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A review of the proposal to rebuild the City Hall complex has flagged several issues with the original analysis that could reduce the estimated savings of redeveloping the area.

City officials are looking at whether to redevelop the Civic Center complex because the city long ago outgrew its original space and now leases more than half the space its employees occupy. Rebuilding City Hall is seen as a way to reduce costs by eliminating those leases and replace asbestos-filled and earthquake-vulnerable city buildings.

Developer Gerding Edlen’s proposal calls for building a 34-story City Hall, along with housing, office, retail and parking space that would be competed in various phases. The savings in Gerding Edlen’s proposal — estimated at up to $62 million over the next 15 years and $400 million over 50 years — came largely from selling land.

The new review from Ernst & Young was conducted because of a possible conflict of interest involving the original analyst. It found no evidence of bias toward the developer, but found that some of the assumptions made in the original analysis were unsupported or undocumented.

Among them:

  • The risks to the city in the case of a default aren’t presented clearly in the original proposal. The Ernst & Young report said it’s not clear whether the city will be “put in a position” to guarantee subleases in the Gerding Edlen proposal in case of a default. The report states:

    Depending on the ultimate structure of the deal, the City needs to fully understand its potential downside risk in case other revenue sources do not materialize or meet projections, even if they are only over a short-term basis.

    Gerding Edlen has indicated that some of the risk can be transferred to a non-profit, but Ernst & Young said such a “straw” entity wouldn’t be able “to absorb several million dollars in potential liability” and that the risk would ultimately fall to the city in case the developer defaults.

  • The assumed rental rates for the city to lease office space appear to be too high, especially given the recent fall in rental rates. The original analysis assumed the rental rates would decrease by 0.5 percent in 2009 but increase by 4 percent annually in subsequent years, an assumption Ernst & Young calls “aggressive in the current climate.”
  • The construction costs for Gerding Edlen are much lower than the numbers providing by a competing developer that dropped out, as well as two specialists hired for the original analysis by Jones Lang LaSalle. The Ernst & Young report says the cost estimates “should be negotiated as a not-to-exceed amount” and should be analyzed to ensure Gerding Edlen can “deliver the buildings as proposed.”

Ernst & Young said the changes “may change the gap between the development and non-development scenarios considerably.” The options that don’t call for rebuilding City Hall include making the city’s use of space more efficient and converting the concourse to office space.

One change that could benefit the Gerding Edlen proposal is the fall in construction costs. However, the Ernst & Young report says there are few construction companies that could handle a project of this size and that “these contractors have not really reduced pricing.” But the report notes that those interviews were conducted in December and construction costs will likely fall this year.

The report will be discussed at a meeting at 5:30 p.m. tonight at the Centre City Development Corp., 401 B St.

I’ll probably post more after that. Also, feel free to send me your comments and questions at rani.gupta@voiceofsandiego.org.

RANI GUPTA

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