San Diego is forced to reexamine sports arena deal in Midway District after state finalizes new guidelines

The city of San Diego’s efforts to lease the 48 acres it owns around Pechanga Arena in the Midway District to developer Brookfield Properties may run afoul of newly finalized state guidelines, leaving the future of the site in limbo.

The guidelines, released April 6 by the California Department of Housing and Community Development, make clear that the Surplus Land Act, as amended by the state Legislature in late 2019, applies to local agency property that is for lease. The interpretation amounts to a heftier blow to the already on-hold sports arena redevelopment deal, as it implies that San Diego should have offered the site to affordable-housing builders before soliciting interest from other developers.

“The city is thoroughly reviewing the final guidelines and will engage with HCD to get clearer assessment on what our options may be regarding the sports arena development,” San Diego’s chief operating officer, Jay Goldstone, said in a statement to The San Diego Union-Tribune. “Those options could include rebidding the property to an affordable-housing developer or receiving an exemption if a certain number of affordable units are built on the site. However, there is no intention to issue a new request for proposals at this time.”

The what-happens-now conundrum comes more than a year after San Diego issued a request for redevelopment proposals for its sports arena property. In August, the city, under then-Mayor Kevin Faulconer, selected Brookfield Properties to redo the site with an all-new sports arena, five acres of public parks, 2,100 housing units and 590,000 square feet of retail space.

As of February, when the city hit the pause button on formal talks with the developer, negotiations were still preliminary and terms remained undecided.

Meanwhile, as the transaction was inching forward, the Department of Housing and Community Development was drafting its rules of enforcement for the Surplus Land Act, which had been expanded by Assembly Bill 1486 to free up more land for affordable housing. The rule book in question, known as the Surplus Land Act Guidelines, defines how cities, counties and other agencies can transfer their real estate assets.

HCD released a draft version in November, signaling for the first time a more stringent application of the law and creating uncertainty around the definition of surplus land.

In the final version, the state agency notes that local government-owned land, whether it’s for sale or lease, must go through a specific disposition process that starts with a formal declaration as to whether the property is surplus land or exempt surplus land. HCD’s rules include special exemptions for small parcels, land advertised for mixed-use projects with at least 25 percent affordable housing, trust lands, short-term leases and deals already under contract, among other things. Otherwise, a local agency must issue a “notice of availability” offering surplus land to a list of affordable-housing developers who have 60 days to respond. Municipalities are then required to conduct a 90-day “good faith” negotiation period with interested parties.

The steps must take place, in order, before a city can solicit bids through a standard procurement process, the guidelines state. However, it’s unclear whether HCD will make exceptions for cities, such as San Diego, that were exploring long-term ground leases before the guidelines were finalized.

“It’s too early to draw any conclusions,” said Ted Lohman of Brookfield Properties. “Brookfield Properties is still reviewing the ... final HCD guidelines to determine next steps. That said, we remain committed to continuing our dialogue with community members, stakeholders and the city, as appropriate.”

Beyond the sports arena property, the state agency’s guidelines have unknown implications for government-owned land across the state that is leased to hotels, theme parks, cultural institutions and other businesses.