The Morning Report
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Now that a proposal to redevelop San Diego’s City Hall complex has been re-examined, the numbers will be recrunched using some of the recommendations of Ernst & Young, which reviewed the original analysis because of a potential conflict of interest.
The City Council will probably consider this summer whether to start negotiating with Portland-based Gerding Edlen, which has proposed building a new City Hall and redeveloping the block encompassing the Civic Center complex. The city is studying the issue because it now leases office space throughout the city for its employees, leases that are due to end in the next five years.
The original analysis showed that the Gerding Edlen proposal would save millions over the years. The new report won’t be as cut and dry, reflecting some of the many factors up the air, said Jeff Graham, vice president of redevelopment for the Centre City Development Corp.
“There’s not going to be just one set of numbers,” he said.
For instance, Ernst & Young flagged in its review the uneven treatment of employee parking subsidies. In the proposals from Gerding Edlen and another developer that later dropped out of the running, the analysts assumed that the city would stop subsidizing employee parking.
They didn’t make the same assumption for the seven scenarios that didn’t call for rebuilding City Hall, such as a plan to convert the concourse building into office space or refrain from making any improvements for 30 years. The parking assumption created a huge advantage for Gerding Edlen.
Another study had recommended eliminating the parking subsidy, but redevelopment officials figured it would be hard to get employees to agree to give up the subsidy if they were working in the same building. Officials figured there was a better chance of ending the subsidy if employees would instead get the benefit of a new building.
Graham acknowledged that the assumption benefited Gerding Edlen and there’s no guarantee the unions and council would agree to it. So now analysts at Jones Lang LaSalle will run numbers with and without the subsidy for all the proposals under consideration.
Ernst & Young also said the original presentation didn’t indicate the total amount the city would owe, which officials said could be “misleading.” The first analysis presented just the net costs to the city, but Ernst & Young said that didn’t make clear the gross costs to the city of borrowing money to build the new City Hall.
In the Gerding Edlen proposal, part of the money the city would put up would be offset by revenues such as property tax and sales tax from the housing and stores the developer plans to build. But Ernst & Young said the total borrowing costs should be presented without accounting for the potential revenue because that money may not materialize.
It appears that the main alternative to the Gerding Edlen proposal is staying put in the current buildings, an option favored by Councilman Carl DeMaio.
Ernst & Young said such an option would only be viable for the next five to 10 years, given the age of city facilities. However, the firm’s report said there should be an analysis of the 10-year costs of the option so the city can “evaluate its short-term space needs giving consideration to the current financial crisis.” In a few years, Ernst & Young noted, the city might be able to buy a lower-priced building given the deteriorating market for downtown office space.
At a meeting Wednesday night, proponents of the proposal to rebuild City Hall emphasized the danger this would pose because the building lacks sprinklers and is vulnerable to earthquakes. Gerding Edlen officials said their proposal would also have difficult-to-quantify benefits from putting all employees in one building.
The new analysis is expected in early May. It will go before the City Council in June or July.
Finally, Jean Walcher, a spokeswoman for Gerding Edlen, e-mailed me following my original post on the Ernst & Young review. I had said the savings from the developer’s proposal — estimated in the original analysis at $62 million over 15 years and $400 million over 50 years — came mostly from selling land.
Walcher wrote to clarify:
The $62 million in the first 15 years “came largely from selling land.” That is true. The $400 million over 50 years does not come from selling land. That comes from space efficiencies, consolidation, tax increment, development, etc.