City must start over on sports arena deal in Midway District

A proposed ground lease between the city of San Diego and Brookfield Properties that would see the developer remake the city’s sports arena holdings in the Midway District into an entertainment district with housing, retail and public parks has reached an impasse, forcing the city to start the process over.

The California Department of Housing and Community Development, or HCD, informed San Diego’s director of real estate assets, Penny Maus, on June 16 that the deal being contemplated with Brookfield would, without corrective action, run afoul of the Surplus Land Act, which was amended by the state Legislature in late 2019 to ensure that excess government-owned land is made available for affordable housing. The formal communication, which implies the city must start the disposition process over or face millions of dollars in fines, appears to be the final blow for a deal that had been on life support for months.

“I am committed to work quickly to restart this process in compliance with the Surplus Land Act,” Mayor Todd Gloria said in a statement. “It is critical that we do not squander this once-in-a-generation opportunity to build a modern arena through a process that prioritizes the affordable housing our region desperately needs.”

Brookfield did not immediately respond to a request for comment.

The mayor, who placed the blame on the previous administration, said he expects to take an item before the City Council in July to restart the process. That means it’s the end of the road for a redevelopment plan that started with a request for proposals in February 2020.

Under then-Mayor Kevin Faulconer, the city had posited a long-term ground lease of the 48 acres it owns around Pechanga Arena with an eye toward converting the Midway District into a more desirable neighborhood. The holdings are composed of six contiguous parcels, the largest being the 34 acres occupied by the sports arena and its parking lot. The plots are north of San Diego International Airport, south of Mission Bay and bounded by Kurtz Street on the north and Sports Arena Boulevard on the south.

Brookfield was selected to build an all-new sports arena alongside five acres of public parks, 2,100 housing units and 590,000 square feet of retail space. No contract was signed. At the time, the developer made no formal commitment to build subsidized housing units. The firm has never publicly stated what percentage of units would be income-restricted.

The latest turn of events represents a letter-of-the-law reading of the final guidelines for the amended Surplus Land Act, as published by Housing and Community Development in April. The state agency’s rules mandate that local agency land, offered for sale or lease, must be disposed of in a prescribed manner.

The local government must first make a formal declaration as to whether the property is surplus land or exempt surplus land. Then the local agency must issue what’s called a “notice of availability” for surplus land, an act that gives affordable-housing developers 60 days to respond with their interest. Finally, the municipality must go through a 90-day negotiation period with any interested parties before it can move on and solicit general interest.

In short, per the guidelines, San Diego should have offered the Midway District site to affordable-housing builders before garnering interest from other developers. While HCD provides special exemptions — small parcels, deed-restricted land advertised for mixed-use projects with at least 25 percent affordable housing, trust lands, short-term leases and deals already under contract — the sports arena property is not eligible for a pass.

“HCD has come to the preliminary conclusion that the current version of the Surplus Land Act (SLA) applies to the proposed transaction and the city may be in violation of the SLA,” wrote Sasha Wisotsky Kergan, head of the agency’s housing policy division.

In the letter delivered to the city June 16 and obtained by The San Diego Union-Tribune, HCD pointed to three areas where San Diego failed to comply with the state law: The city did not make a formal declaration as to whether the property was surplus land or exempt surplus land, it did not properly advertise the availability of the property, and the proposed project does not include enough affordable-housing units.

The city must take “corrective action” to fix each error, Wisotsky Kergan said. Specifically, to remedy the affordable-housing issue, the city would need to record a covenant requiring at least 25 percent of the total number of units to be developed at affordable-housing cost or affordable rent to lower-income households, the letter states.

The language implies that San Diego would risk a hefty fine — 30 percent of the final sale price of the land for a first-time violation, per the state agency’s rule book — if it didn’t start the process over.

Pechanga Arena has served as the longtime home of the San Diego Gulls and San Diego Sockers. The 16,000-seat venue opened in 1966 and, before the COVID-19 pandemic, hosted about 145 sports and entertainment events per year.