Three decades of deed restrictions and legal obligations surrounding what’s always been considered a significant public benefit on the Navy’s former Broadway Complex were unraveled by city leaders and a private developer in a 24-hour period late last year.
The benefit in question, a large museum facility, was to be one day conveyed by the Navy or a developer to the city, as spelled out in a 1992 legal accord between the federal and local agency. It was a contractual gesture meant to communicate that, no matter what gets built on the Navy’s waterfront property, the public is always welcome.
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The significance of the space seems to have eroded with time.
In December, one of San Diego’s top officials at the time rejected a lease offer — a day after receiving it — for a 40,000 square-foot museum space on Block 2A of the complex, public records show. The offer was delivered by IQHQ, the biotech builder with a long-term ground lease who is now actively working to erect a series of office-and-lab towers of varying heights that will afford future tenants with unrivaled views of San Diego Bay.
The written back-and-forth, meant to satisfy the letter of two legally binding land-use documents, quietly memorialized a decision that erased the promise of the museum.
“It was a real offer that (the city) had carefully considered. It was an alternative for them and they decided not to take it,” said John Bonanno, who is a founding partner of IQHQ and the company’s chief investment officer. “We agree with (the city). Taking that offer would not give a fabulous museum to the city of San Diego without public funds, other money, a great benefactor or something else coming into place. And if any of those things come into place, we’re ready to do a museum for them now.”
Still, no longer obligated to reserve the space for a museum, IQHQ can now fill the square footage with restaurants, shops or public attractions that best suit its $1.6 billion life science project, the San Diego Research and Development District.
Facing San Diego Bay, Block 2A is one of eight sub-blocks that make up the 12-acre Navy Broadway Complex, south of Broadway between Pacific Highway and Harbor Drive, that is now primarily leased to IQHQ.
The land, a part of San Diego’s picturesque front porch, is familiar to most locals as the nondescript area opposite the Embarcadero that’s been mostly hidden by construction fences for what feels like a lifetime. That’s because the federal site, first transferred by the city to the Navy for military purposes in the aftermath of World War I, is so consequential that multiple groups have appealed to the courts over the years, stopping forward progress to ensure that whatever is erected respects the coast, doesn’t wall off the city from the bay and provides ample public access.
Ultimately, the property, which Congress authorized for redevelopment in 1987, is subject to a 1992 development agreement between the city and the Navy. The contract, modeled after agreements concerning privately held land, provided the federal agency with long-term certainty as to what could be built on its property. It also secured for the city a number of “extraordinary and significant benefits,” including one or more museums and a one-block, public recreation space.
Specifically, the 1992 document requires the Navy or the developer to lease no less than 40,000 square feet of ground-floor, unfinished shell space for a museum to the city for 65 years. The city, per the contract, has two years from the date of the lease offer to find one or more suitable tenants to sublet the space. In 2015, a settlement agreement between the California Coastal Commission and the previous developer, Manchester Financial Group, added the stipulation that the museum must be located on Block 2A, fronting Navy Pier and the Midway Museum.
Last September, IQHQ purchased the bulk of Manchester Financial’s 99-year leasehold for $230 million to build a life science city on San Diego Bay, inheriting all of the associated land-use restrictions.
The city recently forfeited its right to lease the park block from IQHQ, who is now charged with creating and maintaining a mostly passive public park on Block 1A. That decision played out in a public process, with council members signing off on a 96-year park easement agreement.
Conversely, the museum matter never graduated to the realm of council consideration because no contractual arrangement with the developer was proposed.
A civic calculus
Formed in the latter half of 2019, IQHQ is a local outfit whose five principals have achieved a level of celebrity status in life science real estate circles. The group has amassed $2.6 billion in financing to take home-run-sized swings on science-sector projects locally, as well as in Boston and San Francisco. The San Diego gamble assumes that biotech companies, currently clustered around research and educational institutions in Torrey Pines, are ready to migrate downtown.
So far, no tenants have signed on to the project, Bonanno said. It appears unlikely that a museum operator ever will.
Within months of taking over the Navy Broadway Complex site, the developer requested — and received — a reprieve from its museum obligation.
“As part of a meet-and-greet meeting (with then-mayor Kevin Faulconer), one of (IQHQ’s) requests was that the city just not accept the offer to lease the space for a museum,” said Brad Richter, who attended an Oct. 27, 2020 meeting in Faulconer’s office.
At the time, Richter, who is now retired, was in charge of San Diego’s Urban Division and is considered an expert on the development agreement.
“At that meeting, the mayor confirmed that (the request) would not be a problem,” he said.
That means by the time IQHQ made its formal offer to the city for 40,000 square feet of museum space, as required, the firm was already aware of the city’s intent to turn it down.
On Dec. 1, Bonanno, the IQHQ executive, delivered via email and overnight mail the offer of a lease to the city. The firm offered a base monthly rent of $4.58 per square foot during the first year of the lease — or $2.2 million. The rate did include tenant improvements, expenses, taxes and common area fees. The letter also notes that parking was not available to the future tenant, and that the city was to provide security for the space at all times.
In the letter, IQHQ gave the city a month, through Jan. 1, to exercise the option and start negotiations.
On Dec. 2, Erik Caldwell, a former city executive, notified IQHQ’s lawyer via email that San Diego would not be accepting the offer.
“The city lacks the financial capability to operate or administer the museum space based on the terms presented in the offer,” he wrote.
Another factor appeared to be of greater economic consequence.
A portion of the former Navy Broadway Complex, as seen looking northwest from Pacific Highway and G Street. The skyscraper in the foreground is Navy Building One, which was built and paid for by Manchester Financial. IQHQ is working to develop a park, pedestrian paseo and a series of office-and-lab towers on the six blocks that it controls through a long-term ground lease. Block 2A is northwest of the Navy building, opposite the Midway Museum.
(K.C. Alfred / The San Diego Union-Tribune)
“Despite (downtown’s) population growth, job growth downtown is limited largely by the lack of research and development and headquarters office for innovation-focused firms. IQHQ’s development is not only an iconic mixed-use development; it is the most significant development project in downtown’s history to address the R&D space gap,” Caldwell’s letter said. “The city remains committed to assisting IQHQ as it works to attract world-class tenants.”
The city, through a spokesperson, said the decision to reject the offer for museum space was multifaceted.
“Prior to IQHQ’s acquisition of the site in September 2020, the city and the former developer had been engaged in protracted discussions regarding the city’s lease of the space for a museum,” Scott Robinson, who is a supervising public information officer for the city of San Diego, said in an emailed statement.
“When IQHQ acquired the site from the former lessee in September 2020, IQHQ met with the city to share its vision for the Research and Development District (RaDD), which includes a private museum or another public-oriented commercial/public attraction space. Based on the vision for the RaDD and the reasons outlined by former Deputy Chief Operating Officer Eric Caldwell, accepting the lease offer would not be in the city’s best interest.”
In other words, the city weighed its options and went with what it determined to be the greater good for downtown San Diego.
Bonanno maintains that the developer initially intended to satisfy the development agreement’s museum requirement. Early renderings confirm that IQHQ was planning to incorporate a two-level museum into the design of the Block 2A building. However, the firm learned that complications associated with securing a qualified operator, particularly one that could afford the project’s rent, would be a stumbling block.
“We realized that the reality of a museum being placed here by the city was not going to happen. And then it was like, OK, if that’s not going to be an eventuality, can you (the city) just clear it for us so that we can progress with the design that, under the development agreement, will work for the entire campus, and we can advance this project much sooner,” he said during an in-person meeting with the Union-Tribune.
IQHQ is constructing its project in a single phase, starting with “one giant dig” for the underground parking garage that spans most of the site.
(K.C. Alfred / The San Diego Union-Tribune)
“It’s been like 30 years of torture for this site, right? It needs to be developed. What we’re doing is really a catalytic and transformational project for San Diego.”
Whether the city would have been able to find well-capitalized museum tenants in the two-year period allocated by the development agreement is unclear. Museums are most often structured as not-for-profits and rely on generous donors to fuel operations.
The New Children’s Museum, for instance, owns its 50,000 square-foot, downtown building at 200 W. Island thanks to philanthropic gifts that helped pay for the facility’s construction. Even without the burden of rent payments, the organization spent more than it made in 2020 and 2019, financial records show.
Still, some may wonder why IQHQ could not build and simply set aside the space.
“My personal opinion, they’re building 1.3 million square feet of building area, a 40,000 square-foot museum space didn’t seem like a big lift,” Richter, the former city director, said.
IQHQ, Bonanno said, could not wait in limbo with the city. It is building everything all at once, starting with “one giant dig” for the underground parking garage that spans most of the site, as opposed to constructing each block individually.
A rendering of the building planned for Block 2A, which is meant as a porous, public-attraction space with easy access to three levels of underground parking and the project’s interior pedestrian paseo.
(Courtesy, IQHQ/Transparent House, Inc.)
IQHQ has since moved forward with a design for a mostly public-facing building on Block 2A that it has named the “Alley” because of its double-height entryway and connection to the rest of the project. The four-story building — 120,000 square feet in size with an additional 20,000 square feet of patios and terraces — is meant as a porous, public-attraction space with easy access to three levels of underground parking and the project’s pedestrian paseo.
Three of the Alley’s four floors are said to encourage visitors — not just scientists working on-site — to flow in and through the project. The ground and second floors are intended as an open and outdoorsy space with a two-story, grand entry that frames the waterfront. The floors are designed to accommodate a variety of food and beverage options, retail stores and other visitor-serving attractions, as required by the aforementioned settlement agreement with the Coastal Commission. Museums are welcome, of course, if they can afford the rent. Otherwise, the third floor is reserved for high-end office tenants.
The fourth floor is a bonus public space offering panoramic views, and it will likely include a destination restaurant.
“This building is specifically designed to be all the things that the Coastal Commission would want it to be,” Bonanno said. “The top floor is going to be the most amazing public venue that we have in San Diego. It’s going to be a really special place.”
A rendering of the fourth floor of the the “Alley” building planned for Block 2A. The public space will offer panoramic views of San Diego Bay and will likely include a destination restaurant.
The Coastal Commission’s opinion is of particular consequence. The state agency originally determined in 1991 that the Navy’s redevelopment plan for the Broadway Complex was consistent with the Coastal Act. However, in 2011, it rescinded the approval, believing that the Manchester plan deviated too significantly from what had been previously proposed. In 2013, the commission sued the Navy and the former developer. The parties eventually settled in 2015 and Manchester agreed to 10 different terms, including the placement of the museum on Block 2A. The settlement agreement is still in effect today.
“The museum space is significant and, along with the park space and public access, was an integral part of why the commission had approved of the project,” said Noaki Schwartz, who is the public information officer for the Coastal Commission. “Our staff is looking into the situation, but if the museum is no longer part of the project, this undermines one of the original reasons the commission had found the project consistent with the Coastal Act.”
At least for now, groundwork on the long-dormant site continues at a feverish pace in anticipation of the Research and Development District’s debut in the fall of 2023.