How do you get millions of dollars in public money for doing nothing?

Just ask Fifth Avenue Landing, a company that’s been paid $4 million since 2008 by the San Diego Convention Center Corporation to do nothing with a plot of land owned by the public.

It’s state property, overseen by the Port of San Diego. But the company leased it decades ago before the Convention Center was even built. And that decision turned out to be very lucrative.

The company was in line to get $14 million this year under the terms of a lease buyout deal brokered in 2010. But then the Convention Center expansion project fell apart. A judge ruled the plan to pay for the expansion illegal and it was ensnared in yet more litigation. That big May 6 balloon payment was missed and the Convention Center’s rights to the property ended.

With the fate of the expansion unknown, public officials are now grappling with whether they should pay the company more money or just wait for its lease of public land to expire in nine years. The site of the expansion itself has also been thrown back into question by some decision-makers.

A Smart Lease

The story of how Fifth Avenue Landing wound up receiving so much to do so little on public property dates back to 1984, when company executives obtained a 40-year lease from the Port of San Diego to operate a marine dredging facility on state tidelands. The land suddenly became prime real estate when the San Diego Convention Center opened next door five years later.

Fast-forward to 2008 and the dredging facility had become a marina. Fifth Avenue Landing had approval to build a 250-room hotel but it couldn’t raise the money. Public officials set their sights on it for what would now be the second expansion of the Convention Center. To explore their options, the Convention Center paid the company $1 million that year.

To get Fifth Avenue Landing owners – namely Ray Carpenter and Art Engel – to forgo their standalone hotel plan, a deal was brokered in 2010 for the Convention Center to gradually take over the company’s land lease with the Port of San Diego.

It wouldn’t come cheap.

With the port’s blessing, San Diego Convention Center officials agreed to pay the port $31,333 a month and Fifth Avenue Landing millions of dollars in the years that followed for control of a four-acre parcel – now home to a parking lot and lawn area – until an expansion could proceed.

The Convention Center paid Fifth Avenue Landing $1 million upfront in 2010, and $2 million more over the next four years in $500,000 increments. A final $13.8 million balloon payment to buy out the final nine years left on Fifth Avenue’s lease was due on May 6 this year.

That is, one public agency was about to buy out the lease of another public agency’s land from the private company that sat on it since 1984.

Money for that payment was supposed to come from the same hotelier-approved hotel tax that was going to finance the $520 million convention expansion. That plan went out the window when an appellate court struck down the financing scheme in August for skipping a public vote. The legal challenge came from local citizen activist Mel Shapiro and San Diegans for Open Government, a nonprofit represented by attorney Cory Briggs.

With no other funding available, May 6 came and went and the Convention Center defaulted on its payment plan.

Now What?

City Council members past and present are criticizing the decision not to buy out the lease from Fifth Avenue Landing. They say it means the dream of a contiguous center expansion is now dead.

Amid the chaos and criticism, negotiations took place to extend the lease.

Convention Center CEO Carol Wallace sent a letter to the Port of San Diego May 22, asking to extend all terms of the old lease for one year. For another $500,000, Convention Center officials would continue to operate the parking lot and lawn for another year, and Fifth Avenue would get a year added onto its port lease, for a new expiration date in 2025.

Before the port could consider the request, however, Convention Center board members retracted the letter after a lengthy public discussion about the property May 28. They also directed staff to stop lease extension negotiations.

While it controlled the land, the Convention Center typically made $600,000 in gross revenue on the property each year, nearly all of it from the ACE Parking lot. Some other revenue trickled in from booked consumer shows and community events.

That’s not enough to cover the annual $375,900 lease payment to the port, the $500,000 payment to Fifth Avenue Landing, nor the $19,000 spent on electrical, water and sewer for the property.

The cost to the Convention Center is one reason board member Gil Cabrera opposed efforts to extend the lease. The other reason: the purchase price tag attached to the lease.

“We are paying a net $250K to $300K for the ability to use this property for another year and we are keeping a $13.5 million price tag on this property should we extend, which I don’t think is what it’s worth anymore by the way, and that’s what I have an issue with across the board.” Cabrera told his colleagues.

San Diego Councilman David Alvarez also urged caution at the May 28 Convention Center board meeting, but for another reason.

“There have been no findings of urgency made to justify this special meeting,” Alvarez said. “The secrecy and lack of transparency lends credence to the allegations that a private developer is extorting a public agency over public lands.”

Carpenter and Engel, the principal owners of Fifth Avenue Landing, both objected to the notion they’ve been taking taxpayers for a ride.

“Ludicrous. Everything is absolutely open and above board and done through open public votes and for any public officials to make that statement makes me question his capabilities,” said Carpenter, who also runs a marine construction company in town. “They’ve had six years to make their decision. I don’t think that’s extortion. I think that’s a business deal.”

The deal might not be making them much money. Inaction has cost them not only parking revenues and potential hotel revenues, but, said Engel, Convention Center payments to the company have been heavily taxed, limiting profits.

Carpenter and Engel, who now separately lease port land for the marina next to the expansion site, say they’ve spent $6 million on improvements, including extending the public promenade and building a ticket booth and public restrooms.

Company officials also say their property price is a steal, and cite the recent sale of a 1-acre lot on 16th Street a mile away from Fifth Avenue Landing for $17.2 million.

Of course, Fifth Avenue Landing doesn’t actually own it. Its lease will expire in 2024.

A Short-Term Deal

Wallace, who’s led the Convention Center since 1991, told the board May 28 that lease extension negotiations were under way “in order to meet our obligations for the contracts we have outstanding.”

The contracts in question, however, have nothing to do with the expansion project but rather more than a dozen summertime events booked on the Fifth Avenue Landing property through September.

The reservations, worth $200,000 in revenue, consist mostly of parking space for the San Diego Symphony Summer Pops outdoor concert series, which takes place at a neighboring public park. A couple other reservations are for Comic-Con.

The booked events were a surprise of multiple Convention Center board members, including Cabrera, Marilyn Hannes and Candace Carroll.

“Today is the first time that I have ever heard or imagined that we have contracted for events on this land,” said Carroll, an attorney. She asked Convention Center attorney Leslie Devaney whether the center would be liable for backing out of those events.

Devaney said liability was still being assessed and declined to comment further.

Wallace emphasized to the board that most of the clients booked were originally Fifth Avenue Landing clients.

Engel wouldn’t say definitively whether his company would honor the Convention Center’s agreements.

“They are not commitments we have… If I was a stakeholder I would be concerned,” he said. “They have to come to us and they have to approach us and we have to strike an agreement with them.”

Briggs, one of the attorneys who successfully challenged the expansion financing and who’s now challenging the project’s Coastal Commission approval on behalf of the San Diego Navy Broadway Complex Coalition, told the convention board: “What you are being asked to do, let’s be frank, is cover somebody else’s screw-up for doing bookings that shouldn’t have been done … A responsible planner wouldn’t have done it, at least after the court ruling last year when you knew you weren’t going forward because you didn’t have the money for it.”

Even convention center board chair Steve Cushman, who approved the 2010 deal as a port commissioner at the time, advised against added public expense given the turn of events.

“It would be totally irresponsible even if we had the money to go spend $13.8 million to take over the remaining nine years of this lease because we have no project,” Cushman said.

The Future of the Pricey Parking Lot

At the end of the May 28 meeting, the Convention Center board voted to stop seeking a lease extension and relinquish the land back to Fifth Avenue Landing.

A new $90,000 study under way due out in August will once again survey Convention Center customers and compare the Fifth Avenue Landing expansion site to alternatives downtown.

With a lease extension off the table, Carpenter and Engel said they plan to finally pursue their plans for a hotel or perhaps a mega Ferris wheel on the waterfront. In the event of a default, the 2010 deal calls for Fifth Avenue Landing to seek port approval for a larger 400-room hotel on the site.

For a hotel to work, the Port of San Diego would need to grant a new long-term lease and they’d need all new hotel approvals. Both men said they’re hopeful that will happen.

“No one would build anything with a nine-year recoup,” Engel said. “We will be seeking an extension comparable to every major hotel on the waterfront,” for up to 66 years. “The port is open to it. They get more revenue associated with (a hotel).”

According to an April 2010 port agenda, a 250-room hotel could generate up to $2.4 million in annual rent to the port. A 500-room hotel tied to the expansion was projected to generate $3.6 million in port rent revenue.

Port officials said that while the space is currently approved for the expansion project with a hotel, such a request would be entertained should one be submitted.

“Personally my first priority is to achieve an expansion and every other consideration is secondary,” said Port Commissioner Bob Nelson. “Having said that, I would want to protect the rights of the tenant within our law and our policies.”

Nelson, who served on the Convention Center board from 2005 through 2010, defended the original lease takeover deal as necessary at the time.

“It was the only deal that could be had. Our option was to spend millions of dollars on planning on property we did not control. If we did that, we would have had no bargaining ability at all,” Nelson said. “Business decisions are never made in a vacuum. Our decision was to proceed with the plans for an expansion or to stop it. We decided to proceed and pursue control of the land.”

Correction: An earlier version of this post mischaracterized Cory Briggs’ involvement with San Diegans for Open Government. He is the group’s attorney. Officially, the group is run by Pedro Quiroz and Richard Lawrence. Here’s a story we published last year revealing how the group works and who’s behind it.