The Santa Barbara City Council will pursue a demolition and redevelopment project transforming the Paseo Nuevo mall into a housing and retail project. (Joshua Molina / Noozhawk photo)

Can a redeveloped Paseo Nuevo mall save Santa Barbara’s downtown twice?

City leaders are banking on it.

In a stunning development, the City of Santa Barbara quietly unfolded an ambitious proposal Tuesday to demolish Paseo Nuevo to build at least 500 housing units, along with 60,000 square feet of commercial space.

The City Council voted 7-0 on Tuesday to begin negotiations for a project agreement.

The city wants to enter an admittedly complicated arrangement under which it first works out a project agreement, then a development agreement. Alliance Bernstein Commercial owns the leases in the mall and is working with The Georgetown Company on the housing portion.

“Paseo Nuevo is no longer fulfilling the role that it played when it was created,” public speaker Lee Heller said. “So, this is a unique opportunity.”

Heller said the project is complicated but worth pursuing, and with as much affordable housing as possible.

Dena Belzer, president of Strategic Economics, a consulting firm hired by the city, led the presentation and described Paseo Nuevo as a wonderful asset but a dying mall.

“Right now, this mall is a distressed property,” Belzer said. “Its two largest anchor buildings are both vacant. It’s back away from the street. It has a lot of challenges. The retail industry in general is restructuring. It is an under-performing asset that needs restructuring.”

Macy’s and Nordstrom both left Paseo Nuevo, leaving makeup shops, boutique clothing and jewelry stores, and Gap and Victoria’s Secret to attract customers.

Nordstrom is under separate ownership and not currently part of the project, although Scott San Fillipo, one of the owners of the Nordstrom building, called into the meeting to express optimism.

“We are very pleased to learn the current owners of Paseo Nuevo wish to reinvest in the community,” San Filippo said.

Nordstrom is currently on the market for office space.

Belzer called the mall a “liability” and said it isn’t making any money.

New York investment firm Alliance Bernstein is essentially the banker and real estate investor. It holds the leases on the mall after the previous owners defaulted on a $120 million loan and Alliance Bernstein took back the property in 2022.

The company could have flipped it to another retail developer, but instead, at the request of the city, decided to develop housing and brought in Georgetown. The city could not buy the mall outright itself because it would cost at least $120 million.

Belzer explained that it would be difficult for any mall owner by itself to make any substantial redevelopment changes to the mall because it would likely require a 100-year lease.

Although the city owns the land, Alliance Bernstein owns the leases on the property, which run through 2065. The new buildings most likely would reach 60 feet tall and include a mix of market-rate, middle-income, low-income and very-low-income housing units.

City Administrator Rebecca Bjork and the consultant both indicated that in order for the project to be a financial success, the developer would need to build a large amount of market-rate housing. It’s unclear how much the rents would be, but downtown would be the most expensive land in Santa Barbara.

“This might be the most consequential decision I make during my time on the council,” Councilman Eric Friedman said. “If we are able to go down this path and redevelop it in this way, we will reinvigorate the city for decades to come.”

It’s early in the process, but the council spitballed ideas and priorities for the development.

Most of the council stressed that the housing should include a substantial number of below-market-rate units, particularly two-bedroom units for people with families.

Other council members expressed the need for the community event space to remain, that the current architectural elements remain, and that the development be open and not closed off on State Street.

Georgetown has brought on national architectural firm Gensler and local architectural firm DMHA.

“I am so excited about the possibilities of what you brought forward,” Councilwoman Meagan Harmon said. “I had all but given up on seeing movement here, certainly during my time in office. It’s incredibly exciting that we are having this conversation.”

Harmon said “the more housing the better” and that she really wanted to see “a mix of income levels.”

Mayor Randy Rowse said it’s important that the city doesn’t spend a whole lot of time “trying to pick out the curtains.”

“We need to rely on the expertise of the consultants who know a lot more about this than we do,” Rowse said.

Paseo Nuevo was built in 1990 and saved the downtown area from a proliferation of surf and T-shirt shops and liquor stores. The rise of online sales and the overall decline of retail, however, have hurt the mall’s popularity.

Rowse said the development could be the light switch that turns on downtown.

“If you have 700 people living downtown and you have reduced the retail spaces by 75% from what it is today, you are going to have people walking, living, working, spending money downtown,” Rowse said. “This is definitely the best economic advantage we can get.”