The state, in a reversal, now recognizes a $53.3 million Hercules redevelopment agency debt to the developer of the Victoria by the Bay subdivision, but the decision, like the one it reverses, has no immediate financial consequences for the city, the city manager said.
The $53.3 million debt, part of a payment schedule put together by the city as successor agency to the now-defunct Hercules Redevelopment Agency, derives from a 2001 development agreement between the agency and developer Hercules LLC, then an affiliate of Catellus Corp.
The debt was cemented by a 2010 settlement of a lawsuit filed by the developer three years earlier in a dispute over the value of public improvements for which the developer claimed reimbursement. It will be paid over about 40 years out of tax increments in former redevelopment areas of the city.
The state's 400-odd redevelopment agencies disbanded Feb. 1 pursuant to state legislation. The city is not on the hook for the former agency's debts, said Hercules City Manager Steve Duran.
The state Department of Finance, in a May 17 letter to the city, had said the Hercules LLC debt is not enforceable because the property tax increments in question were low- and moderate-income housing set-asides, and such taxes are no longer allocated to the agency.
That letter prompted a lawsuit by the developer against the state Department of Finance, the Contra Costa County Auditor-Controller and the city as
According to Duran, the May 17 letter had no financial consequences for the city because the debt would be payable out of tax increment.
As Duran put it last month, "We have no dog in this fight."
Hercules LLC's counsel, Andrew Sabey, explained in an email that Hercules was included as a co-defendant in the suit to protect the developer's rights and "to prevent the state Department of Finance from ordering the city or county to deliver to it tax revenues that are due to Hercules LLC."
In a May 25 letter to the city, the Department of Finance said that after further review, it was no longer questioning the Hercules LLC debt.
Sabey said the state's reversal acknowledged that his client's right to tax increment under the 2001 development agreement takes precedence over subsequent state regulations.
"We anticipate that this acknowledgment will lead to a resolution of the lawsuit and also avoid the need to revisit the issue in future years," Sabey wrote in an email Tuesday.
In both the May 17 and May 25 letters, the state also said it no longer questions a debt to a bond insurer, AMBAC, on the list of recognized obligations. The letters quantify the debt, which is pursuant to a March court settlement, at $3.5 million, but the Recognized Obligation Payment Schedule lists it at $6.5 million.
Finance Department spokesman H.D. Palmer, in an email Tuesday, explained that the amount initially was unclear, but subsequent documentation confirmed it as $6.5 million, and the issue is resolved.
But the state agency continues to reject some $2.3 million in construction costs at the half-finished Sycamore North project and some $660,000 in successor agency administrative costs it deems excessive.
Duran said that although the Sycamore North property is owned by the city, the Redevelopment Agency had been funding the improvements until recently. He said the two rejected debts will be discussed at the next meeting of the successor agency's oversight board, probably in mid- to late July.
Contact Tom Lochner at 510-262-2760.