Sunnyvale aims for influence on stalled Town Center

Drive past the Sunnyvale Town Center today, and it looks much the same as it did four years ago: unfinished.

The 36-acre mixed-use project - located in some of the most desirable real estate in all of Silicon Valley - has been stalled for years thanks to a complicated court battle between its developer and the bank that owns it. It's an incongruous sight in Sunnyvale, whose commercial real estate sector has been the envy of the Bay Area during the recovery.

Now city officials, led by new city manager Deanna Santana, are aiming to raise the pressure on both sides of the dispute - developer Sand Hill Property Co. and current owner Wells Fargo - to come to some kind of a resolution.

At the same time, city planners are studying a change to the project that could make the property more attractive to a potential buyer, they say, by increasing the amount of office and residential space and slimming down the retail.

The moves are unlikely to resolve the complex issues in short order. But they show renewed focus by the city on the incomplete project, slated to boast more than two million square feet of commercial space and housing, including more than 900,000 square feet of retail and 300 housing units.

"While it does look like we've been in a holding period, today's my three-month anniversary (and) I would like to assure you I've been very active on this topic," Santana told a frustrated city council earlier this month, during a session on the council's goals for the coming year.

The project's on-hold status has become a persistent thorn in the side of Sunnyvale officials. At the city council meeting, some council members sounded exasperated at the prospect of the town center sitting idle for years longer - a real possibility given the sluggish progress of the lawsuit through an overburdened court system.

"My head will explode," said city council member Glenn Hendricks.

Against that backdrop, Mayor Jim Griffith said the best chance is to use the city's lobbying ability to try to press for some kind of agreement.

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"The only way we'll get a timely response is if the city manages to negotiate something to happen faster," he said at the meeting. "I don't know that that's even possible, but we should certainly try."

In a follow-up interview with The Business Journal, Santana made her most extensive public comments yet on the issue. In recent weeks, she has held separate meetings with Sand Hill and with Wells, though she said she is unable to divulge much of the content of those conversations.

Strictly speaking, there are not many levers for the city to pull. Sunnyvale is not a party to the suit, and has no real legal say in the matter.

Santana described her role as a "facilitator" who can "build trust and collaborate with both sides" while also impressing on them the problems that the stalled project has created. In some cases, Santana said she has personally communicated to Wells issues relating to poor upkeep of the unfinished portions of the project. It is also a brake on continued momentum for this part of Sunnyvale, which has seen strong developer and tenant interest in the emerging downtown despite the stalled development.

"The community is frustrated," Santana said. "My role is to continue to listen to the community's concerns and, in appropriate ways, relay those to the bank or different stakeholders involved."

She is well aware there are limits. "I don't think our role is to adjudicate what's already in litigation," Santana said. "I'm optimistic, not naïve." At the meeting, she told council members, "I don't want anyone to think I have negotiating terms in my pocket that I'm trying to advance."

Joel Zeldin, a veteran attorney with Shartsis Friese LLP who is not involved with the Town Center, said a city could be an effective, if limited, actor in these types of situations.

"There is a role in several respects," said Zelden, who has extensive experience in complex real estate litigation. "In many of these disputes, the parties don't have a good line of communication. Sometimes a third party can restore that, and the parties can make some progress, rebuild trust and decide what to do with this property, which is very valuable."

Complicated past

Santana, who was Oakland's top city administrator from 2011 through early 2014, worked on some of that city's most vexing challenges, including issues relating to medical marijuana, Coliseum City and the redevelopment of the Oakland Army Base.

"I've helped other cities unbundle some very complex, longstanding development projects," she told me.

That background could serve her well in the case of the Town Center, perhaps the Valley's most complicated continuing fallout of the recession.

Replacing an aging indoor mall, Sunnyvale Town Center was slated to boast more than two million square feet of commercial space and housing, including more than 900,000 square feet of retail and 300 housing units. The idea was to anchor Sunnyvale's downtown and re-create a pedestrian-friendly street grid, much of which was torn down in the 1970s to make way for the mall.

Sand Hill and its former partner, Rreef (now Deutsche Asset & Wealth Management), took on the project following failed attempts by previous developers over the years. Then the economic crisis hit. Rreef, which owned 95 percent of the venture, allegedly walked away from the project in early 2009, and the town center went into receivership.

Wells Fargo, which held a $108.8 million note on the project, took ownership in 2011 after no one bid on it at a foreclosure auction. Sand Hill, headed by longtime real estate executive Peter Pau, sued Wells in a fight over control of the project. The legal process has dragged on ever since, with both sides digging in with appeals. A trial date is not on the horizon. (This backstory is simplified; for more, click here and here.)

Wells says it is unable to sell the project to a developer who would complete it because of the cloud of litigation. For its part, Sand Hill - with backing from banks and overseas funds- has undertaken a string of major projects in the Valley, including the mixed-use Main Street Cupertino, and would like to take a crack at finishing the job in Sunnyvale.

A neutral party

Santana's direct involvement comes after a somewhat stormy relationship and limited communication in years past between the city and Sand Hill. But in an interview, Santana studiously avoided casting blame or criticizing either party.

"The city has to maintain relationships with all parties," Santana said, carefully choosing her words on a delicate subject. "We're not involved (in the lawsuit) and a neutral relationship is the best position. My style is maintaining open lines of communication."

Her outlook was welcomed last week by Sand Hill's attorney, Ron Rossi of San Jose-based Rossi, Hamerslough, Reischl & Chuck.

"My wish is she takes an active, aggressive role in resolving this issue and getting this done by being neutral and pushing both sides," Rossi said. "It's going to take a lot of meetings, time and outreach.

"The way this is going, it's going to wind through the courts for years, there will be a trial someday and I expect to win. In the meantime, it just sits there."

Wells Fargo spokeswoman Elise Wilkinson said in a statement: "We're hopeful that we'll get on the Court of Appeals' docket soon so that the legal matters can be resolved, allowing the project to move forward ... for the benefit of the Sunnyvale community."

Changing plans

What project eventually gets built could be different from what city officials originally approved.

Wells is asking the city to consider substantially cutting down the retail component and replacing it with more office or residential.

"Their feeling is, as soon as the lawsuit gets settled we want to move forward and sell the property, but one downside will be that developers will look at it and say we can't build this much retail," said Hanson Hom, Sunnyvale's community development director.

Office and residential has taken off in the downtown Sunnyvale area, including at two office buildings that are part of the Town Center project and were completed under receivership.

"Given the changing dynamics in the retail market, we believe there is stronger demand for office and residential space in both the near and long term," Wells' Wilkinson said. "The property's unmatched location near the Caltrain station makes downtown Sunnyvale attractive to a growing number of people who want to utilize public transportation."

At the council meeting, Mayor Griffith characterized the revised plan - which would still have to be ironed out and approved - as "doing what we can to make sure that our house is in order and that we're ready to go" when the legal issues are resolved.

When might that be? No one can say. But there is some urgency. While there is plenty of demand for ambitious projects during the present real estate cycle, each passing year makes it more likely that a resolution could miss the current market, potentially prolonging the project's completion even further.

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