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.

If you walk from the foot of Market Street south along the Embarcadero, you become part of one of the views that keep bringing the tourists back to San Francisco.

To your left is the blue of the bay and, behind the bay, the green trees and black rock of Treasure Island. In front of you, the Bay Bridge arcs dramatically over the water and jams itself into the side of Yerba Buena Island. To your right, office towers and restored warehouses, upscale restaurants and foo-foo bars stare down at you and beyond to the amazing vista whose foreground you inhabit.

Then, suddenly, you come to an empty, ugly hole. Near the intersection of Folsom and the Embarcadero, there is a block of land that contains nothing but paper bags and squashed aluminum cans and a gritty parking lot. These two-plus underused acres constitute the last great bayfront site available to anyone who might want to erect the kind of signature building that would befit the amazing blue and green and black rock vistas that are available only on San Francisco's Embarcadero, just south of Market Street's terminus.

Actually, though, that empty, ugly, highly desirable block of land is no longer available. The city of San Francisco has acquired the block and is in the process of transferring it to a company -- the casually hip clothing retailer known as The Gap Inc. -- and a man -- Gap founder and chairman Donald G. Fisher -- with uniquely attractive qualities.

The attraction The Gap and Fisher exude must be unique. The city's Redevelopment Agency all but gave away the store to make sure that The Gap built its corporate headquarters on the Embarcadero and kept its 2,400 jobs -- now divided between San Francisco and suburban San Bruno -- in the city.

Let's amend that last statement.
The San Francisco Redevelopment Agency went to truly extraordinary lengths, giving The Gap at least $18 million of preferential treatment, on the stated premise that such treatment was necessary to keep the firm's headquarters in the city.

But there does not seem to have been any real threat that The Gap would leave the city entirely. Even without such a threat, the Redevelopment Agency rigorously avoided any competition that might have maximized the value of its bayfront land -- and the number of jobs attached to any development of that land.

In fact, as it was throwing governmental land and largess The Gap's way, the city's Redevelopment Agency didn't bother to make the firm promise to bring jobs to, or even stay in, San Francisco.

That is not to say The Gap has no plans to expand its headquarters. Government documents filed by the firm itself report it is in the process of spending tens of millions of dollars to expand its headquarters in San Bruno.

A commercial developer turned clothing magnate, Don Fisher founded his company in 1969, supposedly after an unsatisfactory experience shopping for jeans in stores he found poorly stocked, haphazardly organized, and, worst of all, manned by unhelpful sales clerks.

Over the past three decades, The Gap Inc. has become a diversified, worldwide manufacturer, distributor, and retailer of casual apparel and accessories for adults and children. The Gap earned a record $453 million in 1996 -- up 22 percent from the year before. And, as The Gap's bottom line has grown, so has Fisher's civic profile.

In 1992, he joined a group of Bay Area business leaders in a partnership to buy the San Francisco Giants to keep the baseball team from leaving town. His contributions to the city's New Main Library paid for the Fisher Children's Room. Earlier this year, President Clinton appointed him to a seat on a board responsible for managing the transformation of the 1,480-acre Presidio from Army base to self-sustaining national park.

But Don Fisher is also well-versed in getting what he wants from government.
He accomplishes this, at least in part, the old-fashioned way -- with his checkbook. And he goes about getting what he wants with both profound vigor and enormous attention to detail. Although a Republican, Fisher makes political giving a truly bipartisan affair.

During the 1996 election cycle, Fisher and his wife, Doris, dumped $247,950 into Republican and Democratic congressional campaigns, Bob Dole's presidential bid, and GOP party coffers, according to page after page of Federal Election Commission records.

Closer to home, during 1996 the Fishers and The Gap contributed more than $220,000 to candidates for the California Assembly, the San Francisco Board of Supervisors, the city attorney's post, and the town council of Atherton, as well as to state and local initiatives and bond measures.

The giving seems to be as orchestrated as it is prolific. Though the vast majority of the Fishers' federal contributions go to Republicans, the couple appears to assiduously avoid politicians who might be considered extremists. In the North Carolina U.S. Senate race, for example, the Democratic challenger, Harvey Gantt, the first black mayor of Charlotte, was backed over the GOP incumbent, Jesse Helms, who has a documented propensity for playing the race card in his political campaigns.

In 1995, the Fishers contributed early on to the re-election drive of Mayor Frank Jordan, a conservative by San Francisco standards. But the couple gave late to his challenger, retired Assembly Speaker Willie Brown, the favorite in the contest and eventual victor.

It is always difficult to say whether or how political giving affects particular governmental policy decisions. There is simply no way for an outsider to know how hundreds of thousands of dollars in political contributions might or might not influence politicians who might or might not play significant roles in the transfer of public property to private hands.

But it's clear that Fisher and his minions went after the Embarcadero site with a singleness of purpose.

In 1989, Fisher hired William Coblentz, widely considered the city's best-connected Democratic lawyer, to craft a strategy to control the vacant waterfront land at Folsom and the Embarcadero.

Coblentz drafted an option agreement to buy a 13,600-square-foot lot at the corner of Folsom and Steuart streets for $368 a square foot, or $5.1 million. The owners of the lot, Thomas Feeney, a retired lawyer, and William Blake, a former supervisor who is now dead, refused the offer. Coblentz wrote a letter to Feeney in November 1991 to renew the offer, again to no avail.

And so in August of 1992, Fisher turned to the Redevelopment Agency, inking a deal under which the agency would negotiate exclusively on The Gap's behalf to acquire all undeveloped property between Folsom and Howard along the historic South of Market waterfront.

Clifford Graves, a former executive director of the Redevelopment Agency who took over after the pact was signed but who worked on the deal thereafter, claims it was an innovation born of necessity.

The agency's old sources of capital -- federal urban renewal loans -- had long ago dried up. The Gap could provide the capital necessary to acquire underused property and get redevelopment off the ground.

"The Gap deal," Graves says, "is typical of what it [the agency] will be doing. It's the prototype."

But the deal could be seen another way.
In essence, San Francisco's Redevelopment Agency used its unique governmental muscle to acquire both public and private property -- for the benefit of a private business and at the expense of the public.

Back in November of 1989, a team of state transportation officials landed at San Francisco's Embarcadero to examine an irreplaceable public asset -- undeveloped waterfront property -- and prepare to do something nobody in their right mind would ever do voluntarily.

"If it were mine," recalls Clyde Ongaro, the divisional property manager of the California Department of Transportation, "I wouldn't have sold it."

But the land, a one-acre swath between Howard and Folsom streets that had great bay views, was not Ongaro's to hoard. CalTrans had no choice in the matter. It had held the land for decades as right of way for a long-planned freeway construction project. But the project had been scrapped, and the department became legally obligated to offer the land for sale, and governmental entities got first crack at it.

From the start, the San Francisco Redevelopment Agency was ready to take full advantage of the opportunity. So was Don Fisher.

The urban renewal agency entered immediately into negotiations to buy the right of way. It secured zoning changes to allow for the most lucrative form of development on the site -- construction of a commercial office tower. It signed an agreement under which The Gap Inc. would erect said edifice, and then, supposedly, occupy it as the company's world headquarters.

This apparent civic coup didn't end there. Before the agency finished its business, it had acquired not just the subject right of way, but additional land within that very same block. By the close of 1996, the Redevelopment Agency had assembled more than two acres of property at the heart of the South of Market waterfront.

Along the way, a civilian advisory committee, handpicked by the agency, put its imprimatur on The Gap's proposed 17-story, 540,000-square-foot office tower.

All that remained was for the Board of Supervisors to issue its final blessing, which occurred on March 17.

"This has many benefits to the city," Michael Kaplan, an agency representative, told the supervisors at the public hearing that day. In addition to keeping a major corporate headquarters in town, Kaplan explained, the Gap redevelopment deal would produce a litany of new tax revenues, fees, and levies for the city.

The supervisors listened, grinned, nodded, and gave their unanimous consent, never being told that there was little threat The Gap would leave San Francisco, or that all of those revenues, fees, and levies are part of the city's standard development policy and would be required of any developer who built on the property.

Public records show that the San Francisco Redevelopment Agency has granted The Gap the right to buy the last major parcel of undeveloped, South of Market waterfront property at a steep discount from what The Gap itself twice offered to pay for a portion of the property.

That earlier offer -- $368 per square foot for the 13,600-square-foot triangle at the corner of Folsom and Steuart -- was made in January 1990 and renewed in November 1991.

If The Gap goes forward with the deal put together by the Redevelopment Agency, which could occur within the next few weeks, the firm would pay just $207 a square foot for the corner lot. That 44 percent discount -- worth, roughly, $2.3 million -- is available to The Gap, and no one else, because the Redevelopment Agency used its condemnation powers on behalf of the firm.

Quite simply, the agency forced owners who had declined The Gap's $368-per-square-foot offer to sell for $207 -- and then flipped the land to The Gap at no additional cost.

The Gap will be allowed to snap up the rest of the two-acre-plus parcel at even lower rates. The Gap would get the land made available by the scrapping of CalTrans' freeway project -- approximately 43,000 square feet -- at $163 a square foot. The last piece making up the site for the new Gap headquarters is a 35,000-square-foot parcel that the city got for free when the Embarcadero Freeway was razed after the Loma Prieta earthquake. The Gap would get that piece of land for $111 a square foot.

In all, The Gap will pay about $13.9 million for the site.
If the firm had to purchase all of the property at the rate offered in 1991 for part of it, the cost would be about $32.6 million.

The intricacies of this redevelopment deal seem to give The Gap a benefit at every turn. In addition to the land subsidy of $18 million (plus or minus), the deal will route $4 million of the $13.9 million The Gap does pay for the property to a mid-Embarcadero transit improvement and roadway beautification project that runs in front of, and would improve and beautify, The Gap's potential new home.

There is one payment the Redevelopment Agency will require of The Gap that could be considered a legitimate offset to the multimillion real estate subsidy the firm received. If it goes forward with the project, The Gap will have to pay an extra $1 million over the usual development fees for the landscaping of a narrow park across the Embarcadero from the development, and another $100,000 annually for maintenance of what will be called Rincon Park.

This amenity will enhance the Embarcadero's already stunning scenery -- but even the park will give The Gap a benefit. By agreeing to build the park, The Gap acquires a say in the Port of San Francisco's plans to build a restaurant at the south end of the port-owned Rincon Park -- a restaurant that could, or could not, obscure views from the potential Gap headquarters out to San Francisco Bay.

Despite all the benefits given to The Gap, there is nothing in the deal that binds the company to that headquarters -- for any period of time.

Public records show that The Gap would be perfectly within its legal rights to take the entire two-plus-acre parcel that the firm obtained at such discounted rates, resell it to a third-party developer -- and keep the profits. That developer would have to agree to build an office tower, and some "major" company or partnership must agree to establish a headquarters inside the building. But that company doesn't need to be The Gap.

There are indications that The Gap will cede control of the new building to such a third-party developer.

Houston-based developer Gerald D. Hines has been at the bargaining table on The Gap's behalf since very early in its drive to control the waterfront site.

And a "major" tenant already has been lined up to occupy a large part of the office tower. Montgomery Securities, the San Francisco-based investment banking firm, has been negotiating to move into the so-called Gap building for months.

This redevelopment deal contains one other amazing potential giveaway for The Gap.

If The Gap decides not to buy the property assembled by the Redevelopment Agency, the agency's contract with The Gap requires the government to sell the publicly owned waterfront land on the open market and hand the profits over to -- no, not the public, but The Gap Inc.

So, when Michael Kaplan, the Redevelopment Agency senior project manager, testified before the Board of Supervisors that the deal "has many benefits," he was correct. The Gap and Donald Fisher really can't lose.

A paper trail of correspondence, appraisals, and contracts lays bare a simple fact: The San Francisco Redevelopment Agency cut a sweetheart deal with Fisher and The Gap, and forgot to attach any strings. When pressed, public officials are unable to provide a satisfactory -- or even reasonable -- explanation for their actions.

In support of the Gap redevelopment deal, agency officials and city supervisors continue to point to approximately $8 million in one-time levies the project's developer will have to pay to the city. Those levies would be used to fund affordable housing, parks, schools, and public art. But by law, every developer of commercial office space in San Francisco pays these very same levies. By definition, they are not compensation for the extraordinary incentives the city has extended to The Gap.

Supervisor Michael Yaki's Economic Development, Transportation, and Technology Committee reviewed the final pieces of the Gap agreement before it went to the Board of Supervisors. Yaki offers this defense of the agreement:

"I have no doubt for a moment there was a good deal on the land. But, if we want to entice people to stay, and remain, we might have to spend a little. This is a strategy of retention."

Nowhere in the agreement, however, did the agency or the Board of Supervisors ask for any such assurance -- that The Gap Inc. would, in fact, build, move in, or even stay in town.

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.

Jim Haas, a member of the citizen advisory group monitoring the project, says he knows of discussions about the path Donald Fisher's private elevator would take to the building's rooftop garden, where the chairman -- and anyone else allowed on his elevator -- will enjoy the blue bay, black rocks, green trees, and the sweeping arc of San Francisco's Bay Bridge from a special vantage point.

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