Ellison Seeks San Francisco Real Estate as Price for America's Cup in City

Larry Ellison’s plan to stage the America’s Cup in San Francisco has a price: the Oracle Corp. chief executive officer wants control of waterfront real estate rent-free in exchange for bringing the competition to the city.

The billionaire’s sailing group is offering to finance and operate the race in San Francisco in 2013 for rights to piers and parking lots near the Giants baseball stadium and Google Inc.’s offices, according to a proposed agreement with the city. The plan calls for an event authority chosen by Ellison’s BMW/Oracle Racing to commit $150 million for land improvements and raise $270 million in private funds to run the regatta.

The proposal, which would give the authority access to the land for as long as 75 years, would help revitalize an area of San Francisco that few investors have been willing to develop, said Jennifer Matz, development director for Mayor Gavin Newsom. Critics including city Supervisor Chris Daly say it represents a giveaway of public funds.

“This is a boondoggle,” Daly, who represents the South of Market area, which includes the 35 acres (14 hectares) proposed in the deal, said in an interview. “We’re trying to close a $400 million deficit next year and cutting programs for San Franciscans, and we’re giving money away to one of the richest men in the world.”

San Francisco has struggled to find investors willing to pay up front for improvements to city-owned piers and warehouses, some more than a century old. More than $2 billion is needed just to make the structures safe and compliant with modern building codes, according to the Port of San Francisco.

Rehabilitating Piers

“We don’t see this as a giveaway,” Matz said in an interview. “There’s no capital plan for rehabilitating the piers and limited upside to Band-Aid repairs.”

BMW/Oracle Racing won the 159-year-old trophy in February. As defender of the Cup, the team and its affiliated Golden Gate Yacht Club in San Francisco choose the site of the next race. The 66-year-old Ellison and Newsom agreed to draft a plan for San Francisco to host the competition after Ellison’s syndicate defeated the Alinghi team in Valencia, Spain, said Kyri McClellan, event project manager.

Ellison is the third-richest American, worth $27 billion, according to Forbes magazine’s annual ranking. Redwood City, California-based Oracle is the second-largest maker of business application software, behind Walldorf, Germany-based SAP AG.

Stephanie Martin, communications director for the America’s Cup, said she couldn’t answer questions about the San Francisco plan. Tom Ehman, spokesman for the Golden Gate Yacht Club, a named party in the plan, didn’t return calls and messages seeking comment. Deborah Hellinger, an Oracle spokeswoman, didn’t respond to a request for comment on how the event may benefit the company.

Wells Fargo

A civic organizing committee that includes John Stumpf, chairman of San Francisco-based Wells Fargo & Co.; Tom Perkins, partner in Menlo Park, California-based venture firm Kleiner Perkins Caufield & Byers; and Ken McNeely, president of AT&T California, is a named party in the agreement and would raise $32 million to defray city costs, McClellan said.

Ellison is used to getting his way in San Francisco and would be a tough antagonist if the Cup deal soured, said Bruce Richardson, a former industry consultant. The company gets permits and extra police services every year to close streets around the Moscone convention center for its annual conference.

“He takes over blocks of prime real estate and doesn’t care,” said Richardson, now chief strategy officer for Alpharetta, Georgia-based Infor Global Solutions Inc., which competes with Oracle. “There are no negative ramifications for him. For the last 10 years, he’s felt pretty infallible.”

‘Single-Minded’

Ellison is “single-minded” in his pursuits, Richardson said. Oracle spent 18 months completing a hostile takeover of PeopleSoft Inc., and last month the company won a $1.3 billion jury verdict against rival SAP, the biggest ever for copyright infringement. Ellison has publicly ridiculed the board of Hewlett-Packard Co., hiring its deposed CEO Mark Hurd while slighting Leo Apotheker, Hurd’s replacement.

The Italian government may also bid to host the Cup with Club Nautico di Roma, the official challenger to the Golden Gate Yacht Club, McClellan said. The Italian club’s chairman, Claudio Gorelli, couldn’t be reached for comment.

The competition dates to 1851, when a group of New York businessmen financed the schooner America in races against British yachts around the Isle of Wight. The U.S. syndicate won, and the silver trophy it took home now bears the name of the victorious boat. The group donated the Cup to the New York Yacht Club in 1887 and set rules for future contests, according to the Cup website.

Only six clubs have won the trophy. San Francisco would be the third U.S. host, after San Diego and Newport, Rhode Island.

Yacht Berths

The San Francisco port properties in the Cup plan would be used for spectator seating, public plazas, exhibits, sponsor pavilions and yacht berths. Pre-regatta races would begin as soon as next year, with challenger matches and final contests to decide the 34th Cup winner set for mid-2013.

An alternate plan, not specified in the agreement and using piers near Fisherman’s Wharf, may reduce repair costs to $55 million from $150 million, Matz said. The city also is trying to shift as much as $36 million in dredging costs to the event authority in a final document, according to McClellan.

The city board of supervisors is scheduled to vote on a binding agreement during its Dec. 14 meeting.

Economic Benefit

The economic benefit of staging the Cup in San Francisco would be about $1.2 billion over two years of practice and competition races, including housing expenses for crew members and their families, according to a Nov. 18 report by Harvey Rose, the city’s budget analyst.

Direct costs to the city include $86 million in forgone lease payments and taxes from the properties given rent-free to the event authority, the report said. The city would shoulder $42 million more for extra police and transit and relocating port tenants displaced by Cup events for a total net cost of $128 million.

Businesses, not the city treasury, would be the main beneficiaries of the Cup coming to San Francisco, Rose said.

“At the same time the city would incur these costs, it is projecting significant shortfalls and reductions to departmental budgets,” said Rose, San Francisco’s budget analyst since 1971. “We think it’s our job to point that out.”

Daly, whose term ends Jan. 8, said the proposed deal violates California law because it doesn’t include an environmental impact report required by the state for such a project. Daly said he may sue to stop it after leaving office.

Environmental Review

The agreement specifies full environmental review for Cup events and post-Cup building projects, and both the city and the event authority can walk away under certain escape clauses in the plan, McClellan said.

Developments that could be built on the Cup sites after the races end include a 250-unit condominium building, according to Rose’s report. Retail and food facilities built for the competition probably would be subleased. All revenue would go to the authority named by Ellison’s team.

“Oracle is driving a hard bargain because they have all the chips,” said Jim Chappell, former director of San Francisco Planning & Urban Research, a civic affairs group that focuses on real estate. “The city wouldn’t take the bet if it had the ability to develop by itself.”

Waterfront Land

Private funding for waterfront real estate and the economic boost are driving the proposal, said David Chiu, a city supervisor. Lend Lease Corp. of Sydney spent five years attempting to build a cruise terminal, offices and shops on Piers 30-32, the proposed main Cup venue, before abandoning the site, he said. Shorenstein Properties LLC of San Francisco also tried and ultimately walked away.

“We’ve all been waiting and it hasn’t happened,” Chiu said. “This is not a deal we have to do, but we would otherwise not receive financing to rebuild our crumbling piers.”

Ellison’s proposal to improve the piers doesn’t make sense as a pure real estate play, and the Oracle boss likely is motivated in part by staging a memorable event, said Jesse Blout, principal at San Francisco-based Strada Investment Group LLC and the city’s former economic development director.

The total costs for improving Piers 30-32 could exceed $80 million, or $160 a square foot, before profit, Blout said. That’s more than the $140 a square foot that software provider Salesforce.com Inc. paid last month for 14 acres of empty land with no repair costs, no entitlement risk and permission to build 2 million square feet of offices, he said.

‘Good Deal’

“If Ellison is willing to make the investment knowing he may not get all of his money back, that’s a good deal for the city,” Blout said.

The payout is worldwide publicity for Oracle in an exclusive branding arrangement, not revenue from property, according to Richardson.

“The Oracle logo would be everywhere and the whole world would be watching a tremendous event,” he said.

The head of the civic organizing committee said he was aware of Ellison’s litigious past and insisted on shielding his members in the agreement, even as he acknowledged the common goal of staging a successful event.

“I told the Ellison group that we’re partners, it’s all hands on deck, but none of us can be held liable for failure to meet our obligations,” said Mark Buell, chairman of the Golden Gate National Parks Conservancy. “The most important person I had at my table was a lawyer.”

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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