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The city of San Diego recently gave a lease extension to prominent hotelier Bill Evans for the land underneath his Bahia Resort Hotel on Mission Bay.
The agreement was curious in a number of ways, including the way it was rushed through City Council without a committee hearing and ultimately won approval a week before Mayor Bob Filner’s inauguration.
Jim Barwick, director of the city’s real estate assets division, said the rushed treatment was crucial so Evans could secure low interest rates, though rates aren’t likely to rise by January or February, when the item would have come up for a vote if it had gone through the land use and housing committee.
But even if swift action was required to lock in interest rates, it’s not clear why that would be a good reason to expedite the legislative process. Nor is it clear what the rates have to do with the lease itself.
A few weeks ago, Evans got a new 40-year lease — a 21-year extension that nominally raised his roughly $1 million base rent per year, which increases based on the resort’s profitability. He’s also now paying $2.1 million over the lease term, in addition to his annual rent, in exchange for the pre-emptive lease extension.
So far, that’s the only action the City Council has taken.
The agreement does include language guaranteeing Evans yet another new lease if he gets a major renovation project approved at some point in the next 10 years, but that isn’t likely to happen anytime soon — if at all.
When Evans does propose a redevelopment, it will be subject to layers of public approval, and those agencies aren’t likely to cater their process to available interest rates. Once the project is approved, Evans will have a new 50-year lease to finance the project at whatever the market interest rate is at that time, not the one on the day the City Council approved his lease extension.
The city’s explanation is akin to saying you need to secure a college loan rate for your eighth-grade daughter.
“It’s the interest rate at the time of construction that matters,” said Mark Goldman, a real estate lecturer at San Diego State University.
But there is at least one situation in which today’s interest rate environment could be relevant to a lease extension.
If Evans or any business owner leasing San Diego property wanted to refinance his existing debt to take advantage of current interest rates, he’d need the ground lease on the property to be longer than his new mortgage. The new 40-year lease would allow him to refinance with a 30-year mortgage.
“As long as you’re already renegotiating the lease, you might as well get as much accomplished at that time for your long-range plans as you can,” Goldman said.
Even in that scenario, it’s unclear why the City Council would feel obligated to skirt its own process in order to help a tenant facilitate a debt refinance.
But that is moot here.
Just after the City Council approved the unorthodox agreement, Barwick explained that the convoluted nature of the deal was required because Evans didn’t have any existing debt on the property.
Neither Barwick nor Evans responded to requests for comment.
Evans also owns the Catamaran Resort Hotel & Spa and The Lodge at Torrey Pines and has headed a regional hotel association, sat on the Convention Center board and was part of a team tasked with dreaming up a financing plan to further expand the Convention Center. He opposed the plan the city selected before ultimately supporting it.
I’m Andrew Keatts, a reporter for Voice of San Diego. Please contact me if you’d like at firstname.lastname@example.org or 619.325.0529 and follow me on Twitter
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