Bay Area Property
Comes to Attention

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San Francisco's Presidio is the only U.S. national park that is legally required to generate enough money to pay all of its expenses. The former military base spreads over more than 1,500 scenic, forested acres with sweeping views of the Pacific Ocean, the Golden Gate Bridge, the Marin County headlands and the downtown skyline. Ever since the Defense Department's 1989 Base Realignment and Closure (BRAC) process slated the Presidio for a 1994 shutdown, controversy has swirled around the question of the ultimate fate of this extraordinarily desirable piece of prime real estate in a crowded city where open space is at a premium.

The board of directors of the park's managing entity, the Presidio Trust, breathed a collective sigh of relief last August when, after two years of intense negotiations, Letterman Digital Arts Ltd., a development subsidiary of Lucasfilm Ltd., signed a 60-year, $5.8 million ground lease for a 23-acre chunk of the Presidio. The property is the site of the former Letterman Army Hospital, built in 1969 and in the last stages of a $10 million deconstruction paid for by the trust. Lucasfilm, the hugely successful film-production company founded by George Lucas of "Star Wars" fame, plans to build a $300 million, 900,000-square-foot office and digital production campus, designed by San Francisco-based architectural firm Gensler, with a 15-acre park designed by the renowned San Francisco-based landscape architect Lawrence Halprin. The long-awaited deal is a cornerstone of the trust's strategy for achieving financial self-sufficiency for the Presidio by 2013. Although Lucasfilm is designing its campus to fit in with the natural and human history of the Presidio landscape, many San Franciscans still bitterly oppose any commercial development in the park.

The Presidio has guarded the heights of western San Francisco for more than two centuries. It was granted National Historic Landmark status in 1962 and National Park status in 1972. The first military base at the Presidio was established in 1776 by the Spanish and became a Mexican frontier outpost after Mexico won independence from Spain in 1822. Following the U.S. conquest of California in 1846, the U.S. Army held the Presidio until its withdrawal in 1994. Nearly half of the Presidio's more than 1,000 existing buildings are designated as historic and represent architectural styles from the Spaniards' adobe headquarters through every major U.S. military construction style since 1848.

Post-BRAC, an epic congressional struggle for control of the federal parkland pitted commercial interests against preservationists and community activists with competing visions of the best use for the Presidio's natural and built resources. The struggle took place at the height of the "Republican revolution," with its focus on radical cuts in government spending. Legislation was proposed to sell parts or all of the Presidio for development, and several unsuccessful attempts at scaling back its funding would have made it inoperable as a national park.

San Francisco Congresswoman Nancy Pelosi fought to preserve the Presidio's park status. "You had a lot of people who wanted a hand in the pie: 'Let's have condos, let's make a lot of money," recalls Ms. Pelosi's former chief of staff Judy Lemmons. "A liberal Democrat, she went into the Gingrich Congress and won, and saved it." However, Ms. Pelosi succeeded only by promising to sharply reduce the cost to the federal government of operating the huge park with its aging buildings. In 1996, the Presidio Trust was created as an executive agency of the U.S. government, with a federal subsidy starting at $25 million and declining every year until its termination in 2013.

The Presidio Trust is governed by a seven-member board of directors, six of whom are appointed by the president of the U.S. and can serve a maximum of eight years. Chairman of the board Toby Rosenblatt, president of Founders Investments Ltd.; vice chair Mary Murphy, a real-estate attorney with law firm Farella, Braun & Martel LLP; and Donald Fisher, founder and chairman of the Gap Inc., were recently reappointed for their second four-year terms. Other current board members are Amy Meyer, a longtime environmental activist and vice chair of the Golden Gate National Recreation Area Advisory Commission; William Reilly, chairman of the board of the World Wildlife Fund and president of Aqua International Partners; and Jennifer Hernandez, a partner in the law firm Beveridge & Diamond LLP. The seventh member of the board -- currently Ira Michael Heyman, formerly secretary of the Smithsonian Institution and chancellor of the University of California at Berkeley -- serves at the discretion of the Secretary of the Interior.

Like all federal property, the Presidio does not come under the jurisdiction of the local government. The trust's charge is to maintain the Presidio's natural and historic resources to best serve national -- not local -- interests. Although the park's neighbors, community groups and local politicians have no direct control over the Presidio's fate, that hasn't kept them from vociferously expressing their concerns about developing any part of it. These concerns run the gamut from the potential noise and traffic issues to the effects on city transportation, water and sewer systems and the natural environment to more abstract issues such as holding true to the city's progressive cultural and educational values.

Since 1996, the trust has managed 80% of the park, with the National Park Service retaining jurisdiction over the coastal strips. Over the past five years, the trust has labored to come up with a revision of the National Park Service's 1994 management plan for the Presidio as a whole, which allowed a maximum of 5.1 million square feet of residential and commercial development and redevelopment. Last July, it presented its long-awaited Presidio Trust Implementation Plan (PTIP) and its environmental impact statement for public review.

The hybrid identity proposed by the PTIP struck a balance between development and preservation, proposing a combination park, tourist attraction, campus, neighborhood and business center. While allowing some new construction, it also promised that "the historic planted forest will be rehabilitated, wetlands enhanced and native plant and wildlife species protected." The plan, which calls for 5.6 million square feet of commercial and residential space, strikes a balance between the existing 6 million or so square feet of buildings and the 5.1 million square feet allowed in the park service's management plan. It calls for new shops, museums and hotels in the Presidio's northeastern corner but nixes the idea of a grand luxury resort, proposed by one developer and strongly opposed by neighbors. The thousands of citizen responses to the PTIP currently being considered by the trust range from requests for a Costco Wholesale Corp. store and an RV park to card campaigns by environmental groups opposing any further development.

In the meantime, the projects in the Presidio -- such as the Golden Gate National Parks Association's (GGNPA) environmental restoration of the historic 100-acre coastal Crissy Field, on the waterfront east of the Golden Gate Bridge -- continue to move ahead. Once the Presidio's "backyard" of sheds, chain-link fences and abandoned buildings, Crissy Field reopened last May. The GGNPA raised the funds for the privately financed, $34 million project. It recreated a 20-acre tidal marsh, established a wetlands haven for water birds and restored the 28-acre historic 1920s grass airfield, where the old seaplane ramp is still visible at low tide, as a park for enjoyment by the public. And in March, the trust completed a $1.8 million renovation of the showpiece Presidio Officers Club, featured on the trust's logo, which reopened as an art exhibition hall. The Spanish adobe, built in the late 1770s, is the second-oldest building in San Francisco.

"How do you transform the Presidio so that it can have new uses but still reveal the significance of its history?" asks architect Sowmya Parthasarathy of San Francisco-based architectural firm SMWM, one of the Presidio's planning consultants. "Its long period of significance, from 1776 to the 1940s, has left several layers of history on the site, almost like a palimpsest." One answer, incorporated into the PTIP, is to place an emphasis on reusing existing buildings first. For the most part, the PTIP requires that new commercial development be small in scale, adhere to the park's 60-foot height limit and "use sustainable design practices and promote energy and water conservation, waste reduction and recycling and clean technologies."

The PTIP provides for a mix of tenants, from those that will contribute to the bottom line to those that will support the trust's educational and cultural outreach goals, with a heavy emphasis on nonprofit organizations. In its leases to date, the trust has required that tenants provide program content to enhance the park's function as a cultural mecca and expand its educational offerings to the public. For example, Lucasfilm will not only pay market value for its land but has also committed to provide services such as producing films about the Presidio and setting up interactive digital kiosks for tourists, a digital arts museum or similar programs.

In addition to the Letterman Hospital site being redeveloped by Lucasfilm, other prime sites for large-scale development include six 40,000-square-foot former barracks, which, after seismic refitting, will be available at the historic center of the Presidio. The PTIP also would allow 690,000 square feet of commercial space near Crissy Field, perhaps to house an aviation museum. And, according to the trust, several institutions of higher learning have expressed interest in establishing campuses or departments in the Presidio's Fort Scott area. Its cluster of buildings, including a former Public Health Service hospital, could offer a campus a potential 800,000 square feet of space.

A fair amount of commercial development focusing on preservation and reuse has already been completed at the Presidio. By the end of 2001, the trust had already leased a total of approximately 900,000 square feet of commercial space, not counting the Lucasfilm deal. For 2002 the goal is to lease another 60,000 to 100,000 square feet.

A 61,000-square-foot former Sixth Army Headquarters, built in 1940, has undergone a $10 million transformation into the San Francisco Film Centre, now one of the hippest addresses in the park. Other recent commercial tenants include the Niantic Corp., a San Francisco-based investment-management firm founded in the 19th century; LoBue & Majdalany, a management-consulting firm specializing in helping nonprofit organizations; the Northern California Independent Booksellers' Association; InfiniteInfo, an international Web solutions company; and two environmental foundations.

With its emphasis on renting to nonprofits, the trust has brought in private, third-party developers to provide redevelopment equity and benefit from the historic preservation tax credits for which many of the existing buildings are eligible. For example, the Tides Foundation, which promotes social change, worked with real-estate development and property-management company Equity Community Builders LLC to create the Thoreau Center for Sustainability, 160,000 square feet of office space for nonprofits and companies that focus on social-justice and environmental issues. Tom Sargent, a principal at Equity Community Builders, is currently renovating another 60,000 square feet of office space for nonprofits next door to the San Francisco Film Centre

The PTIP forecasts annual lease revenues of around $45 million from about 700 buildings once the development and redevelopment process is completed. Rents at the Presidio cover a wide spectrum. According to the San Francisco Chronicle, Presidio tenant deals range from dozens of nonprofits paying as little as $2 to $6 per square foot to for-profits with rents in the mid-$30s. The most recent deals at the Presidio have been in the low $20s, the trust's new deputy real-estate director, Paul Osmundson, told the Chronicle, in line with leases on San Francisco's northern waterfront, which offers a similar mix of historic, nonresidential buildings and natural vistas.

Land has long been at premium in San Francisco, and the competition for commercial real-estate development opportunities became fiercer in 1986, when San Francisco voters passed Proposition M, limiting high-rise development to 475,000 square feet per year and setting planning priorities to protect affordable housing, neighborhood character and small businesses. Even so, the commercial and residential markets experienced a rapid downturn following the dot-com meltdown. According to Cushman & Wakefield's year-end statistics, San Francisco's troubled commercial real-estate market, already awash in sublets, showed a 477% increase in available space downtown in 2001, to a total of 7 million square feet, or 15.9% of the central business district market. The Chronicle reports that rental rates were down 48% -- 51% in the central business district -- from $78 per square foot in December 2000 to $38 per square foot in December 2001.

Despite the beauty of the natural environment and the prestige of a Presidio address, the trust's commercial space -- potentially some 3.5 million square feet in more than 250 buildings, two thirds of them historic -- has some strikes against it. Located a few miles from downtown San Francisco, it is not convenient to public transportation, and the unique character of its historic buildings can be a drawback as well as a draw when competing with class A downtown high-rises. "Many are built like dorms; they are not great for offices," notes Ted Caulkins, senior director of corporate services at Cushman & Wakefield's San Francisco offices. "But the trust has done a decent job of providing the amenities and entitlements. I have clients there who love being there. They don't want to move out, but it's hard to grow in those buildings. There are historical considerations."

When it comes to commercial leasing strategy, "one of the problems we have as a public agency, and with the peculiar charge that we have, is that we're neither fish nor fowl," says trust vice chair Ms. Murphy. "It's hard to make apples-to-apples comparisons between our lease terms and those in the private sector, for example, because we don't have conventional real-estate taxes. Sometimes we do space leases where the trust renovates the building, and a lot of the time we negotiate long-term ground lease and development structures that are different [from the norm]."

It doesn't help that negative publicity and changes in management have plagued the trust. Currently, it is dealing with fallout generated by the resignation of its executive director, Jim Meadows, following accusations of financial mismanagement published in the December issue of San Francisco magazine. The trust quickly appointed as acting director Craig Middleton, formerly staff to the Presidio Council, a blue-ribbon panel established by the GGNPA to plan for the park's transition. Mr. Middleton has also served as a senior Washington aide to Congresswoman Pelosi.

Last summer, the trust's chief financial officer jumped ship, and the deputy real-estate director was pressured to leave. The latter, Ann Blackburn, told the San Francisco Business Times that she had been hampered by the trust's decision in 2000 to limit leases to five years while long-term uses -- set out in the PTIP -- were being debated and planned. Adds Ms. Murphy, "No one had ever done anything quite like what we are doing before, and it was a tough period in terms of getting our bearings."

Shortly before Mr. Meadows' resignation, the trust appointed real-estate development consultant Paul Osmundson as the new deputy real-estate director. With an extensive background in the business and politics of San Francisco real estate, Mr. Osmundson served in various capacities including as director of real estate for the Port of San Francisco, where he oversaw large-scale redevelopment projects of historic buildings along the waterfront of San Francisco, including Mission Bay, the Ferry Building and the recreational complex at Piers 27 to 31. His selection is seen as an acknowledgment that the trust will need to bring in more outside developers to help meet its financial goals.

Cushman & Wakefield's Mr. Caulkins believes that the trust's management has learned some important lessons. "They have enough experience now," he says. "They know they have to include retail and that they have to bring in heavy-duty electrical and communications infrastructure."

In 2001, the trust generated approximately $27 million in revenue, primarily through leasing programs. Annual costs for running the Presidio, currently estimated at $36 million, are projected to rise to $45 million by 2013. Once the Lucasfilm campus is up and running, probably in 2007, its annual lease payments of nearly $6 million will account for about 12% of the trust's needs. But it may take as long as 30 years to complete the retrofitting and rehabilitation of historic buildings and other planned park improvements, estimated in the PTIP to cost a total of $546 million. "In the broadest terms, it is the operating expenses that need to be met by 2013. But we have huge capital needs -- 470 historic buildings to be brought up to code, roads that need to be maintained, etcetera," says Ms. Murphy.

Currently, residential leasing is the Presidio's cash cow, generating approximately $21 million in 2001, up 60% from the previous year, according to trust spokesman Ron Sonenshine. Despite the shock to San Francisco's residential market following the dot-com meltdown, housing is expected to remain tight in the Bay Area for the foreseeable future. Presidio residential properties range from former barracks and modest enlisted men's apartments -- some of which are currently used by San Francisco State University for overflow student housing -- to well-kept Civil War-era wood-frame houses to grand brick mansions built for high-ranking officers. In 2001, 126 historic and nonhistoric units were refurbished and added to the Presidio's rental housing stock, bringing the total of rented units to 900 at year's end. Residential rents at the Presidio have followed the market down, but with their views of the Golden Gate Bridge and their wooded park setting, large homes in the Presidio can still rent for as much as $6,000 a month.

The high-profile Lucasfilm deal is expected to give a boost to the trust's commercial long-term leasing efforts, especially once the campus is built. "We are evolving the design development, continuing to work with 900,000 square feet," says Chris Glennon, Lucasfilm's director of corporate real estate. "The Presidio Trust has substantially completed the tearing down and salvage of the existing buildings, and we're looking to reuse some of those materials in our construction." Groundbreaking for the Letterman Digital Arts campus is slated for late this year.

Just a short drive through the Presidio is enough to spark an awareness of how remarkable it is and how exciting its future will be if its stewards can strike the right compromise between nature and commerce. "It's been an incredible experience to be able to provide a benefit to the nation at large as well as to the existing community," says Ms. Murphy. "All of us feel that it's an opportunity to do something good, to take a really great place, put people together and create institutions that can have a positive effect on society."

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