One Rincon In Trouble

San Francisco is even tougher than San Diego … They have a stronger socialist tradition in San Francisco than in San Diego, and they mistrust the profit motive. They believe in extracting more money from the business community.

Such were the words of Urban West Associates’ (the developer behind One Rincon Hill) Mike Kriozere in a 2006 San Diego Business Journal article. Now, three years later as the residential market has been tossed into the toilet, the SF Chronicle is reporting that Mike Kriozere has little intention of paying the City of San Francisco about $5M of fees that were to be paid as part of the development agreement.

We posted back in October that the development of the second Rincon Hill tower was put on hold, and to date only 70% of the units in the first tower have been sold, indicating that sales have been essentially flat for over 6 months now.

“I did not give a personal guarantee that if the building failed to make a profit I would personally write them a check,” Kriozere said. “Any money has to come out of the sale of the units because I’ve made no personal guarantee of anything.”

From the sound of it, it sounds like the LP behind the development is ready to throw in the towel if talk of personal guarantees is coming up. The reality is that given the level of fees that were apparently negotiated by the City to approve the development, this was essentially a private-public partnership. And now that the market has busted, everybody should feel the pain, including the city. If there wasn’t a personal guarantee, then that is a deficiency of the agreement the City needs to deal with.

What’s happening here really doesn’t seem that odd. A development was pursued that didn’t pan out as anticipated, and as a result there are stakeholders left holding the bag. In most cases it’s the lenders (which may still be the case here), but this time the city is on the list. If there wasn’t a personal guarantee, then that is the problem the city has to deal with. It’s similar to all the non-recourse debt that fueled all the frenzy over the past few years.

Unfortunately for the developer though, the city and the public won’t see eye-to-eye with him on this, particularly after Kriozere giving such a careless statement to the SF Chronicle. Now all the public sees is a greedy developer looking to screw the city and the public. The reality is that neither the City nor the developer want to take responsibility for a development (and development agreement) that was designed around a housing bubble, and flawed from the beginning.

On a side note, it seems that about two months ago, the planning department approved a reimbursement to One Rincon Hill Development LP for some $1.5M in fees related to site work. If the city owes them more, then it perhaps could try to offset.

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