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S.F. Port hamstrung by crumbling piers, tough development rules
Monday, December 3, 2007
In a perfect world, the Port of San Francisco would develop its crumbling piers, each with a glorious view of the bay, and reap millions of dollars in rents and tax revenues.
But in the imperfect world that entails development of the waterfront, little or none of this has happened because of a thorny welter of state laws, local waterfront plans and, in some cases, neighborhood opposition.
Then there is the fact that the piers have deteriorated to a state where it will cost $1.4 billion to rehabilitate them. The port doesn't have that kind of money, and developers, who do, have walked away from port deals when they learned how much they'd have to spend to fix up the rotten piers.
A case in point can be found in the fate of a prime piece of real estate at the foot of Telegraph Hill - a cluster of three piers that jut out into the bay from the Embarcadero, about halfway between Fisherman's Wharf and the Ferry Building.
More than eight years after the first call went out for proposals to transform the 20-acre property at Piers 27-31 into a recreational and commercial center, one prominent developer spent millions of dollars only to see its ambitious project fall by the wayside. Now, a second company is talking about making one last proposal after struggling for more than a year to come up with a workable plan.
The Port of San Francisco is a city agency whose five commissioners are appointed by the mayor and must be confirmed by the Board of Supervisors. The agency has a staff that is responsible for the port's sprawling operations, which include managing, leasing, developing and maintaining port properties.
The most recent port proposal - by Shorenstein Properties LLC - includes a cruise ship terminal, recreation areas and office buildings. But environmental groups have opposed the project, neighbors have threatened a lawsuit, and the economics remain so murky that it might not happen even if it could attract the necessary public support.
"This is a very complex project with many moving parts and several constraints," said Tom Hart, executive vice president at Shorenstein Properties. "We have the financial capacity to hang in there, but the mental desire wanes the more time that passes."
The port initially had hoped that the Shorenstein project, which featured mostly offices and recreational space, would restore the rust-eaten, seismically unstable piers and generate rent to chip away at the port's crushing deferred maintenance bill.
Senior port officials liked Shorenstein's proposal even more after the developer proposed making Pier 27 the city's main cruise ship terminal. That followed another developer backing out of a deal in 2006 to create a terminal at Piers 30-32, citing soaring pier repair costs. Pier 35, which has served as the cruise ship terminal for decades, is dilapidated and damaged by termites.
The port's infrastructure problems harken all the way back to 1968, when state legislation transferred ownership of the waterfront from the state to the city, but did not say where the money would come from to maintain the piers and other port property.
Unlike other self-supporting city agencies that own property, the port has no predictable income stream to match its expenses and allow it to borrow funds to tackle major capital improvements. Yet it has inherited 7.5 miles of property that, despite its world-class views, is in serious decline.
Maritime to real estate
Decades of a flagging maritime industry on the waterfront have meant that the port has turned to commercial real estate development for income. But that strategy has proved more difficult than first imagined.
For example, the port entered into some long-term leases in the late 1970s - most notably at the heavily trafficked tourist destination Pier 39 - that have not adjusted upward to reflect market rate increases.
The port is also slow to benefit from the financial success of more recent real estate projects like the Ferry Building because high up-front infrastructure costs mean that it takes a long time for developers to recoup their own investments before they are obligated to pass on profits to the port.
And any new projects also are constrained by state laws that control what can be built on the waterfront, local land use plans and politically active neighbors. The Board of Supervisors also must approve all new development projects, triggering a tricky political process.
"I think there's a recognition that the existing business model just isn't going to provide the solutions," said Port Commission President Ann Lazarus. "It will take a lot of creative looking at the rules and regulations and revenue sources that we haven't explored before."
When the Giants opened their popular ballpark in 2000 - on what had been industrial parking lots - and the restored Ferry Building opened to rave reviews three years later, it appeared that San Francisco was in store for a waterfront renaissance.
Instead, those projects turned out to be the exception to the rule as most of the city's shoreline has remained stagnant, stalled by rising repair costs as the piers, built in the early to mid-1900s, have continued to deteriorate.
Meanwhile, neighborhood opposition and state laws have not gone away.
A huge disappointment was the Piers 30-32 project, south of the Ferry Building. The project was promoted as the site of a $270 million cruise ship terminal and shopping arcade.
That plan was seven years in the making. Then, last year, Australian developer Lend Lease decided to walk away, scared off by the $155 million projected cost to fix the piers. As of now, the port has not revealed any new plan for the piers.
An International Museum of Women at Pier 26 was scuttled in April 2005 after restoration costs doubled to $20 million; historic buildings at Pier 70 are near ruin, and the port does not have the $252 million needed to refurbish them; and the agency is $3 million short on a decade-old proposal to replace Piers 36 and 34 with a park and recreation space.
Piers 26, 28, 35, 38, 54 and 80 will need to be closed in the near future if the port fails to secure funding for upgrades, according to Tina Olson, the port's deputy director of finance and administration.
Last gasp for Shorenstein
After months of delaying a Port Commission vote on the Piers 27-31 project, Shorenstein is likely to present what it has described as its final offer early next year.
Hart said the company spent $4 million on more than 50 draft development plans. If an agreement can't be reached, Piers 27-31 will face the same uncertain fate as many other port properties.
The biggest hurdle facing Shorenstein since it got the rights to develop the land in 2006 is the company's proposal for 520,000 square feet of office development as the project's economic engine.
State laws that dictate what can be built along the California shoreline limit waterfront uses, allowing, for the most part, maritime, historic restoration, recreation, retail and other commercial activities that are open to the general public.
Neither residential nor office development is on the list. Compromises have been struck in the past to allow projects to go forward, and special state legislation can be used to supersede those laws, but typically not without a lot of debate and negotiation.
"The cruise ship terminal (now proposed by Shorenstein) is a tremendous public use, but we have serious concerns about the amount of office space we have seen so far," said Paul Thayer, executive officer of the State Lands Commission, which governs what can be built along the California waterfront.
Even if the plan were to clear state regulators, the Telegraph Hill neighbors - who were instrumental in blocking a previous proposal at Piers 27-31 - have argued that the proposed office buildings would shortchange promised recreational space and are inconsistent with area height limits. They have been joined by some local environmental groups that say a cruise terminal contradicts a city waterfront plan prioritizing public access.
Opponents predict that Shorenstein is not likely to receive the support necessary to get the project approved. If the Port Commission were to approve the project, the port itself could face a lawsuit because the development would deviate so drastically from the original plan, they say.
"The underlying issue here is that the port is entertaining development proposals that are inconsistent with their own plans for the piers," said David Lewis, executive director of the environmental group Save the Bay. "They asked developers for proposals for recreation and public access and now they are considering office buildings and a cruise ship terminal."
Lewis and others said the port should issue a new call for proposals on Piers 27-31 and should solicit public input to rewrite a city waterfront plan that reflects current economic realities and public priorities.
Lazarus said there is no time to go back to square one, though she acknowledged the trouble faced by Shorenstein and that the plan might not sail.
Most important, she said, the port needs to quickly find a permanent home for cruise ships, because its longtime cruise ship terminal, Pier 35, may well collapse in the next five years.
"I don't think putting this on hold is an option," Lazarus said. "There is an urgency to complete the cruise ship portion ... maybe that could be severed off from the other part of the development."
Changes in the offing
Hart said Shorenstein is prepared to lower the height of a controversial office building from four stories to three. The company also is willing to allow more cruise ship terminal use than before, he said - a sticking point with the Port Commission.
If the company can convince the commission to agree with its development plan, financing the deal would present its own complications.
Shorenstein and the port have discussed many funding schemes to get around the port's general lack of funds for major capital investment.
The most recent proposal relies on the port issuing bonds to pay for the seismic repair of Pier 27 and a new cruise ship terminal, which is estimated to cost $60 million to $100 million. The port would then use the increased tax revenue produced by the improvements at the pier to repay bondholders.
The developer would pay approximately $145 million in repair costs at Piers 29 and 31 and then about $1.2 million a year in rent for 66 years. The company has said it would relocate its longtime headquarters from the Bank of America Center on California Street. It would become the property manager of its new offices and others at the piers that it would rent out.
Some good news
Olson said that although many hurdles lie ahead, the port has made recent strides - and there is reason for hope elsewhere on the waterfront.
Refurbished Piers 1 1/2, 3 and 5 had a grand opening a year ago, and offices and restaurants are expected to fill the space in the coming months. The Exploratorium has decided to spend $175 million repairing Pier 15, with some investment from the port, and is scheduled to move there from its Palace of Fine Arts location in the coming years.
And the port recently benefited from state legislation that will allow it to develop "seawall" lots, most of which sit on landfill west of the Embarcadero, but are nonetheless governed by the same state laws as waterfront property.
The port believes that the largest of the plots, Seawall Lot 337, across McCovey Cove from the ballpark, could bring in $15 million in annual rent.
In February, a proposed $185 million park bond measure heads to the city ballot. It contains $33.5 million to repair and seismically upgrade unspecified areas along the city's shoreline and to create new waterfront parks in areas under the port's jurisdiction.
"We're starting to have some new revenue streams that we will be able to use in the coming years; we're starting to get out of our dire straits," Olson said.
E-mail Robert Selna at rselna@....