As San Diego leaders weigh the lease of 48 acres of city-owned land in the Midway District, the splashy arenas, elaborate green spaces and vibrant retail districts promised by developers bidding for the sports arena site must take a backseat to how many residential units will be reserved for low-income families.
That’s because the state has the final say.
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California’s Department of Housing and Community Development, the oversight agency tasked with enforcing a recently amended Surplus Land Act, maintains that when it comes to the sale or lease of public land, affordable housing is the priority.
Monday, City Council members will decide whether to accept or reject a recommendation from San Diego’s real estate department to continue negotiating with, and thoroughly vet, just three of the five development teams in the running to lease and redo the city’s real estate holdings at 3220, 3240, 3250 and 3500 Sports Arena Blvd. Last month, a council committee wrestled with the choice, favoring instead further evaluation of most, if not all, of the respondents.
But staff’s suggested short list is still on the table. It is based on an elementary formula with two variables: Affordable housing and the viability of arena proposals. Teams with the highest number of residential rents set aside for people making 80 percent of the area median income, or AMI, are on the list — with the exception of one group that failed to demonstrate that it could deliver a new or renovated arena, as is also required.
By that criteria, Zephyr’s Midway Rising proposal, Monarch’s HomeTownSD bid and Toll Brothers Housing’s Midway Village+ plan make the cut. Conversely, The ConAm Group’s Neighborhood Next pitch and Brookfield Properties’s Discovery Midway vision do not.
The real estate department believes it’s in the city’s best interest to narrow the field and conduct financial analysis on the three teams that it sees “a clear path forward for,” said Penny Maus, who heads the city’s real estate department and is leading negotiations.
Short lists are necessary in real estate competitions of this magnitude, but the city’s criteria is misguided, said Norm Miller, who is a professor of real estate finance at the University of San Diego.
“Not a single proposal, none of them, will pay anything for the site because the land residual value … in all of these proposals is dramatically negative, which means (the city) has to pay (the developers) to make this vision come true,” he said. “The amount of subsidy is a function of how many affordable housing units they have and how low they go on AMI.”
In other words, the greater the number of affordable units and the deeper the level of affordability, the more the city will be asked to contribute. And the aforementioned Surplus Land Act requires the city to give priority to the bidder with the qualities that would obligate the city the most.
“I think we need to get to the point of asking the question: How much subsidy will be required and where will it come from?” Miller said.
Dating to the 1980s, the Surplus Land Act was amended by the state legislature in late 2019 to ensure that excess government-owned land is made available for affordable housing. The revised version strengthens enforcement, includes substantial financial penalties and expands the law’s application to local agency properties that are being offered for lease, as opposed to just offered for sale.
The statute is administered by California’s Department of Housing and Community Development, or HDC. The state agency’s rulebook mandates that local agency land must be offloaded in a prescribed manner. The local government must first make a formal declaration as to whether the property is surplus land or exempt surplus land. Then, the local agency must issue what’s called a “notice of availability” for surplus land, an act that gives affordable housing developers 60 days to respond with interest.
The municipality must then go through a 90-day negotiation period with respondents, and “shall give first priority” to the entity with the highest number of affordable units, meaning those deed-restricted for families making 80 percent of AMI. Currently, the median income for a family of four in San Diego is $95,100.
San Diego’s first attempt to offload the sports arena site ran afoul of the law and was aborted as a result.
The city’s second effort is strictly following HCD’s guidelines, with Maus in regular communication with the state agency. San Diego exited the initial 90-day negotiation period in March and is now attempting to navigate a relatively undefined path forward.
HCD’s rulebook is firm that the city must assign priority to the team with the most affordable units, or in the event of a tie, the team with the deepest level of affordability. For now, that means the Midway Rising proposal from Encinitas-based Zephyr Partners has priority. The group is proposing the most affordable units offered to the lowest income levels — or 2,000 deed-restricted units with an average affordability of 40 percent of the area median income.
However, the statute and the guidelines are noticeably silent on the weight of priority under the Surplus Land Act, leaving open-ended a question as to how much freedom the city has in selecting a team other than Midway Rising.
“The Surplus Land Act does give local agencies a fair amount of discretion in terms of how they go about making the ultimate selection,” said David Zisser, who oversees HCD’s housing accountability unit and will speak at Monday’s council meeting to help clarify the agency’s rules. “The statute and the guidelines provide some direction, but in other ways do not provide a lot of specificity.”
San Diego can take into account price and terms, bedroom mix, time to market, anticipated subsidies, property restrictions such as the arena requirement and other factors, he said.
“At least one thing that the statute is not agnostic about is that the number of affordable housing units in a proposal gets the highest priority. … The next tier is the deepest level of affordability,” Zisser said. “So it’s clear that the Surplus Land Act is really about maximizing affordability in numbers and depth of affordability, getting at those with the greatest need.”
But the perceived ambiguity has kickstarted a debate among council members, community members and interested parties as to whether staff’s recommended short list is appropriate. At April’s committee meeting, Councilmember Chris Cate attempted to arrive at an answer to the priority conundrum.
A conceptual rendering of the Midway Rising plan for San Diego’s sports arena site. The team is pitching an all-new, state-of-the-art arena on the eastern edge of the property. Also pictured are a hotel and a public square.
(Courtesy, Safdie Rabines Architects)
“How much flexibility is there?” Cate asked Maus at the meeting.
“(HCD) said that if we did identify in this case that Midway Rising was not able to be given priority, for whatever reason, that we would need to reach back out to them for technical assistance,” Maus replied. “We would need to submit written findings to them. And then, if they concurred that we appropriately we’re not providing priority, that we could move on to the next team (with the most affordable units). And so on, and so forth.”
“No matter the scenario that exists, there’s going to have to be a prioritization at some point,” Cate responded.
“Correct, based on the highest number of units,” Maus said.
The back-and-forth was triggered in part by an avalanche of public testimony rejecting staff’s short list. Midway-Pacific Highway Community Planning Group Chair Dike Anyiwo, Kobey’s Swap Meet Vice President Chuck Pretto, labor union representatives and several additional public speakers said it was premature to eliminate any teams.
“At this point, it seems as if there are too many unanswered questions that prohibit you, as decision-makers, from making the best decision,” Anyiwo told committee members, citing unknowns about each team’s timing, requested public subsidy or anticipated infrastructure contributions. “Removing any one of the options from the table today is shortsighted.”
The city, citing active negotiations, has not disclosed the teams’ financial models or subsidy assumptions.
The low-income units could require an average subsidy of $150,000 per unit, although state and federal resources, sports arena revenue, market-rate housing and other programming will help offset capital costs, said Miller, the USD real estate finance professor.
“Unless we consider other criteria, such as the subsidy, the impact on the community, the jobs created or the recreational aspect of it, then it’s just going to be a matter of how much do taxpayers want to subsidize this,” he said.
Midway Rising, as the team currently with priority, maintains that it earned its position after careful consideration of the revised language in the Surplus Land Act, and a thorough analysis of what it can actually build when pooling together local, state and federal funds set aside for affordable housing projects.
Zephyr Partners is teamed with sports-and-entertainment venue operator Legends and affordable-housing builder Chelsea Investment Corp. on a plan that calls for 4,250 residential units, a new 16,000-seat arena and 20 acres of open space, including 4.2 acres of elevated public parks atop parking garages. The project includes a 200-room hotel, potentially branded by SeaWorld, and 250,000 square feet of commercial space concentrated in a central public plaza.
Midway Rising would be completed in phases over a 10-year period, result in $2.5 billion in direct spending on construction and produce $27.5 million in annual tax revenue, according to the team’s response to the city’s notice of availability.
“It was really clear to us that the group that prioritized affordable housing to the highest level was going to have an enhanced position in this competition, but we didn’t just rest on that alone in our submission,” said Brad Termini, who is CEO of Zephyr. “We look forward to the next phase of this process where we’ll have the ability to demonstrate the feasibility of our project to the experts — and not in sound bites, at city hall or in the media.”
San Diego’s real estate department will, following Monday’s vote, begin to scrutinize team financials and project feasibility with the help of outside real estate consultant Jones Lange LaSalle. Should the council members approve a short list, Maus has said she can return to the elected officials with a final selection before the end of the year.
