Some Tustin Legacy – Dallas-based home builder Centex Corp. – an original partner in the Legacy Park project pulled out in 2007

November, 2009

Legacy Park Developer Pushes To Rework Agreement with Tustin.

The developer of Tustin’s Legacy Park project hopes to rework terms with city officials anxious to see construction resume at the massive project.

For now, Aliso Viejo-based Shea Properties has entered into a pact with the city to head off a foreclosure threat by Tustin – a tactical move designed to spur a resumption of development at the project.

Executives from Shea Properties say they remain committed to finishing the 820-acre redevelopment at the city’s former Marine base with homes, shops, offices and hotels.

But they say they need more time amid the worst real estate downturn in the county since the early 1990s.

“We are heavily invested in the project, (but) the facts are that the pace of development at Tustin will have to follow the pace of growth of Orange County’s economy,” said CoIm Macken, chief executive for Shea Properties.

Shea Properties and Shea Homes, both part of Walnut’s J.F. Shea Co., are handling development of Legacy Park with the city of Tustin.

A lack of work on the former base amid the real estate downturn has prompted speculation in recent weeks that the entire project could be in trouble.

Dallas-based homebuilder Centex Corp., An original partner in the Legacy Park project pulled out in 2007.

Officials from the city and Shea Properties dismissed talk that Shea plans to walk away from the megaproject. They said talks are under way about a possible reworking of a development agreement for the project.

More Time Sought

Changes to the original plan are needed to reflect the reality of the current market, Macken said.

Given the current state of the local economy, it could take at least three or four years before the commercial real estate market here turns around, he said.

The company said it is in talks with Tustin over the structure of its development agreement for Legacy Park, first signed in 2006. Macken declined to specify what changes could be sought.

Industry sources expect Shea to seek a new plan similar to what neighboring Irvine approved as an amended development and implementation plan for the former El Toro Marine base, which gave the developer there a little breathing room.

Miami-based Heritage Fields El Toro LLC committed to a plan that will give the city anoth- I er 130 acres of land and ^ will see $100 million I spent at the site of Irvine’s Great Park during the next five years, while the developers of the 3,700-acre project wait for signs of a market rebound.

Whether Tustin would be amenable to similar changes remains to be seen.

“The city’s position is that this is a (great) asset, and the city doesn’t want to see those assets devalued,” said Christine Shingleton, Tustin ‘s assistant city manager.

Legacy Park – part of the 1,580-acre redevelopment of the former Marine helicopter base – calls for 2,105 homes and 6.7 million square feet of commercial space, along with about 170 acres of parks and open space.

In early 2008, it was hoped that some construction could begin this year. But that was before the commercial real estate market went into a freefall. Those plans have been indefinitely delayed.

That lack of activity, particularly for roads and other early work, has caused some concern within the city of Tustin. Officials there made moves this summer to try to force Shea Properties to move ahead on the development.

Notices of default items were filed against the partnership overseeing Legacy Park, according to city officials.

City officials said Tustin recently entered into a forbearance agreement with the Legacy Park partnership, following the notices of default.

A forbearance agreement typically is used by a lender to postpone a foreclosure to give a borrower more time to make up an overdue payment, or, in Shea’s case, meet terms under the development agreement.

The forbearance agreement runs through the end of September, city officials said.

Specifics of the agreement weren’t disclosed. Most of the issues tied to the default items are performance-related, rather than financial issues, according to Shingleton.

Hotel Plans

The last big news coming from Legacy Park was in early 2008, when development plans were announced for a trio of hotels, totaling 480 rooms.

Irvine-based R. D. Olson Development signed on to build and own the three hotels, which included plans for OC ‘s first Kimpton boutique hotel, as well as a Hilton Garden Inn and a Home wood Suites by Hilton Hospitality Inc.

Robert Olson, chief executive of the hotel developer, said last week that he expects the project to move ahead.

“I still like the market, and I still like Shea’s plan,” Olson said.

The original plan for the hotels was for construction to break ground this year. The project was set to be completed by the end of 2010.

Now Olson said he hopes the project could be done by 2012.

“It’s going to be delayed. The question is what shape and form (the development) will be” when the market returns, Olson said.

As of mid-2008, Shea had spent about $60 million on Legacy Park. Officials at the time said that about $800 million worth of road and sewer work eventually would be done at Legacy Park.

When completed, Legacy Park should have an assessed value of nearly $3.5 billion, officials said at the time.

Brokers looking to find tenants for planned commercial space at Legacy Park said last week that it’s still business as usual.

“We’re still marketing,” said Eric Hinkelman, senior managing director for Cushman & Wakefield Inc.’s OC office.

Cushman was tapped by Shea about two years ago to handle office leasing for Legacy Park. Some 6 million square feet of office space is planned at Legacy Park.

The first offices set to be built there are at the Shea Technology Campus, where about 340,000 square feet of two- and three-story buildings are planned near Warner and Red hill avenues.

To date, no leases have been signed for the project – not surprising considering the slow state of leasing for existing offices in the past few years, let alone proposed developments.

There’s been no indication from Shea that any development plans have been scrapped, according to Hinkelman.!CB049C080383674!208.entry

Copyright CBJ, L. P. Aug 31-Sep 6, 2009

District at Tustin Legacy


The last loan, from the retail sector, is a transitional story. The $206mn District at Tustin Legacy loan is backed by a newly constructed 985k shopping center in Tustin, California. The project was part of the redevelopment of the 1,600 acre former Tustin Marine Corps base.

The center is anchored by Costco and Lowe’s, which are independently owned and not part of the collateral, along with Target, which is on a ground lease, and Whole Foods, which is part of the collateral. The collateral consists of 522k sf, resulting in a loan balance psf of $395. The property is owned by Vestar and Kimco, a major shopping mall REIT. The 6.9%, 10y interest-only loan was originated in November 2007 and securitized in LBUBS 07-C7. We view this loan as transitional. At securitization, construction at the property had not yet been completed. As of November 2007, only 82% of the space was occupied, despite leases signed for 99% of space. An upfront reserve was established with a balance of $540k.

The transitional nature of the property was likely a factor in the higher loan coupon; we estimate that the relative loan SATO was +55bp. (Loan SATO stands for spread at origination, and is adjusted for comparably issued loans made at the same time. A number > zero suggests a higher-than-average loan spread and higher perceived risk from the issuer standpoint.) The borrower stated that the property would stabilize in 1H08.

Also, the loan terms are unique in that they suggest a partnership with the City of Tustin. The city must approve any lease of space over 20K sf and receives 25% of all percentage rents payable to the borrower. The sponsors invested a significant amount in infrastructure improvement in the area around the site.

Current snapshot

The property has yet to stabilize, due to delayed store openings and lower-than-expected rents. The completion of the project coincided with a severe housing bust in the region. MSA level unemployment touched 11.9% in September, well above the national average, as a large portion of employment was tied to housing. High unemployment and falling property values have contributed to weak retail spending and net absorption in Orange County (Figure 8).

The 2008 NOI for District at Tustin Legacy came in at $13.1mn, versus a budgeted amount of $16.8mn. This was due to a decline in average rent to $20.7 psf, versus $26.2 psf at underwriting. Mid-year financials suggest a similar result for 2009, and the most recent DSCR was 0.86x. The loan has been on the servicer watch list since November 2008, and the upfront reserve has been depleted. On the positive side, occupancy has rebounded to 99% as of June 2009, but we suspect that rent concessions have risen as well.