Transbay Transit Center’s future in doubt after deal falls apart

Construction workers walk across a network of rebar on the second level of the Transbay Transit Center project in San Francisco, Calif. on Tuesday, Sept. 23, 2014. Construction workers walk across a network of rebar on the second level of the Transbay Transit Center project in San Francisco, Calif. on Tuesday, Sept. 23, 2014. Photo: Paul Chinn, The Chronicle Buy photo Photo: Paul Chinn, The Chronicle Image 1 of / 24 Caption Close Transbay Transit Center’s future in doubt after deal falls apart 1 / 24 Back to Gallery

An agreement between San Francisco officials and downtown developers over a proposed tax district collapsed this week, throwing into jeopardy the future of the Transbay Transit Center, the extension of Caltrain downtown and the construction of half a dozen skyscrapers, including one that’s set to be the largest on the West Coast.

That tax district is a key piece of the city’s financing plans for both the Transbay Tower and the $2.6 billion Caltrain extension into the new transit center at First and Mission streets — but it is now likely to become the subject of protracted litigation. On Tuesday, the Board of Supervisors approved the original terms of the tax district, over which developers balked and threatened to sue.

The vote comes two weeks after both sides agreed to the outlines of a deal that would have ensured that the city receive the money it needs for that financing, but would give developers a longer time to pay it by extending the life of the tax district, known as a Mello-Roos district. But as the details were fleshed out and the various private developers examined what the new agreement would mean for their projects, they became more and more wary and, one by one, backed out.

“Everyone inside City Hall was willing to listen to creative ideas that would ensure the city was made whole on all of the prior financial commitments for the Mello-Roos, but at this point, I don’t see a path forward that doesn’t involve legal action,” said Supervisor Mark Farrell, who was instrumental, along with the mayor’s office, in crafting the now-defunct deal. “My hope is still that the developers will come to the table and don’t pursue the legal route.”

But Farrell said that now seems unlikely.

That’s because the Transbay Joint Powers Authority is counting on the tax district to help finance its developments. The agency could issue a maximum of $1.4 billion in bonds against the tax proceeds but expects to issue only $800 million — $200 million of it to finish the Transbay Transit Center, which is to open in late 2017. Another $466 million isearmarked to help pay to extend the Caltrain tracks underground from Fourth and King streets to the transit center, a $2.6 billion project with no firm target completion date.

Matching funds

The money is key to obtaining state and federal dollars that require a local match, Transbay authority officials said. The authority is anticipating at least $1.5 billion in federal and state money for the rail extension project, documents show.

But lawsuits could trip up those financing plans.

On the “slim chance” that the developers prevail “in their attempts to delay the Transbay project,” officials would need to seek alternative funding to complete the transit center, said Adam Alberti, a spokesman for the authority.

“If not successful, the end result could be a lot of fancy, empty towers looking down at a giant hole in the ground where the Transit Center should have been, potentially jeopardizing the developers’ financing and the ability to attract tenants,” Alberti said. “The tax that they now refuse to pay would fund public transit and parks that the developers well know add great value to their buildings. Their opposition to the tax is merely an attempt to shift the cost of this infrastructure to the taxpayers.”

The dispute has its roots in a series of agreements between City Hall and developers that sought to allow the construction of much taller buildings than the area was initially zoned for, in exchange for developers’ taxing themselves through a Mello-Roos district. Those districts are rarely controversial, because they are almost always initiated by and must be approved by property owners.

That district was dreamed up during the boom of 2006 and 2007, when the city was picking a developer to build the Transbay Tower and park next to a new transit center. As the city started talking about increasing heights on that property to 1,200 feet, neighboring property owners began wondering if the district might include other taller buildings.

Once it was clear that there was political support for increased heights, the city started looking at rezoning the whole area, rather than spot-zoning individual parcels — and, said one adviser who has been working with the developers since the beginning, “Everybody understood that the city would ask for more money.”

Halted by recession

Then the recession hit, and everybody breathed a huge sigh of relief that construction had not started.

It wasn’t until 2012 that the Planning Department picked up where it had left off with the rezoning and the formation of the Mello-Roos district. At that time, the city laid out a proposed tax for the district: 0.55 percent of assessed value, or, at the time $3.33 per square foot.

But this year, the property owners — all of whom had bought their parcels after the proposed tax rate had been set — were shocked to see that their financial responsibilities had changed significantly, in part because property values skyrocketed. The tax, for example, jumped from $3.33 per square foot to $5.11.

“The city now says we had no right to rely” on the 2012 figures, said the adviser, who did not want to be named because he was not authorized to speak on the record. “We are talking about a lot of different developers, very sophisticated developers, with experienced analysts — so it’s unlikely that all of them would make the same mistake.”

Alberti and other city officials, however, said the developers have benefited from the city’s agreement to allow them to build higher, more dense buildings, and are now attempted to renege.

“The developers agreed to pay the taxes in exchange for special permission from the city to build much taller buildings than permitted by existing zoning, thereby increasing the developers’ profit,” he said. “Based on the developers’ blatant violation of very clear agreements that they pay the tax in full, any legal challenge should be swiftly rejected by the courts.”

Outcome unclear

Whether the developers would prevail in court remains to be seen.

The city “has sound arguments to support its positions” in court and “may ultimately prevail in litigation,” according to a confidential legal memo from Jesse Smith, the chief assistant city attorney, to Mayor Ed Lee and other city officials that was obtained by The Chronicle.

But the litigation “could take years to resolve,” and even with a court victory, the lawsuit “could have significant practical and legal implications for the city,” Smith wrote in the Sept. 5 memo.

“Depending on the course of the litigation, it could delay or reduce the availability of funding from the Transbay (community facilities district) for the Transbay project,” the memo says, “and in any event the city would not be able to issue bonds until the litigation is finally resolved.”

Supervisor Scott Wiener said the city couldn’t cave just because of a lawsuit threat.

“They were not asking for a token amount of money — this was at a minimum several hundred million dollars,” he said. “And for us to give in to demands that not only damage the project but send the message to developers that if they threaten to file a lawsuit, we’ll let you get out of your obligations — that’s a message we absolutely should not be sending.”

Marisa Lagos, John Coté and J.K. Dineen are San Francisco Chronicle staff writers. E-mail: mlagos@sfchronicle.com, jcote@sfchronicle.com, jdineen@sfchronicle.com Twitter: @mlagos, @johnwcote, @sfjkdineen