After nearly 15 hours of discussion over three days, the commission voted 6-0 against the development agreement at Thursday’s meeting.
“I don’t believe the city should extend its lack of control over how the property is used for another 28 years, especially without being meaningfully compensated and measurably protected,” planning commissioner Lesley Wiscomb said.
City planners and Paseo Nuevo Owners LLC have been working on an agreement for the iconic downtown property for the past three years.
What once was perceived as a slam-dunk approval fell apart over the three meetings as members of the public and planning commissioners consistently poked holes in the pact.
The mall’s lease with the city began in 1990 and extends through 2065. As part of the development agreement, 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 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 decline of in-person retail, the COVID-19 pandemic and the closing of State Street to cars dramatically disrupted everything the two entities discussed. There’s both a philosophical and economical debate over whether the mall, at 739 State St., should continue 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.
“When the property was being developed and the mall’s ground lease was being negotiated, the city was in a difficult financial position and was forced to accept a number of unfavorable lease terms,” Wiscomb said. “We have abided by these onerous terms the past 30 years, and we will have to live with them for another 45. I don’t believe we should perpetuate this lopsided agreement by giving PNO the option to extend the lease for an additional 28 years.”
The development agreement considered only the open-air mall, not Nordstrom and the Ortega building. Members of the commission and community members said they want to see the mall build housing.
Pacific Retail Capital Partners, however, said the commission is shortsighted.
“We are extremely disappointed in the Planning Commission’s decision,” said Steve Plenge, managing principal of Pacific Retail Capital Partners. “To that end, we are appealing this decision and will work with the city staff and the City Council to finalize the development agreement allowing us to continue our commitment to Santa Barbara. We kept our end of the deal and just completed our redevelopment project, investing over $20 million of our private funds in the property. We hope the city will embrace the commitment we have shown to the community by working diligently to revitalize downtown.”
Plenge said Paseo Nuevo will bring long-term benefits to the city.
“We believe the Planning Commission was improperly influenced by the current environment and was shortsighted and dismissive on the city’s long-term benefits set forth in the development agreement,” he said. “As it stands, our current ground lease developed in 1989 extends 45 years, and we have and will continue to provide shopping, dining and mixed-use experiences with a balanced selection of local, regional and national tenants.”
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 also would have the one-time right to a 28-year lease term extension when the current lease runs out in 2065.
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 also would agree to pay the city $60,000 in recycling annually.
The agreement, however, does not include any plans for the former Macy’s building, now called the Ortega Building, and the now vacant Nordstrom building, which the mall does not own.
“One of the significant casualties of the pandemic has been the in-person retail shopping,” Wiscomb said. “Even before COVID, e-commerce’s penetration into retail sales was accelerating.
“The redevelopment of Paseo Nuevo mall, including the former Macy’s and Nordstrom building, should be integrated into a comprehensive downtown plan. It just can’t address the open-air mall in a vacuum, but should at a minimum include the Ortega Building, Macy’s, Nordstrom and the Paseo Nuevo mall, and incorporate future plans for State Street and De la Guerra Plaza revitalization.
“Parts of the plan should not be considered outside of an integrated plan that includes all major components. Just the mall itself in this proposed development agreement is not a good idea.”
Wiscomb led the effort to reject the terms of the agreement. She was upset that Pacific Retail had now shared its redevelopment plan that it shared with investment management firm AllianceBernstein, in seeking a $125.5 million loan. She said the investment firm valued the mall and the Nordstrom and Ortega buildings as worth $173 million.
The Planning Commission encouraged the mall owners to work with the City Council State Street subcommittee to make the terms of the agreement more favorable to the city.
In addition, members said, the city needs to collect more in rent.
“The development agreement does not provide adequate consideration to the city in exchange for the lessee’s right to extend the lease for an additional 28 years,” Wiscomb said. “Any extension should include a minimum percentage or market rate payment for the entire 28-year lease extension period.”
Commissioner and former Santa Barbara Mayor Sheila Lodge agreed.
“The city must get adequate compensation out of this, and the proposed development agreement does not provide it.” Lodge said. “This is just a losing deal for the city.”
Commissioner Jay Higgins apologized to the mall owners for the delay, but said he, too, could not approve the agreement.
Plenge said they will continue to pursue a development agreement.
“As the City Council understands, we have 45 years left on our current ground lease for Paseo Nuevo, regardless of the Planning Commission’s comments,” Plenge said. “We look forward to working with the City Council in moving the DA to conclusion and further enhancing Santa Barbara’s downtown core.”