Sheila Answers Hal: Paseo Nuevo Lease is a "Bad Deal"
(Editor's note: Newsmakers this week published an op-ed by former Mayor Hal Conklin that critiqued the Planning Commission's surprise rejection of a controversial lease extension with the owners of the Paseo Nuevo mall. Not long after, we heard from Planning Commissioner Sheila Lodge -- another former mayor - responding to Hal's piece and explaining the rationale for her vote against the lease, which we're pleased to publish today).
Why the Planning Commission Opposes the Paseo Nuevo Development Agreement
By Sheila Lodge
Regarding Hal Conklin's comments about the Paseo Nuevo Owners (PNO) Development Agreement:
I’m sorry he was not able to watch the three hearings on it. The Planning Commission spent more than 12 hours on this subject. He would have learned a great deal about what a bad deal the original lease was and how, rather than being an asset to the city, it has been an obligation and a drain, as described by Alan Kotin, the city’s consultant on the original lease and again on the draft agreement we reviewed. There was a $2 million loan from the then-lease holder to the city to provide the funds necessary to finish the city’s parking structure when the Redevelopment Agency ran out of money. The terms include 10% compound interest; the loan plus interest now amounts to almost $40 million and will balloon to $2.8 billion at the end of the lease term in 2065.
The terms of the lease allowed interest from the loan to be credited as participation rent over the base rent generated by the mall. Since the lease holder pays no base rent due to a lump sum payment to the City by the developer when the mall was developed, the City collects nothing and has no right to collect any rent through 2065 when the loan is “forgiven.” The lease terms provide that at the end of the lease the loan is forgiven. If the city decides to agree to the lease extension provision, it must insure that the loan disappears at the end of the current term of the lease and is not carried forward. The draft Development Agreement does not address this -- but assumes the loan goes on until 2093, at the end of the extension when it balloons to $40.3 billion.
This is unacceptable and clearly not in the best interests of the City.
Picking up the trash. The development agreement, as proposed, has Paseo Nuevo Owners picking up the actual costs of trash collection and employee discounted parking – these costs amount to about $95,000 annually and should have been paid by the owners all along.
In addition, the agreement increases the Parking and Business Improvement Area (PBIA) assessment from $100,000 to $300,000 annually. However, Assistant City Attorney Knecht said it is highly unlikely that the assessment would reach more than $150,000 annually.
The owners consider that by picking up those expenses, they are, in effect, paying rent. In any ordinary lease these costs would be paid by the lessee; PNO should have been paying them all along. Agreeing to a PBIA cap of $300,000 is of little to no risk to PNO. PNO also makes much of its $20 million investment in renovating the mall. Any well run mall requires renovation every ten to fifteen years. This was the first time in the thirty-year history of the mall that it was done; it should have been done much sooner. The base rent was paid forward by the original lessee. It amounted to $147,000 per year. I asked Mr. Kotin what the fair market rent for the land would be; he said around $1 million per year. I also asked a local commercial property investor; he said fair market rent for the property would be between $1 million and $2 million per year. On the basis of the expected loan extension PNO borrowed $121.5 million on the mall. Clearly the lender thinks it has a great deal of value. That value is in the use of the city’s land; the city should get some return on its property.
Inadequate compensation. The Planning Commission vote was unanimous. We spent three laborious meetings asking questions and in deliberations. We had to make the finding that the city was getting adequate compensation from the development agreement.
We could not make that finding.
Commissioners queried PNO at length about their balanced redevelopment plan, as referenced in the development agreement, for the Ortega Building and the Mall.
Each time their response was evasive and they refused to share plans. We finally got some schematics -- one-and-a-half days before our final hearing -- and they were shocking – not reflective of Santa Barbara’s special character in any way. (See image below.)
Imagining the future. The American Institute of Architects established a design charrette for downtown. There are over 150 people divided into teams, each assigned one of the 14 blocks, from the Wharf to Anapamu Street.
One is the Paseo Nuevo team, working to reimagine that two-block site into something other, or in addition to, a shopping mall. The de la Guerra Plaza committee is getting close to completion of its work.
The City Council asked PNO to work with the community. It declined to do so. The DA does not include the Ortega property now owned by PNO, nor the Nordstrom property which it is hoping to acquire.
The mall must be considered in concert with State Street and De la Guerra Plaza to create a holistic approach to revitalizing downtown.
The Planning Commission's unanimous decision was not arrived at lightly. We could not support the Development Agreement as proposed.
Images: Sheila Lodge; PNO's schematic for Paseo Nuevo (Mayor Lodge's writes in reference to upper right image: "Note skyscrapers in background").