In a move to keep afloat a $200 million hotel project on Harbor Island, San Diego Port commissioners on Tuesday agreed to a number of rent concessions that will save the developer $19 million.
The revised lease were necessary, port officials said, because of a still challenging commercial real estate market that has made financing more difficult to secure. Without a change in the lease , port staff said the 450-room hotel project — already long delayed — would no longer be viable.
Among the approved concessions are new lease that will not only postpone the start of rent payments but also lower them for the first seven to 10 years of the 66-year lease. In addition, the commissioners agreed to evenly split the cost of an “in-lieu” fee of up to $11 million that is required to satisfy the California Coastal Commission’s longstanding demand for affordable overnight accommodations on state tidelands, which in San Diego County are overseen by the port.
In all, the total cost to the port would be a little more than $19 million.
Port Commissioner Dan Malcolm was quick to defend the port’s move to ease lease , which were approved in a unanimous vote, with Commissioner Michael Zucchet absent. Malcolm stressed that he wasn’t advocating for the developer, Sunroad Enterprises, which has been trying to build a hotel on east Harbor Island for more than a decade.
“In 2016, 2017, 2018, we were all working on one set of cost construction cost assumptions, working with very different debt and equity markets back then,” Malcolm said. “The port, when we develop these large projects, we have to look at the market the way it is, not the way that we wish it was.
“It is critical for us to do these projects. Every year our costs go up. We have mandates we have to meet. We have to have revenue-generating projects in addition to projects that enhance accessibility around the bay and have places for people to stay … It’s critical we take a look at the market and make sure we have a market-based project that a developer can actually get out of the ground because absent that, an entitlement is worth nothing.”
The current project calls for basically two hotels in one — a 198-room extended-stay hotel and a 252-room limited-service property that the port calls a “micro hotel” varying in height from 12 to 15 stories.
Under the action taken by the commissioners, the rent revenue to the port over the duration of the lease is now expected to be $417,527,000. That compares to the roughly $430,947,000 port officials had expected from the original lease. The net result is a savings to Sunroad of more than $13 million.
While Sunroad had originally contemplated building lower-cost hotel rooms off-site, the developer and the port are now opting to pay the fee instead. Between the rent concessions and shared fee, the total cost to the port comes to a little more than $19 million.
Sunroad President Uri Feldman, while he didn’t speak at Tuesday’s hearing, told the Union-Tribune on Monday that even with the new lease , they’re not enough to make up for soaring expenses that have raised his project cost by $40 million since 2021, when port commissioners approved the hotel development.
“I’m still worse off but this is the new reality,” he said. “And the port is also recognizing the economic realities of the world we are living in.”
As part of the of the lease and the coastal development permit for the project, Sunroad now has until the end of next year to start construction — an extension of two years from the original deadline. Port officials believe the hotel could break ground sometime next year. With construction likely to take up to two years, the earliest the hotel could open would be in 2028.
Port Commissioner Frank Urtasun blamed the developer’s financial challenges on the Coastal Commission’s policy requiring projects to address the need for low cost overnight accommodations.
The state agency has long argued that under the decades-old Coastal Act, ensuring access to the coast includes providing affordable lodging. Port staff confirmed that proposed in-lieu fees by the Coastal Commission for a couple of recent hotel projects along the central coast had exceeded $400,000 a room.
“This low cost-serving matter has really made these projects uneconomical,” Urtasun said, “and short of an agency like the Port of San Diego stepping up and absorbing some of that expense, it’s going to kill development in California.”
