Falling for the Gap

San Francisco gave away the store to help The Gap Inc. and its politically connected chairman build an upscale headquarters with a bay view. But more than $18 million in subsidies apparently won't bring the city anything it couldn't have had free.

In fact, The Gap has made disclosures to the U.S. Securities and Exchange Commission (SEC) that suggest the firm is actually expanding its San Bruno headquarters, rather than greatly increasing its presence in San Francisco.

"In February 1996, the Company exercised an option to purchase a 12-acre parcel of land for $9,000,000 in San Bruno, California to expand its headquarters facilities [emphasis added]. Construction began in April 1996 for an estimated cost at completion of $55-60 million. The Company will own the facility, which is expected to be in operation in late 1997," The Gap's latest annual report to the SEC says.

Because it was the only buyer at the table and had the Redevelopment Agency's power of eminent domain at its disposal, The Gap had the kind of leverage over the Embarcadero property that any developer would want when putting together a deal. It appears that leverage, pure political power, and fear eventually produced the great Gap giveaway.

A 1991 appraisal commissioned by CalTrans put the value of its excess right of way along the Embarcadero at $17 million.

But by February 1995, CalTrans was ready to accept an offer of $7.1 million, or $163 a square foot, for the same property. By amazing coincidence, $7.1 million is precisely what the San Francisco Redevelopment Agency -- on behalf of The Gap -- had been offering for more than three years.

Redevelopment Agency officials say the reduction is justified by the presence of contaminated soil that must be carted from the site when construction commences. But state studies simply do not support anything close to such a drastic environmental discount on the price of the property.

Clyde Ongaro, the CalTrans property manager who handled the transfers of state land to the Redevelopment Agency (and, thus, The Gap), says he had a weak hand in negotiating the price for the bayfront right of way.

By law, CalTrans had to offer first crack at the land to public agencies, which in reality meant dealing with the Redevelopment Agency, the governmental body with primary dominion over the area. And once the agency signed its pact with Donald Fisher, Ongaro says, "The Gap was the only game in town."

Ongaro says he never felt the brunt of any overt political pressure, but that doesn't mean he felt free to walk away, either.

"It was a high-profile matter," he explains somewhat obtusely.
In a memo written after the Redevelopment Agency's offer was accepted, however, Ongaro made it clear that politics did affect his decisions -- directly. "There is a strong possibility that by selling the parcel at this time," he wrote, "we may be precluding a local agency from having legislation passed whereby the parcel is given to it at no cost."

In other words, Ongaro felt compelled to take the Redevelopment Agency offer -- even though it was less than half the real value of the property -- rather than risk getting nothing for it.

Once the $163-per-square-foot deal was struck, the Redevelopment Agency was in a position to get the rest of the land for Fisher, and again at bargain prices.

In April 1995, the agency filed a condemnation case against the owners of the corner lot that Fisher had once offered to buy for $368 a square foot. The owners now faced the grim prospect of trying to convince the court that their land was worth considerably more than the land immediately adjacent to it, which CalTrans had just unloaded -- apparently under extreme political duress -- for $163 per square foot.

Just before trial in 1996, Feeney and Blake settled for $207 a square foot, or $2.8 million.

Then, The Gap exercised its option to negotiate for the last parcel, which the city had gotten free (by state statute) after CalTrans demolished the Embarcadero Freeway. It fell to Tony Delucchi, the city's director of real estate, to protect San Francisco's interests. He settled for $111 a square foot, or $4 million.

No one can give a reasonable explanation for why that land was worth even less than the fire sale prices The Gap had paid for property immediately adjacent to it.

In March of 1992, the San Francisco Examiner published an editorial calling on local officials to help The Gap make San Francisco its permanent corporate address. The editorial made nary a mention of the amount of Examiner advertising The Gap regularly buys from the paper, but did include an interesting comment from Don Fisher.

"Our people are actually dying to move into the city," Fisher was quoted as saying, "because of the vibrancy of the city itself."

Now, though, Fisher is being more cagey. He is unwilling to discuss the deal for the land that has been touted as the new world headquarters for The Gap Inc., even after the firm filed SEC documents that appear to state The Gap's headquarters and the bulk of headquarters jobs will be in San Bruno.

In fact, a news blackout has been imposed.
"We are just pleased the building has progressed," says Beverly Butler, The Gap's spokeswoman. "We can't comment on any part of the ongoing negotiations."

That building, by the way, promises to be a real eye-catcher. It reportedly will be designed by postmodern architect Robert A.M. Stern of New York, and the appointments apparently will be special.

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