Profiting from Redevelopment 

An East Oakland land deal could cost the city millions, while reaping huge profits for two well-connected property owners.

There are good reasons why cities try to keep their plans for buying and redeveloping land under wraps. If word gets out that a city is eyeing a specific piece of property, speculators can swoop in and purchase it first, and then make a killing by reselling it to the city at a much higher price. This may be happening right now in East Oakland.

The city is about to purchase property on Seminary Avenue for nearly 400 percent more than it sold for just eight months ago. The seller who stands to make a bundle at taxpayers' expense is Dan Mayorga, one of the city's highest paid contractors and a friend of City Council President Ignacio De La Fuente. But Mayorga may not be the only beneficiary of this questionable deal. The church attended by Councilwoman Desley Brooks also could make a sizable profit by selling an adjoining lot to the city for apparently more than it is worth.

Full Disclosure uncovered no evidence that anyone tipped off Mayorga about the city's plans, but there are reasons to believe he learned about them somehow. Either way, taxpayers will get the shaft if the deals go through as planned, as they would be forced to pay several million dollars for blighted property that could have been purchased for much less money.

The story of the land deal started a couple of years ago when the city's redevelopment agency began having internal discussions about buying property on Seminary, between Foothill Boulevard and Bancroft Avenue. The agency planned to transform the run-down property — a series of empty storefronts and vacant lots — into a mixed-use retail center, with ground-floor shops topped with condos or apartments.

It seemed to be a great idea. The agency would use property tax funds to buy the land at a busy intersection in the city's Seminary district, which desperately needs viable retail outlets because local shoppers have to drive several miles just to find groceries. It also would be a boon to the neighborhood to replace an eyesore with an attractive, vibrant development.

According to Frank Fanelli, Oakland's manager of real estate services, city staffers learned last year that they might be able to obtain some parcels along Seminary Avenue at rock-bottom prices. That's because the then-owner of the properties, Luther Patrick, was in deep financial trouble. Public records show that Patrick had fallen behind on his taxes and was in danger of foreclosure.

Fanelli told Full Disclosure that the city was negotiating to buy two of the parcels from Patrick in exchange for paying his tax debts and his mortgage, along with giving the Hayward man a small profit. One of the parcels has a run-down, single-story building on it, and the other is a small parking lot. The entire deal likely would have cost the city less than $500,000. But then, last October, after Patrick's bank announced its intention to foreclose, Mayorga suddenly appeared and bought both parcels for just $380,000.

Now, eight months later, the city is about to pay Mayorga $1.45 million for the very same property. In other words, during a severe real estate downturn, the value of Mayorga's investment could increase by 382 percent in less than a year.

So the question is how did Mayorga find out about the property? The city's plans were supposedly a secret at the time he bought the land. In fact, they weren't fully made public until Fanelli told Full Disclosure about them last week. Did Mayorga get inside information from one of the small group of people who knew that the city intended to buy and redevelop the land? Fanelli said that when he asked Mayorga how he learned about the property, "he couldn't explain it." Neither Mayorga nor De La Fuente returned phone calls for this story.

Fanelli speculated that Patrick contacted Mayorga in an attempt to start a bidding war. He thinks the whole thing then went south when the bank started foreclosure proceedings. He also said that Patrick had been a "flake" who stopped returning phone calls before the sale.

But Patrick told Full Disclosure a different story. He said he wanted to sell his property to the city, but that city officials "held me up." He added that he had "no idea" how Mayorga came into the picture. Then, when told of how much the city now planned to pay for his former property, he became angry and said he might sue.

However, Fanelli defends the new purchase price. He says the property is worth far more than the $380,000 Mayorga paid. "That's not the value of the property," he said emphatically. "It was a distress sale." He said the city commissioned an appraisal that concluded $1.45 million was "fair market value."

Fanelli declined to provide a copy of the appraisal to Full Disclosure until after the deal closes escrow. But he did allow me to look through it with him briefly. Such appraisals typically depend heavily on "comparables" — the price that similar properties sold for. But, in this case, the comps used by the appraiser were Fruitvale district properties that sold in 2006, before the real estate market tanked. When asked why the appraiser didn't use more recent comps, Fanelli said there were none because the market was so soft.

The city's appraisal actually listed the fair market price as a range between $1.2 million and $1.45 million. When asked why the city was paying the maximum, Fanelli said that Mayorga had demanded $1.5 million, and so they settled on $1.45 million. Fanelli also defended the higher price, saying that Mayorga had put "$300,000 to $400,000" in improvements into the property. However, when told that the single-story building still looks worn and that no improvements appear visible, Fanelli said he didn't know what the supposed upgrades were.

But even if Mayorga did make improvements, they were illegal. According to city records, no one has applied for or was granted permits on that property in the past decade. As a result, any improvements made by Mayorga are worthless to the city, because Oakland law requires the city to remove unpermitted building upgrades. In short, the city is paying "fair market value" based on out-of-date comps and property improvements that are worthless at best.

And the city's apparent overpayment to Mayorga will end up costing taxpayers even more money. That's because the city's acquisition will raise the value of nearby properties and force the city to pay more when it tries to buy them. One of the property owners likely to profit handsomely is First African Methodist Episcopal, which also goes by Fame Faith Foundation and owns four parcels directly behind the Mayorga property.

Fame bought the four parcels in 2005, at the height of the real estate boom, for $860,000, property records show. The church had hoped to redevelop the property itself, but has been unable to do so. Now, the city is in negotiations with the church to purchase the four parcels as part of its multi-use redevelopment. And because of the Mayorga deal, the value of the church's property has likely skyrocketed. After all, the church's property is significantly larger than the two parcels for which the city is paying Mayorga $1.45 million.

Among the church's most prominent members is City Councilwoman Brooks, who also represents the district in which the Seminary properties are located. Brooks said last week that her support of the Mayorga deal had nothing to do with her relationship to her church and how much money it might make. "There's no conflict," she said. "I have been very upfront about wanting to redevelop that property. I'm getting nothing out of this."

She also said that she had become enraged last year when she learned that another buyer suddenly purchased the same property that the city wanted to buy and redevelop. She said she didn't know that Mayorga was De La Fuente's friend, and was now suspicious of the deal. "You connect the dots," she said. "Ignacio's friend comes out of nowhere. ... Somebody told this guy. Something is desperately wrong."

Author's Note: The original version of this story mistakenly stated that Mayorga stood to make a 382 percent profit. It has been corrected to say that the value of his investment could increase by 382 percent. In addition, another sentence from the original version, concerning when the city's plans were made public, was modified with the word "fully" for clarification purposes. It is meant to mean that this reporter found no record that the city's plans to purchase the Patrick property, the Fame properties, and several others in order to build a large mixed-use development on Seminary between Foothill and Bancroft, featuring ground-floor retail topped by condos or apartments, were made public until Fanelli told them to me.

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