The Many Faces of Capstone

Developer part of complex corporate web with history of faulty construction

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In their efforts to manage the costs of meeting the demand for housing, UCSC administrators may have entered into contractual negotiations with Capstone Development without a full picture of its past as a company.

Illustration by Anna León

UCSC selected Capstone Development to take part in a public–private partnership (P3) to build a new residence hall, SHW, at the current site of Family Student Housing (FSH), which will be relocated to the bottom of the East Meadow, near the junction of Hagar and Coolidge/McLaughlin. Part of the Long-Range Development Plan, SHW is designed to cater to upperclassmen, who have few if any opportunities for on-campus housing without a housing guarantee.

The P3 option was chosen to better manage the project’s potential debt, which director of Employee Housing and Capital Planning Steve Houser said was over $600 million. While Capstone Development was chosen as its developer, SHW will legally be owned by the Collegiate Housing Foundation, a non-profit, to secure a lower interest rate.

“It’s going to be 12 to 14 years before that place gets to be net revenue positive,” Houser said. “In the meantime, what has to happen is, in all likelihood, […] security, IT, grounds-mowing outside, circulation, bus stuff, those costs are probably going to be borne by [UCSC’s] syndicated housing system.”

That is to say, UCSC will bear the brunt of many operational costs for more than a decade. Houser said that Capstone Development was chosen because of their extensive, nationwide history with student housing projects and sustainable project design.

Capstone’s History

Capstone Development, however, has a contentious legal history. The Hartford Courant reported that a Capstone Development project at the University of Connecticut, which is not listed in its project portfolio, was discovered to have a carbon monoxide leak due to faulty ventilation that required $650,000 to repair, along with other fire and building code violations.

Capstone Development also partnered with Capstone Building as the general contractors for the construction of Roulhac Hall at Stillman College. During that project, a 16-year-old worker fell from a roof 26 feet to his death due to a lack of fall protection compliant with Occupational Safety and Health Administration (OSHA) standards. This incident was also a violation of federal child labor laws, as workers under the age of 18 are forbidden from working on roofs.

Just two months earlier, Capstone Building was cited by OSHA for failing to provide fall protection while serving as general contractor for the construction of a residence hall of similar height in Eugene, Oregon, which was also developed in partnership with Capstone Development. While Capstone Building Corporation and Capstone Development Partners are not related entities, the two companies partnered together for the large majority of Capstone Building projects from 1998 to 2005.

Besides faulty construction and substandard labor safety practices, other accusations levied against Capstone Development projects include mismanagement and self-dealing when it positioned itself as general partner of multiple concurrent partnerships. At the time of printing, none of the above projects are listed on Capstone Development’s online portfolio. Capstone could not be reached for comment, and a Capstone representative at an SHW information session said to City on a Hill Press that “We do not talk to the press.”

Capstone Development’s record of substandard construction on their projects continues into recent years. An independent inspection found that a residence hall constructed at Towson University in 2011 had at least 20 electrical code violations and an uncalibrated heating, ventilation and air conditioning system that produced high levels of moisture and humidity, factors that can lead to mold. A Towson University official said the project management staff, who were employed by Capstone Development, “Obviously have failed and cannot be trusted.”

Campus Awareness

“I haven’t heard of those issues,” said Employee Housing and Capital Planning director Steve Houser, who is involved in the contract negotiations with Capstone. “[…] Lots of things get put on the internet. I don’t know what is right and what is wrong. I haven’t heard about them.”

The Student Housing West Advisory Committee (SHWAC), a student-run committee meant to provide input for the negotiating process, may not be aware of these issues either.

“Personally, I was aware of an incident occurring involving Capstone Development Partners but [I’m] not sure if the rest of the committee knows,” said Ted Cheung, fourth-year student and Merrill College representative for SHWAC, in an email.

UCSC Vice Chancellor for Business and Administrative Services Sarah Latham stressed in an email the distinction between Capstone Building Corporation and Capstone Development Partners and noted that Capstone Building Corporation was not a part of UCSC’s partnership. Latham also said that prospective developers were asked to disclose their lawsuit information during the selection process, and had done so.

The Faces of Capstone

Capstone Development will play a major role in maintaining and managing the facilities for the duration of the contract, which has not been finalized but will likely last between 30 and 40 years, Steve Houser said. Capstone Development itself, however, doesn’t provide management services. Student Housing West will instead be managed by Capstone Management Partners, a subsidiary of Capstone Development.

Capstone Development itself is just one arm under the collective umbrella of Capstone Companies. Founded in 1990, Capstone Companies formally split itself into four separate companies in 2011. The companies operate through a network of multiple subsidiaries.

Capstone Development, Capstone On-Campus and their subsidiaries specialize in on- and near-campus developers and property managers, respectively. Development, construction and management of off-campus housing sites are all done by Capstone Collegiate Communities and their subsidiaries. Purchases and renovations of existing properties are handled by Capstone Real Estate Investments.

The companies and their subsidiaries each have significant overlaps in personnel. The four parent companies all have executives who were part of the former Capstone Companies, and in some cases members of those executives’ families.

Multiple executives serve in both a parent company and their subsidiaries, such as executive officers L. Jeff Jones and Bruce McKee, who each serve both on the board of Capstone Development and of Capstone Management Partners. All four parent companies, and some of their subsidiaries, are housed in the same business park.

James M. Wagstaffe, partner of the San Francisco law firm Kerr and Wagstaffe, who also advises City on a Hill Press, said there’s nothing illegal about such overlaps in leadership, but it can indicate that legally separate entities have some awareness of each other’s activities. Wagstaffe also said businesses will often layer themselves, or split themselves into multiple entities, to achieve certain goals.

“Sometimes [the purpose of layering is] to do different functions, one company does this another company does that. Sometimes because they’re trying to qualify to do something and won’t qualify in one incarnation but will in another, such as being a non-profit,” Wagstaffe said. “[…] Sometimes it’s just for liability protection, they want to do something and they want the mothership, if you will, to be free from liability.”

UCSC is currently working with Capstone Development under a pre-development agreement to finalize the design, financing and contracting options behind the project before executing the agreement, Houser said. He expects the agreement to be executed in the summer or the fall of 2018.

Additional reporting by H. Ann Browning, Sarah Belle Lin and Timothy Tsung.

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Sean D. Ross is editor for the City News desk at City on a Hill Press. Previously, Sean served as an editor for the Investigative News desk and as a reporter for the Campus, City and Sports desks over the past two years. Before coming to UC Santa Cruz, he was News Editor for the Diablo Valley College Inquirer, contributing to the Inquirer earning the Journalism Association of Community Colleges’ “General Excellence” award at the 2016 Northern California Conference. For his coverage of California fires in the fall of 2017, Sean was awarded third prize in the California College Media Association’s Breaking News competition. Sean is pursuing a career in law, and has interned for renowned California attorney James M. Wagstaffe. Besides casually browsing LexisNexis, Sean enjoys board games of all stripes, competitive Magic: the Gathering, playing the french horn, automotive racing and the literary stylings of Neil Gaiman.