Reason to Question

Advertising -- the lifeblood of newspapers, particularly free-circulation newspapers such as the Bay Guardian and SF Weekly -- slowed dramatically. It was anyone's guess as to how long the 9/11 recession would go on, or whether the economy would ever get back to where it had been before the World Trade Center towers fell.

Bruce Brugmann decided it was time to borrow millions of dollars and go into the real estate game.

The news was full of debate about a possible invasion of Iraq when the Bay Guardian's lawyer sent the letter warning SF Weekly that its purely evil business practices were driving the Guardian out of business.

Three months later, in April 2002, amid an economic downturn that had, according to widespread news accounts, caused newspapers to lay off employees in near-record numbers, Bruce Brugmann and his wife, Jean, bought a renovated warehouse building at 135 Mississippi St. As a vehicle for the purchase, they used the newly formed Brugmann LLC, a real estate holding company. The purchase price was $4,737,000, according to public records, almost all of it borrowed; financing came through Placer Sierra Bank in Roseville, Calif.

The building contains about 26,000 square feet of usable space spread, mostly, over three stories. The Bay Guardian leased space on the first and second floors in the building. Mondo Media, an entertainment, design, and digital production studio that has been a pioneer of Internet animation, was an upstairs tenant, and it agreed to remain after the purchase. The Guardian announced that it completed its move into the building on June 28, 2002.

"What Bruce [Brugmann] has always wanted for the Guardian is a building that we own, that is ours in perpetuity, so we never have to worry about an eviction, we never have to worry about a bad landlord, we never have to worry about any of that stuff," Redmond was quoted as saying in the summer of 2002. "We now have a place that's ours, that will anchor the Guardian as part of San Francisco forever."

Just as homeownership benefits most families, it can indeed be a good thing for a business to own its own headquarters. Real estate costs are fixed; no pesky landlord can come along to raise the rent. As the mortgage on the property is paid down, the business gains equity that can be borrowed against or used, in other ways, to aid the growth of the firm. So long as the firm is careful not to borrow more than it can afford, the upside to ownership can be great.

Here, though, Brugmann went from paying extremely favorable rent in the mid-1990s to carrying almost $5 million in debt less than a decade later. Because he borrowed the down payment of $1.3 million though a Small Business Administration loan program, it appears that Brugmann had virtually no equity to speak of in the deal.

And I can't help but point out, of course, that the San Francisco Bay Guardian's version of "progressive" ideology runs almost exactly 180 degrees counter to the pro-ownership sentiments expressed in preceding paragraphs. The Bay Guardian has for decades prayed at the altar of the glorious tenant. In the circles of Bay Guardian hell, landlords occupy some of the lowest rungs, where they presumably chat with PG&E executives. Tenants and tenant advocates, meanwhile, have permanently reserved thrones in the Guardian's progressive heaven.

But even if Bruce Brugmann's jump into commercial landlordism is ironic -- and boy is it -- I have no problem with the San Francisco Bay Guardian owning, rather than renting, its offices. (Several New Times papers, in fact, own the buildings in which they operate; SF Weekly leases.) But in certain situations, buying real estate can be wrongheaded and dangerous, and boy, does this look like a wrongheaded, dangerous situation to me.

Just a few short years ago, when office rents in San Francisco were rivaling and even exceeding those in Manhattan, the Bay Guardian was enjoying amazingly low rent, less than $1 a square foot per month at a time when new leases in the complex where SF Weekly resides touched $6 a square foot. A seat-of-the-pants estimate that errs, I think, on the high side puts the Guardian's total rent in the $190,000-a-year range as late as the final years of the dot-com boom.

As anyone who has bought a house can tell you, there are costs of ownership above the mortgage. There is maintenance, there is insurance, there are taxes, there are utilities beyond what the tenants pay for -- and the list goes on. And Brugmann LLC didn't just buy the house that the Guardian had been living in. It bought a building that is 30 percent larger than the paper's old home, as well as an adjoining parking lot. A real estate analysis conducted for SF Weekly suggests that Brugmann LLC's costs for carrying the 26,000-square-foot building at 135 Mississippi are somewhere, depending on interest-rate assumptions, in the $500,000- to $600,000-a-year range -- or hundreds of thousands of dollars a year more than the newspaper had been paying in rent.

Of course, when a real estate investor buys rental property, he hopes to keep his property filled with renters whose payments will service the loan on the property and cover its other costs, from taxes to maintenance and beyond.