A Mundane Zoning Change, a Potential Boon

Wednesday, Jan. 2, 2008 | A developer that has an agreement with the city of San Diego’s Redevelopment Agency to purchase industrial land could see the value of its investment double or triple if a seemingly mundane zoning change passes through City Council early this year.

The developer, Pacific Development Partners LLC of Santa Monica, agreed to purchase land in the Valencia Business Park in southeastern San Diego for $1.5 million and build 65,000 square feet of industrial development. But less than a year after signing the agreement, PDP petitioned to redraw the zoning on the land, and its contract, in order to build a supermarket, fast food restaurant and more commercial development.

If the government allows those commercial uses on the land, it could significantly alter the land’s value. However, there is no indication that the sales price will be renegotiated or that any analysis has or will be done to value the land based on its new use.

The deal is being facilitated by the Southeastern Economic Development Corp., the city of San Diego department responsible for revitalizing some of its most blighted neighborhoods.

Real estate experts said in most instances commercial land is significantly more valuable than industrial land. In this case, the development agreement inked between SEDC and PDP first envisioned 65,000 square feet of industrial development. Now PDP plans to build 40,000 square feet of commercial development, anchored by British grocer Tesco. Given that a land’s value is directly tied to what can be built on it, the value of the land is likely to change if its zoning is changed to commercial.

“The value typically would change two to three times higher if the land were to be transferred (to commercial),” said Gary London, president of London Group Realty Advisors in San Diego. London added that it would be impossible to tell in the case of Valencia Business Park whether such a rise in value would occur without a full economic analysis of the property.

London stressed that the new project PDP and SEDC envision for southeastern San Diego will provide a much-needed, quality grocery store for the area and that the increased value would mean more tax revenue for the government.

“It’s a no-brainer. How could they not approve that? To approve a Tesco in a grocery-deficient area, to me, it should be unanimous vote in favor no matter any incompetence or lack of sunshine,” he said.

Under redevelopment law, government agencies essentially use public funds to help development occur in areas that might not attract industry and commerce absent subsidies. And before redevelopment departments such as SEDC enter into development contracts that involve public contributions, they must commission a study analyzing the deal’s economics, such as the land’s sale price.

In this case, the June 23, 2006 report from consultants Keyser Marston Associates justified the $1.5 million land sale based on the revenues the developer could expect from an industrial project.

That report contains a section titled “Limiting Conditions” that spells out the conditions that, if changed, would throw off its price estimate. No. 2 reads: “The ultimate development will not vary significantly from that indicated in the Disposition and Development Agreement (DDA), including stipulated architectural quality provisions.”

Alongside the requested rezone, the City Council will also be asked to redraw PDP’s development agreement from 65,000 square feet of industrial development to 40,000 square feet of commercial.

Keyser Marton’s report also notes that, at the time it was written, PDP was in negotiations to sell two of the industrial buildings it would construct and would sell the remaining square footage as industrial condos. It’s unclear what happened to those prospective buyers.

SEDC and PDP officials refused repeated requests for interviews for this story. PDP officials didn’t respond to questions submitted by mail and e-mail; PDP principal Mark T. Burger hung up on a reporter when asked about the project. SEDC President Carolyn Y. Smith issued a written response to submitted questions, but didn’t directly address the questions in the letter.

For now, the city of San Diego continues to own the land; PDP will take ownership once it complies substantially with the terms laid out in its development agreement with the city.

Jim Waring, the city’s former land-use and development chief, said the city should get a higher sale price from the developer if the value increases as a result of the rezone.

“There are reasons why you might want to change the zoning. But if changing use increases the land value, the public agency should in my opinion capture some or all of that increased land value as opposed to having it go to the developer,” he said.

Marketing the Land

The staff report prepared for the Planning Commission when it heard the item in early December said SEDC has had difficulty marketing the property to industrial users, the staff report states. The agency has determined that the site, Valencia Business Park, is unsuited for industrial uses like manufacturing, research and development or wholesale distribution.

While many real estate experts believe that the new supermarket would be a boon to the neighborhood, it remains unclear what was actually done by SEDC and the developer, which has close ties to SEDC’s board chairman, to market the site as industrial to businesses after a development agreement between the two parties was approved by the San Diego City Council last year.

Brokers who handle property in southeastern San Diego said they haven’t seen any efforts by PDP to market Valencia Business Park to industrial users since the developer won the rights to the land. PDP didn’t post the standard advertisements on commercial real estate websites, the brokers said. It didn’t send out e-mails to local brokers, and it didn’t seem to be advertising the project at all, they said.

“I never saw anything advertising that property,” said Darren Mullins, who specializes in southeastern San Diego properties for commercial brokers Grubb and Ellis/BRE Commercial.

In her letter to voiceofsandiego.org, Smith wrote that SEDC began using the services of Grubb & Ellis and its former broker Linda Greenberg beginning in 1999 to market the site, but didn’t address what marketing efforts had been undertaken once PDP became involved in 2005.

More than a dozen San Diego commercial real estate experts, brokers and developers are united in the view that industrial land is actually in high demand in southeastern San Diego. Three brokers familiar with the site and the southeastern San Diego commercial real estate market said Valencia Business Park in particular is an attractive piece of land for industrial users, and that the property’s owner should have had no problem finding businesses willing to move in there.

The Planning Commission staff report states that Valencia Business Park’s irregular shape and freeway access ultimately limited its attractiveness. The Keyser Marston report foresaw the same problems and noted that no industrial transactions had taken place in southeastern San Diego in the two years prior.

The Developer’s Relationship with SEDC

When Valencia Business Park arrives at council chambers, it will do so with considerable baggage.

Valencia Business Park remains the focus of an ongoing breach of contract and fraud lawsuit claiming that SEDC and its president, Carolyn Y. Smith, tricked a local couple into signing away their claim on a piece of the land. The couple claims SEDC and Smith never followed through with a legal settlement guaranteeing their business — an exotic bird store — a warehouse in Valencia Business Park. That failure to act crippled expansion plans for the couple’s business while boosting profits for the developer, the suit claims.

When the couple signed away its rights to the land, it opened the door for PDP, the developer, to take unencumbered control of the land.

At the same time, PDP’s two principals, Burger and Ronald A. Recht, have strong and continuing business ties to SEDC’s current board chairman, Artie M. “Chip” Owen. Since he joined SEDC’s board in 2003, Owen has reported being paid tens of thousands of dollars from PDP in real estate commissions, and he partnered with Burger and Recht on real estate projects with SEDC before joining its board. He has abstained from voting on PDP projects since joining the board.

Councilman Tony Young, whose 4th District comprises much of SEDC’s project area, said he has yet to come to a final decision on whether to support the project change. He said there are many balancing community needs that he will have to consider, but that while his district needs industrial development, it needs commercial development even more.

“That site has been frustrating for me for years, even before I was on council. That’s because it hasn’t been developed,” he said. “It’s a great location for development.”

A zoning change like that being considered for Valencia Business Park slowly makes its way through the levels of government.

Valencia Business Park’s rezone was first approved by SEDC’s board. Then the change went to the Encanto Neighborhoods Community Planning Group. It passed unanimously through the Planning Commission in December.

All those decisions are advisory. The City Council ultimately makes the decision, which would likely come some time early this year.

The rezone passed unanimously through the SEDC board, but it was narrowly approved by the Encanto planning group by a 5-4 vote.

The dissenting members at the Encanto planning group raised concerns about exchanging well-paying industrial jobs for part-time and generally lower-paying jobs of supermarkets and fast food restaurants. “We’re not supporting middle-class jobs,” said group member Kathy Griffee.

Gregory Morales, another planning group member, said he voted against the rezone because the group received a number of different, conflicting answers from SEDC officials regarding the relationship between PDP and Owen. “This is habitual. It’s almost like every time they come in front of us to do something, it’s misleading and what’s presented to us is biased,” he said.

But Planning Commission staff has agreed with SEDC, saying in its Nov. 29 report that the city’s draft General Plan — its blueprint for growth — considers Valencia Business Park to not be prime industrial land.

“Given SEDC’s difficulty in marketing the site for industrial uses, it can be concluded that the site is not attractive for manufacturing, research and development, wholesale distribution and warehousing uses,” the report states.

But two years ago, SEDC determined the land was best suited for industrial use. In May 2005, after it had spent several years and public funds improving the land and bringing it out of the local flood plain, SEDC put out a call to developers to come up with proposals for bringing quality industrial jobs and businesses into the community’s newest business park.

Seven companies responded to the request for proposals on the hopes of doing industrial development there. SEDC selected PDP.

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