Race against the clock

Pub date December 14, 2010
WriterRebecca Bowe


City officials were poised to finalize an offer to host the 34th America’s Cup after amending a sweetheart deal that had city taxpayers heavily subsidizing Oracle billionaire Larry Ellison’s yacht race. But the question now is whether Ellison will accept the new proposal.

The original deal negotiated between representatives for Ellison and Mayor Gavin Newsom called for ceding 35 acres of city-owned waterfront property to Ellison’s America’s Cup Event Authority (ACEA) rent-free, but it was criticized as too expensive for a city facing massive budget deficits (see "The biggest fish," Nov. 30).

So at the Dec. 8 meeting of the Board of Supervisors’ Budget & Finance Committee, that deal was jettisoned in favor of a cheaper alternative that shifted the race venue to the city’s Northern Waterfront and promised long-term leases on commercially reasonable terms. The new agreement appeared on track for approval at the Dec. 14 Board of Supervisors meeting, after Guardian press time.

At the same time, new doubts arose at the last minute when race organizers stated publicly that they were more likely to reject the new option than the original plan because the financial terms were not as attractive. Although expectations have been high all along that San Francisco would be selected to host the next Cup, the team cast doubt on the outcome by publicly criticizing the new plan. According to a source familiar with negotiations, that move came as a jarring surprise to city officials. Nonetheless, supervisors approved the proposal at a Dec. 13 special meeting and sent it on to the full board.

Newsom’s Office of Economic and Workforce Development (OEWD) spent about four months in negotiations with Ellison’s BMW Oracle Racing Team and the ACEA to hash out a host city agreement. The Northern Waterfront scenario emerged in late November after Budget & Legislative Analyst Harvey Rose cautioned in a fiscal impact assessment that the original deal would have cost the city an estimated $128 million, including impacts to the general fund and losses from entering into rent-free leases.

The fundamental shift in the plan at this late stage, less than three weeks before the deadline for a final decision, reflected some deft maneuvering on the part of the board even in the face of intense pressure to approve a binding long-term agreement on an unusually short timeline. Sup. Ross Mirkarimi and Board President David Chiu, who expressed reservations about the original proposal but strongly favored the idea of bringing the race to San Francisco, were able to deflect a deal that would have harmed the city in favor of a wiser alternative by reshaping the proposal at the 11th hour.

"I was a little bit surprised by some of the recent press," Mirkarimi noted at the Dec. 13 meeting, referencing reports that the team was considering rejecting the bid. He asked everyone to keep in mind that "we’re working with public dollars and purse strings."

But the Mayor’s Office supported the modified deal. Press Secretary Tony Winnicker told the Guardian: "The Northern Waterfront bid is good for the city, great for the port, and will provide a spectacular experience for the America’s Cup. Hosting the America’s Cup will bring more than $1 billion in economic activity and thousands of jobs to San Francisco and showcase the city unlike almost any other event."

Speaking at the Dec. 8 committee meeting, Chiu also voiced his support for hosting the Cup. "Obviously this will have enormous benefits," Chiu said. "If this were to come to San Francisco, this will mean $1 billion and likely $1.2 billion in economic activity during the greatest recession since the Great Depression. We cannot ignore this opportunity."

The difference in the two scenarios amounts to tens of millions of dollars in savings. According to a fiscal feasibility analysis released Dec. 13 by the Budget Analyst, the net loss to the city under the Northern Waterfront alternative would be $11.9 million, compared to $57.8 million under the prior agreement (not including costs relating to the rent-free leases proposed earlier). However, that impact doesn’t account for a $32 million contribution that the America’s Cup Organizing Committee is expected to provide to the city to defray municipal costs.

Under the Northern Waterfront plan, Piers 30-32 and Seawall Lot 330 would be leased to race organizers for 66 and 75 years, respectively, on "commercially reasonable terms" with development rights included. The race organizers would receive a rent credit in exchange for investing an estimated $55 million for infrastructure improvements.

Rose’s office also found that the city would realize a net gain by transferring development rights for Piers 30-32 and Seawall Lot 330 with commercially reasonable rents, generating a net $12.3 million in new tax and lease revenues.

"This deal has significantly improved from the prior deal that went before you," Rose noted at the Dec. 13 Budget & Finance Committee meeting. The main reason for the reduction in costs was that under the original plan, ACEA would have been granted rent-free development rights to Pier 50, a 20-acre waterfront parcel needing costly renovations, for 66 years. Removing that costly improvement and shifting dredging costs from the city to race organizers made the prospect more feasible for San Francisco.

Piers 26 and 28 were added to the equation late in the game, too. Under the new plan, ACEA has the option to spend an additional $25 million renovating those piers in exchange for leasing them for 66 years with rent credits. Ted Egan, an economic analyst with the City Controller’s office, noted that the piers were expected to last for only 15 years if they weren’t renovated.

"Without the America’s Cup stepping forward, we lose them, and we lose any potential development that could take place at those piers," he noted. Port Director Monique Moyer also praised the plan at the Dec. 8 meeting, saying piers that would have continued to deteriorate could now be revitalized.

Chiu amended the agreement to secure greater assurance that the city would receive a $32 million contribution from the America’s Cup Organizing Committee (ACOC), the fund-raising arm of the race organizing team, to defray municipal costs. Prior to Chiu’s amendment, there was no guarantee that the city and county would receive that money, Rose pointed out.

Jennifer Matz, director of OEWD, noted that ACOC was "committed to using best efforts" to raise $32 million over the course of three years. Under the agreement, if the committee hasn’t successfully raised $12 million by one week after the environmental review has been completed, the city reserves the right to call off the deal.

The new plan seemed likely to pass muster even with Sup. Chris Daly, the most vocal opponent of the original plan. "One thing that’s clear is that it’s a whole lot better than the previous proposal," Daly said.

Ellison, who captured the 33rd America’s Cup off the coast of Spain and holds exclusive power to choose which city will host the next sailing match, has set Dec. 31 as the deadline for his final decision. But a source familiar with the negotiations told the Guardian an announcement was expected even sooner.

Ironically, there was little doubt that Ellison would select San Francisco until the very end of the process, when the city finally reached an agreement that seemed to satisfy the Mayor’s Office, the Board of Supervisors, and the economic analysts. At press time, it was still an open question whether Ellison will go for it.

"With this latest bit of vetting by us, I think the city has done the utmost it possibly could do in putting forth the best plan it possibly could craft in such a short period of time," Mirkarimi said at the close of the Dec. 13 meeting. "I think that San Francisco stands to be the best contender for hosting America’s Cup, and let that message ring well toward Mr. Ellison, and around the country, and abroad."