When San Diego city staff made its case that a new lease for the company that runs Belmont Park was a good deal, it laid out all the ways the new lease was different from the old one.
It forgot to mention one specific provision that was not in the new lease.
The old lease required the park operator to reinvest in the park throughout the deal based on how much money it made each year.
City staff’s public report on the deal didn’t mention that requirement wasn’t included in the new lease.
If it hadn’t been eliminated, the requirement would have made Pacifica Enterprises, the park’s operator, spend $14.1 million in renovations and improvements over the life of the deal. The new deal instead required $10 million in improvements early on in the lease.
It’s simply not possible to determine whether the city was getting a good deal without considering that change.
Ultimately, the City Council decided not to approve the deal anyway, directing city staff and Pacifica to get back to negotiating. The Council will be asked again to approve whatever they come up with.
But back in September when it made that decision, the elimination of the requirement to spend 2.5 percent of the park’s annual income on capital improvements wasn’t mentioned in the real estate assets department’s presentation to the Council, or in the nearly two-hour hearing or in the written report that itemized 15 key points for consideration.
There was even a portion in the presentation where a few slides specifically detailed the differences between the old lease and the new one. It mentioned seven different items, but not the eliminated requirement.
The independent budget analyst wrote up a report on the deal too, and that didn’t mention it, either.
That’s because the IBA, when it went over the deal with city staff, wasn’t told about the eliminated requirement either, said Jeff Kawar, deputy director for the IBA.
“It was in some information that was in our possession, but it was buried pretty deep,” said Kawar, who released an updated report this week looking at the change.
“We noted the Council may not be aware of the proposed elimination, and something of that order of magnitude we would normally expect to be called out.”
Cybele Thompson, director of real estate assets, said it was an “oversight” for the change not to be included in the report and presentation given to Council.
“It would have been much clearer to highlight it,” she said. “There wasn’t anything underhanded about it being taken out, but it would have definitely been clearer to pull it out as a comparison.”
But, again: You can’t evaluate the deal without looking at the change in capital investment requirements. It’s not the only thing that matters, but it is essential to understanding the negotiation.
The city structured the new deal so Pacifica would have to make a lot of repairs at Belmont Park right away, instead of being required to make smaller investments throughout the lease, as the old lease did. This way, the park would be better and the city would enjoy larger rent payments throughout the lease, since the annual rent is based on how much money the park generates.
In the new deal, Pacifica would make $10 million in improvements in the first three years, instead of the smaller investments throughout the lease. The IBA says the smaller investments would total $14.1 million in today’s dollars. (The IBA also said the city would have received $759,056 less in total rent if it had kept the requirement in the new lease, because the rent calculation doesn’t include money reinvested into the property.)
“I ask you, if something is in total disrepair, would you want a big upfront investment in it or to do it incrementally or gradually?” asked Chris Wahl, a city lobbyist who represents Pacifica. “The city knew this, so it suggested the upfront investment to turn it around faster, because that’d be a better deal for the city, and community and the park, and that’s exactly what they did.”
Thompson made a similar point.
“It would have been clearer to say the 2.5 percent annual capital investment was being swapped out for capital dollars today, but the bottom line is that the new arrangement is a better deal than the old 2.5 percent requirement,” she said.
They also point out the $22 million Pacifica has invested in the property outside of what’s required by the lease since taking over in 2012.
The problem is, anyone weighing the deal based on what was presented at Council wasn’t considering whether $10 million up front is better than $14.1 million over the life of the deal. They were looking at a $10 million up front investment in the new deal, with no mention of any required investment in the old one.
There was one place where the change was mentioned in all the documents submitted to Council before the hearing.
Back in summer 2013, the city and Pacifica agreed to enter into negotiations, and each party signed a letter describing the terms of the negotiations. One of the items removed the investment requirement.
“It was in this funky, nonbinding commitment signed by the former mayor and the former real estate assets director,” Kawar said. “I mean, this isn’t a little provision. This isn’t like saying, ‘You don’t have to change the paper towels in the public restroom,’ or something.”
Nonetheless, representatives for Council President Todd Gloria and Council members Scott Sherman and Lorie Zapf all said they were aware of the change and the logic behind it.
Councilman Ed Harris’ office disagreed.
“No one knew,” said Nicole Capretz, policy director for Harris.