Poison Pill Pitfalls Abound in City of Elk Grove's, Howard Hughes' Development Agreement

December 8, 2016 |   

Research of an excerpt from an Elk Grove City Council 2014 staff report on The Outlet Collection at Elk Grove revealed some disturbing information. In a nutshell, the City of Elk Grove owes the shopping center's owner, the Howard Hughes Company, approximately $15.5 million in reimbursement cost for off-site infrastructure they have installed.

The development agreement entered between the City and HHC stipulates that the City gets to keep the first $295,000 of sales tax each year, HHC keeps the rest, up to $1.625 million each year. If the annual sales tax exceeds $1.9 million, then the city and HHC split that amount 50/50. 

All amounts increase three-percent per year. Once the $15.5 million is paid to HHC, then the city keeps all of the sales tax. 

It appears that the city pays down its debt by forfeiting a share of its mall sales tax to HHC. Therein lies the danger to Elk Grove taxpayers. 

Problems can arise however:

1. If HHC sells off a portion of their land to the Wilton Rancheria for their proposed casino-resort, then that portion does not generate sales tax to assist the city in reimbursement, and yet the $15.5 million is a fixed cost debt. The MOU with the tribe was structured to mitigate municipal service costs and not potential lost sales tax revenue. If HHC eventually sells all of their land to the casino (assuming the DA is removed as an obstacle), the City is still on the hook with HHC for the $15.5 million and gets NO SALES TAX from the mall site. 

2.  The DA stipulates that HHC gets reimbursed by retaining a large percentage of the city sales tax. If the mall never materializes and/or HHC sells their property, will HHC sue the City demanding payment of the remaining amount due? What affect would this have on the City budget? 

3. The City anticipates that the Mall will serve as a catalyst for surrounding development, and those surrounding properties are also required to pay fees for their fair share of the infrastructure that was already installed. The HHC reimbursement timetable could be significantly reduced by the city repaying HHC from fees received from surrounding development, thereby accelerating the timetable for when the city can retain its entire share of the sales tax. 

However, this assumes/hopes for a strong retail market that can absorb that land. What affect will the rapidly developing Delta Shores, a wobbly housing market, and a possible delay or denial of the City's annexation plans through the sphere of influence boundary expansion could have on this whole agreement?

4. The DA stipulates that the mall (with a minimum of 21 tenants) must be open for business in 2018. Any wagers on whether another DA amendment will be needed in 2018? If the schedule is not met, which is a distinct possibility, what then?  

5. With a sovereign-nation casino as a potential owner of land within the Mall area; HHC unable to secure sufficient leases for their Mall; Regal Theaters suing HHC for lack of progress; M&H Properties essentially bound to a non-compete clause with the Mall and no development prospects of their own; and the pace of development of Delta Shores heating up, will there be growing pressure to scrap the entire Development Agreement, its revenue assumptions, and its terms of development?

What becomes of the $15.5 million debt to HHC if current trends continue? At what point will the discounted price of the land obtained following the bankruptcy of General Growth, the shopping Center's original developer, no longer justify HHC to carry that kind of debt? 

Is the City the driver in this, or merely riding along in the backseat hoping the Uber driver knows his way?