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 The purchase price of $8.23 million is based solely on an outdated appraisal prepared in early 2010 for the seller, Washington Federal.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- The city has not hired a professional appraiser to review the outdated appraisal prepared for WA Fed.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?