In 2005, CalSTRS (headed by Mike DiRe, STRS’ Sacramento based Director of Real Estate Investments) partnered with a developer, Pacific Waterfront Partners (“PWP”) (headed by Simon Snellgrove), to develop two parcels of land on The Embarcadero in San Francisco. One parcel was a parking lot on The Embarcadero managed by the San Francisco Port, and the other was a 2.5 acre parcel of land owned by Golden Gateway Center (“Gateway”), which since 1992 had been leased to Bay Club for a tennis and swim club.
STRS and PWP formed a single purpose entity (“SPE”) known as San Francisco Waterfront Partners II, LLC (“Waterfront Partners”) to develop the two parcels of land. STRS was the 99 percent investment member of Waterfront Partners, put up all of the cash for the development by funding its 99 percent investment share and PWP’s 1 percent development share in the form of $13 million in developer fees and had two of the three votes on Waterfront Partners’ management committee. PWP/Snellgrove had the day-to-day task of obtaining government approvals and permits for the luxury condominium project proposed for the combined site, and STRS wrote the checks.
Although Waterfront Partners entered into both an Option Agreement with Gateway in 2006 and an Exclusive Negotiating Agreement (“ENA”) with the Port to entitle and develop a luxury condominium project, they took six years and spent $30 million before Waterfront Partners in 2012 finally had regulatory approvals from the San Francisco Planning Commission and the Board of Supervisors. Along the way, Waterfront Partners and STRS made a number of decisions that doomed their project to defeat.
For example, one of Waterfront Partners’ political consultants in 2008 warned the developer that the then 84-foot height of the project was its major weakness, that well known opponents of the project would accuse Waterfront Partners of being a “greedy developer,” and that the height of the project, which was at the 84-foot zoning limit for the Northeast Waterfront area, could spell its defeat.
Step in District Three Supervisor David Chiu, in whose district this project was proposed. Supervisor Chiu convinced the developer to delay seeking approvals for an 84-foot condo project until the Planning Department could complete a study and make recommendations about height and design for commercial construction on the Northeast Waterfront.
Two years later, the Northeast Waterfront Study recommended a tiered design along the waterfront, in which buildings on The Embarcadero would not exceed 40 feet in height, but then step back from the Waterfront and rise to as high as 130 feet, provided the taller buildings did not exceed one third in bulk of the total structures at that height.
That was all that Mr. Snellgrove and STRS needed to hear. Waterfront Partners spent another two years redesigning its project to rise to 136 feet (exceeding the recommended height limit) and to have double the recommended bulk proposed by the Study. The opposition to this project began to grow. Notwithstanding opposition, however, Waterfront Partners’ project passed the Planning Commission on March 22, 2012, and in June 2012 the Board of Supervisors changed the zoning on the property to permit the proposed 136-foot tall luxury condominiums. STRS and Waterfront Partners must have been counting their chickens, which is when an extraordinary thing happened.
Opponents of the project rallied in a grassroots movement that came to be called the “No Wall on the Waterfront” campaign. Led by a small group of activists who opposed northeast waterfront construction at this site, including Lee Radner, Jon Golinger, former mayor Art Agnos, former City Attorney and Board of Supervisor member Louise Renne, Aaron Peskin, and others, opponents began a petition signature drive to place a referendum on the ballot challenging the Board’s zoning ordinance.
In 30 days, the campaign gathered an extraordinary 30,000 signatures to put the measure on the ballot. Nevertheless, Waterfront Partners and STRS still had a chance to avoid a public vote and build their project. If they had withdrawn the 136-foot design and submitted the original height compliant 84-foot project, which was not subject to a public vote, there would have been no referendum on the ballot. Based on their polling results, however, Messrs. Snellgrove and DiRe decided to push all of their chips to the center of the table and go for broke.
On November 5, 2013, 84,000 San Franciscans defeated the project by a whopping two-thirds margin. The vote wasn’t even close. Ignoring public sentiment and the taint their failure had put on developing this land, STRS and Waterfront Partners decided to propose a hotel project instead of luxury condos. But the developer was out of time on the Gateway option and on the Port’s ENA, political opposition to development of the Northeast Waterfront had solidified, and STRS never seriously pursued the hotel option. Thus, over ten years since 2006, STRS had spent $54 million of teachers’ pension funds on this project and never turned a spade of earth.
You’d think that STRS would look for another way to make money investing the teachers’ pension money, but that’s not what happened. Instead, with STRS’ financial backing, Waterfront Partners sued Gateway for fraud, demanding that Gateway return $9.5 million in nonrefundable option payments and pay Waterfront Partners another $80 million in lost development expenses and interest. Although STRS had fired Simon Snellgrove in 2016, for the next three years STRS paid Snellgrove and another PWP employee over $700,000 to testify at a 2019 trial.
That lawsuit in San Francisco Superior Court went to a jury trial in January of this year following three years of pretrial maneuvering by Waterfront Partners and STRS. In early February, the jury rejected Waterfront Partners’ fraud claims. The following day, the Court threw out the rest of Waterfront Partners’ claims.
Gateway will now ask the Court to hold that Waterfront Partners, a shell with no assets, and STRS, its funding source, must repay all of Gateway’s attorneys’ fees and costs. It is estimated that STRS spent in the range of $10 million in legal fees prosecuting the lawsuit to a total loss and may owe Gateway a comparable sum if the Court agrees with motions Gateway is anticipated to file later this month.
Glenn Zwang and James Wright are shareholders in law firm Buchalter’s San Francisco office. The firm represented Golden Gateway Center.
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