SANDAG's New Office Lease Will Cost Millions More than City's

A few weeks ago, San Diego Mayor Bob Filner announced (with three exclamation points!) that he had come to terms on new office space with a new landlord for some 400 city employees that don’t fit in City Hall.

I analyzed the true savings here and wondered what other local agencies were getting on their leases in downtown offices.

Now, Filner and the city didn’t finalize the deal. Attorneys and others have to look over it. And maybe they could still bungle it.

But I did find a perfect comparison. The San Diego Association of Governments just signed a lease for almost the exact same time period. And it was for a building right across the street from the one the city is moving to.

They have about as much space. But SANDAG is paying a lot more. Over the course of the lease it will spend up to $3.8 million more than the city, in fact.

I obtained the lease through a records request and went through a few rounds of questions back and forth with SANDAG officials.

Let’s go through it.

SANDAG rents space in this well-known downtown building, 401 B St.

SANDAG had some time remaining on its lease but renegotiated the end of it and, on March 1, started a new lease for 79 more months. So the lease now ends in 2019.

Because of the time remaining on its old lease, the new lease is really a 66-month deal starting next year. But SANDAG did save a bit from what it would have been paying until then.

From now to April 2014, SANDAG will be paying an average of $2.53 per square foot. This doesn’t look so good compared to the city’s new deal, which has a base rate of $1.25 per square foot. But we’re not going to give SANDAG any grief for this initial rate right now.

SANDAG new deal really starts in April 2014. And here’s how that looks:

Now, there’s a chance that this price per square foot could go down another $0.12 if SANDAG doesn’t spend more than $1.26 million on construction.

Construction? Yes. Though they’re not moving, SANDAG wants to spend $1.26 million doing this work:

Build out a space for consolidated tech support staff and create an IT “shop.”
Replace carpet and paint.
Update restrooms.
Three small kitchen upgrades.
Build an internal stairway.

So if those projects cost what SANDAG thinks they’ll cost, it’ll knock off another $0.12 off their rate per square foot.

So let’s do that that.

STOP! Hold the presses. I was just informed that SANDAG’s estimate for this work has ballooned to $1.4 million (not $1.26 million), meaning they won’t get the full rent credit of $0.12 per square foot. A SANDAG spokesman, David Hicks, said they were getting more estimates.

I’m going to move the credit to $0.09 per square feet, based on the inflated construction costs.

So here’s the rent so far:

SANDAG officials also made the case that the rent includes parking. In fact, $0.06 of its rent per square foot is for 750 hours of parking for the public per month.

“This allows SANDAG to provide free parking to members of the public coming to meetings,” wrote Shelby Tucker, a SANDAG lawyer, in an email to me.

OK. If we’re going to compare this to the city’s lease, we shouldn’t include this because the city’s not giving free parking in its new office building.

So cut $0.06 from SANDAG’s lease rate.

All that said, here’s what SANDAG will pay to rent its digs in the 66 months from April 2014 to September 2019: $13,451,945.

OK, now let’s compare. The city is going to move to this building at 525 B St.

It’s going to rent 90,000 square feet of it. And its term is half a year longer (72 months) than SANDAG’s.

I’m going to update my analysis from before to include moving and construction costs. The landlord is giving the city up to $900,000 or so in improvements. But it won’t be enough to help everything so, according to the rate they settled on, the city will add up to $0.08 per square foot to the much ballyhooed $1.25 per square foot cost it’ll be paying.

So, over six years, the city will be paying $9,624,180.

Just to reinforce, the city is getting 72 months for $9.62 million. SANDAG is getting 66 months for $13.45 million.

Were we to compare 66 months of the city’s deal, the difference between the two would be starker. The city would pay $4.7 million less than SANDAG. The leases were negotiated within a couple months of each other.

I asked SANDAG officials why they had to pay so much more and whether it was worth it. Spokesman David Hicks wrote me an email saying the space the city is taking was not large enough for SANDAG.

SANDAG was looking for a minimum of 105,000 contiguous square feet and the 525 B St. property was only 91,526 square feet. But, in the end, they only ended up renting 93,000.

Also, Hicks pointed out SANDAG still had two years remaining on its lease. Hard to break something like that and move to the spot the city ended up getting.

SANDAG representatives said they, like the city, only wanted a six-year deal because SANDAG may move into a permanent facility of its own someday. SANDAG leaders are considering building a new facility on top of whatever node it is able to create for its new bus rapid transit effort downtown.

Finally, another point: The city hasn’t actually formally finalized its new lease yet.

I got a hold of Brig Black. He’s the VP of the management company that works for the landlord at 600 B St. This is the landlord the city is leaving. He’s clearly troubled about losing such a big tenant.

He said he’s been re-engaging with the city to try to convince them not to sign a final lease with the new landlord and he said he could save the city a “significant amount of dough” if it decided not to leave.

Quick break to demonstrate what a “significant amount of dough” can do:

Ostensibly, Black is saying that he could have done better for the city than the $1.85 per square foot price he last offered it.

He didn’t want to comment more, hoping that he’ll preserve his chances to figure something out.

But I did ask him about the market. All this would indicate that downtown office rents are plummeting. He said he doesn’t see a correction downward occurring.

“The deal [the city was] able to cut at 525 B. Street was, to some degree, an anomaly. We’re not seeing the same overall correction all around,” he said.

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