Harbor Island redevelopment moves forward amidst stalemate

Port of San Diego’s commissioners were unable to agree on whether to cancel agreement with Sunroad Enterprises.

SAN DIEGO — Plans to redevelop a portion of Harbor Island will move forward as originally planned after a proposal to terminate a contractual relationship between the Port of San Diego and Sunroad Enterprises failed to move forward.

The Port of San Diego’s Board of Port Commissioners debated amongst each other for nearly two-and-a-half hours, March 13, before reaching a stalemate on whether to amend or terminate the district’s agreement with Sunroad Enterprises.

At heart of the issue is whether the eastern Harbor Island redevelopment should be pursued as one 500-room hotel project or a phased development where a 325-room hotel is built first, followed by a 175-room hotel project.

The port district and Sunroad Enterprises had entered into an exclusive negotiating agreement, or ENA, in 2016.

Complicating matters: Plans to redevelop Harbor Island’s eastern edge could still be altered depending on the outcome of a lawsuit involving the California Coastal Commission and port district.

The commission’s deadlock, however, means the proposed redevelopment will move forward as originally planned: Build a 325-room hotel on an “elbow” parcel now and potentially develop a 175-room hotel near Sunroad Marina later.

Harbor Island’s eastern end, which is about 55 acres in size, is considered by the port district to be the last large-scale redevelopment opportunities on San Diego Bay. Car rental companies and a marina, today, primarily occupy the eastern edge of Harbor Island.

Port district staff acknowledged plans to redevelop the eastern portion of Harbor Island has been difficult, but the 55-acre area is still prime for rebirth.

“The port now has the opportunity to reposition the site to a vibrant retail and hospitality destination,” Port of San Diego Real Estate Director Tony Gordon told commissioners. “Redevelopment opportunities of this scale do not come around very often.”

Commissioners were unable to reach any sort of consensus on how to move forward with one of two proposals.

The first proposal was a port district staff recommendation: Cancel the ENA with Sunroad and start the development process all over again. Commissioners were deadlocked on this proposal, 3-3.

A second proposal to negotiate an amendment to the ENA and allow Sunroad to develop a “high-quality” 500-room hotel on Harbor Island’s eastern end also failed by a 3-3 vote.

Commission Chair Rafael Castellanos abstained from the deliberation.


Port Master Plan

Sunroad and the port district revisited their legal status in hopes of remaining consistent with a Port Master Plan amendment, which allows for the development of 500 rooms across as many as three hotels and located on three separate parcels on Harbor Island’s eastern finger.

One hotel property, which would feature 175 rooms, would be located at the farthest end of the Harbor Island finger.

The other 375 rooms, which would have been built first, were proposed on a stretch of land adjacent to Sunroad’s marina parcel.

A single 500-room “high quality” hotel, conversely, could occupy the western edge of Harbor Island’s eastern edge – or “elbow parcel” – and would be consistent with the Port Master Plan amendment.

Building a single 500-room hotel in one phase – as opposed to spreading it out in two phases and multiple properties – would, according to Gordon, speed up the development process and allow Sunroad to still pursue a 175-room hotel project on its marina parcel.

The Port Master Plan, according to port district staff, does not allow for phasing.


ENA Cancellation

Sunroad’s representatives, during their presentation to commissioners, acknowledged the right of both parties to cancel the ENA.

The port’s cancellation of an ENA where the agreement’s other party did not miss any milestones could cause other developers to question or distrust the request for proposal process.

“The port tenants association and all other partners are watching this decision closely,” Uri Feldman, who spoke to commissioners on behalf of Sunroad, said.

Pursuing development plans at Harbor Island’s eastern end with another developer, Feldman said, would only delay the port district plans.

Commissioner Michael Zucchet, conversely, challenged Sunroad’s position, stating no progress has been made on the proposed development and two California Coastal Commission decisions went against the project.

“Sunroad is not a tenant on this parcel,” Zucchet said. “They responded to an open RFP, along with others. This has nothing to do with anything that they do anywhere else on the port. I personally think a reset is in order.”

The port district and Coastal Commission are currently engaged in a lawsuit over this matter.

Commissioner Robert Valderrama, however, echoed Sunroad’s concerns, specifically questioning what a canceled ENA would mean for all future port district projects. The port district, according to its staff, does not have a precedent of canceling ENAs. Port district staff confirmed Sunroad did not miss any of its requested milestones, further complicating the case for cancellation, Valderrama said.

“We’re going to be terminating an ENA when the tenant has not done anything wrong [or] has not missed any of their obligations. It looks like an arbitrary decision we would be making, which sets a bad precedent,” Valderrama said. “What’s the value of having a contractual relationship with somebody if it could be pulled out from under your feet at any given time, and you didn’t do anything wrong. We’re penalizing a tenant in good standing who hasn’t done anything wrong.”

Commissioner Ann Moore disagreed, stating she was “personally frustrated” with the project moving slower than molasses.

“One of the primary premises that we entered into this ENA was this idea that we would get development in short order,” Moore told her colleagues on the dais.

She also questioned the updated Sunroad proposal, in terms of whether it was consistent with the Port Master Plan.

Canceling an ENA would be doing a whole lot more than hitting the pause button, Commissioner Dan Malcolm stated in response to port district staff’s recommendation of resetting the project’s clock.

“[Port district staff said] it makes sense to hit the pause button here. This is a lot more than hitting the pause button,” Malcolm said. “When you have a staff recommendation to, basically, cancel a three-year process that results in an ENA … that’s a lot more than hitting a pause button.”

Moore retorted the board actually made a mistake in approving the project in the first place. She said she, in 2016, envisioned Harbor Island’s entire eastern finger being developed. Sunroad’s initial presentation, made roughly two years ago, convinced her Sunroad and Oliver McMillan were redeveloping the area together but in separate projects would achieve such a vision. Now she’s unclear whether her original vision would be achieved at all.

Attorneys for the port district stated either party could cancel an ENA, which is scheduled to end in September.


Communication of Priorities

Randa Coniglio, the port district’s president and CEO, told board members they might not be relaying their priorities about the Harbor Island project.

“The biggest issue for us, as we’ve been struggling with this over the last few months, is a lack of a good understanding of exactly what the board’s … priority objectives are related to this development,” Coniglio said.

Throughout the deliberation it became clear the port’s commissioners searched for the quickest route possible for development to occur. Commissioners struggled, however, to determine what, exactly, would constitute the quickest possible route to development.

“This is chaotic and confusing,” Commissioner Marshall Merrifield said. “We have an ENA. We have a project underway. Maybe we just forge ahead with that.”

Zucchet, conversely, said he cares about selecting the right project, not the fastest one. The Harbor Island redevelopment would take several years regardless of which path commissioners selected, he said.

“It’s going to take years no matter what happens today,” Zucchet told his colleagues. “It’s a question of whether it’s some years [or] many years. We’re years away and I’d like to get it right.”

Malcolm said the time for contemplating and planning is over – the port district has an ENA, entitlements, a developer and a supportive market, hence the time to strike is now.

“Right now we have an opportunity to strike in the market,” Malcolm said. “There’s a time to plan and there’s a time to build. We’ve done a lot of planning to get to this point. We are at the time to build.”

The disagreement on a charted course is exactly why the commission needed to reset the project, Moore told her colleagues.

“This discussion we had shows what an incredible mess we have on our hands,” Moore said. “I’m not necessarily saying I want to have the fastest project. I want to have the best project. We only have one opportunity to build our bayfront the way we want it.”

Merrifield, Moore and Zucchet voted in favor of terminating the ENA, while Bonelli, Malcolm and Valderrama supported a contractual amendment.

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