Santa Barbara’s downtown Paseo Nuevo mall is on the market, and there’s interest among national retail companies to purchase the property and try to rescue what was once the city’s crown jewel of retail.

The mall’s asset manager, AllianceBernstein, met with the City of Santa Barbara in the fall of 2022, shortly after it seized the property back from previous owner Pacific Realty, which had defaulted on the payments. The meeting was “very high level” and somewhat of a meet-and-greet, sources said. The two groups plan to talk again in the first quarter of 2023.

However, sources told Noozhawk that at least a couple of national retail companies that specialize in rescuing distressed properties have shown interest in the property and may have made bids.

The biggest challenge to securing a reputable buyer and sealing a deal, however, is the length of the current lease. The mall’s lease with the city began in 1990 and extends through 2065.

Any potential buyer will want an extended lease to ensure a return on its multimillion-dollar investment.

“The best thing that can happen is a sophisticated developer with a great track record is able to get the mall under contract from Bernstein, and once that happens that developer will need to work with the city and the city is going to need to work with that developer to come up with a game plan for the whole thing,” commercial real estate broker Austin Herlihy said. “The city is going to have to extend that ground lease and work on the terms of the ground lease so that it is financeable.”

Jason Harris, the city’s economic development director, however, said the city isn’t steering the discussion on Paseo Nuevo and is more in the “passenger’s seat.”

“The city has some limitation to what we can direct,” Harris said. “We don’t own the (tenant) improvements, and the improvements are developed under the ground lease contract.”

Harris said the city has a long-term contractual commitment on the property.

“The city has a partnership, as it were, more of a latent partnership, unless we want to condemn the property,” Harris said.

Whatever happens on the private market, Harris said, the city is poised to react.

“The city stands ready to evaluate and modify and work with the ground lessee owner,” Harris said. “The city is really primed and positioned to work with them.”

The city does not have the financial wherewithal to just buy the mall, Harris said.

Dave Davis, the city’s longtime community development director, said it would make sense for the city to put together a “strike team” to work on securing the mall now that it has gone back to the bank.

“How much is the city in conversation with the leaseholders as to what the future can bring?” Davis wondered.

Davis was there at the beginning, 33 years ago, when the mall was built. Paseo Nuevo was once Santa Barbara’s most prized retail possession. It rescued downtown from a proliferation of surf and T-shirt shops and liquor stores.

More than three decades later, the downtown mall is enduring a period of turmoil and upheaval. The two major anchors, Nordstrom and Macy’s, are gone, retail is struggling and there’s a massive need for housing for all types of income levels in the community.

“All malls of this nature that were built in the ’80s and ’90s are repositioning,” Davis said. “Retail changed. The economics changed. Malls such as this are going through a national cycle of change. Most of them are going into some type of mixed use and creating more of a neighborhood than a centralized mall.

“If I had my druthers, as the chief of Oz, I would knock down the big buildings and do housing.”

Any financial deal over the mall is complicated.

The former owners of the mall had approached the city about a development agreement in 2018.

Paseo Nuevo Owners LLC wanted an option to extend the lease through 2093 and continue to lease the space long term without paying rent for the space. The city, in 1990, entered a lease arrangement through which it received $1 a year from the lessee. The city had banked on the sales taxes, and a revitalization of downtown, as a financial incentive.

As part of the extension of the lease, the mall owners agreed to several financial payments to the city, including $20 million in infrastructure and tenant improvements — concessions that it felt equated to rent.

The deal was intended to provide Paseo Nuevo Owners LLC long-term lease security in the heart of downtown, while providing the city with a greater financial investment from the mall owners.

However, the Santa Barbara Planning Commission in 2020 rejected the development agreement and the deal fell through. Earlier this year, the mall’s owners then defaulted on payments and the property went back to AllianceBernstein.

Herlihy said the city needs to restructure the ground lease to appeal to any potential buyer.

“The city needs to be able to create value,” he said.

Herlihy said the timing is now.

“It’s absolutely critical that we get that property right,” Herlihy said. “It will help State Street. It is going to need to be a mixture of housing and retail.”

Santa Barbara City Councilwoman Meagan Harmon said the city should act swiftly.

“While the city doesn’t have the authority to dictate exactly how the mall evolves, I would like to see us take an active role in determining its future direction,” Harmon said. “To me, housing, or a mixed-use development, remains the highest and best use of the area. In 2023, I’d like us to take a leadership position in discussions about the mall’s future — it is critical for the future of our downtown, and we should treat it as such.”

Santa Barbara Mayor Randy Rowse said Paseo Nuevo still has decades left on its lease, so the city’s direct control is limited.

“We would like to see a combination of housing and retail/experiential businesses such as those recently successfully developed in other locations,” Rowse said. “Paseo Nuevo’s redevelopment is a crucial element in the vitality of the downtown corridor. There have been a number of interested parties inquiring, so the hope is for a developer to strike a deal with the mall’s owner in the near future, if not developed by the owners themselves.”