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Chuckanut Ridge: Due diligence or negligence?

By On

How likely are you to buy real estate in today's market based on an 18-month old appraisal prepared by the seller? Well, if you pay taxes in Bellingham, your mayor and City Council are about to do just that. And, in a BIG way.

In eight days, the city plans to close on an $8 million purchase using funds voluntarily contributed by taxpayers to acquire park land and facilities. The purchase price of $8.23 million is based solely on an outdated appraisal prepared in early 2010 for the seller, Washington Federal.

  • The city has not prepared its own current appraisal.
  • The city has not involved its own real estate experts.
  • The city has not hired a professional appraiser to review the outdated appraisal prepared for WA Fed.

In short, the city has failed to perform due diligence. Is it possible the city is about to significantly overpay for this property?

Let's consider the facts:

1) The property in question, Chuckanut Ridge (aka Fairhaven Highlands,) is currently zoned high density, multi-family for 739 units. It is common knowledge, which has been confirmed by several key city officials, that the current zoning is inappropriate and violates a number of goals and policies of the city's comp plan. Once the city takes possession, the property will be downzoned and the value reduced accordingly.

2) According to the draft environmental impact statement (DEIS,) which is in disastrous shape and will require a massive undertaking and more than $100,000 to complete:

Environmentally critical areas cover almost the entire site. The flattest areas on the site are either wetlands or would need to be set aside as wetland buffers. Most of the remainder of the site contains erosion-prone soils that have slopes of 15 percent slope or more, steep enough to heighten concerns about erosion potential, and some limited areas are considered landslide-prone.”

A real developer's dream!

3) The city has $5 million available and plans to borrow $3.3 million to complete the acquisition. The city's default (and most likely) plan to repay the loan is to sell a portion of the property. Based on the purchase price of $8.23 million, the city would need to sell 40% to repay the loan. If the property is actually worth $6 million, the city will need to sell 55%. At a valuation of $5 million, 65% will need to be sold. Considering the extent of wetlands and steep slopes, it's very possible the city will need to sell every square inch of developable land to raise $3.3 million. The end result: The city will have spent $5 million for undevelopable wetlands, wetland buffers, and steep slopes. Quite the deal!

4) Development of this property must first satisfy the transportation prerequisite: either construct a connector road or widen the bridge to Fairhaven. Construction of the connector road would violate laws that regulate wetlands and steep slopes. Widening of the bridge has been determined to be cost-prohibitive by the previous owner. As it stands now, satisfying the prerequisite is either illegal or does not pencil out. Is the property even developable?

5) Opposition to any development on this property is strong, well-organized, well-financed, and long-lived. The opposition is not going away, regardless of who owns the property. Any developer who doesn't already know this has been living under a rock.

6) For a measly $1,000, the city can hire - even at this late date - a professional appraiser to perform a desk review of the obsolete WA Fed appraisal. I spoke with an appraiser who does this work almost exclusively for banks. He was “very surprised” the city has neither prepared its own appraisal nor professionally evaluated the bank's appraisal. In his experience, properties he appraised one year ago are now being re-appraised at half the value it was just twelve months ago.

I know if I were mayor or a member of Council, I would surely spend $1,000 now to potentially save millions on this acquisition.

Does failing to do so honor the city's fiduciary responsibility when spending funds voluntarily contributed by taxpayers?

Does failing to do so amount to negligence on the part of elected officials?

What would you do?

About Larry Horowitz

Writer • Member since Jan 16, 2008

Comments by Readers

John Watts

Oct 02, 2011

I seems you & I do agree on something.
Imagine that.

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Clayton Petree

Oct 02, 2011

Well said Larry.  If/when the city has to sell off a portion, I don’t think it will be as simple as “hey, let’s sell off this small chunk for the balance”.  IF they are going to do this, the city needs to know what portion, how it could or couldn’t be developed, and they need to know if that portion is valuable enough to actually pay for it before they make the purchase.

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Larry Horowitz

Oct 02, 2011

Clayton,

It’s likely I haven’t been very clear as to where I’m headed with this.  I suspect once I have, I may lose your support as well as the support of John Watts.

I have been actively involved in fighting the disastrous Fairhaven Highlands project and preserving the ecologically sensitive Chuckanut Ridge for more than six years.  I am confident that the property is not highly sought after by developers and is not extremely valuable from a development perspective.

I believe an accurate appraisal that reflects the ‘facts’ on the ground will determine the market value for the property is much lower than the $8.23 million contract price.  In fact, I believe the value will be low enough for the entire property to be acquired - permanently - with either a very small loan or no loan at all.  If the price is more than the $5 million available from Greenways and park impact fees, I believe the differential will be small enough for the local community to raise the funds to retire the debt within six years. 

The current ‘deal’, which requires a loan of $3.3 million, should be re-negotiated based on a revised appraisal.  Once re-negotiated, I believe the need for selling a portion of devalued land will disappear entirely.

It’s true that the $3.3 million loan is a significant problem.  However, that problem is caused by overpaying for the land.  Solve the overpayment problem, and the loan problem goes away.

That’s where I’m headed.  Do I still have your support?

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Clayton Petree

Oct 02, 2011

Larry,
I know exactly where you are going with this.  There are 7 council votes to purchase the property.  Given the support for the purchase, they really need to do things right.

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Larry Horowitz

Oct 02, 2011

Clayton,

Is it simply wishful thinking to believe the mayor and Council might revisit a decision when the evidence clearly suggests the decision should be re-visited? 

It has been my experience that the city abhors going back once the train has left the station, even if the train is going in the wrong direction.  It takes great courage to do so, but I have been told many times that it’s just not going to happen.  It’s too easy to marginalize critics like you, John and me.  It’ll be the city attorney’s word against ours, and we all know how that’s going to work out.  I don’t see Gene or Barry or Michael or Seth or Terry or Jack or Stan having the stomach to deal with this mess.  The best approach is the ostrich-like head-in-the-sand approach.  I’m pretty sure that’s what we can expect.

http://www.ostrichheadinsand.com/images/ostriches-head-in-sand.jpg

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Tip Johnson

Oct 02, 2011

Ostrich in the sand?  Bird in the hand?  Two in the bush? When should one push?

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Larry Horowitz

Oct 02, 2011

Good questions; but a better one might be:

When making an $8 million land purchase (the single largest land acquisition in the city’s history), would best management practices require the city to obtain its own current appraisal and/or hire a professional appraiser to critically review an outdated and potentially obsolete 18-month old appraisal prepared by the seller?

It’s not a matter of having a bird in the hand or pushing at the wrong time.  It’s a matter of due diligence vs. negligence.  It’s a matter of fiduciary responsibility.

Why should - or would - the city pay millions more than any other potential buyer?

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Tip Johnson

Oct 03, 2011

I have no objection to a current appraisal based on fact and agree it would behoove the City to have one.  The last appraisal the City had done came in just over $3mm.  Nothing on the site has changed since then, except for the DEIS having more or less proved the property is undevelopable. The 739 units administratively negotiated through a Memorandum of Agreement was just as improper and arbitrary as the original zoning at twice that density.  All suppositions about development have been completely abstract, as they remain for the Council’s recent decision to use this property as collateral for the bridge loan.

Bottom line?  There is nothing there to sell that can approach the target value.  That supports your premise that the price is too high, but undermines your theory that a greater percentage must be sold as the market value declines.  Nothing to sell is nothing to sell, regardless of the value.

If the City wants to shift current Greenways policy toward enterprise to leverage acquisitions or improvements, it is foolhardy to pin their hopes on the one property with the least potential.  It would be smarter to evaluate Greenways citywide and see which might be surplussed without impinging on park functionality, with low environmental impact, using existing infrastructure, at the least cost and most gain to the fund. That is extremely unlikely at Fairhaven Highlands/Chuckanut Ridge.  Ask Horizon Bank!

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Larry Horowitz

Oct 03, 2011

I’d have a hard time supporting the sale of ANY Greenways properties, including Chuckanut Ridge.  Fortunately, a revised appraisal and better negotiating tactics could alleviate the need to do so.  Unfortunately, I don’t see the mayor or Council having the courage to right this wrong.

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John Watts

Oct 03, 2011

So, Larry,
Since agreement seems widespread that the City has committed too much toward this purchase, how do you propose to remedy the situation?
Sell a part? Raise money independently? Sue? [whom, and for what intent] Tar & Feather those responsible? Kick those ostrich butts? What?
Even if the City scrambled to get an after-the-fact appraisal, what good would that do?
Do you really expect the Mayor OR Council to backtrack on what they have already agreed to do? Seems that train has already left the station and is headed one-way into perpetual infamy.
Or, are you just exercising your right to blow off steam, pat yourself on the back for being so astute, and castigate others who lacked the conviction to demand due diligence?
Hey, weren’t you the guy who claimed that ‘rich people always win’?
Just take your tinsel trophy and wear it with discomfort!
And, make sure you flaunt it so everyone will notice.

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Larry Horowitz

Oct 03, 2011

Wow, so much venom.  Why are you directing your anger toward me?

Before getting involved with the Chuckanut Ridge issue in 2005, my primary experience had been working with business owners and business managers.  Not one of them would move forward with a transaction of this magnitude if they found out they were overpaying by a substantial amount.

I have learned the hard way that government doesn’t function like business.  Perhaps because business owners and managers are directly impacted by the mistakes they make, they are more flexible and less stubborn when it comes to bringing a wayward train back to the station. 

But I have not lost hope.  Yes, I really hope Council will hire a professional appraiser to critically review the outdated 18-month old WA Fed appraisal.  And, yes, I really hope that if they learn the property is not worth $8.23 million, they will re-negotiate a better deal.  If WA Fed is not willing, perhaps the city can obtain a right-of-first-refusal for the $200,000 earnest money they have on deposit and use that earnest money toward a subsequent purchase at a lower price. I believe it’s unlikely WA Fed will receive offers for anywhere near $8 mil. 

Of course, what I believe CR is worth is simply my opinion.  I am not a real estate expert; but neither is the mayor or Council.  That’s why you hire professionals when the stakes are so high.  And that is what I have recommended.

Unlike you, I don’t waste my time to simply blow off steam, pat myself on the back for being astute, castigate others, or flaunt a tinsel trophy while wearing it with discomfort.  My time is spent hoping to change the outcome for the better.

BTW, have you not read your crap of a blog lately.  I heard Google called and plans to change the name from “HamsterTalk” to “HamsterWhine”.  Got cheese?

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