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Tuesday, May 26, 2009 | Central to the debate about whether to build a new San Diego City Hall is a financial analysis showing the city could save as much as $236 million over the next five decades by signing on to an ambitious plan to redevelop the four-block area housing the city’s main buildings.
Consultants have determined that the proposal is, in most cases, cheaper over the long run than waiting 10 years to build a new City Hall, an alternative that has been dubbed the hold-steady scenario.
The potential cost savings are part of the reason the Centre City Development Corp. board last week recommended the city enter into exclusive negotiations with Portland-based developer Gerding Edlen. A City Council committee is slated to hear about the proposal Wednesday.
But the City Hall that would be built under the hold-steady scenario differs greatly from the building that would be built under Gerding Edlen’s plan. It wouldn’t include the housing, retail and office space that, under the developer’s proposal, would bring tax revenue into city coffers, offsetting the costs of the building. And it would be much smaller than the 1 million-square-foot behemoth the developer envisions. Indeed, over the 50-year time horizon, the financial analysis assumes the city would be forced to spend big bucks renting out space outside city buildings, as it does now — a major reason for building a new City Hall in the first place.
To assume otherwise, officials say, would be irresponsible and speculative because the city has no guarantee it could attract a proposal similar to Gerding Edlen’s in the future. But Councilman Carl DeMaio, the most vocal critic of the proposal to rebuild City Hall, said the analysis is being skewed in favor of the developer.
“They continually manipulate numbers to benefit their case for building a new City Hall,” he said.
DeMaio wants a new analysis run comparing the Gerding Edlen proposal to building the same building in 10 years.
The area known as the Civic Center complex houses several city-owned buildings such as the City Administration Building, the Civic Theater, the City Operations Building, and the parkade, along with the privately owned Civic Center Plaza. Officials have long sought to build a new City Hall, as its current 1960s-era buildings aren’t earthquake-proof, lack sprinklers and are full of asbestos. They’re also too small to house the city’s workforce, which takes up about a half-million square feet of space in privately owned space leased by the city.
Gerding Edlen’s plan is to build a 34-story City Hall, complete with an underground parking garage, with enough space to host the city’s workforce for the next five decades. Initially, the city would use only about 700,000 square feet under a lease-to-own arrangement and the developer would rent out the rest until the city needed the space.
Once the City Hall was complete, other city-owned buildings would be demolished and Gerding Edlen, after buying land from the city, would build three towers for housing, office, retail, and possibly hotel space on the remaining land. Alternatively the city could lease the land under those buildings to the developer on a long-term basis.
If the developer backs off the private development, it’s proposed paying the city a non-refundable deposit of $6.7 million, or 10 percent of the purchase price of the land.
Under the hold-steady scenario, officials assumed a much smaller City Hall would be built, with only around 40,000 square feet of excess space, compared to the nearly 300,000 square feet under Gerding Edlen’s proposal.
The hold-steady building wouldn’t bring in as much revenue as the private developer’s proposal, which counts on money from the sale or lease of the land to the developer, renting the unused City Hall space, parking garage revenues and other income to partially offset its costs. In addition, under the hold-steady scenario, the city would start spending millions to rent space starting in 2033.
Jeff Graham, CCDC’s vice president of redevelopment, said Gerding Edlen’s proposal contains a number of unique aspects, such as the developer bearing the risk of renting out the unused space in the new City Hall and the plan to develop the surrounding area.
The hold-steady building, he said, is similar to the proposal from the other developer finalist, Hines Corp., which proposed a smaller building and eschewed the private development. Hines would’ve included a small amount of retail space in the City Hall, but left the risk of leasing it out to the city. After an initial financial analysis showed Gerding Edlen’s proposal would result in more money flowing to the city, Hines dropped out of the competition last year.
Graham said development staffers felt the Hines-like building is more typical of what the city could expect to receive if it restarted the development process in a few years, since a developer wouldn’t hesitate to build a straightforward building in exchange for a fee of a couple million dollars.
“We didn’t want to assume the city would take that risk of building that million-square-foot building and lease it out to a private user until the city’s ready to use it,” Graham said.
DeMaio doesn’t buy that argument. “I think that’s pretty absurd,” he said. “Developers are in the game to make money. If they see a need, they will propose a deal like the ones that are going to be proposed today.”
Tom Cody of Gerding Edlen disagreed, saying the company wouldn’t try again if the city doesn’t proceed with the City Hall project, and others would also be discouraged — something CCDC’s consultants had warned about.
DeMaio’s budget and policy advisor, Tom Aaron, acknowledged there’s no guarantee the city will get the same proposal but added, “This analysis is nothing but assumptions. Why is it unreasonable to assume we’ll get a similar proposal in the future?”
CCDC officials countered that their other assumptions are based on expert opinions. Graham said consultants Jones Lang LaSalle agree that such an analysis could be misleading if elected officials rely on such an analysis in a decision to put off a City Hall and no similar proposal surfaces.
“We can run what-ifs all day long,” Graham said. “For such a critical decision for the city to make based on a proposal that doesn’t exist today, they just feel is a dangerous path to go down.”
A recently released revised analysis found that Gerding Edlen’s proposal could either cost or save the city money over the next 10 years, depending on the assumptions used. Over 15 or 50 years, the analysis found the developer’s proposal would save money compared to the hold-steady option unless the city decided to fund the $440 million project with taxable debt.
If another analysis was run with a Gerding Edlen-like City Hall built in 10 years, would that change the calculus? Aaron said the numbers would swing significantly, but said absent more detailed information, it’s hard to tell whether the hold-steady proposal would end up cheaper over the long run.
Graham, however, said it’s hard to imagine how building the same City Hall in 10 years — at a time when construction costs are expected to be higher — will be cheaper than building it now.
In the meantime, he noted, the city will pay more for upkeep. A recent analysis found that maintaining the city’s buildings for a decade would cost $40.1 million, roughly twice what it would cost to keep the keep them humming for the five years it would take Gerding Edlen to build a City Hall.
“I’m just not grasping how running that scenario could result in a more favorable deal for the city,” Graham said.
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