The term "creative financing" may carry a negative connotation for some but it holds the key to the meteoric success of Starboard Development, the San Diego real estate company that in less than four years has completed, begun construction or planned $280 million in buildings, most of which are designated for public use.
Much of Starboard's success is due to its ability to create innovative financing packages that government agencies can use to build new structures without running afoul of Proposition 13, the 1978 voter initiative that severely limited the spending power of municipalities.
Used to Build Police Headquarters
Those financing methods were used to build a new $43.7-million San Diego police headquarters at Broadway and 14th Street, completed in 1986, and to develop a new 10-story home for the Metropolitan Transit Development Board, scheduled for completion in 1989.
Starboard expects to break ground later this year on its most ambitious project ever, the first phase of the $150-million Starboard Station. The two-block office-hotel complex just east of the Santa Fe depot and north of Broadway may include up to 35 municipal and superior courtrooms.
Founded in 1979 by mortgage banker John Starkey and Bradford Saunders, former assistant vice president Great American First Savings Bank, Starboard financed the police headquarters through sales of certificates of participation, or COPs, an investment that entitles the holder to a portion of lease revenue paid by the Police department.
The COPs package, which was devised by Starboard and San Diego Police Cmdr. Ken Fortier, did not increase the city's bond indebtedness and the city was not required to raise additional tax revenues to pay them. In short, the certificates constituted what those in private enterprise would term "off-balance sheet financing" because the city "incurred a lease instead of a debt," Fortier said.
"Theoretically, the city can walk away from the lease at any time. So, the city is not obligated like it is with a bond," Fortier said. Although COPs are widely used financing devices in California, the police headquarters was the first such project to be built by a private development firm instead of a public entity.
In November, Starboard began construction on the $43.6-million MTS Tower, the new 10-story home of the Metropolitan Transit Development Board and the San Diego Trolley management. The County of San Diego will also occupy several floors of the building at Imperial Avenue and 12th Avenue.
Starboard, which won the right to develop what originally was to have been a two-story building after competition with nine other developers, expanded the size of the project after it and the MTDB saw that a larger building would cost less to occupy, MTDB finance and administration director Murphy McCalley said Monday.
Starboard then hooked MTDB up with the County of San Diego and helped forge a joint powers agreement between the two entities, a common financing method to fund public works that benefit more than one government agency. The JPA then issued lease revenue bonds, interest on which was kept low by the county's good credit rating.
"We couldn't support the entire size of the (180,000-square-foot) building and we don't have the credit rating and backing that the county has," said McCalley in explaining the rationale for the JPA.
Starboard developed both the police and MTDB buildings on a straight fee basis, which in the case of the police headquarters amounted to nearly $3 million. But Starboard said it earned its fee in part by shouldering the entire considerable development risks--cost overruns, possible natural disasters, etc.--of both projects, a necessary concession in the financing packages.
As big as the two projects are, they shrink in comparison with Starboard Station, a project that includes two towers planned for a two-block redevelopment area fronting Broadway east of the Santa Fe train depot. In November, Centre City Development Corp. awarded Starboard exclusive negotiating rights to develop the parcel.
Starboard Station's first phase on the block fronting Broadway will be a $75-million, 28-story hotel-office building. The ground floor will serve as a station for the San Diego Trolley. Retail and museum space will take up the bottom four floors of the building while the next 12 stories will be a 360-room hotel. The top 10 floors will be office space.
Starboard has signed up Unicorp Financial Corp., a real estate investment trust based in New York, as its financial partner for the first tower and said Monday it will announce a hotel operator for the building within the next 45 days.
Starboard president Saunders, 35, is confident that construction can begin by the end of this year. Time is of the essence because the trolley station element of the building must be completed by June, 1989. The farther along construction has proceeded at that point, the less the entire project will cost to build.