The city of San Diego doesn’t have any sort of strategy for all the property it owns.

Last week, the City Council rejected a potential 55-year lease extension for a company that runs Mission Beach’s historic Belmont Park, asking city staff to come back after negotiating better terms.

The Council meeting underscored a strange truth when it comes to how the city leases its property to private entities: There isn’t any common understanding of what constitutes a good deal, nor are deals negotiated with any overarching long-term vision in mind.

It’s been that way for a long time.

The city owns lots of property. City employees occupy some of it, but other properties are leased to private entities, both nonprofits, like the museums in Balboa Park, and for-profits like SeaWorld and Belmont Park. At one point the city wasn’t even sure what all it owned, let alone what it was trying to accomplish with it all.

A 2007 consultant’s report said the city’s real estate assets department needed to create standard performance measures to grade individual properties and the city’s portfolio as a whole, and develop a broad plan to generate a return on the portfolio.


We Stand Up for You. Will You Stand Up for Us?

Four years later, a city auditor’s report beat the same drum: The city needs to create a central plan for all its real estate, and to measure how well it’s doing.

It’s not doing either.

“The city should have an overarching strategic plan that guides what it’s doing, that says, ‘This is our mission, this is what we believe in,’ that sets guidance and expectation on how things will be handled,” city auditor Eduardo Luna said. “You set a policy, and that guides how you administer something.”

Luna’s audit didn’t specifically look at the city’s long-term leasing practices, but said it would like to in the future.

Council policy calls for decisions to be made with a comprehensive “portfolio management plan” in mind, but that plan’s fallen by the wayside, said Cybele Thompson, who was hired earlier this month as the city’s new real estate director.

“We’ve had a portfolio management plan in the past,” she said. “(Last Monday) was my first day. In the next couple months we’ll work with the mayor and Council staff to make any strategic decisions.”

Otherwise, Council policy says the city shouldn’t lease its property for below market value, except in unusual circumstances. It has some other general guidelines, like examining “the capability, expertise, and experience of the potential lessee,” and whether there are “special public benefits to be derived (if any).”

But measuring public benefit is slippery. That’s how a lease like Belmont Park could be described by Councilman Ed Harris as “a public giveaway to a big corporation” and by Councilman Scott Sherman as a solid deal.

All Real Estate Is Unique

“One of the issues the city has is you have such different (conditions) at each property, so there’s never an apples-to-apples deal,” Thompson said. “In general, we’re trying to balance profitability and the greatest public benefit.”

The Belmont Park deal would have cemented the city’s partnership with Pacifica Enterprises, the company that’s been running the oceanfront amusement park since 2012, while getting the company to take care of a $5 million renovation of the Plunge Building, a large historic building in disrepair.

That’s the public benefit to this deal.

Pacifica’s lease currently runs until 2038, and would be extended to at least 2064, with the minimum annual rent increased from about $900,000 to $1.1 million, which would be revisited every 10 years. Pacifica is also trying to take over the lease for the Big Dipper roller coast; if that happens, the rent would tick up to $1.3 million, and it’d be required to make another $2.5 million in repairs to that historic structure.

But those required repairs aren’t just acts of charity. The city cuts the expenses out of the company’s minimum rent by including subsidies, or “rent credits,” in the deal.

So the lease includes $5.2 million in rent subsidies to offset the repairs. And the current lease still has $2.9 million in remaining subsidies that’ll carry over, so Pacifica would have a total of $8.1 million in discounts during its lease term.

Those subsidies are expected to expire within seven to 10 years, “after which rental payments in full would be due to the city,” according to a report on the deal by the independent budget analyst. If that happened, the city would bring in at least $104 million from Belmont Park over the life of the deal.

Maurice Robinson, an expert on municipal leases who consulted with San Diego for its lease with SeaWorld, said getting the private company to make investments up front is key.

“Typically any city’s goal is to get the private sector to pay for repairs that you need as early as you can get them to do it, even if it means they don’t pay rent for a few years,” he said. “The idea is the city is not harmed, because they’re getting the investment on the property, so even if the next guy walks, the property is in better shape.”

“It’s called OPM — other people’s money,” Thompson said. “If you can get that from the tenant up front, it’s a better deal for the city.”

Harris wasn’t impressed. If the city’s giving subsidies for the repairs, that means the city’s effectively paying for them, he said. Instead, it could borrow money to make the repairs, and use the rent to pay it back.

“We are paying to repair the Plunge, whether we pay (Pacifica) to do it, or if we get the full rent, bond against it and hire a contractor,” he said. “It’s the same thing.”

But even Cory Briggs, a prolific environmental attorney who sued the city over an atypical lease extension it gave a Mission Bay hotel, said it’s perfectly appropriate to give a tenant a discount early on so you improve the city asset sooner, and then the city can make its money on the back end once the subsidies expire.

“But then you have to give an incentive so they don’t screw you on the back end,” he said. “You can’t make it free in the early years, because then they just walk away when it’s up.”

For example, the city could mandate the repairs happen early, but give only 75 percent of the subsidy in the first 10 years, spreading the remainder out so the tenant must stick around to get the benefit.

There isn’t any such incentive in the Belmont Park deal.

And the history of the park suggests Briggs’ concern is well established. The city gives early subsidies, counting on making its money on the back end. But the back end never comes.

Since the city struck the current lease in 1988. Even though the annual minimum rent is currently set at $900,000, the city has actually collected only $1.6 million total in those 26 years. In 2011, it collected only $29,166.

The last operator said he couldn’t make the annual payments once the rent subsidies ran out. He had requested a lease extension — one very similar to the one being offered to Pacifica — to keep him in the property. When the city balked, he went into default and eventually declared bankruptcy. (The previous operator also sued the city, and Pacifica inherited the lawsuit when it took over the lease; it agreed to dismiss the suit in exchange for getting extension negotiations started.)

Pacifica could also move on when payments escalate. But that’s where evaluating the company itself as a potential partner becomes important, the city says.

It points to the Pacifica’s dismissal of the lawsuit, and investments the company’s already made as evidence that it’s trustworthy.

In total, Pacifica’s invested $22 million renovating the Wavehouse, building two new restaurants, improving common areas and building a rooftop event space. Those repairs have also benefited the company financially, as they increased the occupancy from 77 percent to 100 percent.

In all, the IBA said the lease was a little longer than similar leases in the state, and the rent was a little lower (it oddly didn’t mention that 50-year leases are extremely common in San Diego).

Whether it’s a good deal is up to the Council, the report says.

‘Shouldn’t Be Doing This Willy-Nilly’

While the Council split on the lease, it unanimously approved a much different 50-year lease in late 2012 for the Bahia Resort Hotel.

That deal extended the lease term for Evans Hotels by 50 years, and specifically stipulated that no improvements of any kind were required on the property. It was odd, because revenue is just one of the benefits of leasing land to private entities; the other is that the city gets improvements on its assets.

Briggs sued over it, because in addition to requiring no improvements, the deal also didn’t come with an up-to-date appraisal of the property’s value. Weeks later, when the Council re-voted to avoid Briggs’ lawsuit, an appraisal was conducted by Evans’ own appraiser. The issue is going to trial Oct. 28.

In one way, the unanimous approval of a long-term lease requiring no improvements and the rejection of a long-term lease requiring many improvements shows the city’s inconsistency with its leaseholds. Or, as the city says, it shows no two deals are alike.

But the Belmont Park deal and the Bahia deal were similar in another way.

Both came to Council after skipping any committee discussion, and in both cases the lessee told Council the deals had to be approved immediately or they’d fall apart. For the Bahia, the thinking was to quickly take advantage of favorable interest rates. For Belmont, Pacifica said it was negotiating with the company that holds the roller coaster lease, and was facing a hard deadline.

“I’ve seen (San Diego) do some last minute, 11th hour proposals where the lessee says they need to do the deal now, which probably wasn’t true, and (the city) certainly should be criticized for not taking their time,” he said. “It appears they’ve lost their way on process. There’s just no cause to do this willy-nilly. It’s a big cost for the city, a big asset.”

Likewise, Harris said he didn’t buy that there was a “hard deadline” looming for Pacifica.

“This is the third hard deadline I’ve heard about,” he said. “They’re not walking off of this deal.”

But Sherman spokesman Diana Palacios reiterated that rejecting the deal last week would be a loss for the city.

“Instead of delivering a win for Mission Beach in Harris’ final weeks as a Council member, this could end up being the biggest lost opportunity for that community in decades.”

Clearly, there’s little agreement from the two most outspoken sides of the dispute.

“It’s certainly true that there’s very little guidance on the books for this stuff,” Briggs said. “But this isn’t the first long-term lease they’ve done, and neither was Bahia. It’s not like there’s ever any clamor to have a black-and-white standard from Council.”

    This article relates to: Belmont Park, City Council, Land Use, News, Parks, Share

    Written by Andrew Keatts

    I'm Andrew Keatts, a reporter for Voice of San Diego. Please contact me if you'd like at andrew.keatts@voiceofsandiego.org or 619.325.0529.

    24 comments
    john stump
    john stump subscriber

    You want to see some poor negotiating?  Do a side by side comparison of the SeaWorld and Zoo Global leases.  One pays the City rent and taxes and the other gets a nearly $12 million dollar blank check from Council

    Jeffrey Davis
    Jeffrey Davis subscribermember

    Coincident with the rushed Evans lease ("low interest rates!") was Evans changing his position on the Convention Center expansion -- which did not have a majority of hotelier room-votes at the time -- providing the swing votes. So, really, who needs improvements?


    I'd also like to note the general indifference of SDCTA and other "fiscal conservatives" on the lease negotiation issue. Extracting good deals for taxpayers just not a priority when rich folk are on the other side of the table?

    La Playa Heritage
    La Playa Heritage subscribermember

    Our San Diego City Charter “Section 219: Pueblo Lands” states “… No lease shall be valid for a period of time exceeding fifteen years.”


    http://tinyurl.com/20130108


    Currently Cory Briggs is suing the City for its long term lease with the City for the Bahia Hotel on Public Tidelines exceeding the 15 year time limit. The City Council’s other choice would be to put the issue of an extended lease to voters for approval.


    http://www.utsandiego.com/news/2014/sep/26/reality-tarnishes-city-real-estate-dreams/


    The UT wants to give public land away, without any enforcement.

    andy_keatts
    andy_keatts

    @LeighASutton in this context, deferred maintenance (like the Plunge Building) would be considered an "improvement."

    Derek Hofmann
    Derek Hofmann subscribermember

    I wonder if the city has any evidence that the thousands of acres of land underneath city-owned street parking "[generates] a return" or whether it's just "a public giveaway", to use Councilman Ed Harris' words.

    Naturally, the oil companies who benefit from it indirectly would argue that it generates a return, but is that really true?

    Derek Hofmann
    Derek Hofmann subscribermember

    @David Crossley If the cost to the city (including the opportunity cost of capital) exceeds the revenue, then yes.

    Derek Hofmann
    Derek Hofmann subscribermember

    @David Crossley Set the price at market clearing. Then if it still doesn't recover the cost, sell off the least productive parking spaces until it does.

    Derek Hofmann
    Derek Hofmann subscribermember

    I would sell them to the highest bidder, wouldn't you?

    Derek Hofmann
    Derek Hofmann subscribermember

    You would hold on to an asset that's earning you less than you could earn in other markets?

    Please let someone else handle your retirement plan.

    David Crossley
    David Crossley subscriber

    @Derek Hofmann-- My retirement is already set, but thanks for your concern.  Again, I ask you, who would you sell the parking spaces to?  As much as you hate to admit, parking is a necessity, especially downtown.  Yet you seem to feel that parking should not be available at a low rate, cars aren't necessary, we need more mass transit, blah blah blah.  I will agree with you in that we could use more mass transit, but with the 1 million or so new residents arriving here in the next few decades, odds are that most of them will have cars.  They will drive those cars.  Those cars need parking spaces.  If the city feels they need to raise the rates on meters in the city--let them.  I have no problem with that.  I also don't have a problem with the city expanding the hours that the meters are used downtown--but we need street parking, especially downtown.  And we don't need a private enterprise getting a multi-year lease on something that would undoubtedly cost the city money in the long run.  And all those cars need roads--not roads that have their lanes reduced, but roads that have enough lanes to get people where they need to go, and in good condition.  And we also need better mass transit.  Expand it all.  It will be needed.

    Derek Hofmann
    Derek Hofmann subscribermember

    @David Crossley If people aren't willing to pay what it costs the city to provide parking, then why should the city provide it anyway at a loss to taxpayers? That's an irresponsible use of tax money, and it requires raising other taxes to make up the shortfall.

    If you disagree that it's an irresponsible use of tax money, please list the taxes you think should be raised to make up the shortfall.

    Paul Webb
    Paul Webb subscriber

    The city should really give thoughtn as to whether it should be leasing public lands to private private parties for profit making ventures.  Entering into a lease, as opposed to a permit or a license agreement, conveys property rights that would not be granted to the private parties in other types of arrangements.  The outcome of this is exemplfied by the long term standoff at De Anza Cove.  There the tenants are reaping a tremendous windfall resulting from their refusal to vacate the property after the lease expired.  Granated, it appears that mistakes were made by the City that led to the settlement, but avoiding a lease would have protected the City's interests.


    Permits and licenses in the land, particularly when given subject to waivers of relocation benefits, can protect the public from such problems as they are governed by an entirely different set of laws and case law.  Leases granted under existing law serve to favor the rights of the lessee, not the lessor.

    The State consititution also generally prohibits the gifting of public funds to private parties.  "Public funds" also include the granting of real property rights at less than fair market value.  The City too often tends to forget this prohibition, or find ways to rationalize its way around it.

    Finally, 55 years is simply far too long a lease term.  If a deal requires a 55 year term to make business sense for either party, it's not a good deal to begin with.  

    Chris Brewster
    Chris Brewster subscribermember

    This is a very complicated issue for a number of reasons that extend beyond normal business. In my experience working with the Real Estate Assets Department, leases are managed and negotiated by mid-level employees with little incentive to engage in hardball negotiations. For one of these employees to negotiate with Bill Evans’ folks, for example, is a David and Goliath experience. That may seem ironic, as the City is a formidable entity, but there is no incentive for the city representative to upset a lessee the size of Evans’ hotels or Sea World. The lessee will take a favorable proposal by the city rep and go with it, but run to the Mayor or City Councilmembers and complain they are being picked on if they believe the deal is unfavorable. Meanwhile the mid-level city representative may be criticized for upsetting a respected City lessee.

    The political side is also complicating. Some of these lessees are major political players in San Diego. They influence elections and contribute to politicians. (Mr. Harris is an anomaly in that he was appointed to the position and had no need to run for election, which makes his opinions harder to influence.) If Mr. Evans, for example, thinks the deal he is offered is a bad one, you can bet he will call in all his markers to try to improve it. That’s business in a political environment.

    I agree that no City lease is entirely the same and that no one approach will probably work, but there is no question in my mind that the City should be endeavoring to get the best deal with the lessees in every instance and trying to keep political influence from intervening. One way to do this might be to engage professional negotiators in these cases, giving them an incentive to cut the best deal, rather than using City staff. This might create a buffer.

    As for Pacifica, anyone who has negotiated anything knows that brinksmanship is part of the process. You always want the other guy to think you are prepared to walk away from the deal. Part of the process is that neither side knows the mind of the other. In this case, I predict that Pacifica will offer a better deal (or wait until Mr. Harris is off the Council). If so, I hope VOSD makes Mr. Sherman accountable for intervening on Pacifica’s side.

    One final point has to do with improvements vis-à-vis the nature of the asset. If Mr. Evans is negotiating for a lease that involves a hotel, he understandably wants to be in charge of the renovations, if any, mentioned in the lease, because it is a property he will market. In a sense, it is his hotel for the time of the lease. On the other hand, in a case like Belmont Park, the improvements are to existing City buildings and infrastructure. It may be that in those cases it is better for the City to contract with an outside firm to do the renovations, rather than placing the lessee in charge of them, and, as Mr. Harris suggests, handling the improvements just as they would for any other City property, retaining control over the process. It is really difficult, once a lease is signed, to hold the lessee accountable for the speed and quality of improvements.

    Erik Bruvold
    Erik Bruvold subscribermember

    @Chris Brewster Don't disagree with this at all but I would add the flip side...you then have OTHER city leases that are in place that are not about maximizing revenue but serving other issues.  Waiting for arrows but Torrey Pines Golf Course has always struck me as example number 1 of a line of business the city really doesn't (shouldn't?) be in and because of politics vastly underprices the assets from what it could get (ergo the 2 a.m. line up to grab the few sat. a.m. tee times that are withheld from the tee time system).

    It will never happen but I so wish the city would just get OUT of this business.  Put stuff up for auction, get the highest price possible for things outside of the core municipal functions.

    james67
    james67 subscriber

    Great in depth story. Next up should be the museums in Balboa Park with their $5 million plus annual revenues paying $1 annual rent to the city.

    Maryanne H
    Maryanne H subscriber

    what is sad is that our "majority" on the Council decided that making nothing from this incredible asset over the last decade is ok and turned on a developer who would have brought the city a $104 MILLION dollar deal over the life of the lease and has already dropped $25 million into the place.......and you wonder why we are in such pathetic shape in San Diego.....


    Can we please revisit actually PAYING our City Council a real wage so we can get folks who understand business otherwise we are doomed to career politicians looking for a stepping stone and union puppets driving our city into the ground....

    Steven Croft
    Steven Croft subscriber

    @Maryanne H Any of the leases discussed could be considered a giveaway by business or political standards. it would be great to see everyone treated fairly. Maybe the leases can be auctioned off every twenty years or a standard increase worked into the rates along with improvements that will benefit the public. They could have required a walkway along the bayside be added around the Bahia and east parking areas or a few other improvements over the term of the lease. Maybe a storage building to the south of the  Boardwalk parking lot so they can remove the storage containers that take up so many parking spaces. The city realistically can not be run like a business because it is not a business.at the present time a lot is decided like a business where wealth and influence dictate the outcome. The city should have the primary goal of helping all it's residents live better etc. people need to be elected who do what is right for everyone. these business do help tourism and provide entertainment and additional benefit is gained from that. The problem we have is political positions end up being paid for and won by wealthy  people it would be great to see an average Joe type person get elected.


    In the last paragraph you throw blame towards career politicians and unions and those officials you call their puppets but at the same time mention City Council members should be compensated more. Isn't the whole anti union stance based on the belief that Union workers are unfairly compensated with exorbitant pay and benefits. Paying Council members more seems like a real turn in the opposite direction.