NORTHERN CALIFORNIA SPOTLIGHT
Don't Feed the Mello-Roos?
Raymond Walker, founder and president of The Walker Companies, says the focus of Longs' site search originally included Reno, Nev., in addition to all of Northern California's central valley. But the Reno option quickly faded because of what he calls "a large transportation penalty" for going that far east.
Next came a hard look at all the large distribution markets near Lathrop, including Tracy, Stockton and Livermore. The area north of Sacramento was also studied because of its touted advantages in the labor arena.
Danny Wald, CFO of The Walker Companies, says a key to the process was Longs' wish to bring in- house functions that had been previously outsourced to the wholesalers, and to do so three to six months prior to consolidating operations.
"From a timing standpoint, we'd acquired the land and started to develop the new facility in advance of selling the existing facility," Wald explains. "Once we were under way there, we undertook the marketing of the existing facility and entered into a relatively short leaseback period. When the sale closed, in January 2006, the proceeds went into the construction costs of the new facility."
Those proceeds amounted to $22 million. But just as important as the capital was the capital timing.
"Timing was a very important element here, and one of our key criteria was going into a community we felt would facilitate our schedule," Wald says. "Patterson accommodated us in terms of their planning and zoning process, meeting schedules and their review of the site development plan. They did everything in their power to accelerate the timing. Patterson made commitments to work with us and accomplished that schedule. In California, that's always an important issue. The regulatory process there can be time- consuming. Not to say it was all that easy, but by California standards it was very smooth."
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Among other differentiators was Patterson's comparatively less burdensome Mello- Roos. It sounds like something found in the outback, but it's a breed found only in California. And if you don't analyze the cost of special property taxes levied by Mello- Roos Community Facilities Districts (named after the 1982 act's authors Sen. Henry Mello and Assemblyman Mike Roos), you may find yourself in a place you don't want to be. They were conceived in the wake of Prop. 13 in order to allow communities to capture revenue to fund municipal services and infrastructure. A district can only be established by approval from two- thirds of the voters within it. Walker says the more developed markets in and around Stockton often have higher Mello- Roos bond debt.
"It's a significant tax," says Walker, "and we found a much more competitive all- in land cost environment in Patterson than we did in many other communities. And then the labor was much more plentiful. I can't stress enough that Patterson is a smaller community, we were one of the first guys in, and their whole planning commission couldn't have been more collaborative in helping us complete this fast- track project. When there is a lot more established demand and existing facilities, you just don't get the level of enthusiasm and excitement as when people are pioneering a new market, and Patterson fell into that [latter] category."
While corporate site developers frequently look first to local entities for assistance in California, there was state help in this instance, as the city and county were able to expand the boundaries of a state enterprise zone to include the Longs site, in addition to some payroll tax rebates. However, a personal property tax rebate was forgone in this instance because the enterprise zone designation would have had to be in place at the time of the property's acquisition. Walker says California's state- level incentives are "a little thin" when compared to other states', and says he wouldn't be surprised if the state government soon recognizes the need to step up with something new to retain its industrial base.
But the 1031 reverse exchange may be the most compelling aspect of the project, says Walker.
"We were able to take all the equity in that property and invest it and avoid the capital gains," he says. "When any public company that is trying to minimize capital investment to keep its return on equity up can avoid paying capital gains and do it in a seamless way, it's a pretty compelling opportunity."
Longs' sophisticated real estate team was of course familiar with the concept because of its experience building and leasing stores, but Walker brought the integrated process to the table. "It's a value- add capability that most corporations struggle to execute independently," he says. "A lot of that had to do with our knowledge of capital markets and institutional investors. Danny Wald made a huge contribution there. In a lot of ways it was like an auction – there were a lot of people who wanted that property, and we were able to get more than we initially had."
