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The Cup Runneth Over: S.F.'s America's Cup Decision Looms 

Wednesday, Feb 15 2012

Illustration by Andrew J. Nilsen, based on The Great Wave off Kanagawa by Hokusai.

A century ago, Daniel Burnham, the preeminent architect of his day, presented San Franciscans with a glistening vision of their city's future: An ethereal stairway from the Castro to Twin Peaks; massive gardens covering five times the area of Golden Gate Park; and, triumphantly, a towering obelisk at Market and Van Ness marking the "great central Place" where 11 major streets would converge.

San Francisco had little patience for glistening visions in the wake of the 1906 earthquake. The city was rebuilt, expediently, atop the ruined foundation that existed before — and, largely, exists to this day. The Burnham Plan was consigned to the history books.

Today's glistening visions feature mockups of America's Cup venues complete with digitized, conspicuously attractive people gaping at catamarans the size of 13-story buildings ripping through the bay. Preliminary construction work on the scheduled 2013 regatta is already under way.

Yet the status of the boat race is not on solid ground. In the next two weeks, the city and race organizers will tussle over the long-term development ramifications tied to the America's Cup, culminating in a Board of Supervisors vote scheduled for the end of the month. The impact of that vote can't be overstated: San Francisco will decide whether the Cup will be tossed alongside the Burnham Plan in the "What if?" file, or whether it will impose a transformative impact along the city's waterfront for generations to come.

Nautical metaphors have been en vogue since Oracle CEO and yachting billionaire Larry Ellison in 2010 turned his eye to holding the America's Cup in this city. So here's one more: San Francisco has taken a long walk on a short pier, and has reached the point where it must decide whether to leap aboard the ship or let it sail off. The cost of this America's Cup voyage will only become truly clear once the pier is receding in the distance. But this much is sure: It's not going to be cheap.

In the last month, the city has quietly downgraded the anticipated number of visitors the event will draw and the tally of spectator boats that will line the waterfront. Millions in private fundraising the city had already assumed in its overall budget has not been delivered — and, last week, the city's budget analyst estimated the logistical costs of holding the event here are now 65 percent higher than previously assumed. Race officials, meanwhile, have denied reports that the number of participating teams will be barely enough to fill a medal stand.

The amount the Port of San Francisco now anticipates it will reimburse to the America's Cup Event Authority — the organization Ellison formed to oversee the race — is double the estimate used when calculating a roughly break-even proposal a year ago. And the anticipated costs of constructing a magnificent new cruise ship terminal on Pier 27 — which would also serve as the centerpiece of the America's Cup — have effectively doubled as well. These costs will either be reimbursed to Cup organizers by the port — or borne by the city and port alone.

The Pier 27 cruise ship terminal and the America's Cup are intertwined in a manner that city and race officials portray as serendipitous. Offering Pier 27 and the northern waterfront as the race's epicenter dislodged the Event Authority from its earlier preference for Pier 50, near AT&T Park — a surefire fiscal bath for the city. Accelerating the development of the pier also gave the city the impetus it needed to finally consummate its longtime dalliance with erecting a cruise ship terminal.

As with people, marrying two complex projects calls for sacrifices and commitments along the lines of "for richer or for poorer." In the case of the port, the proposition of ending up some $40 million poorer as a result of mandatory mitigation projects tied to the cruise terminal struck a nerve. In a January e-mail to staff obtained by SF Weekly, Port Director Monique Moyer laments about the prohibitive cost — which, she worries, may sink the port. "I just don't see how we can commit the Port to financial instability by committing to these obligations. Frankly, the cruise terminal isn't worth the risk," reads the e-mail. "Sorry to be the 'Debbie Downer' on this, but I spent a sleepless night and I came to the conclusion that I can't be the one who does this to the Port."

The city broke ground on the project on Jan. 31.

These are just a few of the issues that will be weighing upon the city, the Event Authority, and the Board of Supervisors in the frenetic two-week race leading up to the supes' vote on the binding "Development and Disposition Agreement." Either the terms of the deal can be massaged to meet both the board's and Event Authority's liking, or the supervisors will vote it down — and essentially bid the Cup adieu.

"This is the key turning point. I don't see how we step back once the development agreement is approved," notes Supervisor David Campos, who has said he's unwilling to support the deal as it stands. "We need to make sure we get this right, and not just for us. This is something that will have implications for people who will be living in this city for a long time."

And that's the case regardless of how the supes vote.

In discussions of the fantastically complex terms governing the staging of the 34th America's Cup in this city — and the public money, property, and development rights that will flow to the Event Authority to make it happen — the phrase "The devil is in the details" comes up. Often.

Parsing the 126-page development agreement, however, it's clear that there are details and devils enough for an entire Hieronymus Bosch tableau.

At its simplest — looking past sections on "fires; floods; tidal waves; epidemics; quarantine restrictions; freight embargoes; earthquakes," etc. — the development agreement conveys money and property rights from the port to the Event Authority in exchange for infrastructure work on and around waterfront structures. The authority's first $55 million worth of work will earn it the title to Seawall Lot 330 — currently being used as a parking lot a stone's throw from the Bay Bridge — and 66 years of rent-free occupation of adjacent Piers 30-32, a deteriorating parking structure across the Embarcadero. Additional work by the authority will be repaid via port bonds and rent credits for other piers, or, potentially, future marinas.

These rent credits serve as coupons the Event Authority can use to recover its expenditures via long-term leases on Pier 29 and, possibly, Piers 26 and 28. But these coupons keep giving: The monetary value of unused rent credits owed by the port to the Event Authority will compound annually at the Tony Soprano-like interest rate of 11 percent.

The port anticipates the Event Authority will spend and seek reimbursement for some $111 million, and potentially up to $136 million — a total more than double the numbers bandied about during the 2010 run-up to sealing the early America's Cup agreement. And while the Event Authority may only be repaid via a finite stream of port resources, there is no formal cap on its reimbursable costs.

With just weeks left to influence the deal — and, of course, grandstand — the supervisors' most basic motivation is to figure out if the city is receiving enough in return for a growing investment. With confidence waning in much-quoted predictions that the race will spawn $1.2 billion in business and 8,000 jobs, this is a complex task. "I've always thought the projections were — 'outlandish' is not the right word, but 'extremely optimistic' is an understatement," says Supervisor Sean Elsbernd.

Apart from the augmented costs, the supes' main complaints figure to coalesce around three issues: The Event Authority stands to take long-term control of the choice Pier 29; the city and port will receive no cut from rents and business on the land handed over; and, similarly, the city and port won't get a percentage from future condo sales on Seawall Lot 330.

These are the specific objections of those who have problems with the finer points of the deal. Yet the most serious critics of the America's Cup question the very framework underlying the arrangement. The port and Event Authority portray the setup as an exchange of private capital improvements by Cup organizers to neglected port facilities for long-term rent-free use and development rights. But this sidesteps the question of whether these improvements truly benefit the port — or just Ellison.

Of the $111 million the port anticipates reimbursing the authority in the near- and long-term, the lion's share — some $91.5 million — is earmarked for work on Piers 30-32. The crumbling piers were long ago "yellow-tagged," meaning they're not fit for any use beyond parking lots. The port hadn't planned to spend any money on them in the foreseeable future; in 10 or 15 years they'll likely be totally unusable. Now, however, the port plans to pay Ellison's Event Authority nearly $100 million to spruce up the piers, then set up Ellison et al. with a rent-free lease for the new and improved space until today's kindergartners are in their 70s. And, even after 66 rent-free years, the deal may not be done. If the Event Authority hasn't recouped its investment, the port is required to turn over half the revenue generated by the piers for 15 more years. Since work may be deferred for up to 10 years after the America's Cup, it's possible that the port will still be reimbursing the Event Authority into the 22nd century.

For those who'd question this scenario, Jonathan Stern, the port's assistant deputy director and head of waterfront development, acknowledges "that's fair. If the America's Cup was never a possibility, we might have made different choices of how to invest our money." But, he continues, deals like this have to be considered "in light of the event."

This doesn't cut it for everyone. "Team Ellison is having their cake and eating it too by restoring a pier that every expert agrees should ultimately be removed," says Aaron Peskin, the former board president and a vocal critic of the current America's Cup deal. "If this was part of a rational plan, we'd be restoring piers that have a potential economic benefit to the port. But that's not what Mr. Ellison wanted." Piers 30-32, Peskin continues, aren't saddled with any historic structures and present "potential for a large, bold real-estate play." The stumbling block for would-be developers of the past was the scores of millions of dollars in necessary rehabilitation work — which the city is now funding. "If you can get it for two-thirds of a century and have the city pay to fix it up," Peskin says, "why not?"

When cruise ships sail into the northern waterfront, they dwarf all they encounter. Thousands of tourists are disgorged from the building-sized vessels and proceed to Fisherman's Wharf to purchase shot glasses, fleeces, and soup in bread bowls before being terrified by that guy who leaps out from behind a bush. It's understandable why the city has, for decades, hoped to build a modern terminal that can accommodate more of these floating cities. But, in this game, you've got to spend money to make money.

The bundling of the America's Cup with the construction of the cruise ship terminal has been presented to the people of this city and its leaders as the development equivalent of the "You got your peanut butter in my chocolate!" "You got your chocolate in my peanut butter!" Reese's commercials. Here was a win-win scenario that gave everyone what they needed. Then the bill arrived.

The port's Stern notes that the city saved some money by combining pre-development and permitting costs of the combined America's Cup Village/cruise terminal projects. And the accelerated time frame kept "soft costs" — planning, designing, etc. — low. But there was a reason it took so long for the city to commit to building a cruise terminal: They're expensive.

As recently as 2009, the port's estimated cost for building the terminal on Pier 27 was $60 million. When the project was ceremonially initiated on Jan. 31, the price tag was announced at $92 million.

When asked how the costs increased by so much in just over two years, the port's reply is straightforward: That was then and this is now. "The simple answer is that initial or early estimates were based on rough drawings without complete knowledge of the existing conditions of the site, site and terminal requirements, etc." writes John Doll, the port's development project manager. The current estimate was "based on final drawings.... The more detailed the drawings, the more precise the cost estimate."

The discovery, in short order, that costs are surging by 50 percent might put the kibosh on a normal development project ("Frankly, the cruise terminal isn't worth the risk"), but not one lashed to the America's Cup like Ahab to Moby Dick. So when some $40 million in mitigation costs were added to the mix, the port had little choice but to soldier on.

To state that the world of San Francisco waterfront development is complex is akin to noting that an America's Cup catamaran is big. But, to greatly simplify, much of local waterfront development falls under the purview of the San Francisco Bay Conservation and Development Commission (BCDC), a state body. The BCDC weighs the impact on the environment and public waterfront access a project like the combined America's Cup Village/cruise terminal would create, and imposes offsetting mitigation projects. The BCDC estimates the cruise terminal's necessary mitigations will total $40 million — costs not included in the project's announced $92 million budget. This was the impetus for port director Monique Moyer's anguished staff e-mail. "I have thought about it and I can't see ... how I can commit the Port not only to prioritizing these items ahead of everything else, but also mortgaging itself to pay for it all," reads that Jan. 5 note. (Subsequent calls and messages for Moyer have not been returned.)

The BCDC did subsequently grant longer timelines for the port to complete the costly mitigations: "That provides them with a lot more time to find funding sources," notes Lindy Lowe, a BCDC senior planner. This is good — while the funding plans the port has thus far generated merit points for creativity, their feasibility is questionable. The port is gambling that a supermajority of voters will approve a bond measure — or, in another ploy, it proposes exploiting property tax payments from a development project that hasn't yet been approved, let alone built. There's also a somewhat fantastic notion about selling air rights to private developers, allowing them to build denser and taller. And if any of these speculative schemes fail, it may become incumbent on the city to swoop in and make up the difference out of its general fund.

"The port is committed to delivering these public benefits," said Brad Benson, the port's special projects manager, at a Feb. 2 BCDC meeting. "Our challenge is figuring out how to fund it."

Expect more sleepless nights for port leadership.

Bill Clinton got a lot of mileage out of parsing the definition of "is." Imagine what he could have done with "endeavor."

This year, the city left a $12 million hole in its budget in anticipation the America's Cup Organizing Committee would provide the funds seven days after the approval of the project's Environmental Impact Report in late January. That did not happen. As of press time, the city has not received "any portion of the $12 million in revenue that is assumed in the City's fiscal year 2011-12 budget," reads a subsequent evaluation from the controller's office.

Glancing over the fine print, however, the Organizing Committee needed only to "endeavor" to raise $32 million over the next three years to offset city costs, and was only required to "endeavor" to "meet its fundraising target of $12 million for year one no later than seven working days after completion of the environmental review." There isn't any language whatsoever in the contract noting when the fundraisers will "endeavor" to actually fork over the loot to the city. Ominously, the $32 million estimate of city-incurred hosting costs the Organizing Committee's contribution is meant to ameliorate appears to be low. The budget analyst now approximates those pending costs at $51.8 million.

"I am very troubled," says Supervisor David Chiu, who ordered the controller's audit. "They are well behind the fundraising requirements put in place to protect the city's costs. It's clear we're not on course."

The Feb. 6 audit revealed the Organizing Committee had about $827,000 in cash, pledges for about $3.2 million payable over the next several years, and an $8 million payment from the America's Cup Event Authority characterized as an advance on future sales to be derived from a revenue-sharing split on sponsorships. Mark Buell, the chairman of the volunteer Organizing Committee, says he's "hopeful" that payments from the Event Authority "will be more than a one-time thing." That would be grand: As Controller Ben Rosenfield tells SF Weekly, "If they don't raise the money, it's on the city."

Chiu states that this must be addressed in the forthcoming negotiations regarding final approval of the America's Cup pact. It's yet another addition to a vast list of numbers that must be crunched, demands that must be answered, and gripes that must be settled before this ship sets sail. And time is running short.

Those about to engage in high-stakes negotiations might also want to know:

• The cost of mitigations to be requested by the National Park Service has yet to be calculated;

• A lawsuit from a group of environmental and neighborhood groups — including Peskin's Telegraph Hill Dwellers — who appealed the project's Environmental Impact Report may be filed by Feb. 24, potentially gumming up the process right when time is of the essence. A lawsuit may be filed regarding the terms of the future development agreement, too;

• An eye-opening suit filed with the New York State Supreme Court by a sailing team called African Diaspora Maritime, spurred by the rejection of its race entry, alleges that Team Ellison's arrangement to extract exclusive use of real-estate in exchange for bringing the race to San Francisco — the very core of the deal — violates the founding deed of the America's Cup.

A hearing on the African Diaspora Maritime case is anticipated this spring; team skipper Charles Kithcart has admitted to the media that some of the money required to engage the prestigious law firm McDermott Will & Emery came from "people who don't like Ellison." Event Authority CEO Stephen Barclay says he's confident the case will be dismissed.

Long prior to that hearing, however, it will be clear which way the deal between the America's Cup and the city is going. In the coming days and weeks any deal-breaking differences will have to be hammered out — or not. Asked if, in the event of the latter, the Event Authority is looking at other cities as a plan B, Barclay's response is instantaneous: "There's always a plan B."

Outside the window of the Ferry Building, tiny white sailboats cut through the waves while hulking cargo ships slowly pass beneath the Bay Bridge, heading toward the Golden Gate, and parts unknown. Inside, the mood is less serene. Nineteen members of the BCDC are present — it's a massive committee — and they're having trouble getting their heads around how evicting Sinbad's restaurant and demolishing the pier upon which it sits is somehow tied to the America's Cup.

Various committee members self-identify as kite-surfers or "a lowly kayaker" — but everyone wants to ensure that the city's recreational boaters have proper access to the waters, even on the days catamarans nearly worth their weight in gold will be racing in the Super Bowl of yachting. The scores of millions of dollars of necessary mitigations for the cruise ship terminal — and the port's uncertainty of how to foot that bill — eventually comes up, too.

Commissioner Tom Bates — who is also Berkeley's mayor — seems to grow weary during marathon discussions of bond measures, infrastructure finance districts, kite-boarding, mitigations, and, finally, temporary 10,000-car parking lots.

Eventually, he blurts out, "I think it's a giant SNAFU" — a military acronym for Situation Normal: All Fucked Up. "The whole thing."

The room erupts in laughter. It remains to be seen how funny Bates' quip will be in the years to come.

About The Author

Joe Eskenazi

Joe Eskenazi

Joe Eskenazi was born in San Francisco, raised in the Bay Area, and attended U.C. Berkeley. He never left. "Your humble narrator" was a staff writer and columnist for SF Weekly from 2007 to 2015. He resides in the Excelsior with his wife, 4.3 miles from his birthplace and 5,474 from hers.


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