It’s perhaps Santa Barbara’s most importance piece of real estate — and its future, through 2093 at least, is up in the air.
The City of Santa Barbara is in the final stages of inking a development agreement with the owners of the Paseo Nuevo mall, an elaborate, complex and multimillion-dollar deal that will shape downtown for decades to come.
The Planning Commission has met for nearly 10 hours over two meetings to discuss the plan.
“We are committed to Santa Barbara,” said Steve Plenge, managing principal of Pacific Retail Capital Partners, the investment firm that owns the mall. “We believe in this community. We think that this is a single point within the downtown core on State Street that can be the nucleus and catalyst for revitalization throughout the state and throughout the downtown Santa Barbara core.”
It’s a high-level conversation because it comes at a time when Santa Barbara is looking to dramatically overhaul downtown in hopes of infusing a new energy and vitality into the retail and restaurant scene. As retail slumps, national retailers such as Nordstrom, Macy’s and Forever 21, for example, have fled the American Riviera, leaving massive vacant holes at some of the most visible spots in Santa Barbara.
There’s both a philosophical and economical debate over whether the mall, 739 State St., should continue in its current form as an open-air mall with occasional outdoor entertainment activities, or whether the city should require the mall’s owners to take bold and dramatic steps to reinvent the area to create a contemporary mashup of housing, experiential activities, small retail, art and vendors.
While malls are dying across the nation as corporations scale back, file for bankruptcy or close altogether, questions remain about whether Paseo Nuevo has jumped the shark in its effectiveness as a destination for tourists and locals.
“These are long years out, and whether or not the mall is still going to be functioning as a retail center in 2095 is anyone’s crystal ball,” Assistant City Attorney Sarah Knecht said.
Further complicating matters is the fact that the proposed development agreement does not include the Ortega Building, which formerly housed Macy’s and The Broadway, or Nordstrom. The deal includes only the open air portion of the mall.
So while city and business leaders are working to figure out what Paseo Nuevo should look like, the two anchor tenants and crown jewels of the mall aren’t even part of the formal discussion.
The mall owners have acknowledged during the two Planning Commission meetings, however, that they do have ideas for both locations. Those decisions, however, are likely to come years down the road. Paseo Nuevo Owners LLC does not own the Nordstrom building, but is in talks with Nordstrom to take over the ground lease.
“Having Nordstrom close was a blow,” Plenge said. “It was unfortunate that Nordstrom decided to leave. We do not control that building. We are in conversations right now to try and get control of that leasehold.”
Plenge said it’s possible that the building could see a grocer on the ground floor and apartments on top.
“We do think that building could be conducive to housing,” Plenge said.
He noted that the mall owners had envisioned a high-end movie theater with dining inside the Macy’s building, but that excitement has tamped down since the COVID-19 pandemic erupted.
“We don’t want high-end retailers,” Plenge said. “We want the appropriate retailers into this marketplace that are a quality mix of local, regional and some national. We want more restaurants and other entertainment. We think the era of the department store is deteriorating quickly, and there are other uses that could anchor an open-air plaza.”
The mall’s lease with the city began in 1990 and extends through 2065. As part of the development agreement, Paseo Nuevo Owners LLC wants the ability to extend the lease through 2093.
The deal is 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.
According to the proposal, Paseo Nuevo Owners would invest at least $20 million to renovate the mall. About $18 million would go to infrastructure improvements and $2 million to tenant improvements.
The mall, which runs a private parking garage, would pay up to $300,000 annually to the city, adjusted according to the consumer price index in the fifth year.
In addition, Paseo Nuevo Owners must make a one-time contribution of $200,000 to the city for the purpose of assisting with homelessness solutions. The owners would also have the one-time right to a 28-year lease term extension when the current lease runs out.
Paseo Nuevo’s owners have agreed to “maintain the mall as a first-class retail center consistent with specified retail centers in Southern California.”
If Paseo Nuevo Owners were to sell the mall during the lease period, the city would have to give its consent, unless the purchaser has a net worth of at least one-half of the purchase price or at least $50 million.
The mall owners would also agree to pay the city $60,000 in recycling annually.
If the Paseo Nuevo Owners LLC sells or assigns the ground lease to a third party, the city would receive 10 percent of the net sale. Knecht said such a scenario is not likely.
“With the declining sales and with the loss of the two anchor tenants, we think it is probably highly unlikely that the city will see any benefit from this clause,” Knecht said.
Also, according to the terms of the ground lease with the city, the mall would pay no rent, which has been the case since the mall was built in 1990.
“There’s something very suspicious about the fact that the citizens of Santa Barbara receive not a penny in rent from this prime, prime real estate,” developer Ed St. George said. “I bet all the stores on the harbor, the wharf would like the same deal.”
He said that it was “criminal” for City Administrator Paul Casey to be pushing a one-sided deal.
“Paseo Nuevo is by all means a miserable failure,” St. George said. “It’s been living proof long before COVID.”
He said the mall is dying a slow and painful death, and approving the development agreement — and adding another 28 years — “is only going to extend the cancer to the rest of our downtown.”
But Scott Shuman, an attorney for Paseo Nuevo, said it’s not correct that the mall is getting anything free.
“The development agreement is not a deal for free rent for the next 60 years,” he said. “It’s the equivalent of rent in a different name.”
He said there’s the equivalent of a $400,000 cost shifting from the city to Paseo Nuevo.
“It may not be called rent, but the idea that this is a free deal or that there is no rent going back to the city is simply not true,” Shuman said.
The Planning Commission, after two hearings and hours of comments, questions and clarifications from the city, the mall and the public, is set to deliberate about the lease at its Sept. 17 meeting.