City Cans Another 7th & Market Development Plan

For the second time in two years, the city of San Diego has nixed a plan to transform a city-owned lot at Seventh Avenue and Market Street downtown. 

The city’s economic development director notified developer Chelsea Investment Corp. in December that it wouldn’t move forward with a hoped-for 405-unit affordable housing project following months of negotiations. 

Now Mayor Todd Gloria’s office says it’s pressing pause and waiting on the market to improve before it pursues a multi-use project at the lot close to Petco Park and the Gaslamp Quarter. 

The notice to Chelsea comes two years after the city ended a deal with Cisterra Development, a company embroiled in the city’s 101 Ash St. scandal, to build a Ritz-Carlton hotel flanked by housing, office space and a grocery store. At the time, the Union-Tribune reported that the city terminated the deal it made in 2016 because it concluded Cisterra wasn’t able to “carry out the project or otherwise perform” despite the firm’s arguments to the contrary.  

Now the city appears poised to pursue a more multi-faceted project than the affordable housing complex that Carlsbad-based Chelsea envisioned. 

“City staff will work to find a development partner for the prime 7th and Market site when the market has recovered sufficiently to support a multi-use project that will maximize the residential and commercial development potential, include affordable housing, with the partner paying fair market for the property,” Gloria spokesperson Rachel Laing wrote in an email. 

Christina Bibler, the city’s economic development director, cited the current state of the market – and specifically, a “scarcity of funding for multifamily affordable housing” – as the city’s reason for calling off talks in a Dec. 17 letter to Chelsea.  

Bibler also wrote that unspecified funding challenges would “directly impact the project phasing and composition of units; lack of commercial development interest in the project; and the city’s payment terms.” 

In response to questions from Voice of San Diego, Chelsea didn’t elaborate on the specific financing challenges it faced. 

Chelsea CEO Charles Schmid simply wrote that his company agreed with the city’s conclusions and appreciated its support of affordable housing. Schmid also emphasized that his firm is on track to deliver hundreds of affordable housing units elsewhere in San Diego over the next two years and plans to deliver more in the years to come. 

So why did the project die? 

Gloria’s spokesperson noted there are “a number of” financing challenges right now but spotlighted a specific one for the Chelsea deal. 

“The city’s condition that our development partner pay fair market value for the site – an incredibly valuable asset – made this particular proposal unworkable,” Laing wrote. 

The Union-Tribune reported in May that the past deal with Cisterra called for the developer to pay $20 million for the plot and that the city needed an updated appraisal before it proceeded with Chelsea. 

The city has yet to get an updated appraisal for the site. Laing said the city’s last appraisal for the property was in 2019, meaning an updated sticker price didn’t directly kill the deal.  

Chelsea’s sole focus on affordable housing rather than on a hotel or other amenities that might draw in more revenue to help pay the bills may have contributed to its struggle to reach a final deal with the city.  

Local real estate analyst Gary London said a project that incorporates income-producing engines such as a hotel and retail help such deals pencil.  

“They weren’t aiming for other revenue potentials to offset the below-market rate housing,” London said. 

After initially pursuing a Cisterra project that followed that mixed-use model, the state Surplus Land Act pushed the city to explore more affordable housing possibilities for the site. 

The city selected Chelsea as the potential Seventh and Market developer in August 2023 after a solicitation process guided by state law.  

Though the city initially called for bidders to make 25 percent of their proposed units affordable, Chelsea pitched a solely affordable 405-unit project for families, seniors and the local workforce. The developer pledged that most of those units would be affordable to those making 60 percent or less of the area median income. (That’s the equivalent of up to $72,720 for a family of two.)  

The City Council voted last June to allow city officials to proceed with exclusive negotiations with Chelsea. 

Now, after ending talks with Chelsea, Laing said the city is preparing documentation it must send to the state to prove it has satisfied its obligations under the state Surplus Land Act. 

After the state signs off, the city can decide when and how it wants to proceed. It doesn’t expect to move quickly. 

Regardless of the project it eventually pursues for the site, Laing said state redevelopment law and the Surplus Land Act ensure that at least 15 percent of any eventual housing units on the site will be reserved for low-income San Diegans.  

London sees the collapse of a solely affordable-housing project at Seventh and Market as an opportunity for the city. 

“The silver lining is that now this is an opportunity for the city to take a deep breath and recognize the upside potential of this site and go well beyond the conception of just a below-market rate housing solution for the site,” London said. 

Some affordable housing at the site makes sense, he said, but the location lends itself to a mix of commercial and residential offerings. 

London said the city’s decision to not immediately pursue other proposals is also a good move during a time when real estate investment and financing options are dragging, commercial office space is a nonstarter and residential development seems to have peaked. 

“This is the pause that refreshes moment,” London said.