following a wave of questions and concerns from residents.

“This has been one of the most frustrating processes I’ve experienced while in office,” said Supervisor Lynda Hopkins, who was elected in 2016 to represent the west county and is the newest board member. “It’s one step forward, two steps back. I’m frustrated by how long it’s dragged on, and how much has been spent on the property in terms of maintenance.”

California Community Housing Agency representatives did not return phone calls Wednesday seeking comment.

Supervisors are expected to ponder two main options at their meeting Tuesday: Consider selling the property to one of the other two bidders, or spend millions of dollars to demolish the buildings and conduct cleanup and testing in hopes of boosting the value of the site for a future deal.

There likely won’t be a staff recommendation for supervisors to vote on, though. Supervisor Shirlee Zane, whose district includes the Chanate property, said General Services Director Caroline Judy and Bob Pittman from the County Counsel’s Office told her about California Community Housing Agency’s decision Tuesday afternoon.

She said she joked with them that seeing them come into her office must mean bad news.

“But it’s not bad news,” Zane said, saying she remains positive. “It’s a great piece of property. It’s better to find out now than later.”

Judy and her staff spent the past several weeks answering and categorizing more than 300 questions related to the complex deal and posting those answers to the county website.

A new deal, should it come, will prompt more.

Judy said she learned of the company’s decision to withdraw its bid in a Tuesday afternoon phone call.

“We asked them about what we could do to change their minds,” Judy said. “But they had made up their minds.”

The property’s future has been in question for about 15 years, since Sutter Health, which took over the former community hospital, announced it would build a new Santa Rosa facility at a different location. Sutter moved in 2014 to its new hospital off Mark West Springs Road.

Most of the Chanate campus is now vacant, and the maintenance bill for taxpayers has skyrocketed. The county spent $33,525 in 2015-16, mostly on security. Those costs reached $768,120 this fiscal year, with another half million-plus planned for the November 2019 to June 2020 time frame, according to county records. The costliest items involve patrols and work to address break-ins and looting.

The property occupies both sides of the 3300 block of Chanate Road. Neighbors have united in staunch opposition to previous development plans. The Friends of Chanate group sued the county — and won — over claims the county should have conducted an environmental study before approving the prior sale of the property in 2017 to Oakmont Senior Living.

The threat of a similar lawsuit loomed large over the California Community Housing Agency proposal and even played into the property’s low appraisal, which dropped to $4.24 million from $7 million in 2016.

Escalating costs tied to seismic studies and future demolition of asbestos-ridden buildings also have contributed to the sinking valuation, officials said.

The county could take on that work in a gamble to entice a future bidder.

“For me, if we can put the necessary time into clearing the property ... If we remove those liabilities, it’s back to a true asset,” Supervisor James Gore said.

The decision by California Community Housing Agency doesn’t close the door on affordable housing on the site. EAH Housing and Oakmont Senior Living, the other two bidders, each promise 25% of the housing built in their projects would be considered affordable. Judy said she believes those offers remain unchanged.

Either deal, however, would be lower than the $11.5 million offered in 2017 by local developer Bill Gallaher, who owns Oakmont Senior Living. After a judge sided with neighbors and blocked the prior sale in July 2018, county supervisors chose to scuttle that deal.

Gallaher’s latest offer is $9 million for the property. EAH made several proposals, including an $8.2 million offer that requires the county to share the $3 million in costs to tear down the old buildings.

Representatives from EAH and Oakmont Senior Living did not return calls Wednesday seeking comment.

At least three supervisors — Zane, Gore and Hopkins — say they want to explore a totally different scenario: Moving county offices a mile and a half east to the Chanate property and building affordable housing on the current administrative campus off Steele Lane and Mendocino Avenue.

It’s a two-part chess move that could aid the county’s ongoing quest for a new, modern headquarters. But the concept has received little to no public vetting to date and it, too, could run into stiff opposition from residents, many of them well-established homeowners in a neighborhood still reeling from the 2017 Tubbs fire. It exposed deep concerns about the area’s ability to handle evacuations in a major disaster.

Zane herself echoed those concerns in an interview about the Chanate site with The Press Democrat’s editorial board on Monday.

“Given that the fire jumped six lanes (of Highway 101) and went to Coffey Park ... I don’t know that we can find a place that’s safe to build,” Zane said. “But safer is the issue. Safer.”

The demise of two consecutive affordable housing proposals for the Chanate site may signal that such development isn’t viable in the area, some supervisors acknowledged.

“I hope we’ll have a public conversation about the path forward,” Hopkins said. “We’ve had so many false starts that it’s caused frustration and concern — just about the efficacy of government. It’s important to have public, transparent dialogue.”

You can reach Staff Writer Tyler Silvy at 707-326-2964 or at tyler.silvy@pressdemocrat.com..

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