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Real Estate Bisnow Real Estate Bisnow
January 15, 2013  
Potent Potables for
$1 Billion

This isn’t Jeopardy, but plenty of brain teasers were involved in financing the Western Hemisphere’s largest seawater-desalination plant: the $922M Poseidon Carlsbad Desalination Project. Of course, it also requires the hemisphere's largest Brita filter.
Dickstein Shapiro partner Fred Lowther led the equity and debt financing involving 60 parties: $755M in investment-grade bonds and $167M in private equity. The facility, which broke ground Dec. 26, will produce up to 50M gallons/day, enough to supply drinking water to 450k homes. He calls the project “a truly public-private partnership between Poseidon and the San Diego County Water Authority and its constituent cities.” This gave it an advantage, evidenced by the low interest rate (4.78%) and the fact 100% of the bonds were subscribed. The private equity piece was provided by Stonepeak, the former infrastructure investment division of Blackstone. According to Fred, confidence in the plant is further reflected in the high debt-equity ratio: 82% to 18%. The local permitting counsel is Latham & Watkins.
Fred has represented Poseidon since the company’s formation in 1995 and has steered the Carlsbad project through the entire process, including 33-year water purchase agreements, and project documentation (agreements for construction, O&M, equipment supply, site lease) and 14 lawsuits filed by environmental groups, all of which failed. Fred says they made “all kinds of allegations”— massive destruction of marine wildlife, huge consumption of power—“that simply didn’t hold water” (boooo). Fred’s working on additional plants for Poseidon, including one in Huntington Beach that’s expected to close financing this year with construction starting in 2014.
What does this mean for real estate? San Diego-based London Group Realty Advisors’ Gary London views SoCal’s water issue as an economic problem, not a resource problem. (Btw, he’ll give the keynote at Bisnow's LA State of the Market in Beverly Hills on Jan. 24.) As the price of water rises due to growth and challenges to our ability to import water, the desal approach becomes economically feasible. “It’s the first of what I believe will be ultimately a growing piece of the pie” in terms of water sources. According to Fred, a local and reliable source of water that is drought-proof—“the raw material is in the Pacific Ocean”—is good news for the development industry. While the plant’s output will be 7% of the county’s water supply, he notes the facility is expandable.

Lowe Enterprises launched construction on phase III of the County Operations Center and Annex redevelopment in Kearny Mesa, which includes the new 119k SF Registrar of Voters HQ. Yesterday, we chatted with SVP Mike McNerney (with wife Tami and their akita, Bib), who tells us the project will be a significant upgrade over the Registrar’s current facility: a 1960s vintage warehouse that was converted for offices. (Every voter registration came with a free lava lamp.) The $73M facility also will be much more efficient, with state-of-the art ballot processing capabilities and separate warehouse and production space. It’s also much more secure. (That's good since we're told some folks like to drop ballots off here instead of at their local polling place.)
The COC’s 15k SF conference center, part of the second phase which Lowe completed last summer, recently received LEED Platinum. Like all phases of the 47-acre project, phase III will feature a public art component. The project team includes RJC Architects and Suffolk Roel Construction. In addition to the COC redevelopment, Mike’s talking to tenants and chasing a couple of build-to-suit opportunities in the market. Lowe is also working on a public-private project with Orange County at the Great Park. Mike’s a huge Lakers fan and is still holding out hope for the team. “If you’re a Lakers fan, you’ve got to stick with them in good seasons and bad seasons, and this season isn’t going so well.”

Cushman & Wakefield CEO Glenn Rufrano (snapped in the firm’s NY office on Friday with senior economist Ken McCarthy just after C&W’s Q4 office webinar) says US job growth and thus office occupancy will remain flat through the year. Two industries are hiring though: Tech is boosting San Fran, San Jose, and Denver, and energy’s helping out in Houston and Dallas. Glenn says the Americas is the only region in which transaction volume rose in 2012 (15%), and it’s forecast to do the same this year. Glenn recited the commonsense refrain: In a storm, board the biggest ship. And thus capital sought Hong Kong, London, and NYC. (Of course, if it's big ships you want, San Diego is home to some pretty large aircraft carriers.)
We're thirsty for stronger stuff than water: your San Diego commercial RE news. Email to julie@bisnow.com.
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