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June 10, 2014

Week in Review: 5/26 - 5/30

• Developer Cypress Equities will soon begin construction on a $150 million San Francisco retail development on the south side of Market between Fifth and Sixth streets. Cypress will start work on the 250,000-square-foot development, named Market Street Place, in September, despite not yet having tenants signed for the space. Cypress had originally pursued value-based retailers such as Target and Nordstrom Rack, but is now looking at more-upscale options. The firm had considered switching to housing for the site, but the politics that would have been involved, along with strong retail demand, kept the retail plan on track. The development has drawn interest from clothing, grocery and other stores, as well as for entertainment use. (SF Chronicle)
• The state Assembly on Thursday passed a bill that would narrow the definition of an ownership change for property reassessments under Proposition 13. Assembly Bill 2372 represents a compromise between pro-business interest groups and Democrats who wanted to close a perceived loophole in the law. The bill by Assemblyman Tom Ammiano, a San Francisco Democrat, would trigger a reassessment when at least 90 percent of property ownership changes in a three-year period. (SF Biz Times)
• Developer Tishman Speyer is negotiating with the city for the final parcel it needs to put together a 400-unit condo highrise project at 100 Folsom St. San Francisco’s redevelopment commissioners will get a first long look next week at negotiations with the New York-based developer over land for a proposed project in the South of Market neighborhood. Tishman acquired a multi-parcel residential development site at 100 Folsom in June 2013 for a project expected to include about 400 units. But to develop the site, Tishman Speyer needs the publicly owned parcel that makes up about 60 percent of that block. The Commission on Community Investment and Infrastructure will meet in closed session Tuesday to discuss negotiations over price and terms with Tishman Speyer about the parcel at 235 Main St. and give instructions to staff on how to proceed. It’s the first time the commission has met to discuss the property, said Mike Grisso, a senior project manager at San Francisco Office of Community Investment and Infrastructure (OCII). Grisso said he could not discuss the ongoing negotiations or any details that will be presented to the commissioners. Grisso said last June that the agency had always intended to negotiate the sale of the parcel with whoever bought the rest of the block because the it should be redeveloped as a whole. OCII is the successor to San Francisco Redevelopment Agency, which was one of the redevelopment agencies wiped out by a 2011 change in California law. Tishman Speyer built the two-tower Infinity project at 300 Spear St. and broke ground last year on Lumina, a $620 million, 665-unit complex with two highrise towers that is being built with partner China Vanke at 201 Folsom St. The surface parking lot Tishman Speyer bought in the 100 block of Folsom could hold a 300-foot tower and two podium buildings of 85 feet and 50 feet. The firm also is developing or manages office properties in San Francisco, including the 30-story office tower at 595 Market Street and the 450,000-square-foot office tower rising at 222 Second St. that will be occupied by LinkedIn. (SF Biz Times)
• San Francisco Mayor Ed Lee today offered up Seawall Lot 330 near the Bay Bridge as San Francisco's proposed location for Lucas' $700 million cultural arts museum, highlighting San Francisco's beauty and technological prowess, and implicitly taking a few swipes at rival Chicago. San Francisco officials are battling with Chicago and Mayor Rahm Emanuel for the museum, after the Presidio Trust nixed Lucas' proposal to put his $1 billion cultural arts and movie memorabilia collection in the Presidio. Chicago has offered a site near Soldier Field. (SF Biz Times)
• San Francisco-based Flynn Restaurant Group L.P., the country’s largest franchisee, closed this week on a $300 million strategic investment from a Canadian teachers’ pension fund, a deal that brings the company’s value to more than $1 billion. The restaurant group, which operates 470 Applebee’s restaurants and 170 Taco Bell restaurants, is the first domestic franchisee to be valued at more than $1 billion, and having been the first to bring private equity into the franchise restaurant field, it’s also the first to make a successful exit from private equity ownership, said Chairman and CEO Greg Flynn. The Ontario Teachers’ Pension Plan now holds more than a 50-percent stake in the group, and in conjunction with members of the Flynn Restaurant Group management team, has purchased all the interests held by private equity firms Goldman Sachs Group Inc. and Weston Presidio. The pension plan’s investment provides capital without the issues of timing that often come with private equity funding, Flynn said. And while usually private equity is the only way to go in buying multiple franchises of a brand like Taco Bell, “many franchisers are wary of private equity,” he said. The company’s exit out of a private equity partnership could be the start of a new evolution in restaurant franchise financing, Flynn said. “We're the only ones who have done it so far,” Flynn said. “And it could be the vanguard of the next wave of franchise finance.” The investment deal also gives the Flynn group the freedom to grow. “We’re not limited by financial resources as a result of this investment and of our robust cash-generated platform,” Flynn said. “Growth will be a function of the opportunities we can discover and execute.” (SF Biz Times)
• The San Francisco Giants want to build a entirely new neighborhood on a parking lot across from AT&T Park. But before that grand project takes shape, the club is starting small. The team is finalizing plans for a mini "pop-up village" featuring a coffee and street food patio, a shopping area, open space, a beer garden and deck to be constructed near Terry A. Francois Boulevard and Third Street. The team will work with SFMade, a trade group that promotes city-based manufacturing companies, and La Cocina, which supports emerging chefs, to line up companies and food offerings in the pop-up village. The entire project would take up about 3 percent — or about 70 parking spaces — from the parking lot that the team leases from the Port of San Francisco for baseball games. The as-yet-unnamed project would be open year-round and is meant to cater to the burgeoning Mission Bay neighborhood. The mix of retail and food offerings, while temporary, could “inform the longer term project” the Giants are envisioning for the parking lot, also known as Seawall Lot 337, said Phil Williamson, a project manager for the San Francisco Port, which is the Giants’ landlord and owner of the site. A similar retail pop-up called Proxy sprouted in Hayes Valley several years ago on the site of a future housing development and has been incredibly successful. Developer Forest City has experimented with pop-up events and retail on the site of its future project at Pier 70, not far from the Giants' site. The Giants' temporary pop-up village is “in keeping with our desire to be cutting edge and innovative,” said Jack Bair, the team’s general counsel. The village’s design is in flux, but it will be constructed largely of metal shipping containers. While the pop-up village could draw Mission Bay residents and Giants fans, the team is proposing a much more significant development on the parking lot in coming years. The team has proposed building a new neighborhood spread across 3.6 million square feet. Called Mission Rock, it would have more than 8 acres of open space, housing, office space and shopping areas. It would also incorporate Pier 48, a 200,000-square-foot warehouse space that juts out from the parking lot. Anchor Steam, the brewer based in San Francisco’s Potrero Hill neighborhood, has agreed to renovate the pier for brewing and will also open a museum, restaurant and tasting room there. The larger project is expected to be built in phases, starting in 2015 at the earliest, and finishing in 2021. The Port of San Francisco, the Giants’ landlord, has given its approval for the smaller, activation plan. The agreement runs into 2017. The village likely will not open until the Giants’ start the next baseball season in April 2015. The club said it wanted time to line up merchants and to further refine the village’s design. (SF Biz Times)
• Three years after bursting on the scene as San Francisco’s most politically connected real estate startup, Strada Investment has transformed into a mature, full-service firm. It has tied up and sold a housing site in Upper Market; rehabbed, leased up and sold a brick and timber warehouse on Berkeley’s Fourth Street. The firm has also been a key consultant on three of San Francisco’s most high-profile developments: the proposed Warriors arena at Pier 32, the redevelopment of the San Francisco Chronicle property at Fifth and Mission streets, and the 2 million-square-foot buildout of dilapidated waterfront land on historic Pier 70. It repositioned a SoMa warehouse and took a lead in repositioning of a Mid-Market building that eventually became home to Uber and Square. Now Strada is gearing up to undertake its biggest development project yet. In July Strada finished the entitlements on Block 1, amending the Mission Bay redevelopment plan to allow for 350 residential units, a 250-key hotel and 25,000 square feet of retail. The 12-person firm is in advanced negotiations to sell off the hotel portion of the project and plans to start construction on the housing in 2014. (SF Biz Times)
• San Francisco is close to finalizing a deal to rehabilitate a collection of battered buildings on the waterfront, transforming them into new space for offices, manufacturers and artists. The San Francisco Port Commission, as soon as May 13, will be asked to approve a $100 million lease and development agreement with Orton Development Inc. to convert six buildings along 20th Street south of Mission Bay. The area is considered the most historically important cluster of buildings in the oldest working civilian shipyard in the United States. Approval from the Board of Supervisors, which is also required, could come as soon as June, which would allow ground-breaking in August. The Pier 70 buildings, formerly the headquarters of Union Iron Works and then Bethlehem Steel, were built between 1885 and 1941. Pier 70 still has an active ship repair business in its northeast corner The rehabilitation project at Pier 70 will signal the start of the development for San Francisco’s next frontier: a 2.5 million-square-foot waterfront development that will create space for office, biotech, arts, retail, entertainment and “modern makers” or cottage industries. The Orton Development work represents a positive economic move for the Port of San Francisco, which controls 7-1/2 miles along the city’s waterfront. The port, which makes most of its money as a landlord, has had few successes with major redevelopment projects along its holdings south of the Bay Bridge. Indeed, discussions about how to renovate Pier 70 date back more than a decade. Working in parallel with Orton on Pier 70 will be Forest City, which is planning about 2 million square feet of ground-up development. Forest City might be more than two years away from breaking ground because of the approvals it needs before work can begin. Orton Development, upon securing approval, said it will begin an 18 month construction project to restore the buildings, making sure they are outfitted with all necessary seismic and infrastructure improvements to make them habitable. The transformation promises to bring new life to a corner of San Francisco that is uninviting now. The project will be paid for through a combination of Orton’s equity, a construction loan, a City of San Francisco seismic safety loan program, historic tax credits and a $1.5 million port equity investment that had been previously designated for seismic work at the site, Madsen said. (SF Biz Times)
• The former Standard Oil building at 225Bush Street in San Francisco is changing hands for the second time in two years, trading deep-pocketed German investors for deep-pocketed Chinese investors in a deal that values the tower at $350 million or $600 a square foot. It’s the biggest San Francisco office deal since 2012, parties to the deal said. That’s a hefty markup in just 19 months. A partnership of Germany’s Seb Immobilien Investment, along with GEM Realty Capital and San Francisco’s Flynn Properties, acquired the 583,000-square-foot property in 2012 for $212 million. Seb Immobilien and GEM sold their entire stakes to Kylli Inc., a Chinese development firm that’s backed by Genzon Group and its principal, making its first U.S. real estate investment. Flynn also sold part of its 30 percent stake to Kylli, but retains a substantial minority ownership and will continue to manage and serve as leasing agent for the 22-story office tower. When Flynn, GEM and the Germans bought the property on Bush just north of Market Street that year, it went for $360 a square foot and tenants weren’t exactly busting down the doors to get in, said Greg Flynn, founder and president of Flynn Properties. “We’ve taken this building from 68 percent leased to 99 percent leased in the space of 19 months and positioned it as one of the premier creative-space technology buildings in the city,” Flynn said. The steel-framed tower faced with brick, granite and terra cotta was built in 1922 and served as headquarters of the oil company now known as Chevron for more than 50 years. It’s considered a historically significant structure and listed at No. 25 on the San Francisco Business Times’ Top 25 List of largest stand-alone office buildings in the city. (SF Biz Times)
• San Francisco’s airport has begun looking for a lodging company to operate a 4-star hotel it wants to build on its property. San Francisco International has issued a request for proposals for hoteliers able to manage high-end properties. The airport plans to build and own the $160 million hotel, but SFO will hire an outside company to run the 400-room facility day-to-day. SFO said it expects most of the people staying at the new hotel — about 60 percent — will be well-heeled business people. Meetings could make up another 30 percent of the hotel’s business with approximately another 10 percent comprised of leisure travelers. Responses to the request for proposal are due Aug. 8. SFO has said it wants the hotel open for business by 2018. The site for the new hotel is a small triangle of land bounded by South McDonnell Road, Interstate 101 and the off-ramp from 101 to the airport. The site, currently a dirt lot that soon will be used for overflow parking, was occupied by a Hilton Hotel until the mid-1990s, when it was razed to allow for construction of the airport’s $2.85 billion international terminal. When that Hilton hotel was torn down, SFO officials had hoped to build another hotel on the site. But a series of setbacks — the dot-com bust, the Sept. 11, 2001 attacks and the SARS outbreak — put those plans on ice. SFO’s rising passenger traffic levels gave officials there the confidence that it was the right time to build a hotel. SFO set a new all-time record for passenger traffic in 2013 with 45 million passengers. That figure surpassed the previous record of 44.5 million passengers set in 2012 and represents the third consecutive year of record-breaking traffic levels at SFO. (SF Biz Times)
• Lennar may begin work on its planned Treasure Island development earlier than expected. The developer, along with Wilson Meany, may be able to start work on the redevelopment plan after the eastern part of the island and Yerba Buena Island are transferred to the city later this year. Lennar is planning to build 8,000 homes in the project, 25 percent of them affordable-housing. Currently the Navy is preparing to conduct radiation-contamination tests on the island. The Navy and state agencies are checking to ensure that cleanup of the island has been effective. Lennar is also still facing opposition from citizens concerned over the environmental and traffic impacts of the development. (SF Chronicle)
• San Francisco’s Market Street is getting a makeover — and city planners are using crowd sourcing to find a new aesthetic for the busy thoroughfare. The planning department is working with the Yerba Buena Center for the Arts to hold the Market Street Prototyping Festival, asking people to submit their ideas on how to reshape 36 blocks of Market Street. For three days in October more than a mile of Market Street will become a testing ground for new ideas to improve the public space along Market Street. Autodesk, the Exploratorium, Gehl Studio, California College of the Arts and The Studio for Urban Projects are among the design leaders participating in the festival. As many as 50 projects will be chosen from the submissions. Selected projects will work with community members and urban designers to implement their designs. City officials estimate that the prototype designs will be seen by more than 300,000 people, who will provide feedback to help the planning department identify the ideas for permanent installation on Market Street. Proposals can be submitted through July 3. The link to submit and get more information is at marketstreetprototyping.org. Any person, business or nonprofit can submit a proposal. The only requirement is that the idea must improve public space in a way that engages passersby and encourages them to think differently about the city’s streets and open spaces. (SF Biz Times)
• After failing to pass Wednesday, a bill that would let San Francisco prohibit landlords from using the Ellis Act to evict tenants within five years of buying a property made it off the state Senate floor after Sen. Mark Leno promised amendments to mollify legislators who had voted "no." Leno, D-San Francisco, secured a 21-13 vote for SB 1439, with only Democrats in support and a mix of Democrats and Republicans against. He picked up the votes he needed for passage after agreeing to exempt owners of up to two properties, although a cap on the size of those properties is yet to be determined. In addition, Leno agreed to consider including sunset language in the bill. The legislation will now go to the Assembly where it will receive committee consideration. If it passes off the Assembly floor, it will come back to the Senate for another vote. Leno introduced the bill saying that San Francisco is in a “crisis” because evictions are on the rise as real estate prices have skyrocketed, and speculators have allegedly turned apartment buildings into tourist rentals via short-term rental websites like Airbnb and VRBO. The bill would allow landlords to use their Ellis Act rights only once, and creates penalties for violations of its provisions. Enacted in 1985, the Ellis Act allows landlords to evict all tenants from a building if they want to exit the rental business. Supporters include some prominent technology companies and backers, including Salesforce.com, investor Ron Conway and San Francisco Mayor Ed Lee. Opponents include the California Association of Realtors and the California Chamber of Commerce, which argue that the bill would enable a local government to force people to keep operating businesses even while losing money. (SF Biz Times)
• In downtown Palo Alto, new development is so rare any project is likely to command sky-high prices. That makes the small, mixed-use project under construction at 611 Cowper St. near Caltrain a good bet for a sticker price near the top of the market. While it's still fairly tough to get loans for mixed-use condo projects — let alone those that combine office condos with residential — Jeff Wilcox of Newmark Realty Capital managed to score a $24 million loan and construction has begun. The sale of the 5,000-square foot residential condo, in turn, would produce a big chunk of cash up front to pay down the construction loan and make it worth the extra time and effort to do the more complex development, said Stephen Reller, a principal with developer R & M Properties. R & M plans to lease the 30,000-square-foot offices on the first three floors of the building and already has a tenant lined up, said Reller, who would not identify the tenant. “We’re hoping to get $1,500 a square foot or more for the residential portion, but it depends on the market and when it’s finished,” Reller said. Neither Wilcox nor Reller would discuss financial specifics, but $24 million for a 35,000-square-foot project works out to a loan of about $685 per square foot. Commercial projects typically cover only about 70 percent of costs through financing, so a $24 million construction loan might mean the total cost is approaching $35 million or roughly $1,000 per square foot. Reller said R & M is borrowing slightly more than 75 percent, but selling the top-floor unit could produce immediate income to reduce the debt. (SF Biz Times)
• Bolstered by the Sacramento City Council's approval of a new downtown arena, the operator of planned ancillary development nearby, JMA Ventures, said the next focus is giving more flesh to those bones. “Obviously, we’re super excited by how fast the project has been able to achieve so much,” said Todd Chapman, president of San Francisco-based JMA Ventures, which already manages the remaining half of Downtown Plaza to the west. Chapman said his company has already started talking with consultants and designers working with the Sacramento Kings to give a sense of cohesion among all aspects of the development, which for JMA includes 1.5 million square feet of commercial space. While it’s too soon to say when more details of that development will be known, Chapman said JMA has the same goal as the team for what will open alongside the arena in fall 2016: A 250-room hotel near the corner of 5th and J streets, and 125,000 square feet of retail space. In turn, Chapman said, he’d acknowledge there’s some urgency to get going on design and construction parameters if that development is going to be built on a parallel track to the arena, which is scheduled to formally begin construction in November. “This project has moved at a pace you don’t see too often in California,” he said. “It’s certainly a very complex site we’ll be working in, and we’ll be looking for ways to coordinate that.” (Sac Biz Journal)
• The Bay Area continues to lead the state’s economic recovery and buttresses the government city of Sacramento with tax revenue and the Central Valley with lower cost distribution centers linked to technology companies, according to new findings from the Business Forecasting Center at the University of the Pacific. The Bay Area has been “on a remarkable run,” said center director Jeff Michael. The Central Valley is benefiting from some migration to the area, “both in people as commuters as well as some businesses that are sensitive to those costs. …There definitely has been some movement of those centers into the inland areas that are serving the Bay Area market.” For example, retail giant Amazon began hiring last year for its distribution facility in Patterson, which is part of the Modesto area. On the whole, California is in its third year of a five-year recovery, Michael said. The state is expected to reach its pre-recession employment number nearly a year earlier than previously projected, according to the report, and the statewide unemployment rate has already fallen to below 8 percent for the first time since 2008. The business forecasting center expects that California’s unemployment rate will remain above 7 percent throughout 2014 and most of 2015 before dropping below 7 percent at the end of next year. The rate is projected to finally reach 6 percent at the end of 2016. The drought could decrease employment by about 1 percent in the Central Valley this year, slowing but not reversing the fledging economic improvement. Overall job growth in the Valley is expected to reach or exceed 2 percent this year, less than the 3 percent improvement that occurred in 2013. (Sac Biz Journal)
• More housing near West Sacramento’s riverfront is being proposed, this time with a single-family home project similar to the nearby Landmark Lofts development. Next week, the city of West Sacramento's planning commission will get its first look at what's only for now called “4th Street Subdivision,” with a total of 22 units, according to city associate planner Kathy Allen. Of those, 12 would be single family and the rest what she called “half-plexes,” or about half the size of a traditional duplex. Project neighbors have received planning documents showing most of the project would be along 4th Street south of B and north of C streets, with an alley on either side. One portion of the project would extend as far north as 5th Street, though existing development would be to the east and west. The project developer is listed as First Capital Community in Sacramento, which did not have any contact information available. Allen said the planning commission hearing is meant to get feedback from both commissioners and the public before city planners come up with a formal recommendation for action. “Because it’s still under review, I don’t want to say it’s going to be recommended,” she said. “But it does look like it’s in keeping with the city’s plans for the area.” (Sac Biz Journal)
• Sacramento’s B Street Theatre got unanimous approval for its $8.4 million long-term loan from the California Infrastructure and Economic Development Bank. The theater company will use the loan to begin construction of its new midtown theater this fall. Terms of the note are favorable to the theater, including a 30-year term. The theater will repay the loan with seat surcharges on the two stages it will build. The 45,000 square-foot complex at the corner of 27th Street and Capitol Avenue would have two theaters. Plans call for a 270-seat thrust-style theater and a 380-seat proscenium theater, both of which would have fixed seats. B Street has been planning the move from its current cramped location at 27th and B Streets for a decade. The California Infrastructure and Economic Development Bank, or I-Bank, only recently was authorized to make loans to non-profit groups. It previously only made loans to public agencies and districts. The I-Bank is an economic development program of the Governor’s Office of Business and Economic Development, popularly known as GO-Biz. The I-Bank programs are meant to spur economic development. The theater company has raised commitments of $18.3 million toward the goal of $22 million to build the new venue. The new location is a block from Sutter’s Fort State Historic Park and a block from Sutter General Hospital. B Street will retain its venue at 27th and B streets for storage, offices and other uses. That venue is just down the levee from the main line of the Union Pacific Railroad. (Sac Biz Journal)
• Like his character’s motto on Star Trek, Mr. Spock to some extent prospered with a Lake Tahoe home he sold earlier this month. Initially listed at $5 million, the home formerly owned by actor Leonard Nimoy on 2930 Lake Terrace Drive in Tahoe City sold for $4.788 million to a couple from the Bay Area who will use it as a second home. Bill Dietz, who worked on the sale on behalf of the buyer, said his understanding was Nimoy and his wife weren’t spending as much time at the 4,000-square-foot home as they used to, so it was logical, as Spock might say, to pursue a sale. “I believe Mr. Nimoy is now in his 80s, and there comes a point where living in the mountains isn’t as easy for everyone anymore,” said Dietz, president of real estate for Tahoe Luxury Properties. Built in 1979, the house has four bedrooms and four bathrooms and was assessed at $1.38 million last year, according to online records. It was not immediately clear how long Nimoy, 83, had owned the home, but the actor acknowledged recently he was suffering from chronic obstructive pulmonary disease, which can be exacerbated by high altitudes. Dietz said his clients, identified in public records as Mario DiPrisco and Jennifer DiPrisco of Lafayette, had been looking for Tahoe homes for some time and liked the Nimoy home as soon as they saw it, before they knew of its famous owner. (Sac Biz Journal)