Would-be homeless shelter landlord borrowed millions against proposed 35-year deal, county records show

On the same day investor Douglas Hamm paid more than $13 million for the abandoned warehouse that San Diego Mayor Todd Gloria wants to lease for 35 years, Hamm borrowed more than $17 million from a private lender in El Segundo.

According to county property records, companies owned by Hamm took out a pair of mortgages totaling $12.5 million against the proposed future site of a 1,000-bed shelter on Kettner Boulevard. Hamm also borrowed $4.75 million against a separate property he owns in Bankers Hill.

The loans were made by West Bay Capital LLC, a hard-money lender that according to its website typically charges 9 percent interest on debts for up to two years along with a 1 percent origination fee. All three of the loans are secured by future rental income from the two properties.

The complicated financing surrounding the mayor’s proposed homeless shelter is noteworthy because the city has a troubled history when it comes to making real estate deals.

San Diego’s lease-to-own deal to acquire the former Sempra Energy headquarters at 101 Ash St., for example, is costing taxpayers more than $200 million for a 19-story office tower that cannot be safely occupied.

Like the proposed warehouse lease with Hamm, the Ash Street deal was shrouded in complex financial arrangements. The office building’s financing hid millions of dollars in payments to people and firms the public was never told about.

Mayoral spokesperson Rachel Laing said the city had no knowledge of Hamm’s financing, and said again the city never approached the then-owner about purchasing the property directly during the six months of negotiations it held with Hamm.

“As mentioned prior, this facility was not offered for sale,” she said by email. “Further, the city was not privy to the details of the private real estate transaction and what the owner was planning to borrow.”

When Gloria announced plans for the massive new congregate living shelter at a press event on April 4, he provided few details about the planned shelter or the proposed site, which Hamm had just acquired two days earlier for $13.25 million.

The Mayor’s Office said it reached the deal to lease the 65,000-square-foot warehouse for 35 years, beginning at $1.9 million a year, after lengthy private negotiations that began last year, after Hamm first approached the city about leasing the property last October.

Under the deal struck between the mayor and new owner, the rent increases by 3 percent a year, meaning the property would cost the city a total of $92 million in rent over three and a half decades. Two five-year options would add almost $30 million to that cost.

Laing said Gloria wants a long lease but would not say whether it includes an exit clause.

“The city is interested in a longer-term deal for this site given the tenant improvements that are planned and the need for long-term shelter solutions,” she said.

Gloria also agreed to pay $18 million in renovations to get the abandoned warehouse in working order — spending that Laing acknowledged is typically paid by landlords.

“However, those improvements are then factored into negotiations and absorbed into the rent price,” she said. “In this case, the city elected to pay for the improvements up front vs. spreading the costs of those improvements, at higher costs, over the term of the lease.”

The plan announced by the mayor estimates the 1,000-bed shelter would cost some $30 million a year to operate, pushing the cost past $1.1 billion over the length of the lease.

That translates to at least $2,700 per month for each bed.

Laing previously said the project would not erode other homelessness services. But the proposed budget Gloria released last week would take millions of dollars away from the San Diego Housing Commission, which administers homelessness programs on behalf of the city.

The financial terms have already slowed down the project.

The Mayor’s Office initially sought to present the shelter plan to the City Council’s land use and housing committee on April 18. But the item was pulled from the agenda after several officials raised questions about the project that were not immediately answered.

The City Council is now expected to discuss the proposal in a special closed session Monday.

No public debate has been scheduled, although the talk around city hall is that the lease may be debated publicly by council members as soon as Monday, April 29.

But the city’s independent budget analyst, Charles Modica, who was given a copy of the draft lease the same day Gloria publicly announced it and has been scouring it ever since, said he thought the financing was worth evaluating.

“Funny timing on your email about the $12.5 million loan,” he wrote in an email Tuesday. “Our consultant just sent over that breakdown to us about an hour ago. We are looking into it.”

‘We didn’t know’

Neither Hamm nor his companies responded to requests for comment on the proposed shelter or the tens of millions of dollars he would make if the City Council approves the lease.

West Bay Capital LLC similarly did not return messages asking about the hard-money loans.

The real estate broker who represented the warehouse‘s former owner, CALFA Holdings Five LLC, said Hamm never discussed his plans for the property during negotiations and an escrow period that lasted more than one year and was extended at least once.

“We didn’t know anything about the buyer’s proposed use until after the closing,” broker Robert Brown said in a telephone interview. “That’s it.”

Meanwhile, two experts who monitor the San Diego real estate market carefully remain flummoxed at the terms of the deal. The proposed cost to the city is much higher than the average rate for industrial space, their analyses show.

According to a review conducted by London Moeder Advisors, the proposed lease payments represent a 14.5 percent annual return — a capitalization rate that is two or three times the average.

If the City Council approves the deal, the warehouse value would soar past $30 million overnight, the company said.

“The city would be far better off financially to use city-owned land,” said Gary London, one of the firm’s principals. “In this way, all capital invested in the shelter would go first to capital improvement and then to its operation rather than paying rent.”

Ron Goldman of Goldman Ferguson Partners, another San Diego real estate advisory, said the city would be smarter to buy the warehouse, even for more than what Hamm paid, than to enter the lease Gloria presented.

“I would think the new owner would be happy to sell the building to the city and lock in a fair profit,” he said. “It is not as though this is the only vacant building that would fit the bill.”

Goldman said he would recommend the city sign a lease of no more than 10 years — possibly with a series of five-year optional extensions — capped at $1.50 per square foot, along with annual increases limited to 2 percent.

“This would still provide the owner with a very financially attractive lease — especially with the city of San Diego as a tenant, which is the gold standard for credit tenants,” he said. “Without these changes, it would appear that the city is embarking on 101 Ash St. Chapter Two.”

According to the latest market analysis from global real estate giant Cushman & Wakefield, the vacancy rate for industrial property in San Diego County rose to 5 percent in the first quarter of 2024, the highest level in years.

“Market-wide occupancy fell by 403,000 sf in Q1 2024, marking the fifth consecutive quarter of occupancy losses following 10 straight quarters of gains recorded from Q3 2020 to Q4 2023,” the current study states.

Despite rising vacancies, the overall asking rent for industrial leases has ticked upward, Cushman & Wakefield analysts found. Rental costs inched higher by 1.4 percent quarter over quarter, and 6.8 percent year over year, the report shows.

Even so, the average lease now costs $1.50 per square foot, notably less than the city’s proposed cost of $2.45 per square foot.

Total leasable space

San Diego city officials do not dispute the discrepancy between typical industrial leases and the cost of the proposed deal cut by the mayor.

But Laing said the agreed-upon rate does not include thousands of square feet of other space on the warehouse grounds that could be readily used by whatever provider agrees to operate the planned shelter.

“These spaces include a large courtyard and parking lot (off Walnut) that can be used for programs (i.e. safe parking), subleased or otherwise generate revenue that offsets the rent,” the mayoral spokesperson said.

“The total leasable square footage of the site makes the per-square-foot cost $1.31, which is below market given the special use that is being considered on-site,” she also wrote.

Real estate professionals generally do not include parking or other outside space in their per-square-foot lease costs. Those amenities are typically included in purchase or sale agreements for real property.

The idea of adding 1,000 beds to the city’s inventory of shelter beds was first proposed in Gloria’s State of the City address early this year.

It is likely to be well-received by at least several City Council members; Councilmembers Stephen Whitburn and Jennifer Campbell were at the mayor’s side when he introduced the plan earlier this month.

But Council President Sean Elo-Rivera and Councilmember Kent Lee have both publicly expressed concerns with the policy and cost of creating a massive shelter to operate for decades to come.

At least one national homelessness advocacy group told The San Diego Union-Tribune last week that the $1 billion-plus that Gloria proposes to pay for a new shelter might be better spent on permanent housing or keeping people housed in the first place.

The City Council is scheduled to debate the matter in closed session Monday.

Results of the market analysis the mayor’s staff prepared for the project will be provided to council members ahead of the closed session, Laing said.

But the findings will not be made publicly available as long as changes may be made to the proposed lease.