Deal gone wrong

“Buy land—they’re not making it anymore.”
—Mark Twain

Nothing very good can come from a situation teeming with high-priced, Bentley-driving lawyers.

So, when the “deal that was” suddenly became the “deal that wasn’t” in the rush to lock in the rights to a swatch of land next to the San Diego Convention Center for future expansion, it got Spin Cycle to scratchin’ its tiny head, wondering, How did this deal fall through?

In a review of e-mails, reports and letters and interviews with some of the players in this melodrama, Spin Cycle discovered that the much-uttered words—“The deal fell through”—in this instance do far too little justice in capturing the complexity and emotion of this escapade in deal-making.

No, the behind-the-curtains conversations beginning late last year among convention-center executives and board members, leasehold sellers and potential buyers—oh, and the lawyers—rise even to the level of questioning just how much power Carol Wallace, president and CEO of the Convention Center Corp., should wield in pursuing land deals.
But it’s always best to start at the beginning.

Ray Carpenter, an amiable fixture on the bayfront whose family ties there date back to the 1930s, runs a marine construction company now based in National City. But before that, Carpenter operated from the site now coveted for a convention-center expansion and a fancy, sail-shaped, bayfront hotel. He’s held the lease on the five acres of land and four acres of water since 1981.

“It was characterized as a marine contractor’s work basin. We’re just a bunch of hard-hat guys with cranes and pile drivers—that sort of thing,” Carpenter explained. But with the convention center expanding Carpenter’s way over the years, he said the Port of San Diego made it clear that he would have to relocate his business.

Fifteen years ago, he recollects, he sold half interest in the lease for $1 million to another long-time bayfront denizen, ship-repair mogul and San Diego Harbor Excursion CEO Art Engel, when the port ran Engel’s water-transport business off the G Street Mole.

The pair, Carpenter said, proceeded to spend about $5 million in prep work to get the land portion rezoned for hotel use, eventually gaining approval from the state Coastal Commission. But he said the port limited the number of rooms allowed, which “restricted a lot of things, including the cost-effectiveness of the whole project.”

Meanwhile, the lease still required the duo to develop a Water Transportation Center, which Carpenter said has cost “in the neighborhood” of $6 million and should be completed in a month.

“So, we’ve got probably $11 million or $12 million in this damn thing,” the 67-year-old Carpenter said. “My wife keeps saying, ‘What are we doing?’”

Add on top of a hotel dream with no financial backing the $500,000 a year in rent to the port and no significant revenue, and the two partners decided to put the lease up for sale. Asking price: $14.5 million.

Two years ago, enter a couple of relative unknowns in the building world, Todd Sabin and Brian Ross, who wielded an impressive list of team members and, as their bio attests, a “powerful vision for this unique property” that “has forged a path where others have failed.”

“They’re young guys,” Carpenter said, “but they were enthusiastic.”

In fact, Carpenter notes—and Convention Center CEO Wallace confirms—that he was instrumental in hooking up Sabin and Ross with convention-center executives to discuss a joint development of the Spinnaker Waterfront Hotel and the center expansion.

“I personally took them to the convention center and introduced them as their new neighbors, and then I stepped back,” Carpenter said. “And we stayed away from the convention center and any discussions with them until after this thing was over.”

By over, Carpenter presents a lawyer-produced timeline that details the two attempted purchase agreements and numerous failures to meet escrow closing dates. “I was really sad when I had to terminate with them,” he said, which came Aug. 25. “We gave them six extensions, and after the seventh one, I still wanted them to close escrow. I think what you’ve got here, it’s unfortunate, are guys who said they could do something that they really couldn’t do, and they got themselves in over their heads.”

The e-mails obtained by Spin Cycle through public records requests of the Convention Center Corp. and the port reveal at first excitement, then disappointment, then blatant suspicion about the Sabin and Ross team.

In one telling e-mail, CEO Wallace writes to convention center board Chair Cheryl Kendrick four days before the Aug. 25 deal termination while the development duo sought to continue negotiations: “Consider this: Spinnaker Group string us along and use our political muscle to obtain the extension. Then they don’t agree with anything. With the extension, the site becomes more valuable and now he has the parties to proceed without us.”

Kendrick replied: “I was thinking exactly the same thing…. Do you really think they’re that smart?”

In a subsequent interview, Wallace—who used a marital analogy to describe her organization’s former relationship with Sabin and Ross—said she’d discovered that the two were negotiating with port officials about a hotel-only plan while talking simultaneously to convention reps about a hotel and convention-center expansion.

“Some things didn’t compute,” Wallace told Spin Cycle. “It didn’t make sense that they would be acting the way they did when we’re supposed to be engaged.”

Now with the marriage called off, Carpenter and Engel are working directly with the convention center folks to sell the lease to the center for a $1-million upfront “due diligence fee” and $13.5 million in cash at the closing of escrow, should officials decide within the next year that the project is feasible.

But don’t count out Sabin and Ross (who have consistently declined to comment to Spin Cycle) just yet. They have local powerhouse attorney Brian Seltzer, close friend to incoming Port Chair Steve Cushman, on the case.

Last Friday, Seltzer was handed a letter from Wallace urging his client “not to interfere” with the Nov. 4 port meeting, where port officials were poised to sign off on a memorandum of understanding among the port, Carpenter and Engel and the Convention Center Corp.

But as we go to press, it’s been confirmed that port commissioners have delayed the signing for 30 days. “We’ll have to see what that does to the deal,” Carpenter said.

Seltzer told Spin Cycle Friday, before hopping into his late-model Bentley, that his message to the convention-center board and the port is this: “Guys, slow down here, consider our proposal. We’ll take the economic load here. … Just slow down for a second and give us a chance.”

By my count, that would be an eighth chance. Yeah, this’ll be interesting.    

Take a chance: Send a tip to
johnl@sdcitybeat.com.

Want more? Here’s an update: Spin Cycle couldn’t possibly cram all the intriguing comments and e-mails into the space-constrained print column. Herewith a sampling of the leftovers:

- Bob Nelson, a local marketing executive and Convention Center Corp. board member, expressed “exasperation” in an e-mail to board Chair Cheryl Kendrick following the board’s Sept. 26 meeting about whether the board was wisely poised to “get in the hotel development business.”

Apparently not satisfied with the answers he received from convention center CEO Carol Wallace about a perceived commitment to build a hotel and how that affects the lease purchase price, he wrote, “One solution is for me to stop asking questions that I believe deserve to be answered. The other answer is for Carol to just listen to the actual question and give a direct answer to that question, not some other question.”

- One interesting player in this soap opera is Perry Dealy, who worked for developer Doug Manchester until resigning in March to reopen his own development-services firm. Within two weeks, he had been hired by the Convention Center Corp. as a $150-an-hour consultant on the expansion plans. Asked if he maintains any allegiance to Manchester, whose bayfront hotels would likely compete with a new hotel next to the center, Dealy said his hopes to pursue hotel options with Manchester failed to materialize “due to the economy.” Added Dealy: “I do not have any conflicts with the Convention Center or other public projects that I am pursuing.”
 
- Brian Seltzer, the Spinnaker group’s attorney, spoke briefly to Spin Cycle in the convention center’s subterranean parking garage on Friday. Some highlights:

When asked why escrow hadn’t closed on so many occasions, Seltzer was coy: “I’ll leave that to another day, the reasons why. I think that’s a discussion better had in a different venue and in a different way.” (When told of the comment, leaseholder Ray Carpenter remarked, “That sounds like a threat.”)

“There’s a significant difference between a developer who has a nominal investment in a process and simply options something for sport in hopes they can close it versus someone who has paid $2.9 million in option money, real money, that they’re not going to get back.” (Carpenter countered that $2 million of that sum amounted to non-refundable deposits that applied to the purchase price, lost when Sabin and Ross failed to respond to a final proposal and the deal was terminated.)

- During the height of negotiations in May with Sabin and Ross, e-mails show that Wallace had to deal with the death of her mother-in-law, including traveling to Dallas to help with funeral arrangements.

- Several e-mails also shed light on efforts to “choreograph the conversation” with incoming Port Chair Steve “Iron Fist” Cushman about the board’s negotiations with Sabin and Ross. In a June 6 e-mail from Dealy to the team: “We also agreed on a two-step Cushman approach whereby Carol and Cheryl will call first thing this morning and then let Brian and Todd know and they will place a call second.”

Three days later, Chris Hargett, the port’s senior real-estate asset manager, fired off a testy letter to Sabin chastising the Spinnaker folks for negotiating with the Convention Center Corp. without port approval. “We have been very upfront and honest concerning the transfer of the Lease and Option and expect the same in return,” Hargett wrote.

In another e-mail in early September, an assistant to Kris Michell, a deputy chief of staff in Mayor Jerry Sanders’ office, informed Kendrick that an appointment with Michell had to be canceled, leaving Kendrick in a meeting with Cushman. Replies Kendrick, “Not good. … I don’t like the idea of seeing Kris for the first time in months with Cushman there as well. But if there’s no choice, it can’t be my fault if she’s hearing things for the first time.”

- Convention Center attorneys were well aware that if the port delayed Tuesday’s scheduled decision on the memorandum of understanding, Carpenter and Engel would not be happy. In an Oct. 20 e-mail, Christopher Neils of Sheppard Mullin wrote that he had spoken to the pair’s attorney, Ross Schwartz. “Art and Ray have instructed him that they won’t wait until December. … It sounded like Ross had firm instructions on this.”