Photo by Randy Tunnell.

Michele Zollna wanted her family to live in Seaside Highlands, the giant new development being erected on the former Hayes Park housing area of Fort Ord. Now in its nascent stage, Seaside Highlands is already very visible: It''s the brown swath of dirt off Highway 1 just north of the Sand City, slashed of trees and scraped bald, with a gaping retention pit out front and a dozen model homes perched at the lip.

Zollna, an accounting technician at Cal State-Monterey Bay, thought there''d be some affordable housing available at Seaside Highlands. Born in Carmel and now a single mother supporting three children, a disabled sister and a nephew, she is spread thin. She pays two rents; one for her and her 4-year-old daughter in Fort Ord housing for college staff and another for her college-age daughter in Pacific Grove.

Having recently received a modest inheritance from her Carmel Valley grandparents, she felt that buying a place would be a good lifestyle move and a good investment. "If we could all get under one roof, it would be cheaper," she says.

Seaside Highlands was conceived soon after the US Army abandoned Fort Ord in 1994. Housing titan KB Home--a company with $5 billion in sales in 2002--teamed up with the controversial Los Angeles civil rights activist and developer Danny Bakewell to buy Hayes Park. The area included 500 housing units in 365 derelict one-story buildings, located on a prime piece of property: 110 acres with ocean views.

To help the deal go through, Congressman Sam Farr wrote special legislation to convey the Hayes Park land directly from the Army to Seaside, bypassing the Fort Ord Reuse Authority, so the project could get underway quickly.

The city got the land for the bargain price of $5.2million, and sold it to KB/Bakewell for the bargain price of $6.8 million. In addition to other exemptions that would come to light later, $10,000 was knocked off the $29,600 per house re-use fees.

For this sweet deal, the developers vowed to do right by Seaside. When KB Home and Danny Bakewell were talking up the project in the late-''90s, they promised a lot of things. They promised to make the development an attractive place for longtime Seaside residents to move up to. They promised job training and jobs for locals, many of whom were feeling some deep economic pain when Fort Ord closed.

In addition to jobs for local workers, there would be some nice affordable housing--and some upscale homes as well, to be sure.

The developers promised to offer a wide selection of prices among the 380 homes, including those in the Peninsula''s affordable range. In 1998, that meant homes priced "from below $200,000 to in excess of $500,000," according to city council minutes from May 4, 1998. "This is in keeping with the City''s direction to provide mixed housing types for first-time as well as luxury buyers."

Now, five years later, the first of the 380 houses are being built, as families like Michele Zollna''s are trying to find a home near where they work. The fact that Zollna could get a new home on the Peninsula in 2003 for $475,000, with room enough for her whole family, sounded too good to be true.

It was.

On May 31, Zollna showed up at the Saturday morning gathering of hopeful homebuyers that''s now a regular event at Seaside Highlands.

Empty lots on Seaside Highlands are being sold through a lottery of 200 prospective homebuyers. Every week, those who''ve been granted a number go to the site to choose from whatever lots are available that day. Zollna had a high bid number, at 195, but she knew what she wanted.

The homes at Seaside Highlands are all named for marine life--from the Avocet (a low-slung and modest 2,059 square foot at $568,000 with optional missionary-style crosses above the front door and window) to the Sea Star (2,864-square footer going for a base price of $648,000) to the most expensive, the $740,000 Shorebird. Zollna had her heart set on the Abalone house, a four-bedroom 1,725-square foot house with floor plan she liked.

"It''s the cheapest house," she says. "I wasn''t going to add any upgrades because I couldn''t afford them, but I didn''t know what the house came with stripped down."

The only extra she wanted--and KB offers a kaleidoscope of expensive optional upgrades--were French doors connecting the main bedroom to the back patio.

The cheapest house on site started at $475,000, and she was pre-qualified for $520,000.

She showed up that Saturday morning prepared to make a down payment and write a check for between $20,000 and $30,000. She says that for someone ready to be on the hook for a half-million dollars, she felt like she was being shoved along by a cattle prod through a loading chute.

"It was such a joke," she says. "It was the craziest thing I''ve seen in my life."

Each week, people hoping to buy a house whose lottery number has been chosen for the day are told to show up at 10am. They arrive at the sales office and sign in. At the center of the office is a glass-encased mockup of the building site, where the hopeful can see the way the roads and lots are arranged.

Like the homes, the street names are ocean-oriented: Paradise Cove Court, Bay Crest Circle, Beach Wood Court and so on. The project itself is divided into the Cove and the more exclusive Bluff, which borders the Bayonet/Black Horse Golf Courses.

Prospective buyers take time studying the layout, as some lots are bigger than others, have a better view or more backyard on the open space area that bisects the land. When one of the lots is claimed, a color-coded plastic block denoting home style is placed down on the appropriate square, Monopoly-style.

When it''s time to begin, a woman comes out of a side office and reads a list of about ten names. On a recent visit, only one lottery winner was present. The rest of the people in the room at 10am--and there are couples and families filling the room--were told to come back at 1pm. A young woman, put off by the three hour delay, says, "As long as we''re first!"

Zollna found the rules for picking a house bewildering. She says she learned quickly that the seven lots offered the first day were on the fringes of the development, and not what she wanted. Since she didn''t get the chance to pick a place, she lost one of the three turns that each lottery winner is granted.

Meanwhile, the home prices have continued to go up. The cheapest home, promised in 1998 at below $200,000, was first offered at $475,000, and is now over $520,000.

The whole experience has turned Zollna off. She has bailed out. Now she''s looking for a house in Aromas.

"I couldn''t play their game," she says. "I''m not that rich to play their game."

Sam Farr is also frustrated by what he sees happening at Seaside Highlands.

"I''m appalled at what''s gone on in this," Farr says. "KB has taken advantage of the city."

At every chance, Sam Farr has been hammering on the cities in his district to use the cheap government land at Fort Ord to build housing for Monterey County''s workforce. He''s threatened to hold up pending land transfers unless he sees results; but in the case of Seaside Highlands, there''s no longer a federal hook.

There are state laws, however. Under California redevelopement law, 15 percent of all new or rehabilitated units in redevelopment project areas must be affordable to low and moderate income households. Somehow the redevelopment of Hayes Park into Seaside Highlands did not qualify.

"What happened here is the firm just made a sweetheart deal with the city of Seaside and therein, no conditions or provisions which are normally in a development were added," Farr says.

With plenty of high-end homes available throughout the Peninsula, Farr believes that Seaside''s windfall should have provided some workforce housing.

"That ought to be the highest priority for that development," he says. (Farr has submitted major affordable housing policy changes for review by the FORA board on July 11).

Seaside''s own general plan recognizes the huge housing problems in the city. According to the plan, filed in March 2003, there are almost no homes available in Seaside. In 2000, the vacancy rate for owner-homes was 2.9 percent and renter rate was 1.5 percent.

"These low vacancy rates are often indicators of pent-up demand for housing," the General Plan reads.

Seaside is also responsible to meet state-mandated regional housing quotas. The city was required to provide 1,305 additional housing units from 2000 to 2007--around 800 priced for low- and moderate-income residents, and 480 for those in the upper income bracket.

So far, only 12 moderate-income units have been completed. The 380 units at Seaside Highlands nearly fills the mandate for upper-income dwellings.

Mayor Jerry Smith sees no problem with the project. He agrees that Seaside may have a need for affordable housing, but says Seaside needs upscale housing too. "I look at it as a wonderful addition to the community of Seaside," he says.

"Now with 20/20 vision everyone is saying we need affordable housing," he says. Smith, who was not in office when the plan was approved, approves. He''s not afraid to show it. On top of a cabinet in his office he has a gold plastic hardhat from Seaside Highlands.

Last week, Smith--whose day job is in community relations at the Soledad state prison--announced his intention to run for county supervisor.

Smith looks at Seaside Highlands and sees future Seaside residents who will have "more disposable income," and who might participate in school associations, baseball leagues, and the governance of the city.

He says he believes Seaside is a community in transition, from its roots as an Army town to a tourist destination like Pacific Grove and Monterey.

"We have to recognize that Seaside has been a very strong blue-collar, hard-working, very religious community," he says. "We''re trying to find our identity and that''s taking advantage of our cultural diversity."

Like others in Seaside politics, Smith feels that his city has done its share to provide affordable housing. He thinks the other Peninsula cities need to do their share and not put the burden on the poorer cities. And he thinks Congressman Farr is wrong.

"Obviously Sam Farr has raised the affordable housing issue and he feels strongly that the affordable housing should be the responsibility of Seaside and Marina communities to provide it. I don''t agree with him."

In order to provide the affordable housing the city does need according to its own rules, Smith says the city is being "pro-active" about partnerships with developers and has changed zoning to encourage mixed use development. But as of now, there are no plans to build any affordable housing in Seaside.

"There''s been no application. We really are desirous of partnerships but we have nothing in the pipeline," Smith says.

The decision to forego affordable housing in favor of Peninsula luxury has landed Seaside Highlands in court.

In late May, a complaint for injunctive relief was filed against the city of Seaside in superior court, by lawyers from Seaside and Walnut Creek, representing a Benjamin Kaatz of Seaside. The lawsuit is an attempt to stop the Seaside Highlands project before it can be completed. The gist of the suit, which echoes Sam Farr''s concern, is that the city and its residents are getting screwed on this deal.

The plaintiffs contend that Seaside should be getting more than $6.8 million for a valuable asset like 110 developable acres with ocean views adjacent to a golf course. With an independent appraiser completing a report on the value of the coast land, the plaintiff lawyers are trying to wrestle the property out of the developers'' hands.

"I am confident his [appraisal] report will show the city got way less than what it was entitled to," says plaintiff''s attorney Jay Renneisen. "The end result we''re looking for is property to be deemed city property. The city got the short end of the stick."

The suit contends that under state and federal law regarding use of conveyed government land, the city has an obligation to provide affordable housing. If law is not enough, they''re holding the developers to their word. Renneisen refers to the 1998 pledge by the developers to sell homes "for under $200,000."

"There were representations that there would be affordable housing," he says. "Basically we''re saying to the judge, ''Order the city of Seaside to take control of the property.'' Ultimately we''re looking for an order from the court invalidating the deed for transfer of the property."

Besides not living up to its promises, the case says the city should be recouping what it did not get in the beginning. The plaintiffs alleged when they announced the suit that the land was worth $115 million and the developers stand to make $200 million on land they for which they paid $6.8 million.

"We went in and looked at it and found the city essentially gave away tens of millions of dollars of value to the developer," he says.

The action is next scheduled for a hearing on August 7. The judge will consider a court order whether to issue a preliminary injunction that would shut down the project.

According to Renneisen, KB/Bakewell may get a call to court as well. Already he''s planning to subpoena records revealing the financial dealings between the city, Bakewell and KB. The plaintiffs are also considering naming the developers along with the city of Seaside.

"That''s something we''re looking at right as we speak," Renneisen says.

Next Week: The Bakewell Connection.