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Every 10 years, the Unified Port of San Diego takes a second look at how much it’s collecting in rent from NASSCO, the shipbuilding giant that leases public property on the waterfront.
The largest of the three shipbuilding and repair companies on San Diego’s waterfront, NASSCO is the only full-service shipyard on the West Coast. It has rented more than 100 acres of public tidelands property for more than 50 years.
It employs 3,600 people between its waterfront facility and its satellite offices in Mission Valley, many of whom are blue-collar workers who make a comfortable living, the sorts of middle-class jobs politicians build speeches around.
Now, it’s going through its scheduled rent review, part of its 50-year lease with the Unified Port of San Diego, meant to ensure its rent is consistent with the prevailing market.
The rent review compares the value of the property to properties at other ports, like San Francisco, to get a sense of what NASSCO could expect to pay if it looked for a similar location outside of San Diego.
Ensuring San Diego retains the shipbuilding and repair industry — and the good-paying jobs that come with it — by reserving scarce waterfront real estate for operations that require it (you can’t put a facility to repair Naval ships in Kearny Mesa) is at the heart of the Port’s mission, said Bob Nelson, Port chairman.
“This maritime industrial activity is key among the things we can and should be doing,” Nelson said. “The Navy is an enormous part of our economy, and these properties are very important to the Navy’s mission.”
But not everyone’s convinced the Port’s getting as much for its public land as it should – and are zeroing in on NASSCO’s under-review lease as an opportunity to get more money.
“They’ve got a sweetheart deal,” said Laura Hunter, senior policy adviser for the Environmental Health Coalition, an environmental justice nonprofit group.
EHC has been a vocal supporter of a new growth plan for Barrio Logan, the neighborhood where the shipbuilders are located, that sought to create a buffer area between industrial property and nearby residences. The shipbuilding industry is trying to overturn the plan in the June election.
Here’s a rundown on what NASSCO pays now, and how its rent review will play out.
NASSCO’s Current Lease
The shipbuilder leases 126 acres of Port-controlled public property, or more than 95 football fields, if it were all land. Thirty-seven percent of the property is water.
NASSCO pays $234,766 a month in rent, or just over $2.8 million per year.
The Port charges it as a flat rent, but that works out to 51 cents per square foot per year.
In its leasing policy, the Port says it “should receive market rent for the leasing of its property, and rent should be adjusted to market periodically during the term of the lease.”
The policy also says the Port’s board can consider granting discounts or concessions on rent, and should do so by balancing its duty to promote commerce, its requirement to provide public access to the bay and its mandate to be fiscally responsible.
Industrial space all over the county is significantly more expensive than that, with manufacturing space in the county’s cheapest submarket, the South Bay, going for $5.76 per square foot, according to a market report from real estate company Jones Lang LaSalle.
Hunter said the rents charged for industrial space show the Port isn’t getting as much as it could for the public’s property.
“Warehouses that are inland in Otay Mesa are in the dollars per square foot,” she said. “For industrial land that’s adjacent to deep water, close to freeways and rail, I don’t know why a warehouse in Otay Mesa would be more than that prized property.”
But that’s not a straight apples-to-apples comparison.
For one, NASSCO’s lease isn’t for any of the buildings or facilities on the property. It just rents the land underneath them. It’s called a ground rent, which is common on leases for public land but exceedingly rare in the private market.
NASSCO itself pays for the construction and maintenance of those buildings and facilities, and improvements it must provide are written into the lease.
In the lease struck back in 1991, NASSCO was responsible for at least $85.5 million in improvements over its 50-year term.
In 2007, the company invested $33 million for a “paint and blast” facility. It hasn’t made any other major capital investments on the property since then, said Sarah Strang, NASSCO spokeswoman.
Another complicating factor: The appraisal process compares the property to other properties reserved for maritime industrial uses, not to general industrial space available in the private market.
But the other two shipbuilding and repair companies that operate right next to NASSCO at the Port do pay a fair bit more.
Both BAE Systems and Continental Maritime pay more than 70 cents per square foot for their smaller leases at the Port, or 40 percent more than NASSCO pays on a per-square foot basis.
“These are good-paying jobs and we are glad to have them,” Hunter said. “But on the other hand, you’re giving away the Port public tidelands to a private entity, they’re getting cheap rent, and they’re using the saved money to hire expensive attorneys to fight the cleanup of the bay and expensive consultants to pay to fight Barrio Logan’s new community plan.”
Port representatives stand by the appraisal process.
“When you look at the shipyard leases, these rent levels are reasonable and fair,” said Tanya Castaneda, Port spokesperson.
Nelson said the rent review process accounts for the fact that the property is constrained to a maritime industrial use.
“When we evaluate those properties, we evaluate based on zoned uses, not on ‘highest and best uses,’ which would be used in market appraisals,” he said. “We might be able to get more if that land was waterfront hotels, but we don’t have a free hand in how we use land. The Port sets forth protected uses and it’s our job to ensure those are able to thrive.”
All things considered, NASSCO’s rent is appropriate, he said.
“I would just restate the facts: The rent they are paying now is based on an appraisal done at the time of their last rent review, and the current rent review is to make sure the rent they’re paying is fair or if there should be an adjustment,” he said.
The Rent Review Process
In the rent review process, both NASSCO and the Port propose what they think is a fair rent.
Then both select their own professional appraisers. Together, those two appraisers select a third, independent appraiser. The three appraisers form a board, and by majority vote select which proposal is closest to market rent.
Or, NASSCO and the Port can come to an agreement before that point.
The process is called “baseball appraisal.” It resembles the way Major League Baseball decides how much a veteran player should get before he reaches free agency, when all teams in the league can bid for his services.
NASSCO and the Port were meant to set a new rent by the end of 2013, but negotiations are ongoing and private. Whenever they come to an agreement or the panel of appraisers selects a proposal, the new rent will apply retroactively to the months since it was supposed to be finished.
The new rent will also reflect an additional quarter acre of property that was added to NASSCO’s lease in 2010, but which the company hasn’t had to pay for. NASSCO will start paying for that property once the rent review is finished.
During the last review process, in fall 2003, the Port’s first proposal was to boost NASSCO’s then-rent by $1.5 million, to $3.4 million per year, or 62 cents per square foot. NASSCO at the time was paying $1.9 million a year, or 35 cents per square foot.
It took three years of meetings and negotiations, with the company undergoing a sale in the interim, but in 2006 NASSCO’s proposal went the other direction: It argued it should be paying less than it was at the time, and asked for a $200,000 cut in rent, to $1.7 million per year, or 31 cents per square foot.
Ultimately, the two sides agreed on the price NASSCO pays now, $2.8 million a year, or 51 cents per square foot.