Smooth sailing for developers

Pub date June 28, 2011
WriterRebecca Bowe

It’s a mad dash at San Francisco City Hall to put all the pieces together in preparation for the America’s Cup, the prestigious regatta that will culminate in the summer of 2013 along the city’s northern waterfront. But once that spectacle is over, the biggest impact of the event will be a massive, lasting, and quite lucrative transformation of the city’s waterfront by a few powerful players, a deal that has been modified significantly since it was approved by the Board of Supervisors.

As negotiations on the fine terms of the development agreements continue to unfold, the future landscape of a huge section of the San Francisco waterfront is in play. If the America’s Cup Event Authority (ACEA) — the race management team controlled by billionaire Oracle CEO Larry Ellison — aims high in its investments into port-owned infrastructure, it has the potential to lock-in leases and long-term development rights for up to nine piers for 66 years, with properties ranging from as far south as Pier 80 at Islais Creek to as far north as Pier 29, home of the popular dinner theater Teatro ZinZanni.

The possibility of securing long-term leases and development rights to Piers 19, 23, and 29 — provided race organizers sink more money into infrastructure improvements — was added to the deal in the last two weeks of 2010, just before San Francisco won its bid to host the world-famous sailing match. The possibility of obtaining rights to portions of two additional piers, 27 and 80, were also added at the last minute. Race organizers and city officials negotiated the final modifications after the Board of Supervisors signed off on the Host City Agreement on Dec. 14, 2010.

Not all board members knew that three additional city-owned piers were being added as possible extensions of the land deal, and those properties weren’t mentioned in any of the earlier documents that went through a public review process in the months leading up to the approval of the agreement. Yet Board President David Chiu was evidently appraised of how the last-minute negotiations were unfolding and he quietly offered his support.

On Dec. 22, 2010, Chiu sent a letter to Russell Coutts, CEO of Oracle Racing, the team that won the 33rd America’s Cup and is an integral player in laying plans for the 34th. “I understand that Mayor Newsom and the city’s team have been working directly with you since the board’s approval of the Host City Agreement to make the necessary adjustments and clarifications to the agreement to ensure it meets your needs. I am aware of these changes and support them,” Chiu wrote in a letter that was not shared with his fellow supervisors.

Quoting from a section of the agreement that explains that ACEA is ensured long-term development opportunities in exchange for funding improvements and upgrades, Chiu’s letter went on, “This section specifically applies to … Piers 30-32 and Seawall Lot 330, as well as Piers 26 and 28, and if mutually agreeable could apply to Piers 19, 23, and 29. To obtain the community’s support and agreement for future development rights to piers on the northern waterfront, you will need to invest in a strong partnership with the community … I am prepared to help facilitate that relationship.”

Former Board President and Democratic County Central Committee Chair Aaron Peskin, who has closely followed the America’s Cup land deal and has for decades been actively involved in land-use issues along the northern waterfront, interpreted Chiu’s letter to Coutts as a backroom deal.

“There is no question that the president of the board, without the authorization of the majority of the Board of Supervisors, went behind closed doors, out of view of the public, and committed to [long-term development] for three piers,” Peskin said, highlighting the fact that no other supervisors were copied on Chiu’s letter. “That he has done this unilaterally, without the consent of a board’s vote at a board meeting, is not good governance. If there’s one body that’s supposed to do all of its work for the public, it’s the Board of Supervisors.”

Chiu defended the letter by emphasizing the part that asked for a partnership with the community. “This was all within the broader framework of the Host City Agreement that we signed in the middle of December,” he told the Guardian when presented with the letter during an interview and asked to comment. “They had questions about, well, can we develop on these other piers? And what I said was, ‘Well, as I think the language here specifically says if mutually agreed upon … you could possibly do this.’ And we specifically said you’ll need to invest in a strong partnership with the community.”

He added that specific development plans would still have to be approved by the Board of Supervisors. Proposals for each parcel will be made in separate Disposition and Development Agreements, subject to board approval.

On hearing Chiu’s response, Peskin was still critical of the lack of transparency in this deal: “My position is, if it walks like a duck and quacks like a duck, it’s a duck.”

Meanwhile, an analysis prepared by Budget Analyst Harvey Rose in mid-March suggests that the final amendments did reflect new commitments for the city that go well beyond what was discussed publicly. “No city approval of the Event Authority’s selection of Pier 29 for a long-term lease is required in the agreement, as modified by the Mayor’s Office and other city officials,” the Budget Analyst’s report notes. “This entire provision … was not included in the agreement of Dec. 14, 2010 as previously approved by the Board of Supervisors.”

Brad Benson, special projects manager at the Port of San Francisco, explained the Pier 29 provision slightly differently. “The city would have to be acting in its reasonable discretion to say no,” he said, emphasizing that ACEA would have to invest well above the $55 million threshold to obtain rights to Pier 29.

At a time when a new era of civility is being hailed at City Hall, two elements of the city family are essentially agreeing to disagree on the broader question of whether the 11th-hour modifications to the deal resulted in a greater hit to city coffers than supervisors approved. While Rose stated in public hearings that the modifications would deal a greater blow to city revenues, City Attorney Dennis Herrera, a mayoral candidate, has stood with the Office of Economic and Workforce Development in his assessment that the changes did not significantly exceed the scope of what was approved by the board. Fred Brousseau of the Budget & Legislative Analyst chalked it up to “a difference in opinion,” reflecting “the auditor’s standard for materiality versus the city attorney’s.”

Legalese aside, it’s clear that the race organizers stand to gain some highly desirable waterfront property in exchange for investing in the piers and bringing an event to the city that is expected to generate substantial economic activity. If ACEA invests a minimum threshold of $55 million for infrastructure improvements, it can likely secure long-term development rights for Piers 30-32, a 13-acre waterfront parking lot where Red’s Java House is located, plus win the title to Seawall Lot 330, a two-acre triangular parcel along the Embarcadero that has been discussed as the site of a future luxury condo tower that has already cleared city approval for that use.

A high-rise next door to Seawall Lot 330, called the Watermark, currently has condos going for $1.2 million apiece on average, according to a calculation of online listings. Under the America’s Cup deal approved by the board, the port would have received 1 percent of each condo sale plus 15 percent of transfers or subleases made by ACEA. “Such required payments … have been entirely removed from the agreement as modified by the Mayor’s Office and other city officials,” the budget analyst’s report points out.

Waterfront real estate in San Francisco, always expensive, has recently soared to even higher values. According to a June 22 article in the San Francisco Business Times, Farallon Capital Management recently put up for sale a 3.36-acre parcel in Mission Bay zoned for life science and tech office space — and it’s expected to fetch around $90 million. This past April, BRE Properties shelled out $41.4 million for two Mission Bay residential development sites entitled for 360 residential units, and last year, acquired a 14-acre Mission Bay property for $278 million, or $140 per buildable square foot.

By comparison, the $55 million that ACEA must invest to be granted a two-acre waterfront parcel on the Embarcadero, plus long-term rights to lease and develop an additional 13 acres across the street, sounds like a good deal. “We’re using an appraisal approach. It’s not going to ridiculously undervalue the property,” Benson said. Under changes made to the deal after the board signed off, base rent for Piers 30-32 will be $4 per square foot of building area. Rent for all other possible piers will be $6 per square foot of building area.

The ability to transfer city-owned Seawall Lot 330 outright to the ACEA is predicated on the approval by the State Lands Commission to strip that property of constraints placing it, like all coastal properties, in the public trust. Lt. Gov. Gavin Newsom, who pushed the deal as mayor, is one of the three members of that commission.

Under a provision in the agreement, the ACEA’s $55 million investment will be applied toward rent credits on city-owned parcels — and depending on how much the company puts in, that credit balance can increase by 11 percent every year. Benson described this as a typical arrangement, saying, “It’s not out of the line with other rent-credit deals the port has done.”

Two former mayoral advisors from OEWD, Kyri McClellan and Alexandra Lonne, have since gone to work for the America’s Cup Organizing Committee (ACOC), a nonprofit entity working in tandem with the city and the ACEA to secure financial commitments for hosting the race. Newsom has also been named ambassador at large for the America’s Cup effort.

Meanwhile, an OEWD budget proposal includes $819,000 in staffing costs for four management-level positions relating to America’s Cup planning. A refund is expected in the form of $12 million that the ACOC has committed to fundraise by the end of 2011, with an ultimate target of $32 million by 2013. So far, ACOC has only raised $2 million, but plans to seek higher donations once it gains tax-exempt status. “I think the $2 million is a really good start,” said Mike Martin, who transferred in February from the San Francisco Public Utilities Commission to OEWD to direct the America’s Cup effort. “They’re building a foundation for an effective pitch.”

For now, city departments are scrambling toward completing the environmental review process for the infrastructure improvements, expected to be complete sometime in November. “It’s incredibly compressed,” Martin said. “There’s a lot to be done in a very short time.”

Peskin, for his part, seemed be keeping a watchful eye on the unfolding America’s Cup plans. “What we, the citizens of San Francisco, have to watch out for is that we’re not being taken advantage of,” he said. “We’ve got to be vigilant that we don’t get taken to the cleaners.”