Facing Development Challenges, Z&L Properties Considers Sale of Two San Jose Development Sites

Z&L Properties, San Jose, North San Pedro Towers, Park View Towers, Block H, First Church of Christ Scientist, William Polk, Nanci Klein, Green Valley Corporation, DAL Properties
Rendering Courtesy of Z&L Properties

By Meghan Hall

The Bay Area development scene is fraught with challenges that project teams must navigate, including the design and entitlements process and ever-escalating construction costs. For Foster City, Calif.-based Z&L Properties, those challenges have largely prevented the developer from meeting its contractual obligations with the City of San Jose on two projects: North San Pedro Towers and Park View Towers. According to City Officials, while San Jose and Z&L are still evaluating the future of the Park View Towers site, Z&L is moving forward with a City recommendation to sell the North San Pedro Towers project to another developer.

“The mayor has made a commitment to add a large number of units to downtown San Jose, and Z & L Properties was initially enthusiastic that these two projects could contribute to this commitment,” Robert Buckner, CFO of Z&L in a statement to The Registry. “Since purchasing the projects, the escalating cost of construction — both for materials and labor — made it so these developments don’t pencil out for us anymore. If we had more time, we believe we could make them work. The milestones outlined by the DDA could not be met within the time frame required, so we are working with the city to find new developers to take on the projects.”

Together, the two projects could bring more than 500 units of much needed housing to downtown San Jose.

“Z&L has two disposition and development agreements. Technically, Z&L had not met the dates that they were required to make in their agreements,” explained Nanci Klein, assistant director of economic development and director of real estate for the City of San Jose. “These projects can bring online 500-plus units, so collectively, or even independently, that is a significant amount of housing. This would be very beneficial for close-in tenants of San Pedro Square, and they would be wonderful contributions to bringing people to St. James Park.”

Z&L Properties originally purchased the North San Pedro site, also known as Block H, for $10 million in April 2017, with construction on the property originally slated to begin at the end of 2017, according to City documents. Located at 188 West St. James street, the most recent plans for the property included 305 residential units.

The Park View Towers site, located at 252 N. First St. included 220 residential units and more than 20,000 square feet of retail space. The project also intended to rehabilitate the long vacant and dilapidated First Church of Christ Scientist, which was built in 1905 and was designed by San Francisco architect William Polk. As of the end of 2018, Z&L had not established a use for the rehabilitated church due to the extensive renovations the building required, but was considering options such as gallery space or performance venue. According to previous reporting by The Registry, the costs of the renovations were unknown as of November 2018. 

Z&L Properties also purchased the Park View Towers site at the same time. The two were previously owned by Green Valley Corporation, who was bound to two similar disposition an development agreements. The original DDA for the North San Pedro Tower project was executed between Green Valley Corporation and the former Redevelopment Agency in 2007. An amended DDA was executed by Green Valley and the City in October 2013 but with little success on moving either project forward.

However, when Z&L also struggled to break ground, the City recommended moving forward with another developer. 

“The City had indicated that their preference would be for Z&L to sell to another buyer,” stated Klein. 

The North San Pedro property is currently under contract, according to Z&L properties, and the executed purchase and sale agreement has been approved by the City of San Jose. Escrow is expected to close by the end of the year. According to industry sources, the anticipated buyer is DAL Properties, LLC.

While a similar course of action is expected for the Park View Towers property, Z&L and City officials are working on moving forward with North San Pedro Square first.

“Park View is more difficult, for a variety of reasons,” stated Klein. “The site is surrounded by three sides by Light Rail, the site work requires to also take on renovating and restoring the church. There are a series of issues, and we’re just beginning the conversation about a potential new developer. But the City is eager to get going because our commitment is to build as many housing units as possible.”

Klein also noted that it is not unusual for developers to face challenges that make it difficult to meet the criteria laid out in disposition and development agreements.

“It is not unusual, that for one reason or another, a developer cannot meet the obligations set forth,” said Klein. “This is an example of that and the city is being direct about what we would like to see happen.”

Z&L sited current construction costs, physical site constraints and market conditions as just several of the challenges it has faced with the development of both properties.

“The goal was to find a successful path to bring these two projects to market.  The rapidly escalating construction costs over recent years have resulted in San Jose project costs reaching San Francisco levels,” said Buckner. “The San Jose market is getting squeezed — these large construction costs cannot be supported, as San Jose housing prices are not at SF levels.” 

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