Lehman, SunCal, and Alameda Point 

What will the company's bankruptcy mean for two long-stalled local developments?

Buried on the web site of major West Coast developer SunCal Companies is the story of a little girl named Courtney Faye Smith. Courtney has spinal muscular atrophy and cannot play on area playgrounds because none of them can accommodate her wheelchair. But SunCal, flush with cash from its partner Lehman Brothers - and newly named the master developer at Alameda Point - is going to do something about that. It is going to build "Courtney's Sandcastle," a wheelchair-accessible wonderment of wind chimes, topiary creatures, and plants that "emit aromas when touched." The playground will boast an interactive musical pathway, a castle ringed by a moat, a ship sailing a simulated ocean, a sea serpent or two, a mist-breathing dragon, and a "rock mountain that comes to life with sensor-activated water features." It will all be part of San Clemente's new master-planned Marblehead Coastal development, and will serve as a draw to the 8.5-acre park that SunCal "will begin building for the public this fall."

That article is dated July 2007. The playground has not been built. And according to the mayor of San Clemente, the rest of Marblehead Coastal is a "quagmire." The public infrastructure and street improvements that SunCal pledged to complete have been so far behind schedule that in March the city authorized its attorney to sue the company if it did not see progress.

SunCal's troubles in Orange County mirror the troubles the company has encountered elsewhere in California, from a bankrupt project in Bakersfield to a scotched development at Bethel Island, shuttered when the market slumped and then left to languish indefinitely. At Bethel Island, dug-up dirt blows downwind into houses and the company has to send in water trucks to dampen the stuff on windier days.

In recent years, SunCal has set its sites on the western East Bay, where the housing market isn't as bad as many other areas of the state. SunCal is the master developer at two of the region's biggest base conversions, the massive Alameda Point project, and the Oak Knoll Naval Hospital in the Oakland hills.

At Alameda Point, SunCal is in the planning stages of an ambitious effort to transform the toxic former Naval air station into a vast mixed-use development powered by a solar farm. At Oak Knoll, already in the middle of a long and costly process, the company hopes to build 960 units of housing, with 300 to 400 units potentially opening as early as 2010. That project has seen its share of delays, but SunCal remains hopeful that the market will rebound.

SunCal boasts of being the largest privately owned land developer in the West and currently has more than fifty projects in various stages of development throughout California and New Mexico. But for all its size and scope, some of SunCal's recent publicity has been as toxic as the assets it bid big on in the years before the real estate bubble burst. And in the wake of the collapse of its biggest backer, the investment bank Lehman Brothers, SunCal's spotlight at the center of the current crisis has some Alameda officials worried that yet another developer might have to walk away from its promise to develop the Point.

Observers such as Alameda City Councilman Frank Matarrese are watching SunCal's travails as the planning process for Alameda Point moves into the next phase. "We have to be concerned about the entire health of the company if they've got these projects that are all taking hits," he said. "We can't afford the same scenario. We can't go forward without infrastructure improvements because the roads, the sewers, the electrical out there is just not suitable. It's not serviceable. And that has to happen in order to develop the land."

SunCal says it's committed to moving forward in Oakland and Alameda and that the issues with other projects have no bearing on its work in the East Bay. As word of Lehman's collapse broke, the company began firing off press releases to communities across the West with assurances that all of its projects are separate entities. Some, in fact, are not funded by Lehman at all; its largest project is backed by hedge fund D.E. Shaw.

But even those who are eager to see the company's projects succeed have cause to worry. SunCal has missed some of its early deadlines in the planning phase at Alameda Point, and as the process has progressed, it has had to obtain assistance from Shaw.

The question is what impact the developer's woes will have on the long-stalled developments at Oak Knoll and Alameda Point.

With greenbacks from Lehman Brothers often in hand, SunCal had developed a reputation for big thinking and bigger bids. It put up $100.5 million for Oak Knoll, a move that left local developers "astounded and amazed," according to the San Francisco Business Times. It outbid Donald Trump for a site in Los Angeles; grabbed up $250 million dollars worth of land in the now-troubled Inland Empire; planned a 25,000-home development that would have tripled the population of Barstow; and scored a 57,000-acre land grant twice the size of Boston west of Albuquerque.

The credit crisis has hit all developers hard, and like its industry peers, SunCal has suffered. Yet, it has been in the news more than others in its industry. The company has seen increased scrutiny ever since its partner Lehman Brothers announced in June that it had lost $2.8 billion in the second quarter of 2008.

"Projects With SunCal Drive Part of Lehman's Big Loss" was the headline of a subsequent story from the Orange County Business Journal, where reporter Mark Mueller follows the Irvine-based developer closely. He documented staff cuts and attempts to restructure loans on some thirty projects, and reported a "buzz in the industry" that Lehman was negotiating to take over some of SunCal's projects. "A number of developers and distressed-asset investors were believed to be considering bids for some of the Lehman-SunCal projects," Mueller wrote. Of course, that was before the infamous conference call that signaled the beginning of the end for the nation's fourth-largest investment bank.


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