Port agrees to consider revised proposal for Coronado Ferry Landing

The operator of the Coronado Ferry Landing retail center and its government agency landlord will seek to bridge a $17.5 million divide and mend a fractured relationship as the parties’ contentious contract dispute quickly approaches a cliff.

Tuesday, the board for the Port of San Diego, which controls the tidelands around San Diego Bay, agreed to evaluate a recently revised lease and renovation proposal from its longtime tenant, Port Coronado Associates LLC. The board of port commissioners, however, did not consent to a one-year lease extension, as requested by PCA.

The decision leaves a seven-month window of opportunity to come to terms before the operator’s current lease expires at the end of June.

But the gap is wide and tensions are high.

“No tenant, no entity, no business, has the right to control public land in perpetuity. Nobody does,” Commissioner Dan Malcolm said. “Controlling public land, being a tenant on public land is a privilege. And in order to to keep that privilege, you’ve got to go over a very high bar, the least of which is complying with your lease document, maintaining your property and maintaining it in a way that that doesn’t cause life safety problems, and where you don’t walk on the property and see obvious signs of deferred maintenance.”

The remarks address the heart of the disagreement.

PCA believes it is entitled to a 40-year lease extension since it has proposed to invest nearly $20 million into revitalizing the Ferry Landing.

“For nearly 40 years, PCA has been a committed and consistent steward of this property. Our proposal continues that commitment,” Christian Herrera, the vice president of development and operations at the Ferry Landing, told the commissioners.

The port, however, views the suggested cash infusion as an overdue obligation because the operator has let the waterfront landmark fall into disrepair.

Built in 1987, the Ferry Landing, at the foot of the Coronado peninsula, looks across the bay to downtown San Diego. The outdoor retail center, on a little more than 13 acres of land and water at 1201 First St., consists of eight, single-story buildings alongside a ferry and fishing pier, plaza space and two parking lots.

The Ferry Landing is home to 38,000 square feet of shops and restaurants, and is fully leased to 21 subtenants, including Peohe’s, Lil’ Piggy’s Bar-B-Q and Village Pizzeria. The property is projected to gross $32 million in sales this year, according to its operator.

The center was developed by PCA, which signed a 40-year lease agreement with the port in July 1986. The contract is set to expire on June 30. The leasehold in question is distinct from a neighboring site that includes Il Fornaio and a vacant pad slated to become a new restaurant. The adjacent leasehold is operated by a related entity, Ferry Landing Associates LLC.

In October 2022, PCA submitted a project proposal to extensively remodel, in three phases, the Ferry Landing’s buildings, paseos, plazas and landscaping, taking aesthetic inspiration from the Hotel del Coronado. The submittal triggered the start of a formal lease extension negotiation process, as prescribed by the port’s real estate leasing policy, known as Board of Port Commissioners’ Policy No. 355. The policy is designed to provide certainty to extension requests, with the length of the term linked to the amount of money a tenant plans to invest in the leasehold, excluding deferred maintenance costs.

After three years of negotiations, the port board formally rejected PCA’s proposal at its October closed-session meeting. In response, PCA turned to the court of public opinion, appealing to Coronado residents and leaders anxious for a revitalized center. The company accused the port of dealing in bad faith by violating its own policies, blindsiding a family-owned business in good standing and secretly wanting to control the property for its own enrichment.

The port responded to the public-pressure campaign with two November letters, one addressed to PCA and the other to the city of Coronado, that called out $17.5 million in deferred maintenance needs at the Ferry Landing property, as identified in two consultant studies on land and water facility conditions.

Tuesday, agency staff presented commissioners with a series of photos, depicting broken concrete steps, deteriorating storefronts, corroded power units and pipes, warped and water-damaged wood plank siding, active roof leaks, pier deficiencies, and broken and rusted dock parts.

PCA said in a letter and slide deck submitted ahead of Tuesday’s meeting that it was prepared to immediately begin repairs on nearly a dozen fixes identified in the facility condition reports.

The deck is a supplement to a revised lease and an $18.6 million redevelopment proposal submitted to the port last month. The updated proposal includes an earlier project start date and better contractual safeguards, including a personal guaranty executed by PCA owner Art Engel, according to a staff report prepared for the board meeting. The tenant is also requesting a one-year lease extension to finalize negotiations.

PCA, however, flatly rejects the port’s assertion that the proposed renovation work amounts to overdue maintenance.

“PCA seeks term for new capital improvements, not credit for deferred maintenance,” Herrera, the Ferry Landing executive, said.

Herrera cited a Pro Forma Advisors LLC June 2023 consultant report that evaluated the proposed terms against the port’s real estate lease policy and determined that the promised improvements equate to a 40-year extended term. A spokesperson for the port said the report predates the condition assessments and did not consider whether PCA was in compliance with its lease.

In addition, the Ferry Landing executive said the land and water facility condition reports show that a majority of the maintenance work is required in future years, as opposed to needed now before the end of the lease term. The property also recently passed fire and insurance inspections, he said.

Herrera said PCA’s goal is to “lower the temperature” on what has become a highly contentious issue in the hopes of finding a win-win solution for both parties.

The PCA executive found a friendly ear in Commissioner Frank Urtasun, who represents the city of Coronado on the seven-member board and has been frustrated by the protracted length of the lease negotiations.

“I want staff to work this thing out,” Urtasun said, noting that he has stepped in to help broker a deal. “There’s plenty of blame to be on all sides. This thing got really hot in the media. … We need to bring the temperature down. On all sides. The temperature has got to come down. Let’s look at the deal. What’s in the best interest and let’s act on that.”

Other commissioners were less inclined to move on from what they described as disturbing and damaging rhetoric.

“It’s despicable because you do all of this to try and gain a negotiating advantage. Because you’re looking for 40 more years — $32 million of gross revenue that will grow over those 40 years,” Commissioner Michael Zucchet said. “And yet you make it all about, or attempt to make it all about, transparency and (say) that the port is inept. And really it’s just about money — and that’s OK — but it’s really (expletive) that you attack people who … are representing the people’s interest in a financial transaction where there are disagreements.”

As for the deal itself, Zucchet sees the dispute over deferred maintenance as potentially insurmountable.

“That issue is the issue. It has been the issue. Is the $18 million, give or take, maintenance, or is it capital (improvements)?” he said. “And in the second proposal by PCA, there is zero progress on that. Zero. … So while I also appreciate the fact that we’re still talking, that’s there’s progress, until there’s progress on (the deferred maintenance), I’m not particularly optimistic.”

Commissioner Danielle Moore, the outgoing chair of the board, echoed the sentiment.

“This idea that anyone would expect that they cannot maintain a property and get (lease) term is outrageous,” she said. “I’m incredulous at the idea that the port is greedy. Because if there is anything that suggests greed to me, it’s being able to profit from a project and not invest resources back into it.”

Earlier in the meeting, Coronado residents and leaders, as well as several Ferry Landing business owners, pressed the port commissioners to come to terms with PCA.

“This is something that our community really needs. It’s great for commerce. It’s … really one of the best places and best views in all of San Diego,” said Coronado Mayor John Duncan. “My biggest fear is that the project doesn’t go forward, and then it’s a very long time before another vendor may start on it. … We really want to get this done. I do believe PCA is capable of doing a project like this and moving it forward very quickly.”

One tenant, Marcella DiMichieli, who owns a bike and kayak business, compared the situation to feuding parents on the verge of divorce, with the tenants like children who are the collateral damage. She said the small-business owners have growing anxiety over subleases that are set to expire during the crucial summer season.

“Most of us are seasonal and our leases end on June 30. We run in the red for many months a year, and (turn) to black in July, in August, in September. And I think that’s a really concerning part for us, is the seasonal nature and not knowing what’s next,” DiMichieli said.

Port commissioners were sympathetic to the plight of the Ferry Landing’s small-business owners. Moore asked agency staff to come up with ways to provide long-term stability to the tenants.

The board, which unanimously agreed to continue negotiations with PCA, also directed staff to come back to closed session next month for a more candid conversation about the deal terms in the revised proposal.