Fallout From Manchester Episode : Port Hits Snag in Curbing Option Speculation
In January, when developer Doug Manchester attempted to sell his $100 option to build a waterfront hotel on public property for $15 million, criticism that he was engaging in blatant speculation reverberated from City Hall to the San Diego Unified Port District.
Although Manchester’s proposed deal with Seaport Manfred Company Inc. fell through, the Port District, as the agency that granted the option in the first place, decided to take steps to prevent a similar reoccurence on any of its property in the future.
The district was urged on by Mayor Maureen O’Connor, herself a former port commissioner, who accused Manchester of attempting to make an “obscene profit . . . through speculation” on public property.
Now, however, it seems that the task of preventing speculation on land options has hit a snag, principally from those who say the Port District’s proposed regulations would have an “anti-business” effect on people who want to build bay-side facilities or invest in companies with proposed waterfront projects.
At issue is a proposal by the Port District’s special attorney, Alan Perry, to curtail future speculation by taking away the developer’s profit from the sale of an option and turning it over to the Port District.
Perry, who has been working on his recommendation for several weeks, unveiled it Tuesday to the Board of Port Commissioners. The complex six-page document attempts to regulate a large range of option sales and transfers between limited partnerships, general partners, individual limited partners and outside corporations.
Perry says he has concluded that it’s unlikely that the courts would uphold the enforcement of an anti-speculation provision that gives the Port District the authority to arbitrarily withhold its consent of an option sale.
Instead, Perry says, the Port District’s legal “safety valve” is taking the profit away from any option sale or transfer through the creation of a “profit entitlement” provision that would be included in the agency’s future option agreements.
This provision would allow the Port District to receive the profits from the sale of options after the developer’s legitimate expenses, such as design and engineering fees, have been paid.
In an interview Wednesday, Perry said he believes that “the kind of profit provisions I’ve recommended to the port would have a less chilling effect” on business than similar provisions placed in Port District leases.
Perry said that, because leases usually require much more investment and are of long duration, while most option agreements are not, any profit take-aways included in Port District leases would be much more onerous and would probably scare away investers and lending institutions.
It was clear from the comments of port commissioners that some of them are now having second thoughts about the need to make any changes, primarily for two reasons. First, they are concerned about criticisms by some real estate attorneys with a special interest in representing clients with waterfront projects, who say that the profit take-away provisions will drive away business.
Second, there is a feeling that maybe there was never a big problem to begin with, that the Manchester episode was simply an aberration and that the Port District’s system of option agreements is fundamentally sound.
“I want a little more assurance that you are right,” Commissioner Phil Creaser told Perry on Tuesday in response to Perry’s statements that his proposal wouldn’t severely discourage businesses from investing in Port District projects.
“To the extent that his (Manchester’s attempted sale) was a one-time incident, there’s a lot of truth to that,” Commissioner William Rick said Wednesday. Rick, who recommended that Perry’s proposal be put off for two months while it is circulated for comment in the city’s business community, an action approved by the board, said, “I had a feeling it was going to get messy.”
There’s little doubt about the opinions of many real estate attorneys. Lawyer Miles Harvey told the commissioners that the imposition of “anti-profit clauses” in Port District options would further hinder what he called the agency’s “anti-business . . . reputation with many lenders.”
Richard Burt, an attorney who represents Seaport Village, said the proposal needed to be delayed until it had a full airing in the business community.
Perhaps the most cogent warnings came from Chris Neils, the lawyer who represents Manchester. Saying that he was speaking for himself and not his client, Neils said the profit take-away provisions under consideration would hamper the formation of investment partnerships “very early in the game.”
He said it was not clearly established that any change is needed, explaining that Manchester “didn’t buy his option four years ago to sell it.”
(Manchester has said it is “ludicrous beyond imagination” for his opponents to accuse him of speculation. He has explained that his company had to build the $200-million twin-tower Hotel Inter-Continental and turn over 12 adjacent acres to the Port District for construction of a convention center before he obtained the $100 option on property proposed for a third hotel.)
Neils said: “Port District options haven’t been sold like pork bellies on the Chicago (commodities) exchange. . . . That has not happened.” He warned that adoption of the proposed anti-speculation provision would send a “dangerous message to the business community.”
Perry said Wednesday that he had little doubt that San Diego business people will make their feelings known loud and clear.
“The business community will urge the port not to do this thing,” he said. “Legally, it’s a damn complex problem . . . and at least some of the port (commissioners) have begun to feel second doubts or fears that this could cause a chill. That’s legitimate for them to be worried about that.”
As for O’Connor, the mayor is aware that regulations on option sales are anathema to many investors and business people, said her spokesman, Paul Downey.
“But her position is still the same: Developers shouldn’t be reaping huge windfalls on public property” by trading in options, Downey said.
