HomeMy WebLinkAboutEric Higuchi-Item 6Eric Higuchi
Tustin, CA 92782
Tustin City Council
300 Centennial Way
Tustin, CA 92780
March 16, 2025
IN RE: MARCH 18, 2025 CITY COUNCIL MEETING; CONSENT CALENDAR ITEM
6, DISPOSITION AND DEVELOPMENT AGREEMENT WITH TUSTIN
LEGACYACQUISITIONLLC (IRVINE COMPANY)
To the Tustin City Council:
I am writing to express my support for the Irvine Company's proposed development.
However, going forward with the remainder of Tustin Legacy, I believe the City needs to re-
evaluate how it's proceeding with entitling, designing, and marketing the property it controls.
Money isn't everything (we need high quality housing), however, I am concerned the City is not
only leaving a very substantial amount of money on the table, it's also delivering new housing
units at a very inefficient rate.
For example, the nearby development in Santa Ana called The Row at Red Hill (1,100 units on
14.5-acres) was sold for $73,600,000 in 2021 ($5.075M per acre or $67K per unit). Even though
The Row is in an obiectively inferior location and address, The Row: (i) sold for $2.4M per acre
higher than the City's property; (ii) included 80,000 square feet of commercial space; (iii)
contributed $13,000,000 to Santa Ana's affordable housing fund; (iv) looks way more expensive
to build; and (v) is nearly complete.
Alternatively, if the City had sold the entire property currently in contract with the Irvine Company
as a for -sale housing development, the property would have likely been worth ±$135, 000, 000 (or
f$7.OM an acre) if the terms of sale were properly structured. Those $85,000,000 in additional
proceeds could have been utilized as an endowment that provided full housing subsidies for 140
families each year, or could have subsidized the entire cost of the permanent supportive housing
site on Park Ave and Warner Avenue, or could have been used to repair the Tustin War Memorial
Building.
Tustin Legacy
Santa Ana Comp
Tustin Legacy
Irvine Company
The Row @ Red Hill
For Sale Alt (Est)
Close of Escrow Apri12026
March 2021
Apri12026
Entitlement Status at COE Entitled
Entitled
Entitled
Property Status at COE Rough Graded w/ Utilities
Vacant Office
Rough Graded w/ Utilities
Acres 19.4
14.5
19.4
Units (Mrkt Rate) 1002
1100
388
Units (Affd)) 334
0
0
Units (Total) 1336
1100
388
All -In Acquisition Price [1] $51,684,715
$73,600,000
$135,000,000
Price PerAcre $2,664,161
$5,075,862
$6,958,763
Price Per Unit (Mrkt Only) $51,582
$66,909
$347,938
Price Per Unit (Total) $38,686
1 $66,909
1 $347,938
[1]lncludes purchase price plus fairshare obligation.
Why is the City's Purchase Price so Low?
• Market Timing. Multifamily land, in this current market (and for the past 24 months), is
effectively worth zero due to: (i) high interest rates; (ii) high constitution costs; and (iii)
oversupply.
o High Interest Rates. To be frank, I believe there's a strong argument that current
interest rates are not "high" as, historically, they are closer to normalized interest
rates.
o High Construction Costs. Low labor supply and government infrastructure projects
have kept costs flat. Tariffs will also likely drive prices higher.
o Oversupply of Multifamily. There is a significant number of multifamily units
coming online in Santa Ana, Tustin and Irvine.
Obviously, the Irvine Company does not value the land at zero. However, the Irvine
Company has a very unique approach to its real estate assets as: (i) they are long term
owners; and (ii) they do not require project specific, third -party capital to finance
acquisition and construction. This project would likely not be moving forward in the near
term if the Irvine Company was not an interested buyer due to lack of available debt
financing.
The current status of the market also highlights why urgency matters in real estate
development. There are very limited windows of opportunity in a market cycle where
entitlements, demand, and financing align to make ground -up development viable.
• The Offering Was Too Big. 1,002 Market Rate Units equates to a three-year lease up period
(assuming 30 occupancies a month) which means a much longer duration of exposure to
market risk. Further, during lease up, the developer needs to subsidize operational costs
and has a high cost of capital as the project is not stabilized.
o Breaking up the offering would have resulted in higher land values by: (i) reducing
developer carry and lease up costs; (ii) creating a larger competitive pool of buyers;
and (iii) creating a larger pool of interested capital sources.
• Off Putting Sales Process. Merchant builders avoid buying land from municipalities
because of the perceived unfairness of the process and having to participate in a "Dog and
Pony Show". Cities often require conceptual site plans and renderings in order to make a
decision on which developer they select, however the cost of providing conceptual plans
is not only significant, it consumes an inordinate amount of employee time. Accordingly,
most merchant builders cannot justify the expenditure of resources especially since cities
often select buyers based on relationships and subjective qualifications. Participants in the
"Dog and Pony Show" are not only successful at securing land at below market rate due to
limited competition, they are also well positioned to negotiate a cheaper re -design and
lower purchase price because of the City's lack of incentive to re -open the bid process.
Again, I am supportive of the project, and we are very fortunate to have the Irvine Company as a
partner as they are quite possibly the best apartment developer in the world.
We are in a housing crisis, and I believe we do have an obligation to deliver a significant amount
of high -quality market rate and affordable housing to the market. However, we have a "once in our
city's history" type resource in Tustin Legacy which, if properly developed and monetized, could
literally secure the economic future of our community for the next 50 years.
To be frank, I think there is real concern that the City's approach to Tustin Legacy so far will
ultimately lead to a breakeven endeavor at best.
Regards`,
Eric Higuchi