What's wrong with the America's Cup deal? A lot

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Photo by JEAN-BAPTISTE DANIEL

Let’s start out with a premise that even Larry Ellison’s minions have come to accept: The race is happening here. Too late now to move it to another city. Worst-case scenario, according to Stephen Barclay, the point person for the world’s sixth-richest man: "If we don't meet those dates, the teams will be forced to relocate to other places around the bay."

That’s right -- the teams will relocate to other places around the bay. The host city will still, for all practical purposes, be San Francisco; the races will happen off SF’s waterfront (where the Coast Guard is willing to allow them and the conditions are right) and the rich tourists will stay here, not in Burlingame or Fremont.

If Ellison decides the city’s not giving him enough, he won’t put up $55 million to fix up some of the waterfront piers. The city may decide that a development deal of some sort with him makes economic sense. But it’s a real-estate deal at this point, not a deal for the race. At least, that’s what the Ellison team seems to be confirming.

And I fear that the real-estate deal that the Board of Supervisors Finance Committee sent forward yesterday, 2-1, is a bad deal for the city.

The terms are really complicated, and it makes my head hurt just trying to figure it all out -- and still, the supes are expected to vote on the 120-plus-page document Feb. 28. Here’s what we do know, though:

The supervisors originally came to a deal with the America’s Cup Event Authority back in December. The concept was -- and is -- pretty straightforward, the same sort of deal the city has done (or, certainly, the Redevelopment Agency has done) many times in the past. In exchange for putting cash into renovating several piers, Ellison’s group would get long-term leases and development rights on the property. The idea: The city can’t afford to fix the piers. Ellison’s organization can. And once the property is renovated, the developer can make back that initial investment, and a profit, by building commercial space, condos and whatever else the Port decides to allow.

In a perfect world, San Francisco (and the state and the feds) would tax the hell out of people like Ellison, and there’d be public money to rebuild the waterfront as public open space, recreational facilities and the like. And wouldn’t that be utterly cool? Wouldn’t this city have the most awesome waterfront in the world?

But no: The only way the piers are going to anything but a place to park cars until they fall into the bay is if some private developer gets the rights to build something that I won’t like.

Supervisors Jane Kim and Mark Farrell, who don’t agree on a lot of things, both agreed with my basic analysis of the politics here: We shouldn’t let the excitement over the prospect of a boat race get in the way of analyzing this for what it is: A financing tool for the Port to get its infrastructure fixed up. Without a private investor, “they just don’t have the capacity to do that,” Kim told me.

So let’s just stipulate for a moment that this is the best, maybe the only way the city can restore the Port. Then it comes down to the real issue: Has the Mayor’s Office negotiated a good enough deal? Is San Francisco getting enough out of this? Or is everyone so hyper-buzzed about fancy carbon-fiber boats in the water (and I admit, they’re pretty cool) and free-spending tourists in the hotels and restaurants that we’re letting Mr. Ellison -- who didn’t get so stinky rich by being a weak negotiator -- walk away with most of the cookies?

Remember: Ellison's not doing the city any favors. He's only fixing up the piers that he will effectively own (as least for most of the rest of this century).

Back in December, the rough outlines looked like this: A corporation set up by Oracle, called the America’s Cup Event Authority, would put $55 million into repairing and renovating piers, then would get  66-year leases and development rights on piers 30-32, 26 and 28, as well as seawall lot 330, across the Embarcadero, which Ellison’s team wants to turn into more condos for rich people. If that's not enough to pay for Ellison's investment, Ellison's heirs or successors get half the rent for the piers for another 15 years. That's 81 years.

The original deal mandated that the city would collect a 1 percent fee on the re-sale of the new condos. It also had a requirement that Ellison share with the city any profits he made by flipping the long-term leases.

That’s a big deal, because almost nobody in the city actually holds onto development entitlements anymore. A developer wins the right to build an office building -- and next week, he or she sells that right to somebody else. It’s almost certain that at some point, Ellison -- whose sole goal here is going to be making a profit off city land -- will decide that the best way to make money is to cash out. He’ll keep his 66-year leases for a few years, maybe lobby his way to approvals for office, condos, time-shares (gasp! yeah, they’ll do that if it’s legal) restaurants or whatever -- then sell the remaining time on the leases, plus the development rights, to somebody else. And because he’s Larry Ellison, he’ll wind up making a nice tidy profit.

That used to be what happened with Port property (see: Pier 39) but lately, the Port’s gotten a bit wiser and has, in some cases, insisted that part of the profit from flipping a lease goes back to the city. In the original discussions, Ellison was going to have to pay the Port 15 percent of any net gains he made from the almost inevitable sale of the valuable leases.

But that’s gone now. After the board approved Newsom’s deal, the former mayor -- who was always terrible at negotiation with the rich and powerful and always gave away the store -- went back and monkeyed around with it. He and Sup. David Chiu insisted that the changes were just technical, not substantive enough to require a new board vote -- but the current deal has no 15 percent cut for the Port, and the 1 percent levy on condo sales only applies after the second owner sells -- which will be years down the road.

Then there’s the part where the city has to reimburse Ellison if the cost of renovating the piers exceeds what’s expected (oh, and we have to pay him 11 percent interest, which is about ten times what I get on my bank account; how about you?) There’s no cap on what the city might have to pay. And Ellison gets to develop a new marina.

And while Pier 29 is no longer a part of the deal, the city has to give Ellison $12 million -- or rights to a pier to be named later. (Maybe Ellison figures that in a few years the people who opposed Pier 29 development will be out of office and he can convince the new mayor and supervisors to give Pier 29 back. It’s not legally excluded.)

Kim told me she’s going to insist that the final deal include a local-hire provision, which the rest of the board would be crazy not to support (and which Ellison, despite his company’s problems with local labor laws in the past, would be crazy not to accept).

But overall, Kim -- who with Sup. Carmen Chu was part of the 2-1 majority sending the package to the full board -- told me she thought the city got a good deal. “It took me a while,” she said. “But [Port Director] Monique Moyer convinced me that this was good for them.”

Sup. John Avalos, the dissenting vote on the Finance Committee, isn’t convinced. He’s got a long list of concerns, starting with the fact that he thinks the projected attendance and economic benefits are a bit delusional. “The figures seem farfetched,” he told me. “I’m seeing a lot of pumped up numbers. And those numbers drive whether this is a good deal for the city or not.”

He’d like to see the 1 percent rule apply to the second condo sale, not the third. He’d like to see the Port get 15 percent of the profits from any sale. And he’d like a cap on the reimbursements the city has to give to Ellison.

But here’s the problem: When the development agreement comes before the board, sitting as a Committee of the Whole Feb. 28, it will be hard to put any of that back in the agreement. This is a contract, and while the board can pass a resolution asking for more, in the end, it’s a matter of voting it up or down.

Vote yes and it’s done -- more or less as is -- although Kim says there will be another chance to make changes down the road, since the board and the Planning Commission will have to sign off on whatever type of development Ellison wants to do. The problem with that scenario? Ellison's lawyers will wave this development agreement around like a Giants victory towel and proclaim that it binds the city and limits any ability to demand any more changes later. That's how these people operate.)

Vote no and the ball goes back to Larry’s Court: His group can sit down with the Mayor’s Office and make some changes, or they can walk away (and build their boat sheds in .... where? Oakland? Foster City? Who’s got waterfront that can handle this?)

When the Finance Committee send the package to the full board, Avalos said, “we pretty much lost our ability to influence the agreement. Now we have to decide if we want to call [Ellison’s] bluff.”

PS: One of the lingering issues is whether the America’s Cup Organizing Committee can raise the $30 million-odd that is needed to make the numbers pencil out. If I were a rich person and Mark Buell, the ACOC point person, called me for money, here’s what I’d say:

How much is Larry Ellison contributing?

See, Ellison’s improvements on the waterfront aren’t charity. He’s looking to make a buck off everything he does. In past eras, the great robber baron capitalists would donate civic monuments -- libraries and museums and stuff -- and by any traditional standard of great wealth, Ellison ought to be writing a personal check for that $30 million. Or at least for some of it.

But so far, he hasn’t given a penny. The sixth richest man in the world isn’t actually donating anything to San Francisco. Yeah, he’s gracing us with his lordly presence, but cash? Nada.

Good luck with that one, Mark.

PPS: This whole concept that the city needs to fix the "crumbling" piers ought to be examined. First of all, nobody's ever said that Pier 29 was in anything but fine shape. But beyond that, the Bay Conservation and Development Commission considers piers to be bay fill, and in the long term, wants San Francisco to get rid of some of them. "Maybe it's a good thing if some of the piers fall into the bay," former Sup. Aaron Peskin told me. "Then we'll have more leeway with BCDC when we want to fix up some of the others."

Research assistance by Royce Kurmelovs