The great Natomas land rush

Editor’s note: One of the great dangers of weekly journalism is that, once in a great while, events will change a story right after it is printed. This week was one of those occasions.

Many readers by now will know that the Natomas landowners who were pushing a ballot proposal to open up as much as 10,000 acres of farmland to development in order to pay for a new Kings arena have, for now, pulled the plug on their plan. After weeks of negotiations, they conceded that the plan in its present form just couldn’t guarantee the construction of a Kings arena.

It probably isn’t the last we’ll see of the arena proposal. Already, Sacramento elected officials and the Kings’ owners, the Maloof family, have expressed a desire to salvage a deal.

And it almost certainly isn’t the last we’ll see of attempts to speed up the development of thousands of acres of farmland and wildlife habitat north of Sacramento’s current city limits.

In the meantime, we hope the story below, “The great Natomas land rush,” will provide readers with useful information and perspective on how major-league sports and high-stakes land speculation have shaped and will continue to shape our region.

When Leonard Padilla bought 60 acres of farmland in the middle of the Natomas flood plain, his friends laughed at him.

“People asked me, ‘What are you buying land halfway to Oregon for?’” Padilla recalled. In fact, the land was only 10 miles from downtown Sacramento, not 300. But in 1979, when Padilla bought the land north of town for $4,000 an acre, it was strictly in the middle of nowhere, a flood-prone piece of bog with little foreseeable prospect of being anything but rice fields and snake playground.

Today, it’s one of the hottest pieces of property in the Sacramento region. Padilla said he has recently been offered as much as $200,000 an acre for the parcel. That’s a steep price for any real estate, especially for land that currently—by law—is reserved for agriculture.

“And come November, it’ll be worth $400,000 an acre,” Padilla claimed. He is confident that he can sell it to a developer who, over the next three or four years, will transform Padilla’s field into houses, office buildings and retail shops. Padilla would make $20 million or so before taxes—the developer could see a much larger profit. At least, that’s the plan. But Sacramento County voters will need to do their part first.

Landowners like Padilla, along with some of the region’s biggest developers, are hoping that Sacramento voters will approve two ballot measures this fall that would open up to development 10,000 acres currently set aside as farmland and wildlife habitat. If the initiatives are approved by voters in November, the landowners say they will pledge 20 percent of their profits, estimated to be about $300 million, to build a sports arena that may—or may not—one day be used as a new home for the Sacramento Kings.

The landowners, a loose coalition of farmers and professional real-estate developers and land speculators, expect to spend about $4 million promoting the initiatives. Another $2 million or more would be spent by the county to hold a special election.

Early this week, landowners and their political consultants were putting the finishing touches on the two ballot measures and had not yet released any of the final language to the public. Together, the measures are being touted as a way to keep the Sacramento Kings basketball team in Sacramento, without spending public money on a new arena. But they are also the latest bold stroke in a game of high-stakes land speculation that’s been playing out in the Natomas Basin for years.

The property, if developed, would nearly double the urban footprint in Natomas and one day could be home to more than 100,000 people. Much of the new development would be a clone of what is currently in North Natomas, with large houses on small lots, shopping centers and ample parks spread throughout. But some of the developers behind the proposal also have promised more urban projects that would include senior and high-rise housing.

The lucrative new real-estate frontier would be worth anywhere from $2 billion to $6 billion once it was built out.

It’s an extraordinary scheme, moving the county’s urban-growth-limit line so far north that the city of Sacramento would extend almost uninterrupted to the suburbs of Sutter County. And it potentially could unravel a fragile wildlife-conservation plan that took 15 years and several lawsuits to put in place.

Through normal planning and political processes, this would take decades to accomplish. “If this initiative passes, we break ground in two or three years,” Padilla explained.

Although Natomas has been a playing field for land speculators for two decades, the game has gotten more intense in the last 12 months—with farmers, developers and a few politicians furiously swapping land back and forth, jockeying for position and awaiting public approval to let the earthmovers rip.

But, like the development business itself, this proposal comes with a high risk, and many of the outcomes are hard to predict. The measure puts at risk a recently implemented conservation plan crafted to protect more than two dozen native wildlife species in the area.

In turn, lawsuits from environmental groups, or even a downturn in the local housing market, could stymie development for years, cutting off the revenue stream needed to pay for a new arena. As such, the initiative’s backers admit that their proposal doesn’t even guarantee one of its most important selling points—keeping the Kings in Sacramento.

Saving the Kings
Sacramento County Sheriff Lou Blanas first unveiled the arena-land-swap proposal last summer, apparently after a revelatory discussion with his friend, and his wife’s sometimes business partner, developer Angelo Tsakopoulos. Tsakopoulos owns more than 500 acres in the Natomas Basin and would profit handsomely if the land were approved for development. Despite Blanas’ financial entanglements with Tsakopoulos, and intimations of a conflict of interest, the proposal steadily gained support among local political leaders as the solution to what has been an ongoing civic crisis.

For three years, local business and political leaders have been going through a series of contortions trying to figure out how to build a new arena for the city’s sole major-league sports franchise, the Sacramento Kings. The Kings’ owners have insisted for years that they want the team to remain in Sacramento. But the billionaire owners don’t want to pay for a new facility to replace Arco Arena, one of the oldest arenas in the NBA. The Sacramento region is zealously, desperately in love with its Kings. But several proposals that would use public money to build the arena have failed to gather much political support.

Enter the landowners, with an ambitious plan to fund the new arena themselves, in exchange for expedited approval to develop the Natomas Basin.

The plan is similar in many ways to the first arena-land scheme, which is responsible for what we now call North Natomas. Like in the current proposal, the need to create a home for a major-league sports team was the wedge used to break open the existing urban-growth line.

In the 1970s, there were several obstacles to developing in the Natomas Basin. It was prime agricultural land, and it was deep in a flood plain, only a few feet above sea level.

The basin begins on the north bank of the American River and extends along the Sacramento River for six miles into Sutter County. The land is naturally marsh, reclaimed for farming in the 1910s. As such, all of its boundaries are waterways with tall levees along their banks. The Sacramento and American rivers form its western and southern edges. Steelhead Creek (also known as the Natomas East Main Drainage Canal or NEMDC) shunts away water that otherwise would flow in from the east. The Cross Canal separates the Natomas Basin from its northern neighbor, the Sutter Basin.

The wet clay lining its floor makes the Natomas Basin ideal for rice farming. But with two major freeways constructed through the basin, and it being only a few minutes from downtown Sacramento, the boggy patch was tempting for land speculators with enough cash to buy up cheap farmland and try to swing development their way.

In the late 1970s, some landowners, including Greg Lukenbill and Richard Benvenuti, began to assemble large parcels of land with an eye toward annexing it to the city of Sacramento. By 1983, Lukenbill and his partners crafted a proposal to open up more than 4,000 acres in the Natomas Basin for development. Part of the land was to be devoted to a baseball stadium to lure a major-league team to Sacramento. The rest of the land originally was planned to be mostly commercial and office development, which would help pay for the stadium (over several years, the development plan would evolve to focus on much more housing).

But it wasn’t until 1985—after Lukenbill and other developers formed the Sacramento Sports Association, which purchased the Kansas City Kings basketball team—that the Natomas development plan gained steam.

It was a heated battle, with environmentalists and their sympathizers on the city council initially lining up against the proposal. But team spirit was overwhelming.

Ultimately, the city council agreed to open the land, what we now know as North Natomas, to development. Developing the basin, however, was fraught with risk, as many planners at the time foresaw.

“We are predicting problems in North Natomas,” said the city’s planning director in a 1985 interview with The Sacramento Bee. “It’s almost like people are blind because they think the gods are the ball team.”

In fact, the real gods had other priorities. In 1986, the Sacramento River nearly topped its levee in Natomas. It became obvious that the basin didn’t have nearly the level of flood protection needed to allow people to move in.

Millions of dollars, mostly federal funds, had to be spent on levee improvements following the 1986 storms. But in the short term, the flood risk made immediate development nearly impossible. And many developers who bought in on the 1980s wave of speculation saw their land values plummet. The economic recession and housing downturn of the late 1980s and early 1990s stung even more. But it was a string of lawsuits by local environmental organizations that caused a decade-long building moratorium in the basin.

Lukenbill and company eventually got Arco Arena built in 1988. But Arco stood alone in the flood plain for years. Real construction didn’t take off in North Natomas until 10 years later. The baseball stadium promised by Lukenbill was started and then abandoned.

Gaming the system
Environmental lawsuits froze development of North Natomas for more than a decade. But all the while, pressure was building to develop the rest of the Natomas Basin, far beyond the current suburb of North Natomas.

As early as 1996, landowners in what is now called the Northern Territories, began making applications to develop their land, asking Sacramento County to amend its current growth limit, the county’s Urban Services Boundary (USB), to include the remaining territory in the basin. The USB is intended to be the hard edge of urban growth, a way to prevent runaway sprawl and conserve farmland and wildlife habitat. It’s a tough line to move, requiring four out of five votes on the County Board of Supervisors. And it hasn’t been redrawn in more than 10 years.

Landowners often have presented elected officials with new and creative reasons to move the USB, other than the simple desire to make money on the land.

In 2002, the Leal family (whose land is mostly in Sutter County, though the family controls significant chunks of Natomas) and landowner Richter Farms, offered to fund a private university in exchange for getting their property approved for development.

Because of pressure from developers, and the staggering rate of growth in the Sacramento region, Sacramento city and county officials began in 1999 to craft plans to develop the Northern Territories of the Natomas Basin. A very general agreement known as the Joint Vision proposal was struck. It would allow some 10,000 acres of farmland north of the city of Sacramento to ultimately be built out, with the city and county sharing in the revenue generated in new property and sales taxes. But the build-out plan was anticipated to take decades and go through years of environmental review and public hearings.

“Even in 2003, there was that fear that if you owned property up there, that it wasn’t going be developed, that it was going to be habitat land,” Padilla explained.

But Padilla said he rested more easily when he found out that Doris Matsui, the wife of late Congressman Robert Matsui, had gone into business with Tsakopoulos, buying an interest in the proposed Greenbriar development across Interstate 5 from Padilla’s property.

The congressman had worked for years to bring greater flood protection to Sacramento. In the Natomas Basin, those millions of dollars in flood protection, levee improvements and drainage canals eventually became an enormous subsidy to development in the flood plain. Doris Matsui since has made flood control a major plank in her own congressional campaign.

“When I found out that my neighbor across the street was sleeping with a congressman, I knew my property wasn’t going to have a duck pond on it,” said Padilla, who is now running for Congress against Matsui and 10 other candidates. “I knew it was going to be a development.”

Matsui’s campaign staff says she was merely an investor and had nothing to do with the machinations of development in Natomas. “When Mrs. Matsui invested in the Greenbriar partnership, she was aware that the partnership would own property north of Sacramento in the Natomas region,” said her campaign director, Nick Papas.

“However, she did not know what specific land the partnership would own, buy or sell, nor was she aware of how any property managed by the partnership would be developed or used,” he continued.

Matsui sold her interest in the Greenbriar venture in January, making a $93,784 profit.

Despite the intense interest in developing the Northern Territories, Padilla and his colleagues had reason to fear that it would remain off-limits. The most important being the Natomas Basin Habitat Conservation Plan (HCP)—a key piece of a 2001 settlement between the city and county of Sacramento, Sutter County, and environmental groups like Friends of the Swainson’s Hawk and the Environmental Council of Sacramento.

The plan allows the city of Sacramento, Sacramento County and Sutter County to go ahead with 17,000 acres of development. The land includes everything within the current city boundaries of Sacramento in North Natomas. It also covers a 2,000-acre office-park development next to the airport, called Metro Air Park, which has been approved by the county, and around 6,000 acres of industrial development and housing in south Sutter County.

But the HCP also requires that 9,000 acres of wildlife habitat be set aside permanently and managed by the Natomas Basin Conservancy, the agency created by the HCP.

The conservancy, if successful, will acquire the acreage and restore half of it to something like natural habitat. The other half it will lease to farmers who will keep the land going in productive and environmentally friendly agriculture.

Compared with similar plans in other areas of the state, the habitat-to-development ratio is fairly small—one-half acre protected to every acre developed. But the plan also explicitly takes into account the habitat value of the thousands of acres of farming in the area, outside of the land the conservancy owns.

That surrounding agricultural land is as important in some ways to the survival of certain species, like the giant garter snake, as the vacant land the conservancy owns outright, explained the conservancy’s director, John Roberts.

The first piece of property that the conservancy acquired was what is now called the BKS—for Betts-Kismat-Silva tract, after the three families that farmed the land historically.

Bert Betts was the California state treasurer in the 1950s and 1960s. “[The Bettses] bought it to teach their 10 sons the value of hard work,” Roberts explained. “And it worked. One of them became an astronaut; others are doctors and lawyers, all very successful.”

But the Bettses weren’t really farmers. With the kids off pursuing their careers, the Bettses decided to sell and, by 1999, had gone so far as to subdivide the property for eventual development. That’s when the newly formed conservancy approached them.

“We were very lucky, because we bought it for $3,000 an acre,” Roberts noted. Five years later, “it would have cost us $30,000 an acre.”

Looking at the BKS today, it’s a spaghetti-like network of canals and hills shaped by earthmovers. Here and there, clumps of tule are growing in the wetter parts. It’s called managed marsh, and it’s incredibly expensive to build. On a similar piece of preserve land on the northern edge of the basin, just seeding the tule plants cost more than $100,000.

The canals, though manmade, mimic ideal habitat for the giant garter snake, an extremely shy aquatic snake that has been extirpated from most of its historic range up and down the Central Valley. The steep banks provide safe places to burrow at night (and throughout the cold winter months), and the channels just outside their front doors offer a quick escape route and easy transportation to hunting grounds.

In fact, the reason rice farming is so beneficial to the garter snake has little to do with rice or rice fields. Instead, it’s the infrastructure of rice farming, the vast network of irrigation ditches that are flooded year-round that support the largest remaining population of giant garter snakes. These hundreds of miles of “snake highway” connect every corner of the basin. But as the rice farms move out, and the ditches are turned into underground storm sewers and drainage pipes, that connectivity will be lost.

Happily, Roberts said snakes already are starting to move into some of the preserve land, after just three short years. “It’s a rare thing, but this HCP is actually working,” Roberts explained.

“The really fun part is going to come in 15 to 20 years. These places are going to be breathtakingly beautiful. And I’ll be able to look at it and say I had a hand in it,” he added.

So far, Roberts has acquired a little more than one-third of the 9,000 acres needed to complete his mission. But Roberts so far has been outmatched and outmaneuvered in what has turned into a game of ag-land monopoly played out over tens of thousands of acres.

The rampant land speculation in the Natomas Basin has so inflated land prices that Roberts has had trouble piecing the preserve together. Plotted on a graph, the prices per acre that the conservancy has had to pay have risen at a 45-degree angle. The last purchase, on land called the Tufts tract, cost a whopping $22,000 an acre, even though it’s not on anybody’s development map.

“Today, I can’t find anything for less than $30,000 an acre,” Roberts explained.

The tumult of land speculation has made it impossible to compete with developers for land. Several times, Roberts said, he’s been close to a deal, only to see the farmer walk away, enticed by the lure of higher profits somewhere down the road.

“I actually lose sleep over it,” said Roberts. “To put in hundreds of hours working on a deal and just watch it fall apart, it’s like a dagger in the heart.”

The price instability due to speculation comes from the fact that nobody in Natomas believed the current urban-growth boundary would stick. “It was really a Maginot Line. The landowners on the periphery knew all along it was going to be gamed,” Roberts said. But more than just driving land values up, the Blanas-Tsakopoulos plan could mean having to scrap the current HCP entirely, leaving area wildlife like the giant garter snake and Swainson’s hawk in the lurch.

The gamble
Like betting on a land investment, the arena proposal itself is full of hope, uncertainty and risk.

The plan is actually contained in two separate measures that backers hope will appear on this November’s ballot. As of press time, they were sweepingly titled “The Farmland Protection and Planning Initiative of 2005” and “The Major League Sports and Entertainment Facility, After-School Recreation Programs and the Arts Initiative of 2005.” They are linked, and voters must approve both measures if either is to take effect.

The first would move the county’s current urban-growth line north and west, from Elkhorn Boulevard to one-half mile south of the Sutter County line.

The second asks voters to approve the creation of a publicly controlled trust fund, into which landowners would deposit 20 percent of their profits from selling and developing their land in the Northern Territories. That money, estimated to add up to about $275 million over several years, would go to building a sports arena, presumably to be occupied by the Kings. According to Jeff Raimundo, one of the political consultants running the landowners’ campaign, the second measure also would specify that some $25 million be set aside for arts and after-school programs. So far so good.

But the particulars of the financing plan then become rather baroque. According to Raimundo, the initiative requires that Sacramento County must start considering development proposals no later than 2007. The idea is to raise money for the sports facility as quickly as possible. The first developers to pay into the fund actually would be financing the arena and be reimbursed later.

The first developers to make money would pay for the sports facility, even if it meant giving up as much as 80 percent or 90 percent of their profits.

The next wave of developers to get development approvals and make money then would be expected to pay the first group back out of their profits, and so on, until everybody had developed his land and contributed his 20 percent to the arena kitty.

One landowner characterized the approach as being similar to the way Allied troops overcame concertina wire on the battlefield, with the first wave laying their bodies down to clear the way for their comrades behind them.

What happens if the pace of development is somehow disrupted? History suggests that there are all sorts of occupational hazards for would-be real-estate moguls. A major downturn in the housing market, lawsuits from environmental groups and even acts of God could leave somebody holding the bag.

And there’s not much certainty that the contributions would come in fast enough to get the Kings into a new arena.

Raimundo acknowledged that the pace of development, and therefore the revenue stream from development, could be unpredictable.

“Frankly, that’s been one of the reasons that the landowners haven’t been able to guarantee the Kings an arena on their timetable,” he said.

Still, Raimundo said the landowners are confident there won’t be the same combination of problems that plagued the first wave of Natomas growth.

“The expectation is that it’s going to be OK. Yes, there could be a housing downturn, but ultimately it will pencil out.”

And though the Kings have been publicly skeptical about the proposal, saying they are concerned it wouldn’t generate enough money for a first-class arena and wouldn’t generate that money fast enough, the landowners are undaunted. Indeed, though the proposal initially was billed as a way to save the Kings, it seems it will go on with or without them.

If the Kings don’t want to wait, Raimundo said, “we’ll have $275 million of non-taxpayer money waiting for another major-league franchise. I like baseball myself.”

More uncertainty comes in the financing plan’s definition of “expedited development.” Under the proposal, those landowners who paid into the arena fund would expect their projects to move ahead more quickly than usual, said Raimundo.

But some landowners have defected from the arena proposal already. The Ose family (whose son Doug Ose was a U.S. congressman for six years) and neighboring landowners withdrew some 1,900 acres from the plan, saying they didn’t want to foot the bill for a ballot campaign or give up 20 percent of their development profits.

It isn’t clear whether landowners like the Oses and the Leals could expect expedited approval—or any approval at all—to develop their property if they don’t pay into the fund.

And environmental groups are wary of anything they perceive as shortcuts in the environmental-review process. One fear is that county supervisors reviewing a development application would feel pressure to approve bad projects to keep the arena money flowing.

Not likely, said Raimundo, “because I don’t think any supervisor is going to want to be perceived as killing snakes, either.”

On the subject of killing snakes, the arena proposal, like other plans for the Northern Territories before it, will have to take into account the requirements of the HCP. Without a valid conservation plan in place, approved by federal environmental agencies, development permits can’t be issued. But the federal Fish and Wildlife Service, along with the state Department of Fish and Game, has suggested that further development in the Natomas Basin would undermine the current HCP.

Late in 2003, in letters concerning the Joint Vision proposal, the agencies warned that additional development in the Natomas Basin would fragment snake habitat throughout the basin, as well as have an effect on 22 other species covered by the plan. The agencies also warned that the one-mile buffer zone south of the Sutter County line proposed under the Joint Vision proposal “is very unlikely to support a viable giant garter snake population.” The arena proposal shrinks that buffer to a mere half-mile strip.

Officials at both agencies were reluctant to comment on the arena proposal, other than to say that the concerns they expressed over the Joint Vision proposal still remain. “Until we see a formal proposal, it’s all just speculation,” said Jenny Marr with the Department of Fish and Game. But Marr said that any development beyond that which is already approved would change many of the conditions that make the current HCP work.

Taking out as much as 10,000 acres of productive farming, with its network of irrigation canals and other habitat benefits, could require a new, separate HCP, meaning years of environmental review and negotiation.

Even with the best planning efforts, building out the basin could do irreparable harm to the environment, said Vicki Lee with the Mother Lode Chapter of the Sierra Club. Rushing the process with promises of expedited development doesn’t make any sense to her.

“But, then again, when it comes to the Sacramento Kings, we seem to suspend all rational thought,” she said.

Pawns in the game
Who wins and who loses in this speculation game depends on where the lines get drawn.

Rice farmer John Bianchi bought his Natomas farmland in 1980, around the same time as Padilla bought his. But Bianchi’s property is a little farther up the road, straddling the Sacramento County-Sutter County line. Bianchi bought his land to farm it, not to develop it. But he is just as caught up in the speculation game as anybody else, not necessarily as a willing participant.

“You come out here at night on a tractor and just sit here in this field,” Bianchi explained. To the south you can see the lights of Sacramento at night. To the east it’s the airport, and to the west Placer County. “You can see all the lights just glowing, kind of closing in on you. It’s a little scary.”

Bianchi is ready to sell and stop farming in the Natomas area altogether. Because of the steep increase in land values in the area, rice farming—actually, any farming—makes less and less sense economically. “You just can’t afford to purchase land and farm it and expect to be able to pay the debt on it,” said Bianchi. He thinks that there might be no farming in the Natomas Basin in 10 years, except perhaps for land that the Natomas Basin Conservancy can manage to acquire and keep in agriculture.

The basin is really the last significant area of farming adjacent to the city of Sacramento. And Bianchi said the pressure is high to cash out and use the money to buy property elsewhere, in Yolo and Sutter counties especially.

But at the same time, many farmers like Bianchi won’t see the kinds of profits that other landowners will make in the current development proposal.

Half of the 300 acres he owns in the Natomas Basin are on the Sutter County side and are currently optioned to a developer with a promised purchase price of $50,000 an acre. The other half of his property is on the Sacramento County side, but not in the proposed development area. Rather, it is in that half-mile buffer zone that one day would separate the metro areas of Sacramento and Sutter counties.

Bianchi said he, and a lot of other property owners around the periphery of the proposed development, are frustrated by being forced out of farming and essentially gerrymandered out of the serious money.

“A lot of us around the edges are asking, you know, ‘Why us?’” Bianchi explained. He said that he hasn’t been in on any of the landowner meetings concerning the arena proposal and that, like other farmers in the basin, he sees his property as being sacrificed for other people’s plans. “We’re just pawns in this whole thing,” he said.

But they’re not completely powerless. Some landowners in the so-called buffer area, have threatened to mount their own campaign against the arena plan if it goes forward. Bianchi has another strategy, though it’s tough to tell if he would actually go through with it. He said he’s looking for American Indian tribes that might be interested in his land for a casino. A tribe, he said, wouldn’t be bound by the county’s zoning laws. “They could put in a casino, no problem.” Later, Bianchi said the casino idea is a joke, sort of. “Who knows? If you throw enough stuff at the wall, maybe some of it will stick.” And so the speculation game begins again, just one step farther north.