Government Involvement in Real Estate Deals versus Private Ownership Rights

Citizens of San Francisco were taken back last week at the announcement that the Armory, a long-abandoned federal historical landmark, was purchased by a pornography studio for $14.5 million.

The purchase was perfectly legal and occurred because this particular buyer was the only one left after years and years of attempts to renovate the building for a variety of uses. Effort after effort was spurned by special interest groups and nay-sayers who had their own agenda for what they wanted to see at the Armory.

The Armory had not been used in more than 30 years. The first serious attempt at a renovation occurred during the dot-com days, when an out-of-state developer sought to turn the space into a collaborative Internet workplace. Mayor Willie Brown cut the ribbon at the beginning of construction, but soon it was halted due to protests from the surrounding neighbors, who demanded that the project cease in favor of one that provided affordable housing and community space. This created enough delays that when the dot-com economy crashed, the developer was forced to pull out, leaving the project in the hands of the lender.

The lender tried unsuccessfully to sell the Armory to a variety of users, including a school, a corporate headquarters, and a number of sports-related and retail-type companies. The school deal died when the cost to upgrade the building to full seismic standards pushed the overall project to more than $35 million. The plan to develop residential condos and provide affordable housing was met by demands by local community interest groups that pushed the affordable housing numbers so high that the project no longer made any sense. I introduced a client that was willing to provide affordable housing in exchange for multi-level retail in the assembly area of the Armory. After working through parking issues, my client felt comfortable that adequate parking could be provided. Then we heard from City Hall that the project would be “dead on arrival” because of traffic concerns.

All the projects required governmental approval for change of use permits or extensive tenant improvements, which gave power to local special interest groups. Yet today’s buyer, without much fanfare, is able to meet current zoning laws without extensive build-out requirements that would require a public review process. That’s because the buyer will simply work with the building it in its current condition. After public outrage in reaction to the proposed sale, the city is looking into ways to prevent the new owner from using the building.

The city had a wonderful opportunity to take a proactive step and work with the community to develop the Armory into a variety of workable services for the community. Instead, city officials sat back and did nothing; now the Armory is the future home of a porn film studio.

The city is on track to do much the same regarding a building on 8th and Market. A deal had seemingly been brokered, until two members of the Board of Supervisors stalled the process, demanding even more affordable housing than the generous developer was offering.

When is the city going to get it? Private developers must have a profit incentive to make a project happen. If the city cuts profit margins too low, the developer will determine that the risk is not worth the cost. The city gets no affordable housing and no community centers—only buildings that are in blight or are worn down, creating dangerous neighborhood.

There must be a balance between government involvement in private development and private ownership, concessions, and the realistic effect they have on a development. Right now, San Francisco is sending a strong signal that businesses aren’t welcome to do business here.