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San Diego’s new lease agreement with the Bahia Resort Hotel is one of a kind.
The Bahia Resort Hotel’s lease wasn’t set to run out for another 19 years, but the City Council recently OK’d an extension for 21 additional years anyway.
That alone isn’t entirely uncommon. The city often extends leases with tenants in order to help facilitate expensive renovations.
However, the lease extension for the Bahia — a resort covering 15 acres in the Ventura Cove area of Mission Bay — is peculiar for a number of other reasons.
In fact, Jim Barwick, director of the city’s real estate assets division, said he can’t think of another one like it executed by the city.
“Every real estate deal is different,” he said. “This deal was tailored for the unique situation available here.”
So what is the unique situation, and how did the city tailor an agreement to it?
Here are five elements that make this deal bizarre.
1. It could end up as two lease extensions, not one.
Two weeks ago, the City Council voted to give a new 40-year lease agreement to Bahia owner Bill Evans.
Evans also owns the Catamaran Resort & Spa and the Lodge at Torrey Pines, previously headed a major regional hotel association, sat on the Convention Center board, served on Mayor Jerry Sanders’ task force to conceive of a financing plan for the Convention Center expansion and was temporarily a vocal opponent of the financing plan that was ultimately selected.
The agreement outlines a way Evans can end up with a second long-term extension within the next 10 years.
In exchange for the 40-year lease he just received, Evans is being charged $2.1 million, broken into yearly payments over the length of the deal on top of his standard rent.
But if over the next 10 years he brings forward a major redevelopment plan for the property, and gets it approved by all necessary public entities, he not only gets to stop paying the $2.1 million fee, he will also be handed a brand new 50-year lease.
And the city will compensate Evans for whatever he already paid toward the $2.1 million by halving his monthly rent payment until he’s all squared up.
The city says the unorthodox arrangement is a two-pronged attempt to encourage Evans to redevelop the property, specifically a group of buildings that were part of the original 1950s-era construction.
The first lease extension is intended to provide Evans enough long-term security to make the costly process of securing approval for a redevelopment scheme from the Mission Bay Park Planning Committee, the City Council and eventually the California Coastal Commission worth the effort.
Evans said he wanted a long enough extension to spread out the costs of dealing with those entities.
“To do any type of planning is a multimillion-dollar exercise, and then the city can agree to your plan or not,” he said.
But once (or if) Evans receives that approval, the 50-year lease extension is meant to help Evans finance the redevelopment project.
“If you don’t have a 50-year term, it’s unfinanceable,” Evans said.
And the $2.1 million fee — broken up into $75,000 annual payments for the first 10 years — is designed to capture the city’s potential lost revenue at the end of the lease term if no redevelopment takes place. This last piece isn’t unprecedented. The city used a similar fee on the lease extension for Four Points by Sheraton.
Both Evans and Barwick say the arrangement prioritizes their No. 1 goal: redeveloping the property.
2. Redevelopment explicitly is not required under the new lease.
If everyone involved wants to redevelop the property, why not just require redevelopment within the lease terms?
After all, that’s what the city did with another property just a day after granting Evans’ lease extension.
In that deal, the nonprofit organization that operates the San Diego Civic Theatre received a new, 50-year lease with a requirement for $30 million in improvements by the end of the term.
Yet, the new Bahia lease specifically spells out that the tenants are not required to improve the property. At all.
Barwick said the city decided not to require any improvements because the California Environmental Quality Act requires a study of environmental effects before a project gets a green light.
That reasoning marks quite a departure for the city, which isn’t known for showing such deference to the state’s landmark environmental requirement on other large-scale projects.
The council cast a series of votes on financing the Convention Center expansion, for example, before the Unified Port of San Diego commission produced an assessment of the project’s environmental impact.
Barwick also compared the Bahia’s potential 50-year extension to one given to the Hyatt Regency Islandia, also on Mission Bay. That lease required redevelopment.
3. The deal was rushed through City Council a week before inauguration.
City Council unanimously approved the lease extension on Nov. 26, exactly a week before Mayor Bob Filner’s inauguration.
But the plan had already been expedited by city staff, allowing it to bypass a hearing before the council’s land use and housing committee.
If it had gone through the normal legislative process, it wouldn’t have come forward for a vote until late January or February.
Councilwoman Marti Emerald attempted to bounce the item back to committee, but was overruled.
Councilman David Alvarez asked why the deal had been given the benefit of skipping committee, pointing out that many city decisions had been improved by the lengthier process.
“I don’t think you can over-vet certain things,” Alvarez said.
Despite the pointed questioning from Emerald and Alvarez, the item passed unanimously.
Barwick told him the deal couldn’t wait because interest rates were so low, and they might increase over the next two months.
But the Federal Reserve Open Market Committee has publicly announced its intention to keep interest rates low into 2015.
After the vote, Barwick reiterated the idea that the council had to act quickly.
“You might be comfortable saying interest rates aren’t going up, but I’m not comfortable taking that chance,” he said. “Time kills real estate deals.”
Alvarez said he was satisfied with Barwick’s explanation that interest rates forced the immediacy, and didn’t think there was any relevance to the vote occurring during Sanders’ last week in office.
“You could say that about every item that came in the end,” he said.
The mayor’s staff has input on the City Council docket, which is ultimately controlled by the council president. This was the last week in which Sanders’ staff would be able to influence what went before the council.
4. The deal has been in the works for some time.
Despite Barwick’s insistence that the clock is ticking on locking in this major real estate transaction, the deal has been in the works for a long time.
In fact, the parties had been in negotiations for months. Or years. It depends who you ask.
The terms of the deal were first outlined in a September letter of intent from Evans to Barwick.
“Talking to the property department, we had been talking for years,” Evans said. “That letter is at the end of a long, drawn-out process.”
“I’d say months,” Barwick said. “These transactions take a long time to negotiate.”
After those negotiations, it took the city two months to turn Evans’ letter of intent, which outlined all of the major terms of an extremely uncommon lease, into a formal agreement. Then the agreement skipped the committee process, which might have delayed it another two months or so, and was hurried to a City Council vote. And the vote happened to take place a week before Filner took office.
5. The city wants you to know this is a good deal.
“This is a good deal for the city,” Barwick said. “This is ultimately going to lead to a redevelopment of the property, additional rents paid to the city and revitalization of an older property that needs revitalization.”
The nicer property, Barwick said, will attract more tourists to more expensive rooms, and therefore generate more revenue through the city’s various taxes on hotel guests.
The deal also gives the city ownership of any improvements to the property (or the power to tell the developer to demolish the improvements), whereas the tenant owned improvements under the last agreement.
“There’s value there,” Barwick said.
Alvarez said he’d defer to Barwick on whether this was a good deal for the city.
“I’d hope he only brought forward the best deal for the city,” he said.
I’m Andrew Keatts, a reporter for Voice of San Diego. Please contact me if you’d like at firstname.lastname@example.org or 619.325.0529 and follow me on Twitter
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