To: City of Santa Clarita
From: Greystar
CC: Jason Crawford, Patrick LeClaire, Dave Peterson Date: October 16, 2023
RE: Sand Canyon – Justification for modification of Approval Condition PL4 Background
Greystar acquired Planning Areas (PA, collectively PAs) 2, 3, 4 and 5 of the Sand Canyon Plaza project in June 2022, and under the terms of that purchase, committed to complete sitework (utilities, roads, infrastructure and rough graded building pads) for the entire master plan, including Planning Area 1 (PA 1), which is still owned by Sand Canyon Plaza, LLC and under contract to be purchased by Intertex and Link Senior Development, two unaffiliated developers.
The sale of PA1 to Intertex is anticipated to close upon Greystar’s completion of PA 1’s rough graded pad.
After the acquisition in June 2022, Greystar immediately began construction of the sitework, with the forecasted schedule of delivering the PA 1 pad in March 2023, and the completion of the remaining PA pads by November 2023. Since then, the project has encountered several challenges including unforeseen underground conditions (asbestos pipes, hard rock material, underground seepage pits), an unusually rainy winter in 2022/2023, and most recently a 90-year Tropical Storm in August that severely damaged the site and surrounding area. In aggregate, these events have directly increased project costs by more than $15 million and have resulted in schedule delays of more than 9 months. Greystar currently forecasts, with overtime and acceleration, delivering the PA 1 pad in December 2023, and completing the remaining Planning Area pads by June 2024.
At the same time, the outlook for commercial real estate, including multifamily housing, has become increasingly uncertain due to rising interest rates and persistent fears of a recessionary environment. Investment in new development is facing a perfect storm as higher interest rates have resulted in tighter credit standards and a reset of risk tolerance, increasing the threshold required by the capital markets to invest in new projects. Greystar and its capital partner Resmark Companies have committed to-date over $80 million to complete the horizontal site work and are now seeking final approval to invest an additional $130 million to construct 323 apartment homes on PA 2. However, to receive final approval from its construction lender, a modification of project Approval Condition PL4 is required.
Request
Greystar is requesting the Approval Condition PL4 be amended to read:
Prior to the 324th occupancy, the applicant agrees to complete rough grading of the entire site, consistent with the grading plans, and complete Phase 1 of the project as shown on Exhibit A.
Completion of Phase 1 includes:
ATTACHMENT A:
1) Certification of pads for both the commercial retail center and for the assisted living facility, as well as start of construction on the commercial retail center including issuance of building permits and foundation inspection for the retail anchor building. The retail anchor building construction is expected to take 9-12 months;
2) common area landscape in Phase 1, including the frontage on Sand Canyon Road and Soledad Canyon Road;
3) the corner monument sign/water feature; and
4) the updated LMD sign.
Condition PL4 currently conditions the occupancy of the 324th residential unit (accounting for all Planning Areas) on, among other things, the completion of PA 1’s commercial anchor building shell (floors, walls, roof) and associated site improvements. Although this reflects a modification that was previously requested by Greystar in 2022, this is no longer viewed as an acceptable level of risk by project’s lender, given that the construction of the commercial development on PA 1 is outside of Greystar’s control. The lender will not finalize the loan to commence vertical construction of the 323 apartment homes on PA 2 until this condition is satisfied. This request replaces the requirement of the commercial anchor building shell construction with (1) the certification of building pads for PA 1, which is fully within Greystar’s control and a prerequisite for the vertical construction on PA 1, and (2) the issuance of building permits and foundation inspection for the anchor building, which, while outside of Greystar’s control, is anticipated to be completed by February 2024, approximately two months after Greystar’s delivery of the PA 1 pad.
Justification
The modification of Condition PL4 as requested would result in the following:
1) Greystar will be able to obtain final loan approvals and commence construction of the 323 apartment units on PA 2 by February 2024, when Intertex is anticipated to complete foundation inspection for the commercial anchor building. Greystar will not be able to obtain a construction loan until Condition PL4 is satisfied. If PL4 is not modified, it would likely not be satisfied until 2025 given Intertex’s anticipated construction schedule. This would further jeopardize the construction of apartments on PA 2 as this would likely result in the redesign of the 323 apartments pursuant to the 2022 California Building Code (it is currently grandfathered into 2019 CBC which, subject to payment of permit fees, would expire in 2024), resulting in over $8 million of estimated additional costs. This additional schedule and budget burden does not result in acceptable investment returns in the current market environment and could likely cause an indefinite pause until conditions improve. Greystar has worked hard to receive equity and loan commitments in a challenging market environment, but cannot proceed in the near-term without a modification to PL4.
2) The commercial development on PA 1, anchored by a Sprouts grocery store, will proceed as planned. In recent discussions with the principals at Intertex, the developer under contract to purchase and construct the PA 1 retail component, Greystar has learned that any uncertainty regarding the near-term development of the residential apartments and for-sale homes on PAs 2, 3, 4 and 5 has the potential to delay and/or jeopardize the construction of the commercial buildings. All tenants, including Sprouts, have signed leases under the expectation of the residential units, particularly the 323 apartment homes directly across the street, would move forward in a timely fashion. Even a delay in the construction of the 323 units would be problematic due to the concern over the impact of construction on retail operations over a prolonged period.
3) Greystar will be able to sell PAs 3, 4 and 5, which comprise a total of 119 single-family lots and 138 townhome units, to home builders in 2024, which would allow for residential deliveries in 2025. Home builders are subject to the same capital market conditions and as a result are exhibiting similar risk aversion for new development projects. Greystar is under contract to sell PAs 4 and 5 to Intracorp Homes upon delivery of the PA 4 and 5 rough graded pads (currently anticipated in June 2024); however, the sale will not close until Condition PL4 is satisfied. Home builders are not willing to be subject to a condition that is out of their control. In exploring a potential sale of PA 3 with home builders, Greystar has received the same feedback.