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Thursday, May 17, 2012
Regional Focus: February 2008
The Confluence of Two Rivers
Are builders hit harder by the housing market or the floodplain designation?
Story by J.T. Long
Editor’s note: Federal officials proposed rules on Jan. 15 to limit building in North Natomas, deeming the levees weak and prone to flooding. The Federal Emergency Management Agency announced this step after reviewing new data from the Army Corps of Engineers, which said it couldn’t certify the levees to withstand a storm with a 3 percent chance of occurring in any year. North Natomas residential and commercial building currently accounts for nearly half of the development activity in the city of Sacramento. City officials met the announcement with outrage and opposition, saying the federal decision could stifle the local economy and hurt tax revenue. The building restrictions are scheduled to take effect in December when FEMA releases updated flood maps for the area.
On a recent sunny afternoon, a team of Arcade Contracting roofers topped off a home at Commons by Lennar in Natomas Park. Across a wide drainage ditch, a monument sign in a grassy field announced that KB Home’s Stonybrook development would be coming soon. How soon could depend on the impact of a pair of dark shadows cast over the fast-growing area: a flood plain designation threatened by the Federal Emergency Management Agency and a difficult housing market leaving developers with too much inventory and not enough qualified buyers.
The same day roofers placed the final tile, FEMA engineers released a pair of maps that put $900 million in permitted projects by Lennar, KB Home and many others in a flood zone that could effectively halt building until the area has flood protection that can withstand a once-in-a-lifetime storm.
Stein Buer, executive director of the Sacramento Area Flood Control Agency, predicts the 100-year flood protection required to remove the AR Zone designation will come in 2010. That’s thanks to a $326 million assessment the district passed in March to pay for the local share of $2.68 billion in improvements. Two years later, SAFCA plans to be at 200-year protection, taking Sacramento out of the lead as most vulnerable city in the country for flooding.
The Natomas Basin received the AR designation after FEMA denied the A-99 exception requested by city leaders. The zoning means all new homes must be elevated 3 feet off the ground and current residents must purchase flood insurance.
“That would be too expensive to build and not protect anyone,” says Gregory Thatch, a land-use attorney who has represented Natomas real estate interests for so long that a residential street is named after him. He currently represents a who’s who list of the biggest builders in the state, including Alleghany Properties LLC, Shea Homes, Reynen & Bardis Development, Lennar and KB Home. All have significant interests in Natomas.
Since January 2006, more than half of the 4,306 applications for single- and multi-family residential units — totaling $895 million — were approved by the city of Sacramento. Another 1,563 residential permits representing 2,671 units have been applied for but not issued.
That is just the tip of the building iceberg. Long-term projections show the community of 50,000 could double by build out. “We are talking about infill projects that were certified safe by the federal government when they were planned,” Thatch says.
The Army Corps of Engineers certified the city with what it called 100-year flood protection in 1998. That meant in any given year the area had a 1 percent chance of seeing a storm that exceeds levee flood control capabilities. In its quest to improve the odds, SAFCA set a goal of 200-year protection and was testing the soil to do just that when it discovered an underseepage problem that led the Army Corps to decertify the levees in 2006.
SAFCA, with support from the building community, scrambled to raise the money to make the improvements — berms, cut-off walls and dry wells — while developers waited to see what action a weather-beaten FEMA would take in the wake of the public relations disaster of Katrina. The shoe dropped on Nov. 15 in the form of draft maps that show Sacramento’s hottest growth area as ground zero for flooding.
“FEMA is definitely interpreting the data stricter than it did pre-Katrina,” says Sacramento Assistant City Manager Marty Hanneman. In the 1990s, the city was given a waiver when it showed that it had a plan for reaching 100-year protection and building fees helped pay for those improvements. “They weren’t willing to do that this time,” Hanneman says.
Thatch was hopeful that the impact of the flood designation would be short-lived. Restrictions wouldn’t take effect until June 2009. When the repairs near completion in 2010, the city can apply for a waiver. “Until then, it is building as usual,” Thatch says.
A true building moratorium would have sweeping consequences, Thatch says.
Although the AR designation is easier on commercial projects, like the planned Natomas Town Center expansion, retail projects could be delayed for market reasons if the rooftops aren’t on the horizon.
Sacramento Vice Mayor Rob Fong calls that scenario “devastating.” He was hoping for a linear process where construction and levee improvement moved forward simultaneously.
“Without the developer fees from the fast-growing area, the city will have to cut spending drastically,” Fong says. He says that of the $15 million a year in fee revenues realized in 2006, 56 percent was from Natomas.
“Development is not like a light switch,” Fong says. Developers like certainty. If they don’t know when or if they will be able to build, they won’t invest in permitting and engineering projects. So once the area is opened for business, development could trickle in rather than flood back to historic levels, he says.
Additionally, some builders won’t be able to sustain a drought. “I worry about some builders defaulting on the bonds used to fund levee improvements,” Fong says.
Plus, there’s a ripple effect. “The perception of danger could impact the property values of existing homes, reducing sales taxes that would be paid by new homeowners.”
Fong also stresses the need for local control. “I think land use should be under council control, rather than a national administrative issue.”
The housing market has also hit Natomas relatively hard. In the third quarter last year, 317 homes sold in Natomas compared to 929 for the same period in 2003, according to The Gregory Group based in Folsom. And it was in the third quarter 2006 that incentives as high as $80,000 per home began popping up. The Multiple Listing Service showed more than 660 homes in the 95834, 95835 and 95836 zip codes for sale in December.
The increase in inventory was weighing down some developers. The same month that FEMA was re-examining its flood maps, Las Vegas-based Pardee Homes announced it was shutting construction on 660 homes planned for Natomas.
City of Sacramento’s Hanneman saw the confluence of the building restrictions and the slow market as a blessing. “It would have been terrible to have to stop building when the market was hot,” Hanneman says.
Thatch disagrees, “In a slow market, developers need every chance they can get to sell a home.”
One company that hopes the timing works in its favor is AKT Development Corp. Any delay in lifting the AR Zone’s infill-only designation could have wide-ranging impacts on AKT’s massive Greenbriar project, a partnership with Woodside Homes. The entitlement process, including annexation to the city of Sacramento, on this project wedged between Metro Air Park and Interstate 5, is set to be completed just as the final touches are being put on the levees.
“We have pledged not to do any vertical construction until 100-year protection is established,” says Phil Serna, Greenbriar project manager.
Ultimately the project would have 3,000 residential units and 288,000 square feet of commercial space. That would be a lot of tiles for roofers three years from now if flood improvements move ahead on schedule.
