Subsidy or Not? Measure A Rancor Stems from How You Define It

Editor’s note: This is the third in a, an initiative that will either push the proposed Playa del Norte commercial development another step toward fruition or will kill the controversial North Beach project. 

Shaheen Sadeghi said that the city’s negotiating agreement with his development company has some pretty strict provisions and that his Playa del Norte project at North Beach wouldn’t use any government subsidies.

Much of the debate and rancor over the Playa del Norte project, the subject of the March 8 Measure A ballot measure, hinges on what voters define as government subsidies.

Any way the deal is presented, the city has spent hundreds of thousands of dollars, and plans on spending millions, in connection with the project.

Sadeghi’s LAB development company is behind the proposal to build the controversial Playa del Norte development, which would have several retail/restaurant buildings consisting of 49,000 square feet of shops and restaurants, offices and storage centered with a 40-foot tower.

The project at North Beach would include 11,000 square feet of outdoor “view-oriented” plazas, according to city documents.

The buildings would be built with red tile roofs and white stucco in the Spanish colonial style prevalent in the area, according to renderings and documents.

The city, in conjunction with the proposed development, would be building necessary infrastructure and adding parking half a mile up Pico Avenue and at a sites across Pacific Coast Highway from the development with $4.6 million from the beach parking fund and other funds. The beach parking fund consists of money paid by developers specifically reserved for beach parking.

Measure A opponents, however, argue that the fees are passed on to homeowners in the increased price of their houses, meaning the money in the fund might as well be tax dollars.

A large portion of the $4.6 million would come from the city's general fund and sewer fund, the money for which comes largely from property taxes, sales taxes and water/sewer rates.

At any rate, Sadeghi said, the money from parking fees paid by beachgoers will go back to the city, not to the LAB or Playa del Norte businesses--a figure that one study places at $1.4 million ever year.

This is one reason Measure A proponents say they don’t consider the parking lots to be subsidies, though opponents dispute the $1.4 million projection as huge overestimation.

City officials said they would have moved forward with two of the lots whether or not the project was approved.

“[The city] hasn’t given us a nickel,” Shaheen Sadeghi said.

That is true in the sense that the city hasn’t literally written a check to the company, but the potential parking lots are seen by opponents as a government subsidy, as does time the city staff spends handling permits and studies surrounding the project.

The expenses for the project itself are not in question. The city is obligated to use staff time to cooperate with LAB in assembling and inspecting plans for the project, as well as money for public improvements and their corresponding environmental documents, according to the contract.

According to the exclusive negotiating agreement, “All fees and expenses for engineers, architects, financial planning and other consultants and contractors … shall be the sole responsibility of the developer.”

Staff time has cost the city several hundred thousand dollars in man-hours, consultant fees and studies, opponents say.

The current document guarantees the right of LAB to be sole negotiator with the city on any North Beach development: “Nothing herein shall be deemed a covenant, promise or commitment by either party to enter into a development agreement,” the document states.

What a final and as-yet nonexistent contract to build would look like is a lease agreement with a purchase option.

The LAB would lease the land for three years, then have an option to purchase the land at the end of that period, when the 49,000-square-foot retail complex is fully up-and-running.

Sadeghi contends that this is when the land will be the most valuable–the real estate market will likely have recovered somewhat and the buildings and entitlements for the property will be in place.

“A piece of land is worth what you can put on it,” Sadeghi said. “That way I don’t have to worry about shrinking the project.”

Furthermore, Sadeghi said, when the option for a sale does approach, the city will use its own appraisers to determine the value of the land, not appraisers from the LAB’s lenders, which he says is typical in most real estate transactions.

He said city-contracted appraisers could demand a higher-than-market price for the land.

“But that’s the risk that I take,” Sadeghi said.

The LAB, according to the terms of a potential deal as it stands now, would be getting a significant discount deal on the land purchase, however. According to city documents, LAB would be permitted to purchase the land for half its valuation, minus construction costs, after three to seven years:

“Price the LAB will pay for the land being purchased by the City will be set by deducting from the finished project value (including land) the cost of construction of the project.

“Payment to the City for the land will be 50 percent of the margin between the project value and the cost of construction.”

Once again, Measure A opponents consider this potential discounted sale to be a subsidy, while proponents say it's a fair deal that considers the work and expense that the developer will have invested in the property by the time Playa del Norte is operational.

At a recent council meeting, City Manager George Scarborough explained the lease option in the agreement. He said city officials wanted to make sure they got a good value for the land but didn’t push the price up so high that a development at North Beach would fail.

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