Downtown S.F. developers prepared to sue city over tax district S.F. says developers near Transbay Terminal must pitch in to help Caltrain

As work on the Transbay Terminal continues, developers of nearby properties are balking at the tax rate they would pay in a proposed Transbay Transit Community Benefits District. As work on the Transbay Terminal continues, developers of nearby properties are balking at the tax rate they would pay in a proposed Transbay Transit Community Benefits District. Photo: James Tensuan, The Chronicle Photo: James Tensuan, The Chronicle Image 1 of / 1 Caption Close Downtown S.F. developers prepared to sue city over tax district 1 / 1 Back to Gallery

Downtown property owners say they are preparing to sue the city over a proposed tax district that's a key part of paying for the extension of Caltrain into the $4.5 billion Transbay Transit Center at First and Mission streets.

The threat of a lawsuit comes as the Board of Supervisors on Tuesday is set to establish the Transbay Transit Community Benefits District, which could generate $1.4 billion for the Bay Area's biggest mass transit project since the construction of BART in the 1960s.

The property owners, which include the developers of the Salesforce Tower under construction next to the transit center, are pressuring the city to postpone the vote. If the board goes ahead and approves the formation of the district at its meeting, the developers will file a lawsuit, according to sources familiar with the talks.

"We are engaged in discussions with the city regarding a continuance that would provide the needed time to be able to continue to engage in discussions with a goal of reaching an agreement that is fair to all parties, and most importantly, allows the project to stay on track," said political consultant Chris Lehane, the spokesman for the property owners.

The property owners - all developers with plans to raise large towers around the transit center - argue that the city has been increasing the amount of property taxes they would have to pay as members of the community benefit district to help make up for cost overruns on the center. The city says the property owners are simply victims of San Francisco's booming economy: Property values have gone through the roof, particularly near mass transit.

The city and the developers have been negotiating for more than a year on a compromise but have been unable to work out differences.

'Huge fork in the road'

"This is a huge fork in the road for San Francisco," said Gabriel Metcalf, executive director of the urban think tank SPUR, which works for public transit and smart growth. "We are trying to do the right thing, which is to focus growth around transit and use the growth to help pay for the transit. But it's really tricky getting that right. If we get it wrong, the Transbay Terminal and the downtown extension of Caltrain could blow up in our faces."

The developers include Boston Properties, owner of Embarcadero Center; TMG Partners, San Francisco's biggest local developer and builder of Riverbed Technology's new headquarters at 680 Folsom St.; and Hines, which developed 101 California and 560 Mission. Boston Properties and Hines are developing the Salesforce Tower, which at 61 stories will be the city's tallest building.

They say they bought properties in the area based on tax rates - 0.55 percent of value - that were part of the Transbay District "implementation document" approved in 2012. Mostly because of increased value, the proposed taxes have doubled since then, which they call an effort by the city to "pass on cost overruns to developers."

Supervisor Scott Wiener, a generally pro-development lawmaker, said the city should not be "bullied by the threat of a lawsuit."

"These developers received massive zoning benefits in terms of up-zoning that has helped explode the value of their properties," Wiener said. "These properties have just exploded in value because of the up-zoning, and the point of the assessment district is to capture a portion of that value."

The "up-zoning" refers to taller buildings being allowed in the transit district.

'We shouldn't cave in'

"People can always file lawsuits and use that as leverage, but we shouldn't cave in to that threat," Wiener said. "Every dollar that we reduce the size of the (tax district) is a dollar that does not go toward the downtown (Caltrain) extension. That is the project that will be defunded if we back down."

He said that the property owners are just being asked to pay their fair share.

Money raised in the special tax district, known as a Mello-Roos district after the state legislators who authored a state law passed in 1982, is just one piece of the funding package for the $2.6 billion downtown extension that would take Caltrain, and possibly someday high-speed rail, to the Transbay Transit Center. But it's a big piece, said Adam Alberti, a spokesman for the Transbay Joint Powers Authority.

"It is a critical part of the funding that was anticipated, and it is the bedrock of the funding package along with land sales," he said. "Every dollar we take out is a dollar less that we have for the extension."

The funding plan for the 1.3-mile subterranean extension from Fourth and Townsend to the terminal's basement train box counts on winning $650 million in federal funding, using $639 million in already committed funding and $1.3 billion in other city and regional funds.

Cost overruns

But cost overruns on the terminal will probably eat away at the previously committed money, and the federal "New Starts" funding, which is highly competitive, requires a local contribution, likely to come from Mello-Roos revenues and land.

"The city believes that the special tax rates that the developers are being asked to pay are more than fair considering they are taking advantage of a very significant increase in height limits for their buildings offered under the transit center district plan," said Christine Falvey, Mayor Ed Lee's spokeswoman.

In June, The Chronicle reported that cost overruns would delay the 2017 opening of the $37 million Transbay Transit Center Rooftop Park. The news caused an uproar, prompting staffers from Lee's administration to pledge that the 5.4-acre park would be open on time.

"We would like to find a different source of funding - that is what we are working on," Ken Rich, development director from the Mayor's Office of Economic and Workforce Development, said at the time.

Chronicle staff writers Michael Cabanatuan and Marisa Lagos contributed to this report.