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Market Economics 

Wednesday, Apr 19 2000
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.


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