Thursday, July 24, 2008 | Months after Artie M. “Chip” Owen, now the chairman of the Southeastern Economic Development Corp., earned $500,000 by flipping a piece of property to the agency, he signed over $400,000 of that money to another developer doing business with the agency.
Owen, who joined SEDC’s board three years after the land transaction, was listed in public documents and discussion as the sole businessman involved in the land sale and as the manager of the corporation that exacted it, Caravan Properties LLC.
However, shortly after the deal finalized, the lion’s share of the earnings shifted to Santa Monica-based Pacific Development Partners LLC, according to documents on file with the County Registrar’s Office and SEDC.
The relationship between Owen and PDP has become a major point of contention surrounding SEDC, as PDP has been awarded and re-awarded a controversial deal administered by the agency at a separate development, Valencia Business Park. In total, the two principals of PDP have been involved in at least four SEDC projects in the last decade, at least three of which directly involved Owen as either partner or broker.
A handwritten note by Owen, as well as a more formal letter dated Oct. 16, 2000, informed SEDC that PDP had the rights to the outstanding $400,000 on the property. SEDC documents reviewed by voiceofsandiego.org from before the sale of the land made no mention of any PDP involvement in the project, which was at the corner of 54th and Market streets.
While the fact that Owen flipped the land has garnered a lot of interest recently as the agency’s troubles have publicly unfolded, the transfer of the earnings to the developer reveals in greater depth the complex relationship between the agency’s chairman and one of its most frequent development partners.
Owen has reported on his statements of economic interest receiving between $10,000 and $100,000 a year in deferred commissions from PDP for a deal he said he brokered in 2002, before he joined the SEDC board in 2003. The City Attorney’s Office last week opined that Owen’s financial ties to PDP violated the state’s conflict of interest law because, at the same time Owen has sat on the board, PDP has been awarded development agreements by SEDC.
But Owen, PDP and its two principals, Mark T. Burger and Ronald A. Recht, have a deeper and more opaque relationship than is explained on the statements of economic interest, as illustrated by the transfer of Owen’s earnings to PDP.
Owen hasn’t been speaking to the press recently as the publicity over a hidden SEDC bonus system and his relationship with PDP has intensified. When asked about the earnings transfer in an interview last summer, Owen acknowledged that Burger and Recht were partners in the 54th and Market project.
He said he transferred the earnings to PDP based on tax advice from his accountant, but said he didn’t remember the specifics of why he did so. “I took my remaining economic interest and did something with that. They transferred something of value,” Owen said.
“I have no idea exactly what occurred,” he continued, declining to answer further questions about his personal finances.
Miguel Smith, a real estate attorney with Solomon Ward not involved in the transaction, said it’s impossible to analyze the transaction without all the information. However, he said, the simplest explanation for such a contribution is that the party transferring the funds is buying in as a member of the corporation, meaning Owen would’ve become an actual member of PDP rather than simply a business partner.
Owen has also said Burger and Recht were also similarly involved in another project in which Owen purchased land from SEDC, constructed a building for a janitorial company and sold it quickly. They are also currently partners in a development project outside of SEDC’s boundaries, though Owen refused to provide specifics about that deal.
It appears that they first connected when Owen, working as a broker, was searching for a developer to work with SEDC on what became the Imperial Marketplace Plaza on Imperial Avenue. He brought PDP to SEDC in the late 1990s and PDP build the mixed-use development there, which is anchored by a Home Depot and also contains SEDC’s headquarters.
That development agreement was awarded without the public request for bids that is typically issued by public agencies.
Burger and Recht have repeatedly declined to comment on this and other SEDC issues.
The fact that Owen flipped the land at 54th and Market to SEDC for a $500,000 gain before he was board chairman was first reported on blogofsandiego.com last year and again this week by The San Diego Union-Tribune.
Because of the way the land titles are recorded, the documents state that Owen owned the land less than a minute. Deeds on file with the county show that Owen purchased the land for $1.8 million from Federated Industries, Inc., at 10:59 a.m. on May 1, 2000. And at the same exact time, 10:59 a.m., on the same date, the deeds show he sold it for $2.3 million to the city of San Diego via SEDC for an instant $500,000 gain.
However, the land deal is a bit more complicated than the simple quick profit.
Owen said he had contracted with Federated to buy the land from them a year or two before the sale with the city went through. However, under a transaction known as a “double escrow,” Owen wouldn’t formally take the land’s title from Federated until he found another buyer to purchase the land directly from him in return.
Owen said that this arrangement allowed the sale to be completed free of taxes. He said he paid rent on the property and had to renovate it while he searched for a buyer to purchase the land from him.
Gary London, a real estate consultant not involved in the project, said such double escrows are usually done when the first buyer has some sort of sense of the opportunity or has another buyer that he has inserted himself in between to make a quick profit. Typically, the flipper doesn’t put cash down for the original purchase.
“What makes it unusual is that then he subsequently went to be chairman for the public agency that he took advantage of,” London said. “That’s what makes it a little surly.”
Royce Jones, an SEDC attorney, said in an interview last year that the $2.3 million the city paid for the property was market value at the time. The agency is required by law to pay fair market value, he said. “So if he (Owen) got a sweetheart deal early on, that’s not something the agency would be able to take advantage of,” he said.
In the same interview, SEDC President Carolyn Y. Smith said she knew that Owen assigned his rights to PDP, but that she didn’t know why.
One real estate expert said it’s reasonable to assume that the property Owen flipped would’ve increased in value by $500,000 if the original asking price was agreed upon two years prior to the actual sale because the value of land in the area was appreciating during that time. The four-acre property was comprised of two lots, 5335 Market Street and 5415 Market Street; one was vacant, the other contained a warehouse.
But how the city ended up buying the land from Owen in the first place still isn’t exactly clear.
Owen said he had originally planned to sell the plot to the San Diego Rescue Mission in the late 1990s, not the city of San Diego. But, he said, city officials approached him to buy the land, saying the plot would make a good location to house produce wholesalers who had been forced out of downtown by the building of Petco Park.
However, because the deal with the produce wholesalers fell through, the city took the land off of Owen’s hands, he said.
But the sale appears to have played out differently at City Council.
In the Oct. 26, 1999 City Council hearing during which the council voted to purchase the land from Owen, SEDC President Carolyn Y. Smith made no mention of the deal with the produce wholesalers having fallen through.
Smith said the land sale coming before council was originally going to specify that the land be used for a produce center, but that because the project would require a zoning change, it would be better to separate the two elements of the purchase. The land should just be purchased and the produce center concept should be dealt with apart from the sale, she said.
When asked by then-Councilwoman Christine Kehoe what SEDC would do with the land if it didn’t get the zoning change, Smith said the city had an excess of industrial users who were interested in another of SEDC’s land parcels, Valencia Business Park, which is a stone’s throw from 54th and Market. Those users could be accommodated at the 54th and Market property, she said.
Smith is also no longer talking to the media. Last year, she said in an interview that the zoning changes to accommodate the produce center took too long and SEDC “went back to the drawing board.”
Two months after the deal between Owen and the city was completed, Owen assigned his rights to $400,000 of the funds the city would pay for the land to Pacific Development Partners, LLC.
Since then, Valencia Business Park and PDP have stayed at the forefront of SEDC’s business.
In 2005, SEDC awarded the development project to PDP. The agreement said PDP would pay $1.5 million for the land and would build a 65,000-square-foot industrial development.
Last year, however, PDP changed course on the project, instead drawing up plans for a grocery store and other commercial developments to be built on the land. To accommodate the project, SEDC attempted to rezone Valencia Business Park from industrial to commercial zoning, saying that there was a lack of interest in the property from industrial users.
The zoning change likely would’ve made the land two or three times more valuable than it was as industrial land, as the value of land is tied to what the government allows to be built on it.
However, there was no attempt made to renegotiate PDP’s $1.5 million purchase price.
That concerned city officials, who forced SEDC to put the project back out to bid in May.
Last month, PDP was re-awarded the project for an initial purchase price of nearly $1 million less that it had originally agreed to pay, despite presenting the same proposal. The one competing developer for the deal, St. Stephen’s Cathedral Church of God in Christ, cried foul, citing Owen’s relationship with PDP.
The church has since asked Mayor Jerry Sanders to circumvent SEDC and manage the Valencia Business Park contract through the City Council in light of SEDC’s recent troubles and an opinion issued by City Attorney’s Mike Aguirre stating that PDP’s deal is void. Aguirre said that, despite Owen’s abstention from PDP-related votes, his mere existence on a board granting contracts to SEDC constitutes a conflict.
SEDC is a nonprofit arm of the city’s Redevelopment Agency and uses tax money to revitalize some of San Diego’s most blighted neighborhoods through beautification projects and subsidies to developers.
Correction: The original version of this story misstated the name of Miguel Smith’s firm. We regret the error.