San Diego gets a Comic-Con deadline – The San Diego Union-Tribune
Either way, San Diego will survive. But no local politician, let alone Mayor Kevin Faulconer, wants to lose both the Chargers and Comic-Con.
This is really all the political context we need to ponder the business implications of a cryptic letter sent to the City Council this month from Fifth Avenue Landing, a company that can either assist or complicate the city’s moribund plan to expand the convention center.
If nothing else, the letter offers a window into the cozy relationships that have long governed how the Port of San Diego, a government agency, conducted its business. And it offers a contrast to recent changes in the port’s behavior that could benefit the public.
The proprietors of Fifth Avenue Landing are Ray Carpenter and Art Engel, prominent businessmen and influential port tenants for at least four decades. On Dec. 14 they delivered the letter to Councilman David Alvarez, with copies to every other councilmember.
It informed the council of “an informal agreement we have reached with the mayor,” as follows: The two are giving the city until March 1 to revive an option to acquire — for $13.8 million — their leasehold on about six acres that stands between the convention center and San Diego Bay.
After March 1, the company will pursue a big development, a “400-room or more hotel” on the site, as required by their lease with the port.
Whether this is a gracious offer or a shakedown depends on your point of view.
“I see the letter as a red flag,” said Alvarez. “This is a horrible, horrible deal for the city.”
The councilman is not a real estate appraiser. Yet he notes that the company has merely eight years left on its 40-year lease.
Besides, this particular hotel development seems like a long shot. Permits would involve an update to the port’s master plan, a stop at the nettlesome Coastal Commission, and inevitable lawsuits. Although the port would extend its lease by 66 years for a successful project, just getting the chance could easily burn through eight years, not to mention millions of dollars.
Site once considered key
Less than a year ago, many city officials considered this land — sans hotel — vital to expansion of the convention center, which in turn was judged essential to keeping Comic-Con and other major shows from bolting for larger venues in other cities. That’s why the public agency that runs the convention center had paid the company $4 million since 2008 for the option to spend $13.8 million more to take over the leasehold.
But the initial payments were made before Cory Briggs, a public interest lawyer, convinced a court last year that San Diego’s hotel tax hike was illegal, wiping out funding for the expansion. By May, the convention center defaulted on its lease option.
The mayor, who continues to support expansion, seems unconcerned with the company’s letter, let alone its March 1 deadline. And he wants it made clear that he reached no agreement, informal or otherwise.
More to the point, he doesn’t appear to think a big new hotel would block a future expansion.
“Based on previous conversations with their consultant, we understand that there may be an option that incorporates a smaller waterfront expansion and their hotel project,” said Craig Gustafson, Faulconer’s press secretary.
Incidentally, that consultant is the ubiquitous Charles Black, who negotiated the lease in question as the port’s development consultant, then worked for the city on the expansion plan, and now works for Carpenter and Engel. When it comes to selling advice in San Diego, it pays to be nimble.
Despite the permitting hurdles, the hotel opportunity is well worth pursuing to Engel, who says they probably should have used the term “offer” instead of “agreement” in the letter.
“Ray Carpenter and I are good citizens of San Diego,” Engel said. “We gave them the best opportunity to expand. If they don’t want to expand, that’s OK.”
Lease calls for hotel pitch
An important detail: The port’s lease requires the company to propose a hotel development according to a timeline that started when the convention center defaulted on its expansion option. The port wants development.
“The downtown hotel market is running at a very high capacity ratio,” he said. “They need more hotel rooms downtown to support the convention center. We have the absolute best site for a hotel.”
We shall see if the market supports such optimism. Their previous hotel proposal, made during history’s biggest real estate bubble, failed amid the 2008 financial crisis.
Then, in 2010, the pair agreed to sell the leasehold without a hotel to the city for its preferred, larger convention center expansion. Now that’s on life support.
Still, businesspeople generally become rich people through a combination of determination, good luck and hard work. So I’m certainly not surprised that these two would seek to maximize their investment.
A more interesting story lies in how that investment on the site — essentially a parking lot — grew over time, with help from the port.
Carpenter, who owned a maritime construction firm, signed a 40-year lease on the site in 1984. His lease specified maritime uses, but Carpenter was certainly looking ahead: At the time, San Diego was seeking Coastal Commission approval to build its original bayfront convention center.
Engel (with family members) became his partner five years later. The next decades featured a series of lease amendments. Most were routine.
Upgrade adds to potential
One, in 2003, allowed the company to propose a hotel development, a concession that modified the site’s approved use — and substantially boosted the potential value of the lease.
Here’s what didn’t happen: The port didn’t invite competing proposals from major hotel companies for the new, higher use.
Sure, such proposals would have suffered the cost of compensating Fifth Avenue Landing for the unused remainder of its maritime lease. But at least the port could have gauged the market value of a leasehold with upgraded development options.
Carpenter and Engel, who hold several other leases around the bay, have achieved similar upgrades, often to accommodate further investment, capital improvements, and new jobs. They aren’t alone: The port has made similar deals with plenty of other tenants since its inception in 1962.
Most shared a common thread: When the port made a deal, it preferred exclusive negotiations with tenants in good standing. Outsiders have claimed for years that the port was closed to them, for good reason.
From the port’s perspective, this may very well be good business. Tenants wield political power. And nobody wants a failed newcomer cluttering up the bay.
Still, the risk of leaving money on the table accrues to the public. Unlike most government agencies, the port doesn’t subsist on tax revenues.
Instead, the port depends entirely on its skill in landlording over 34 miles of public tideland across five cities. Much of that activity is decidedly costly, from maintaining 20 parks to running its own police department.
Port opens to outsiders
But now the doctrine of tenant primogeniture is being tested.
After 69 years, Anthony’s Fish Grotto is losing its prime location on the downtown waterfront. The Brigantine Restaurant won an open competition with its offer to pay higher rent and build $1 million boat dock.
What’s more, the port is just getting started. In October, its board opened a competition to redevelop Seaport Village, one the best pieces of real estate in the nation. Notably, the agency rejected a lease renewal and redevelopment offer from Terramar Retail Centers. The company still has an opportunity, but not an inside track.
Next comes redevelopment of Harbor Island. At 57 acres and $1 billion or more, it’s arguably the port’s biggest project ever. And the world’s top developers are invited to make proposals.
The concept is simple: Open competition tends to produce the best outcome for consumers, which in this case is the San Diego public.
“I feel really good about the process,” said Dan Malcolm, the Imperial Beach commissioner who is chairman of the port’s governing board. “We want the very best, world-class development on the waterfront for the next 50 years.”
It’s certainly possible that this agency could revert to form. These giant deals could end up with the usual handful of local developers.
But for now, it appears that a new sheriff is in town. If San Diego’s mayor gets serious about building more space for Comic-Con and other customers, the port may insist on considering a wider cast of characters to make it happen.