Sports arena redevelopment plan in Midway District is on hold

More than a year into the process, San Diego appears no closer to transforming the 48 acres it owns around Pechanga Arena in the Midway District — or what’s commonly known as the sports arena site.

The city said March 26 that it officially paused negotiations with would-be developer Brookfield Properties in mid-February while awaiting a determination from a state agency that could fundamentally alter how the city disposes of all property going forward.

The recent change in circumstances is just the latest wrinkle in a highly anticipated real estate transaction that has yet to graduate beyond the realm of the conceptual, despite previous commitments to move the deal forward early this year.

At issue now is whether San Diego can lease its sports arena land to Brookfield without first offering the property to affordable-housing developers. That’s because, in November, the California Department of Housing and Community Development said in a draft document that recent amendments to the state’s decades-old Surplus Land Act will apply to property that is leased, not just land offered for sale.

HCD is responsible for enforcing the revised rules, including penalizing with hefty fines cities that run afoul of orders. The implications of the 2020 changes to the Surplus Land Act on the sports arena transaction were first reported by the Voice of San Diego.

“There are still conversations happening between the city and Brookfield; however, pending the outcome of the state Department of Housing and Community Development regulations regarding the Surplus Land Act, formal negotiations have been paused,” San Diego Chief Operating Officer Jay Goldstone said in a statement to The San Diego Union-Tribune.

“Because the transaction was structured as a lease, the previous administration assumed the [Surplus Land Act] did not apply. Based upon HCD draft guidelines, it would appear that the sports arena property would not be exempt from the [Surplus Land Act],” Goldstone added. “We are awaiting the HCD’s final guidelines to provide clarity.”

The holding pattern adds a new layer of uncertainty to a transaction that did not appear to be approaching an agreement even before the surplus land issue escalated into a potential problem.

In February 2020, San Diego issued a formal request for redevelopment proposals for the property with the broader goal of revitalizing the Midway District. The city, under then-Mayor Kevin Faulconer, selected Brookfield Properties to redo the city’s holdings. The developer pitched an all-new sports arena, five acres of public parks, 2,100 housing units and 590,000 square feet of retail space. It made no formal commitment to affordable housing.

At the time, a long-term ground lease was initially anticipated to go before the City Council in the first half of 2021. Deadlines and expectations have shifted substantially with a change in the mayoral administration and other complications. A term sheet, which would spell out how much Brookfield would pay to rent the property and solidify other development commitments, is off the table for the time being.

“The submittal of a term sheet has been put on hold pending the outcome of the [surplus land] issue,” Goldstone said. “It is important for us to have the final guidelines in place so we can continue our negotiations.”

Separately, Zach Adams, the Brookfield executive who was the point person for the sports arena project, left the firm this year. And a lawsuit contesting the legality of Measure E — the voter-approved initiative that allows for buildings more than 30 feet tall in the Midway District — still looms, threatening to limit Brookfield’s ability to reconstruct the sports arena or erect high-rises, as desired.

“The city of San Diego and Brookfield Properties continue to discuss the next steps in the redevelopment opportunity for the sports arena site in the Midway District,” Brookfield executive Ted Lohman said in a statement. “A project of this scale and community impact is a multiyear, collaborative effort that takes time. We are committed to working through project challenges and continue engaging with stakeholders as this process unfolds.”

HCD anticipates releasing its final guidelines for the Surplus Land Act in the next few weeks, agency spokeswoman Alicia Murillo said. A finding that the law does, in fact, apply to properties for lease would have far-reaching implications for government-owned land up and down the state.

In the case of the sports arena site, barring a special exemption, the city would need to issue a notice of availability to affordable-housing developers and negotiate with interested parties before it could resume negotiations with Brookfield.