SAN MARCOS – As a landlord, the city has done some lucrative business for years.
By leasing vacant city-owned property to developers, it earns millions of dollars annually. The money goes to the general fund to help pay for such things as firefighters, law enforcement and city parks.
Now the general fund will be half a million dollars richer every year for the next 55 years – thanks to a new lease.
The city recently signed an agreement with The McDonald Group for a 6-acre parcel across from the Civic Center. The development will be anchored by an LA Fitness gym and will include a food court, some small businesses and a community-focused "pocket park."
"It's a great fit," said Michael McDonald, president of The McDonald Group. "If you look at the amount of professional offices going in around the area, and as residential development grows, I think there is going to be a lot of young families that will be very interested in using LA Fitness."
Leasing land to a developer who then builds at his own expense is not unusual for large cities. San Diego, for example, issues numerous ground leases.
However, for cities the size of San Marcos it's unusual, said Assistant City Manager Paul Malone, mostly because smaller cities don't own that much land.
But as a growing city, San Marcos does a significant amount of capital improvements, Malone said, and often acquires property when purchasing rights of way. Additionally, San Marcos likes to be original.
"It's in our city charter. It's a mandate for the city to be entrepreneurial," Malone said. "One of the things we struck on quite some time ago was becoming a landlord to generate a recurring income stream."
The city currently leases about 50 acres of developed land, which generates about $5.75 million in income annually, Malone said. That amount is projected to increase to $7 million in the 2005-06 fiscal year, based on escalating existing leases.
McDonald signed a 55-year lease with the city for $425,500 a year, with a 20-year option to extend. Including sales and property taxes, the project is expected to generate about $550,000 annually.
This is the third ground lease McDonald has signed with San Marcos. The others were for office buildings constructed in 2001 and 2003 in the same area.
"Both those buildings did very well," McDonald said, "But leasing does make financing more of a challenge, particularly for a suburban office building."
McDonald hasn't entered into ground leases anywhere else.
"It's an unusual arrangement, but it seems to be working very effectively for the city of San Marcos," he said.
Business owners have complained in the past about the city's competing with the private sector, but Malone said it's the public that benefits because of the huge revenue source.
"It's the hardest money for the city to come up with, to pay police and firefighters and parks and recreation," Malone said.
He said the city doesn't subsidize any tenants and doesn't market to other tenants already in the city.
"All tenants are a net add," Malone said. "They are new to town. We do not market to other people's tenants. There is no net gain to the community to do that."
This particular parcel was created when the Civic Center was built in 1994. The city is patient, taking its time to find the right partners, Malone said.
"There's a rising market here in terms of land values. There is no compelling need for just any old use."
LA Fitness' project will cover 43,000 square feet and include a lap pool and a basketball court.
The development also will have three smaller buildings, with a total of 17,000 square feet, for restaurants and small businesses. What makes the project special, McDonald said, is the pocket park that will be created between the buildings.
"The idea is trying to create a true sort of public space," he said.
That means not just canopied eating areas and grass seating, but a raised bandstand area – prewired so performers can just "plug in and play" – and a large outdoor wall on which to show movies.
McDonald said he is planning to have a projector installed that would create a 10-foot-by-30-foot image. It could be used for family-oriented movies on Sunday nights, or for broadcasts of events that generate community interest, such as when the Vista Little League team played in the national finals.
"The idea is to create a gathering spot for the community. A place with ambience, to create a draw," Malone said. "It's a package of amenities to the Town Center that don't exist here today."
Construction is expected to start at the end of March and should be completed within nine months.
Deborah Ensor: (760) 737-7552; deborah.ensor@uniontrib.com
