A judge's ruling Wednesday dealt a major blow to development of two critical blocks on the K Street mall in downtown Sacramento, setting the stage for a potentially lengthy legal battle or an eminent domain fight.
Sacramento Superior Court Judge Loren McMaster found that the city wasn't likely to prevail in a lawsuit to force a development team headed by property owner Moe Mohanna to go through with an agreed-upon land swap.
The city wanted the exchange so that a development team fronted by Joe Zeiden, owner of the Z Gallerie furniture retail chain, could revamp the historic buildings in the 700 block of K Street and install them with well-known retailers.
The exchange would have paved the way for Mohanna's team to transform the street's 800 block with condos and retail.
But McMaster found that a fire and demolition of buildings in the 800 block lowered the property value and wouldn't have resulted in a fair exchange.
The city's lawsuit still is pending, but the ruling will trigger discussions on the next steps, said James Gilpin, the private attorney representing the city. Options include the city using its powers of eminent domain, he said.
"We're at a fork in the road," Gilpin said. "We have to decide which way to go to get K Street redeveloped."
Gilpin said it was possible to go forward with the lawsuit, and noted that not all evidence had gone to McMasters before he made his ruling.
Mayor Heather Fargo, through a spokeswoman, said she hadn't been briefed on the ruling and could not comment.
The attorney representing the Mohanna team called the lawsuit "frivolous" and said the victory Wednesday all but kills the land swap. And, they said they are preparing for a fight.
"If they try it (eminent domain) we'll be ready for that, said Myron Moskovitz, attorney for Mohanna and his team.
"My clients want to see the redevelopment of K Street. They have the ability to redevelop the 700 block themselves, and they'd still like to do that."
If the case goes forward, it would likely take a year to go to trial, Moskovitz said.
City officials have said the land swap is crucial to make redevelopment possible in the area. The city already has spent more than $24 million to speed up the process by buying property in the area from other owners and relocating merchants.
"At this point we're left with scattered parcels of ownership," said Leslie Fritzche, the city's downtown development manager. "We're left to explore our options. Do we fold our tent, lick our wounds and go home? I don't know."
Wednesday's setback could also mean developer Zeiden pulls out of the project. Fritzche said Zeiden has so far remained committed, but they would have to look now at whether he wants to go forward if land can't be consolidated.
Zeiden's spokeswoman, Wendy Hoyt, did not return a call for comment.
Redeveloping the 700 and 800 blocks, among downtown's most blighted blocks, is crucial and the main concern for the Downtown Sacramento Partnership, said executive director Michael Ault.
"Whatever the ruling, progress has got to be the priority," Ault said. "Further legal wrangling impacts our ability to move forward."
Movement has been slow in coming. In January 2005, the city took a get-tough approach.
It gave property owners of the run-down businesses and empty lots a tight deadline to produce viable redevelopment plans or face the possibility that the city would appropriate the property under the power known as eminent domain.
In court Wednesday, the Mohanna team's attorney complained to the judge about the tactics, and said his clients didn't like the land swap deal.
"(The city) said 'you're not good enough, we're going to take it away from you and if you don't like it we'll use eminent domain,' " Moskovitz said. "They were under pressure, under threats."
After a fire in November and subsequent demolition, Mohanna has said banks have been unwilling to transfer $4 million in loans he has on property in the 700 block to the 800 block. Mohanna went to the city to ask for more financial help but that was rejected, he said.
"My client was left with rubble," Moskovitz said.
At issue in Wednesday's hearing was a legal document the city filed against the properties that were to be part of the exchange. The "lis pendens" warn the land is tied up in litigation and make it difficult for properties to be sold or for money to be borrowed on the land.
The judge ruled that the lis pendens be removed.
Mohanna also has filed a countersuit against the city, seeking to recover damages. His attorney said he's losing $40,000 in monthly rent from tenants the city evicted.
And Mohanna is suing Zeiden, claiming the developer was negligent in his oversight of his buildings, leading to the fire.
Despite these complaints, Mohanna's team hasn't said officially it won't accept the land swap.
"We're not claiming the agreement is terminated," Moskovitz told the judge. "Maybe we will, and maybe we won't."
Sacramento CA Bee: http://www.sacbee.com