Council OKs framework to continue negotiations on Paseo Nuevo redevelopment; staff asked to negotiate DDA, exempt Lot 2 from surplus lands act

The Santa Barbara City Council on Aug. 5 authorized staff to continue negotiations on a revised Paseo Nuevo redevelopment framework and adopted a resolution to exempt part of Parking Lot 2 from the California Surplus Land Act so the project can proceed to feasibility study and housing discussions.

City staff presentation and project summary

Laura Bridal, a planner in Community Development, told the council that AllianceBernstein (AB), which acquired the Paseo Nuevo properties after a borrower defaulted, has proposed a revised plan that retains most of the mall's in-line retail and community uses while demolishing the Macy's building to make room for housing and refreshed public spaces.

Under the plan outlined at the meeting, AB proposes:

- A new housing component on the current Macy's site with about 233 market-rate dwelling units; - A separate, stand-alone affordable housing project of roughly 80 units proposed for part of Parking Lot 2 to be developed concurrently with the market-rate work; - About 175,000 square feet of retail and food-and-beverage space that would include a specialty grocer at State and Ortega; - Retention of the Museum of Contemporary Art and Center Stage Theater uses in the mall core rather than full demolition of that central portion; and - A reconfiguration of parking: Lot 1 would be increased to an estimated 600 spaces with an allocation for retail and 1.0 residential space per housing unit; Lot 2 would be reduced to an estimated 383 spaces; Lot 10 would retain about 546 spaces for retail support.

Bridal emphasized the plan is a revised, more financially feasible alternative to an earlier, larger proposal AB offered in 2024 that would have required demolition of the entire center and substantially higher upfront foundation costs.

Why the city is involved and legal constraints

Staff and the city attorney explained the redevelopment is complicated by the city's ownership of the land under long ground leases and by charter limits on lease extensions. The city's charter generally limits leases to 50 years; the ground leases under Paseo Nuevo now have only about 40 years remaining. That structure restricts the property's market value and makes private purchases or straightforward development deals unattractive to many investors.

To permit the proposed affordable housing on Lot 2 as part of a coordinated redevelopment, staff asked the council to adopt a resolution amending an earlier action to declare Lot 2 exempt from the Surplus Land Act for purposes of affordable housing. Department staff said the California Department of Housing and Community Development has preliminarily approved earlier related surplus-lands exemptions for the mall parcels.

Finance and the developer's economics

Staff presented preliminary pro forma materials provided by AB and reviewed by city consultants and independent reviewers. Key financial points reported to council:

- AB took ownership through foreclosure of the mall improvements after a prior owner defaulted; as an institutional investor (an investment management firm rather than a traditional real estate developer), AB does not routinely build retail/housing projects but has assembled a development team for this site.

- City land contributions under the draft framework could have a value in a range AB and staff estimated at roughly $32 million to $39 million once encumbrances are removed.

- AB's modeled developer returns on the revised project ranged from roughly 4.3% to 6.8% under scenario assumptions, below the typical market-return target of around 8%.

- AB asked the city for a 20-year annual payment equal to the city's share of the property tax generated by the project (staff estimated the city's share at roughly $300,000 per year as a planning-level estimate). Staff said the city also currently pays maintenance and related costs under the reciprocal easement agreement (roughly $150,000 per year), which would end if the city's ground-lease interest is restructured as part of a redevelopment agreement.

Affordable housing and "banked" units

Under the proposed arrangement, 12 to 25 units of the proposed Lot 2 affordable building would satisfy the city's immediate affordable-housing requirements for the Macy's-site housing. The affordable project would be delivered as a stand-alone deed-restricted building so it can access tax-credit financing and other subsidy sources; staff said AB would also seek to "bank" additional affordable units as credit toward any future market-rate development on the site, which staff and council discussed will require explicit limits and documentation.

Public comment and stakeholder concerns

Shopoff (the owner of the former Nordstrom property) and other nearby property owners urged the city and AB to coordinate closely and treat Shopoff as an equal negotiating party because the reciprocal easement agreement and shared parking affect redevelopment options. The Museum of Contemporary Art and local arts advocates asked that the city preserve arts uses and for the developer to include a percent-for-art or artist-residency component. Nearby institutions, including the Music Academy of the West, requested earlier notice and outreach about a possible reduction in Lot 2 parking capacity. Neighborhood speakers urged a strong public engagement plan and careful review of traffic, parking and public-safety implications.

Council action and direction

Councilmember Harmon moved and Mayor Pro Tem Friedman seconded a motion to approve staff recommendations: to approve the amendment to the project description and to adopt the resolution to exempt the portion of Lot 2 from the Surplus Land Act, and to direct staff to continue negotiations with AB on a disposition and development agreement consistent with the terms outlined in the staff report. The motion passed at the meeting. Councilmembers emphasized the need to:

- Protect the museum and theatre uses in the core unless replacement spaces are guaranteed; - Require concurrent delivery of the affordable units before or at the same time market-rate units are occupied; - Limit and memorialize any use of banked affordable-unit credits (council asked staff to return with clear caps and rules); - Keep the public process robust and to coordinate closely with Shopoff and other parcel owners; and - Explore whether the county could participate in property-tax sharing given regional benefits.

Next steps

Staff said they will continue negotiating a draft disposition and development agreement with AB and other parcel owners, begin feasibility and engineering analysis for Lot 2 affordable units once council has declared Lot 2 exempt, meet with the housing authority and other affordable-housing providers about financing and delivery, and continue coordinated outreach with stakeholders. The project will return to Council for final approval of any DDA and entitlements once the negotiations and design are further developed.

Ending note

Council's August 5 action authorizes negotiations and a surplus-lands exemption that enable feasibility work and housing-finance discussions. Council members and several public speakers stressed that substantive public outreach and clarity on parking, affordable-unit banking and guarantees for arts uses remain priorities as the negotiations proceed.