City and Port Near $32 Million Deal to Buy Out Partnership on Key Convention Center Land

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A partnership that once ran industrial and dredging operations on the bayfront, before the Convention Center creeped closer and closer to its, operations will walk away with a more than $32 million payoff if the initiative to expand the Convention Center once more wins in November.

On June 12, the City Council and Port commissioners are set to approve the settlement, according to terms confirmed by two sources who requested anonymity because they were not authorized to speak publicly.

The partners, Ray Carpenter and Art Engel, will receive an immediate payment of $5 million, according to the proposed settlement. And then, the partnership would receive up to $3.2 million to compensate them for their efforts to get a hotel approved on the land.

If the ballot measure — being promoted by the campaign Yes! For a Better San Diego — is successful, it would increase the hotel-room tax and fund an expansion of the Convention Center. When it is certified as successful, Carpenter and Engel will receive $25 million in exchange for the lease to the land, which is crucial for the long-envisioned expansion.

If the ballot measure fails, then the partnership can continue to pursue its planned hotel on the property and keep the city and Port’s $5 million.

A rendering of the proposed Fifth Avenue Landing hotel / Rendering courtesy of Fifth Avenue Landing

The $33 million payoff is significantly larger than the $12.5 million plus interest the city could have secured the land for four years ago.

And, if approved, it marks the end of a long, intense drama and it’s yet another obstacle overcome as the city tries for its long-held goal of expanding the facility.

Fifth Avenue Landing, the parcel in question, is publicly owned — property of the state of California. But the Port district manages the leases on it. Carpenter’s operation had the lease for decades, where he pursued heavy industrial operations.

This is what the marine dredging and construction operation at Fifth Avenue Landing used to look like. / Photo courtesy of Fifth Avenue Landing LLC

Then, as the Convention Center transformed the land into tourism-centric uses, Carpenter formed the partnership with Engel and began pursuing a hotel.

As the economic cycles shifted, Carpenter and Engel eventually agreed to sell the lease to the city to facilitate expansion of the Convention Center. But then, the city’s plan for paying for the expansion fell apart after a judge ruled that the hotel-tax had been raised illegally without a vote of the people.

The city, and its affiliated Convention Center Corp., faced multiple challenges to expand the Convention Center. Leaders decided to simply stop making payments on the deal. Carpenter and Engel repeatedly warned them not to, and checked in regularly to alert them that they would be foreclosing on the lease and take it back.

“At the time, there was no plan on how to move forward and it was going to cost the Convention Center $1 million a year to keep the option open — and we did not know how long [Fifth Avenue Landing] would agree to keep option (sic) open. So it was the right decision,” said Gil Cabrera, now the chairman of the Convention Center Corp., in a statement.

Engel and Carpenter did not return a message seeking comment.

Ray Carpenter owns the lease at Fifth Avenue Landing where he and partner Art Engel are seeking approval for a hotel that would end plans for an expansion of the Convention Center for good. / Photo by Scott Lewis

After it stopped receiving payments, the partnership foreclosed and began pursuing a hotel project again. The Port of San Diego had ensured them they would have a chance to get a hotel approved. They later earned the support of the hotel workers union and partnered with a major hotel developer, Robert Green.

They increased their leverage by threatening to spend $500,000 against the campaign to expand the Convention Center.

Their hotel project was about to cross another hurdle until these latest negotiations intensified and the Port canceled scheduled hearings on the hotel.

Now a deal is just about complete.

“In such a large project, even at the $30M, it is still a small portion for land acquisition cost and given how much money we would make in TOT over time with the expansion, it is worth it,” Cabrera said.

City and Port leaders will argue, to justify the high cost, that the land got much more valuable with each successful step the partnership took to get permits for its planned hotel.

There is one major sticking point. The campaign to increase the hotel-room tax is a citizens’ ballot initiative. Labor unions and hotel owners are funding the campaign, and it will cost up to $1 million to gather the signatures to put the measure on the ballot and then more to campaign for it.

They’re doing it as a citizens’ initiative because there’s a chance that only getting a simple majority of support from voters would be considered a win. A landmark but still confusing California Supreme Court ruling basically said that the law that requires a two-thirds vote for special tax increases does not apply to citizens’ initiatives.

But some observers think it’s still unclear whether the ruling means you can raise taxes with only a simple majority passage of a citizens’ initiative.

Carpenter and Engel only get their payment if the measure wins. But what if the measure gets more than 50 percent of the vote but not two-thirds?

Before the election, the city attorney will have to decide whether that is a win or not. And that decision will likely be tested in court no matter what.

The city would only have a few months after the vote to settle the issue before Fifth Avenue Landing could continue with its hotel project.

It’s setting up a fascinating scenario. Though it could all be avoided if the campaign succeeds and two-thirds of voters support the measure.