City Budget Analysts Slam New, Improved Mega Shelter Deal

By Lisa Halverstadt, the Voice of San Diego

July 17, 2024

Next week, Mayor Todd Gloria will ask the City Council to approve a proposed lease for a 1,000-bed shelter that’s more favorable than the initial deal he pitched a few months ago.

But independent budget analysts for the city and a veteran industrial broker who once tried to lease out the Middletown warehouse’s top floor in the late 1980s argue the city is proposing to pay more for the space than it’s worth according to the market.

The City Council now has a decision: Should the city pay a premium for a site Gloria has decided is ideal for a long-term homeless campus?

Following four closed-door City Council briefings on the deal, the rental rate the owner of the building is seeking fell by 50 cents a square foot to $1.95 a square foot with rents escalating 3.5 percent annually over the proposed 30-year lease. That landlord, Douglas Hamm, has also agreed to chip in $5 million, which the city may use to help pay for the estimated $18 million in upgrades needed to convert the former print shop into a shelter campus. The new deal also calls for Hamm to pay 14 percent of his net profits to the city if he flips the property within the first five years of the lease, though Hamm has said he plans to hold onto the property. The city would also skip rent payments during the first 19 months of arrangement while it’s converting the warehouse into a shelter campus.

Gloria and veteran mayoral adviser Steve Cushman, who stepped in to help negotiate the deal after the initial terms spawned an avalanche of criticism, argue they’ve got an excellent deal for a property more ideal for a large-scale shelter than at least 19 others the city has assessed.

“I think what we’ve been able to do in terms of the deal that was first daylighted a few months back to where we’re at today, it is absolutely a better deal,” Gloria said Monday. “I think that this deal is very comparable to what else we could get in the marketplace, largely because the size and location is absolutely unbeatable.”

The two-level 65,000 square foot building at Kettner Boulevard and Vine Street is surrounded by train tracks, an airport parking garage, Interstate 5 and a San Diego Gas & Electric substation – and not in the immediate vicinity of homes or businesses. Even so, it has drawn pushback from Mission Hills residents.

Gloria and his team have also argued the multi-story building north of downtown offers flexibility to serve multiple homeless populations in different spaces and allows for onsite amenities such as a commercial kitchen and medical services.

But independent budget analysts for the city and their real estate consultant, Kosmont Companies, came away convinced the new deal remains too favorable to Hamm in traditional commercial real estate terms, even with his more recent concessions.

“The proposed lease is not competitive with market rates for similar properties and is likely to further trend above market due to the high annual rent escalator,” budget analysts wrote in a report released late Monday.

In April, they documented 37 comparable properties with an average per square foot rate of $1.44 a square foot and a second review of nine properties earlier this month found nine properties in the surrounding area had average rents of $1.54 a square foot.

“In sum, the proposed lease terms represent a premium above competitive market rates,” budget analysts wrote. “It may be reasonable for the city to pay some premium for the Kettner and Vine site if the site’s unique characteristics make it more valuable to the city than it would be to any other party, but the Council and public should be aware of how much that premium is, and fully consider associated tradeoffs.”

Veteran industrial broker Rex Huffman, who has worked in the area for years, said the proposed city lease deal remains vastly more expensive than others he negotiated last year. He thinks it would be a better deal if the city razed the building and built a new one given all the challenges the 1960s era building presents.

“I wouldn’t touch this deal with a 10-foot pole,” Huffman said. “I just don’t get it.”

Huffman said he helped negotiate what he considers a similar deal for a lower rate last year. It was 10-year lease renewal with Specialty Produce for its longtime 50,000 square foot headquarters – which also has about 7,500 square feet of office space – near Hamm’s warehouse and came with a a $1.72 per square foot base with a 3 percent annual escalator.

That’s also what is called a “triple-net lease” like the one Gloria’s team is pitching for the Middletown shelter. Triple-net leases typically put tenants on the hook for building maintenance, property taxes and other costs on top of the base rental rate. (City budget analysts estimated non-rent costs for the city deal tied to this arrangement would amount to about $390,000 annually on top of the $1.95 a square foot base rent.)

Hamm, the building owner, has argued critics among real estate experts aren’t imagining the property’s possibilities like he does. He said the Middletown property is ideal for entertainment, sports and retail tenants looking for large properties with significant indoor and outdoor space close to downtown that aren’t surrounded by neighbors.

This spring, Hamm shared documentation with Voice of San Diego describing a potential 15-year lease for the full property with a base rent of $2.50 a square foot and an email exchange with a “national creative company” about a 20-year proposed lease at $3.50 a square foot that he engaged earlier this year.

Hamm spokesperson Margie Newman Tsay didn’t elaborate on concerns about the lease deal in a late Monday statement.

“We’re proud of this effort and Doug is honored to be a partner in this bold work to address San Diego’s homelessness crisis,” Newman Tsay wrote.

Gloria and Cushman maintain that the property Hamm purchased for $13.25 million in April has passed city officials’ many tests and bested other sites they’ve eyed as shelter options.

“At this point in time, we have the best facility that we could hope for,” Cushman said. “There are those who could say it’s 10 cents or so too expensive. That isn’t the issue. The issue is, where can we find a facility that we can provide a meaningful service to help people transition their lives?”

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