By Mark Gutglueck
San Bernardino City Councilman Benito Barrios this week questioned why city manager Andrea Travis-Miller and the city’s lead economic development consultant, Steve Dukett, acquiesced in providing Keller Williams, a real estate brokerage company that is marketing what has been deemed surplus city real estate, with a ten percent commission. Barrios suggested that the ten percent commission was inflated from the six percent commission normally provided brokers on such transactions.
Travis-Miller had attempted to have the matter considered as part of the consent calendar at Wednesday night’s city council meeting. On the city council meeting agenda, the contract with Keller Williams was shown as a consent calendar item entitled “Listing Agreement with Keller Williams Realty for the Listing for Sale of Certain Real Property Assets.” The consent calendar is reserved for issues deemed non-controversial, and those items on it are approved together in one vote without any prior discussion. At the beginning of the meeting, Barrios requested that the item be removed from the consent calendar, meaning that the council would have the opportunity to discuss the issue and question staff about it rather than being put in the position of voting on it without the deliberative process occurring.
When the item was considered, Barrios said, “I have a lot of questions about this. Who is advising the city on the selection of who we are going to appoint?”
Travis-Miller sought to put the matter into context. She said the provision of the contract with Keller Williams “stems from our redevelopment activities and our role as the successor agency.”
Travis-Miller’s reference was to legislation passed in 2011 which closed out all of the redevelopment agencies throughout the state. Redevelopment agencies were adjuncts to municipal government which were intended to facilitate the elimination of blight within the confines of those cities. In this way, the redevelopment agencies sought to incentivize the development of deteriorating properties. This strategy sometimes consisted of purchasing or otherwise obtaining those properties and applying available revenue to improve infrastructure on or around them and refurbish the properties and sell them to end users. When the 2011 legislation ending redevelopment agencies passed and was eventually signed into law, cities such as San Bernardino were left with properties formerly owned by their redevelopment agencies. Through a protocol involving the California State Department of Finance, each city created a successor agency which would sell the land and distribute the proceeds to local agencies such as school and water districts, or absorb the property and put it to public use.
Travis-Miller continued, “When the state dissolved redevelopment we were required to walk through or provide an inventory of all the properties that we have available or properties that were purchased for economic development purposes or for housing purposes. So, the city went through that process per the state law. We identified some properties we still felt had some economic development value and we wanted to retain those for economic development purposes. One of those we talked about [was] the Carousel Mall. There are some others. We also recommend that we retain several housing properties because we think there’s an opportunity to change the complexion of the neighborhoods by investing in housing in those areas. There are properties, however, that we really don’t have the present ability to utilize, and the state requires that we put those on the open market and sell them. The council reviewed a property disposition plan several months ago and approved a plan wherein we would solicit brokers from within the community. We recognized that they needed to have a particular level of expertise in this. The reason is because our goal certainly was to dispose of them in a very proper manner. So we did that process. We had an internal group [evaluate] proposals. I wasn’t part of that group.”
Barrios inquired if those who eventually selected Keller Williams had experience in dealing with real estate issues.
“Certainly our economic development staff [did]. Steve does have a real estate background,” Travis-Miller responded. “So, yes, we did have people who have done both economic development work as well as housing work and had an understanding of the real estate process.”
The “Steve” Travis-Miller referred to is Steve Dukett, who is with Urban Futures, a consulting firm which was brought in by then-city manager Alan Parker in 2013 to serve as the city’s finance department following the vacuum created when former finance director Jason Simpson resigned in February 2013. Urban Futures, Inc. was also used by the city to provide bankruptcy-related services which were needed in the aftermath of the city’s 2012 Chapter 9 filing, including refinancing loans and bond financing and managing the disposition of various municipal assets. For that work, through June of this year Urban Futures was paid $2,327,665. Dukett and Urban Futures remain consultants to the city.
“Who were the five [real estate brokers] that submitted proposals?” Barrios asked.
“The five firms that submitted proposals that were reviewed were Keller Williams, the company we are recommending; AB Commercial; Sweet Dreams Real Estate; Daum Real Estate; and King Real Estate,” said Duckett. “It was reviewed by a committee of both staff and members of Urban Futures that have done this for other purposes in the past.”
Barrios, after indicating that Keller Williams is “big because they get a lot of work done” and stating that he had “no problem with their [Keller Williams’] credibility,” asked about the rate of the commission Keller Williams will receive.
“Why 10 percent?” he asked.
“There’s two reasons for that,” said Dukett. “Number one, as your city manager has mentioned, this particular process was authorized by your council as a function of approving the property disposition strategy. The original one was approved in March. We issued the RFP [request for proposals, i.e., a bid invitation] in effect to real estate brokers. It was open to anyone that would want to do this and we had roughly around 40 or so direct mails and it was put on the website as well. So, we tried to be as far reaching as possible, so there was a bidding process and as a part of that bidding process we asked each of the firms to commit to what their percentage of a fee would be. In this case, these properties are in fact vacant or they’re properties that will be vacant in terms of an ultimate buyer reusing them. So, that’s typically the starting point with respect to a fee. So, there’s a bidding process for the fee. Number two, hopefully you have had a chance to look at the agenda packet for this and notice what their contract looks like. The beginning part of the contract appears to be a standard real estate listing agreement. In fact, it’s based on that. However, there have been some amendments to it to meet our particular needs. In addition, there’s an exhibit to it with a couple pages of additional things that are required. These additional services were specified in the RFP. So, this is a little bit different than a standard listing agreement you might enter into if you were selling your home, for example. So, we require more services of them. In addition, one of the things we asked all the firms that submitted proposals to respond to is what their courtesy to brokers would be. And frankly, it wasn’t an even process. The reason why that was important to us is we anticipate not only the ones that submitted proposals bringing buyers but others that would bring buyers to the table for potentially acquiring some of these properties and what would be their incentive. The incentive to be involved is to have a piece of the commission. And with respect to Keller Williams, they were really straightforward plain vanilla, which is whatever the fee is, if the buyer is brought in by another brokerage house, they get half of that fee. So, there’s a double incentive. Now, we did notice with respect to the response we got from the companies that were interviewed – only three were interviewed, by the way – two responded to an RFP that we didn’t issue. I’m being very kind.”
Barrios asked for and was given a clarification as to whether that meant outside brokers would split the ten percent commission with Keller Williams if the outside brokers performed with regard to a sale.
“So, we asked if they weren’t selected, would they [those responding to the RFP] still be interested in bringing buyers,” Dukett said. “In one case, there was one of the three that said ‘We will definitely do it or try to do it,’ but we expect that to be a pretty broad level of interest, especially with the team we’re getting with Keller Williams. We’re getting four professionals led by Dennis Craig. He’s got a real strong team of individuals working with him that are basically, from our view, electric. They’re on fire. We hope to be able to complete the sale [of all city surplus properties] during this fiscal year, and they’re committed to do that, and I told them I wouldn’t hold them to this, but they certainly hope to be able to finish bringing them into us for approval, and by the way, every single transaction comes to you first. So nothing is done separate from the council authorizing it and you see the full background of the transaction proposed and they’re hopeful of doing that by the end of the first quarter of calendar 2018. We’d like to finish this up, at least through the contract phase, before the end of June 2018 because if there are any holdovers, those holdovers will have to go to the countywide oversight board.”
Dukett said it would be better to get the properties sold by next June because, “The county process is less conducive to special meetings.” Dukett said that if the transactions are handled involving the city as seller, Keller Williams as broker and the ultimate purchaser as the buyer, the sales “will average about 60 days.” He said involving the California “Department of Finance – another layer of process [will take] another 90 days. We’d like to get this out of the way completely. We are very excited about this opportunity. We have absolute confidence that this team they’re bringing forward can get this job done for you and get it done quickly.”
Barrios noted that there were eighteen properties the city is looking to sell, but that was reduced to 16. “There were 18 on the list,” he said. “Two were removed.” Dukett acknowledged that there had been 18 on the list but that two properties entailed special circumstances where there were several buyers already interested in the properties because of the land’s suitability for certain types of projects.
Barrios then angled with regard to how exacting the bidding process had been. He noted that Keller Williams was being given a 10 percent commission when “the standard rate is 6 percent. That’s standard. I can go find a broker to replace Keller Williams that has the same quality and they’ll do the same exact things. I’m not understanding why we’re doing that ten percent. We’re giving up four percent and we’re talking about selling off properties of that value maybe in the millions. Just multiply that: 4 percent.”
“There’s a simple answer,” Dukett responded. “You are right with respect to selling developed property. That’s typically the starting point. However, for vacant property, the starting point is ten percent. As I mentioned, this was a bidding process between entities, in light of the additional requirements we’re placing on them with respect to handling these matters. We feel that’s appropriate given the process, especially what we’re going to get from them.”
“So it’s going to be ten percent on all the properties, resident occupied or non-developed properties?” Barrios asked.
“Only for the ones that are listed,” Dukett said.
“So the sixteen properties are all undeveloped?” Barrios persisted.
“Well, no,” said Dukett. “There are two that are developed with structures that are decrepit. That’s why we believe they are tantamount to being vacant.”
“So they will pretty much be torn down?” asked Barrios.
“They look like tear-downs, yes,” said Dukett.
At that point, Travis-Miller leapt into the breach. “And I think the other thing we are sensitive to [is] if you sell something on the open market, you don’t have requirements with respect to the type of buyer that we’re looking for,” she said. “We certainly don’t want to put our property back on the market and have what has happened, it be held for nothing or worse. So we are looking for them [Keller Williams] to do a lot of work that is beyond what you would normally have someone do to make sure it’s the type of user or purchaser that we want to see in this community. We don’t want to get into a situation where it is sold and it’s developed into something that is then a future issue for us. It needs to be a quality end user.”
Barrios said, “So, ten percent is the standard for undeveloped and six percent is for developed property?”
Dukett said, “Granted, that is a starting point, but again there was a bidding process. And they submitted that price and the plain vanilla commission sharing program in light of the requirements we placed on them beyond the normal transaction a broker would do. We feel confident they will scramble and get this done. We are looking for people with the financial wherewithal to develop in the manner consistent with what your specific plans are and the general plan adopted by this council. We’re looking for people that have a history of making properties in compliance with city codes and investing in the communities they are in.”
Clearly, the sentiment of the council at that point was moving toward incentivizing Keller Williams to begin its efforts at marketing the property. Quibbling over a few percentage points on the commission was not a priority.
Councilman Fred Shorett, who once worked as a licensed real estate agent, said, “There’s people that would be interested in buying this and sort of sitting on it and waiting for the market to go up. That is not something we want at all. We want people that are ready to move and get this property developed. We’re not interested in selling vacant land for people to sit on and try to make a capital gain.”
The council approved the contract with Keller Williams unanimously, including the vote of councilman John Valdivia, who was not present but participated in the meeting telephonically.
One real estate professional with more than 30 years experience in the Central San Bernardino Valley told the Sentinel that Barrios was correct in attempting to push the council toward exploring if a commission with Keller Williams more favorable to the city was possible. “Undeveloped property sales is a specialty,” the real estate broker said. “I’m not sure how much experience Keller Williams or Dennis Craig have with undeveloped property. It is true that six percent is, or was, the standard commission on developed property. Ten percent was standard on undeveloped property. But that is a starting point and there is competition, so you have seen commissions dropping to 5 percent. If you are selective you can get 5 percent. The same principle applies in undeveloped property sales. You could easily see a discount to 9 percent. And if we are talking about a lot of properties from a particular seller, certainly you might see a discount to as low as 8.5 percent. You would still have costs such as having to buy signs and make contact with potential buyers, but you would also potentially be marketing to the same people, so there are savings along the way and economies of scale. So, if you were bidding for the work, that kind of discount in your offer would be in order.”
By Mark Gutglueck