The developer tapped to turn 820 acres of Tustin’s former Marine base into business, shops and homes said it plans to pull out of the stalled megaproject.
“We are working with the city for an exit,” said Colm Macken of Tustin Legacy Community Partners LLC, which was slated to redevelop part of the former base as Legacy Park.
Macken also is chief executive of Aliso Viejo-based Shea Properties, a unit of Walnut’s J.F. Shea Co.
Shea Properties and sister company Shea Homes are the driving forces behind Tustin Legacy Community Partners.
Tustin Legacy Community Partners has worked on the project with the city of Tustin, which took over the former base in 1999.
The end of a development pact with Tustin could be finalized by early summer or sooner, according to Macken. The financial implications of terminating the deal still are being worked out, he said.
The Shea project was set to take up about half of the 1,500-acre former Marine helicopter base.
The project, centered on vacant land surrounding the site’s iconic blimp hangars, was expected to be one of the largest developments in Orange County, after work planned at Irvine’s former El Toro Marine base, which totals about 4,700 acres.
Legacy Park called for 2,100 homes and 6.7 million square feet of offices, restaurants, shops and hotels. When the development deal was signed in 2006, it was expected the project—valued at the time at $3 billion—would go up in earnest during the next six to eight years.
The real estate downturn that started in 2007 quickly put the timetable in doubt, with no significant work completed to date.
“It’s a casualty of the economy,” Macken said.
There has been some development on other parts of the former base not overseen by Shea, including The District at Tustin Legacy shopping mall, homes and nonprofit operations.
Shea’s loss on the project could run in the $50 million to $75 million range, one source familiar with the deal estimated.
Dallas-based homebuilder Centex Corp., an original partner in Legacy Park, pulled out in 2007, taking a reported $20 million write-off.
Tustin officials had been working to prod Shea to move ahead on early infrastructure work. Last year, the city and Shea entered a forbearance agreement designed to spur some activity.
That agreement recently ended, with no work done on the project, according to Christine Shingleton, Tustin’s assistant city manager.
The developer now is “in material default” of its agreement with the city, she said.
“No one wants this to be a hostile kind of closure,” she said. “But it’s time to move on.”
Next Move?
Since the partnership still officially is under contract on the land, the city hasn’t had discussions with other developers about taking over the project, Shingleton said.
It’s unclear what the city’s next step might be.
The city could try to find a new master developer, although only a handful now are strong enough to take on such a big project.
Another option could be to sell parts of the land to individual developers, with any sales likely coming at big discounts from what the land was valued at a few years ago.
Or the city could sit on the land as the real estate market slowly rebounds—something it hasn’t seemed content to do with Shea.
Drastically different views on land values and when construction should start to appear have been the key issues leading to the breakdown of the Shea-Tustin partnership.
The original development pact called for Tustin Legacy Community Partners to make more than $236 million in land payments and spend nearly $500 million on grading, roads, sewers and other early work, according to Shea’s figures.
The initial pact reportedly called for about $150 million of the land payment to be made late last year, which didn’t happen.
As the market soured, the city made concessions on infrastructure work and the timing of when initial work should move ahead, according to officials from Shea and Tustin.
But their values of those concessions vary.
Tustin’s City Council was prepared to provide the developer with economic incentives valued at $200 million to $300 million to get the project moving, in addition to giving Shea more time to restructure its financing on the project, according to Shingleton.
“We have in good faith worked with them to provide incentives,” she said.
Shea valued those incentives at closer to $70 million and said none were in the form of cash, according to Macken.
“The city wanted too much infrastructure, too fast, ahead of the market,” he said.
Home prices in the county have fallen by roughly a third since the peak of the market in 2006, when the development agreement was signed.
During the same time, office rents are off by as much as 25%, while other commercial space has gone for about 50% less.
Factoring in those declines and initial development costs, the value of the raw land at Legacy Park is well less than the $236 million Shea had been expected to pay. The county assesses it at $43 million.
Tustin still considers the land at Legacy Park “the most valuable property in OC,” Shingleton said.
The city sees redevelopment as a 20-year project, she said.
It might take until 2016 for the market to recover to a level where home prices, rents and commercial property values would be close to where they were in 2006, Macken said. Starting work now wouldn’t make financial sense, he said.
Tustin’s “view of the (economic) recovery is much faster than our view,” Macken said.
Macken said Shea is making it through the down market thanks to its diversified lines of business.
Besides housing and commercial development, the company also does heavy construction, finance, gravel plant management and some construction equipment manufacturing.
The construction division is doing well with a tunnel under way in New York and projects elsewhere on the East Coast, Macken said.
Shea Homes is holding up, he said, with home prices in parts of California showing some recovery and other areas “bouncing along the bottom.”
Shea Properties’ apartments and retail holdings have held up, particularly outside California, according to Macken.
The company’s hardest hit sector, he said, likely is its office properties division, which still is struggling in OC and other markets.
