Market Economics

Behind the name S.F. Shopping Centre Associates are two companies, Urban Retail Properties and Hackett Meade Interests, that jointly run the mall. Okla Basil "Dickie" Meade Jr. is an investor from Virginia with 30 years' experience in real estate. "For the past 20 years, his firm [Meade & Co.] has represented the Jameel family of Saudi Arabia in acquiring and selling properties comprising a portfolio in excess of $2 billion," the Financial Times wrote in 1994. "His firm has also represented Cabot, Cabot & Forbes in the sale of a $300 million portfolio." So Meade is big time. He's also a genial, straight-talking Southerner who believes he's being screwed by the school district.

In 1994, he formed a partnership with another investor, Patrick Hackett, to bail out the mall's previous owner. By that time the ground rent had risen by formula to $1.3 million from a $1 million base in 1983. In '95 it was poised to rise again by formula -- starkly, to about $2.2 million -- but in that year the lease also allowed either party to reappraise the ground under the mall and haggle over the rent calculated from that appraisal. Hackett and Meade asked for an appraisal, hoping to pay something less than $2.2 million, and S.F. Associates eventually filed a lawsuit to enforce its reappraisal right.

Real estate appraisal is a wildly inexact science, and S.F. Associates failed to agree with the school district on just how to arrive at a reasonable value of the land in 1995. Should they look at nearby lot prices? But developers by '95 were already buying in a hot market with the idea of renting to Internet start-ups, an option not open to the mall owners.

The lawsuit took two years. It ended in a settlement binding the school district to a set of terms that basically detached the rent at Fifth and Market from all potential uses of the land in the city's burgeoning real estate boom. Under these new instructions, appraisal of the land had to consider site improvements "as is," meaning not what could be earned by any developer at Fifth and Market, but by what S.F. Associates actually earns by leasing space in its mall.

The idea is that many stores -- especially Nordstrom, which takes up three-fifths of the mall's floor space -- signed cheap, long-term leases in the late '80s, before the boom, and S.F. Associates, as a result, may be less rich than you'd think.

Not that it's poor. According to a summary in the court file, the company raised about $15 million in gross rent from all its stores in '95, with a free-and-clear profit of about $9 million.

"I'm mindful of the fact that the average reader of the SF Weekly is likely to think that the school district needs the money more than my client does," says attorney Bass, "but that's not the way we see it." Bass and his clients view the matter as a commercial landlord-tenant dispute, and they're suing for the right to pay only as much rent as the ground lease and the '97 settlement -- the settlement the school district agreed to -- allow. Because of those strict settlement instructions, Bass says, comparing the mall's ground rent to other rents in San Francisco is "simply mixing fruit."

OK. At this point, the exact tally of who owes what to whom is for a Superior Court judge to decide. But a fair summary of the whole mess so far is this: The mall owners sued for appraisal in '95 because the rent may have risen automatically to $2.2 million, and the school district, by settling on terms that appear to be very favorable to the owners, threw in the towel. Why?

The school district says it agreed to the settlement calling for a new appraisal to save time.

"Rather than extend litigation even more, we said, 'OK, yeah, let's do it again,'" says Elaine Koury, a spokesperson for the school district. "Because it seemed obvious to us what would be obvious to everyone -- that Fifth and Market is a pretty good property. So even though SFUSD had no conflict with the way it was first [appraised], we said, 'Yeah, we'll do it again.' Just to get it done, basically."

Bass says the new appraisal was needed because the initial reappraisal was performed by a firm that had "improper entanglements" with local government. In his view, rather than wrangle about the appraiser's supposed conflicts of interest, the district settled. But was S.F. Associates just dickering? Did the district screw up a good case with a biased appraisal? Would it have gotten its $2.2 million? Those questions are legally moot. What's clear is that the district didn't speed up the process by settling, because both parties are back in the same ugly quagmire. In the current suit -- the one raging since last year -- S.F. Associates has raised questions about another appraiser, this one court-appointed.

After two weeks of investigation, I can't say whether the school district screwed up royally by settling in '97, or just misstepped, or did the right thing, or did the wrong thing accidentally-on-purpose. All I know is that Meade and his lawyers make strong arguments, within the confines of their settlement with the district, and if these arguments hold sway, the 1.74 acres at Fifth and Market will slip into an unusually low-rent Twilight Zone, keeping more than $4 million from reaching the city's crumbling schools.

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