Market Economics

Market Economics
At one edge of the San Francisco Shopping Centre's facade at Fifth and Market hangs a weathered, unobtrusive brass plaque, embossed with lots of writing and mounted in 1989 by then-members of the school board. "This site was dedicated for public school use in 1858," it reads; until the turn of the century, two schools actually stood where the mall now stands. "After the 1906 earthquake, the entire site was leased with the provision and foresight that the income derived from this property would benefit the public school students of San Francisco. This spirit and dedication continues."

After reading the plaque you might wander up the mall's brass-railed escalators, among the gleaming food and clothing boutiques and bright-lit Nordstrom counters, and marvel at how the skyrocketing value of the ground under all that commerce must produce skyrocketing income that goes straight to the students of San Francisco. And of course it would be nice if it worked that way. The school-mall setup should be an ideal piece of economic architecture.

But for procedural reasons that have nothing to do with the currently insane real estate market, and not much to do with common sense, the owners of the mall at Fifth and Market may not see a rise in their ground rent for the years between 1995 and 2000 -- years when commercial rents rose by incredible annual percentages.

About a year ago, when Bill Rojas was still superintendent of the San Francisco school district, I happened to sit through a noisy circus of a school board meeting in the lofty auditorium of Everett Middle School, in the Mission. The board members sat behind their microphones and listened to a string of abuse from parents who insisted on better learning conditions for their children now. Public schools in San Francisco needed (and still need) millions of dollars of repair, and the parents ran through a litany of complaints: worn or missing books; moldy and leaking classrooms; filthy, cracked-tiled restrooms; broken windows. Some lapsed into lyrical fugues of indignation; one woman swore to quit her job and wage a personal campaign to ruin the career of each and every board member who voted against the proposal up for debate -- in this case, the sale of the property at Fifth and Market, proceeds from which would help pay for needed repairs.

The board, wisely, voted the sale down. The proposal was a cynical maneuver by Rojas to save his 1998-99 budget with an infusion of real estate cash. "That was all a red herring, about the sale of this property being necessary for those school renovations," says Dan Kelly, one of the board members. "The issues were totally unconnected." Shortly after failing to bend Kelly and two other members to his will, Rojas took a superintendent job in Texas, leaving the San Francisco school district in a fiscal mess that a recent state report catalogs in depressing detail.

One multimillion-dollar hole in the district's finances relates directly to the mall at Fifth and Market, and the company that owns it. San Francisco Shopping Centre Associates sublets floor space to stores ranging from Nordstrom to Surf City Squeeze, and any rise in ground rent adds to its basic operating costs. It had been paying $1.3 million a year for the site, but in 1995 the district tried to raise the rent to $2.25 million, and the two outfits have been in and out of litigation ever since.

"They've basically been paying the same rent since 1990 on a property that is on a corner of Fifth and Market Street in San Francisco -- i.e., extremely valuable property," says a source at the school district. "So it was not unreasonable for us to go in 1995 and say, 'Hey guys, you've had the same rent for five years, which makes you probably the only people in San Francisco [for whom] that's the case.'"

Here we need to make a correction, though, because in 1995 the mountain didn't go to Mohammed: Mohammed went to the mountain. That is to say: The mall owners asked the district for a reappraisal of the property -- a reappraisal on which rent would be based -- not the other way around.

And Jonathan Bass, an attorney for S.F. Associates at Coblentz, Patch, Duffy & Bass, argues, "No one is claiming that the absolute value of anything has gone down from 1990 to 1995." But the owners do claim the mall shouldn't have to pay a higher rent because, Bass says, "the school board got its number -- $2.25 million -- by not following the instructions."

Oddly enough, he may be right. S.F. Associates has been making a sophisticated case to this effect in Superior Court for about a year. Last February, a judge ordered the company to quit diddling around and pay the new rent retroactively (five years of back rent that amounts to $4.6 million, not including interest). But a final judgment in that case won't come down until May 12 at the earliest, and no matter how it turns out, the suit seems to stand as an embarrassing example of the type of questionable financial acumen for which the San Francisco school district has become famous.

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.

The shadiest aspect of this whole saga involves Bill Rojas' secretive and heated campaign to sell the ground under the Shopping Centre. It's worth pointing out that throughout Rojas' attempt to dispose of one of the school district's most valuable assets, S.F. Associates managed to remain a vague nonentity, and the names of potential buyers never managed to surface. Even now, Jonathan Bass tiptoes when asked about S.F. Associates' interest in owning the site. "Look at it this way," he says. "I think my client is a natural buyer of the ground under the building they own. And I think the school district is aware of our interest."

But Meade himself told me: "I had some discussions with a guy named Tim Tronson [the school district's head of facilities development and management], and frankly, we had agreed, between he and I, in order to settle all this, we were just gonna buy the damn thing. And we agreed to a very healthy price."

The price was $22 million. Meade figures this price was healthy on the basis of the rent he currently pays ($1.3 million). Other observers estimate the value of that lot at "easily" $45 million. By law, the district is bound to put the land out to auction, so an outside buyer could have bid up the price or even snatched the lease rights from under S.F. Associates' feet; but the sense I get from nosing around on this issue is that neither the school district under Rojas nor Dickie Meade wanted to let that happen.

To be absolutely fair about this, Bill Rojas wasn't stupid enough to sell the district's most glamorous perpetual asset for a mere 17 years' worth of ground rent. He wanted to apply for state matching funds to bring in a total of $80 million.

Still, at best, the saga of the San Francisco Shopping Centre is a dingy, business-as-usual tale about some investors protecting their bottom line by outwitting some fairly witless school district negotiators. At worst, Rojas' campaign last year to sell the land was underhanded and nefarious, and it raises real questions about the way in which the school district has handled two lawsuits over Shopping Centre rent.

In the sluggish late '80s, as Meade and friends argue, it may have been a pioneering risk to put up a mall on the unfashionable side of Market. But I don't see any reason, now, to cushion S.F. Associates from the consequences of an unexpected boom that the rest of us have to deal with every day.

Michael Scott Moore ( can be reached atSF Weekly, 185 Berry, Suite 3800, San Francisco, CA 94107.

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