City Deal Would Give Aerobics Center Big Break on Rent

The City of San Diego is negotiating to lease prime La Jolla land to the developer of an aerobics center for about one-fourth of its appraised worth.

Property Department officials are currently in exclusive negotiations with the Hospital Corp. of America to lease 3.49 acres of city-owned land to the medical conglomerate for the construction of an aerobics center next to the Green Hospital of Scripps Clinic. The land is near Torrey Pines Golf Course and is in the Golden Triangle, where land values have increased rapidly in the last few years.

An analysis of the property, which was done for the city by Gerald S. Kibbey & Associates Inc., concluded that the land is worth $3.8 million--or $25 a square foot. A copy of the six-page analysis, which is dated Sept. 8, was recently obtained by The Times.

When the Kibbey value is plugged into the city’s standard formula for leasing public land, it would mean administrators could charge an annual rent of $380,000, or 10% of the property’s total value.

But city administrators are asking for far less. Property Department Director Jim Spotts said Thursday he is negotiating a contract with HCA that calls for a base rent of $80,000 in the first year, escalating to $165,000 in the third year of the lease--figures that place the land value for the total parcel between $6.60 and $10.80 a square foot.

Spotts acknowledged Thursday that he has decided not to act on the Kibbey evaluation, which cost the city $1,500, and instead press on with negotiations that are based on the lower values for city land. Spotts said he came up with his figures after calling around the country to compare other aerobics operations to the proposed center.

“Mr. Kibbey is an appraiser that I have a great deal of respect for,” Spotts said. “He has stated an opinion, and I have to take note of that opinion and I have to respect it. That doesn’t mean I won’t question it and (that) I won’t use whatever resources I can to examine the results.”

However, Councilwoman Abbe Wolfsheimer, whose district includes the site for the proposed aerobics center, said she thinks it is “outrageous” for the Property Department to ask for so little from HCA, and she added that she would ask her colleagues not to approve the agreement.

“We’re looking at the Golden Triangle, which has been named Golden for one reason. Not because the sun shines on it, but because of its dollar value,” Wolfsheimer said.

“This property is within that area. It’s pure gold, in a sense.”

During the 1986 fiscal year, which ended June 30, the leasing of public land netted the city $16.9 million in revenue, according to Property Department statistics. Rents can be charged on a flat, per-square-foot basis or they can be a percentage of the income from the business operating on city land. The city leases its land for a variety of purposes--from golf courses to hotels--and Spotts said the political decisions on what to do with the land often mean forsaking high rents to accomplish a public good.

“We are not always going for the highest return on property,” Spotts said. “We manage property for the public good, which is not necessarily the highest dollar return. We are taking good, prime pieces of property that have lots of potential, and use them for a park.”

One example, Spotts said, is Mission Bay Golf Course, which yielded 3 cents a square foot in revenue in 1982. Yet the Hyatt Islandia Hotel not far away yielded $1.57 a square foot in 1982, the last year Spotts said he had figures available for a comparison on the properties.

“We could turn Mission Bay into hotels,” Spotts said. “We don’t. There is a variety of uses in Mission Bay, and isn’t that good?”

But once the city establishes what the land is supposed to be used for, administrators say they will ask for annual rents equal to 10% of what the land is worth for that use. So if land is eventually valued at $10 a square foot, the city will charge $1 a square foot each year for the term of the lease.

The concept of putting an aerobics center on the 3.49-acre parcel off Torrey Pines Road was approved by the City Council in 1982. It solicited bids on building the center, as well as a neighboring hotel, and the Sheraton Corp. was named the winner.

At the request of Scripps officials, Sheraton relinquished its right to build the aerobics center and HCA was substituted as the developer. Hospital officials reasoned that HCA, which has an ongoing relationship with Scripps and is committed to providing major capital improvements, would be best suited for the project because the aerobics center is considered an extension of the adjacent Green Hospital.

“The decision was made by council that they wanted an aerobics center on that site,” Spotts said. “We have tentatively dedicated the acreage. What’s a fair return for that use?”

It was a puzzling question, Spotts said, since there were few aerobics centers in operation during the formative discussions about the proposal.

After consulting with real estate experts and calling around to aerobics centers throughout the country, Spotts said, he decided to tentatively suggest that the city get $80,000 to $165,000 a year in base rent. In the third year, presumably after the center was constructed and in operation, the city would have the option of taking a percentage--possibly 10%--of the gross revenue at the facility, which would sell memberships. The center would have a running track, a pro shop and restaurants.

The City Council voted on Sept. 8 to award HCA the exclusive rights to negotiate a lease to build the center. The agreement signed with the corporation on Sept. 8 reflected the $80,000 to $165,000 base rents, said Dick Johnson, who is overseeing the project for the Property Department.

That same day, however, an appraisal firm hired by Spotts’ department finished an appraisal that showed those numbers were too low for the parcel fronting Torrey Pines Road and next to Green Hospital. The Kibbey appraisal pointed out that less desirable property on the east side of Torrey Pines Road had sold for $22 to $23 a square foot.

“The research on the aerobic facility has proven to be much more difficult, since no other similar facilities appear in the county and none can be suggested by the proposed operators of this facility,” says the analysis, which also said that hospital-related land has values comparable to other commercial uses.

“Lacking any additional input, we suggest that the value of the entire parcel under its current plan of utilization would be at a rate of $25 per square foot,” the appraisal said. “This would assume proper zoning and availability of utilities. There appears to be no conclusive evidence that the land value should be less due to the proposed development of an aerobic facility and also a parking structure. If a lease were put in place which had specific contractual terms, we could estimate a potential lease fee and leasehold valuation.”

A member of the appraisal firm declined comment Thursday. Richard Bracken, executive director of Green Hospital who is also negotiating the lease on behalf of HCA, also declined comment.

Dennis Richter, vice president of Scripps Clinic and Research Foundation, said he was not familiar with the details of HCA’s negotiations, but said any proposed agreement would be open to public scrutiny.

“Whatever those terms are will be a matter of public record, and if the terms or the prices are unfair, I’m sure somebody will call attention to it,” Richter said.

During a lengthy conversation Thursday, Spotts said the important part of the proposed lease with HCA is the 10% of the aerobics center’s gross revenue that the city will receive. But he said that, even taking that into account, city estimates show the projected income from the enterprise would yield rents equal to a value of $18.30 a square foot.

Spotts gave several reasons for not taking the Kibbey appraisal into account in his negotiations with HCA. One was that he had confidence in the original numbers he proposed for the lease, and another was that Kibbey’s valuations amounted to unsolicited advice.

Spotts said his department meant only to ask the Kibbey firm what values should be placed on the parking garage at the aerobics center. That direction was somehow misunderstood, said Spotts, and the firm reported back with an appraisal on the entire parcel.

Spotts also said injecting the Kibbey information into the negotiations with HCA might be considered a breach of good faith.

“Here’s where you get into the good faith of negotiations,” Spotts said. “You reach some tentative terms, you get a position and you’re going along, and someone suddenly comes in with another opinion. That’s why I felt I was bound by good faith to stick with those (original figures).”

Finally, the property director said he didn’t recognize the importance of the Kibbey appraisal immediately because of other city business that demanded his attention.

“I don’t think that’s inhumane,” Spotts said. “I think that’s typical for most of us when we have a lot of things to handle at any point in time.

“Maybe important doesn’t register with you right then, then you talk to your staff and pretty soon you begin to appreciate the importance.”

Spotts said that last week he decided to order a couple of other appraisals on the land to see whether Kibbey was on target at $25 a square foot. Meanwhile, negotiations are continuing with HCA on the aerobics center and an eventual lease.

“I concluded that it is better off that we get a couple of other opinions and see what they say,” Spotts said.