Paseo Nuevo Rehaul Earns Blessing of Santa Barbara City Council

After years of false starts, failed negotiations, and plans that never quite won over the community or Santa Barbara City Council, there’s light at the end of the tunnel for the long-dormant buildings anchoring the Paseo Nuevo shopping center in the heart of downtown.

On Tuesday, City Council approved the terms of a disposition and development agreement that outlines the new plan for Paseo Nuevo. It replaces the previous proposal that fell apart last December after City Council refused to give away its piece of ownership of the mall for a housing project that would have required an entire rehaul of the Macy’s building and the partial demolition of a city parking lot.

When City Council denied that proposal, an alternative came to light after Santa Barbara–based Yardi Systems approached the city with a plan that would move its corporate headquarters from Goleta to the long-empty Macy’s building at Paseo Nuevo. The city worked with Yardi Systems for months to negotiate a deal that could satisfy all the members of the mall’s complicated ownership structure and be completed alongside a parallel plan for an adaptive reuse housing project at the Nordstrom building.

Paseo Nuevo’s split ownership means the deal requires the approval of all parties to the agreement: the city, which owns the ground under the mall; DSP, which owns the Nordstrom parcel; AllianceBernstein, which owns rights to the Macy’s building, the mall parking lot, and the inline retail spaces; and Yardi Systems, which is looking to take over the city and AllianceBernstein’s portions of the mall.

The new proposal earned unanimous approval from the City Council on June 2, in a hearing that was much different from earlier deliberations. The Yardi Systems office conversion and Nordstrom reuse projects could both be done rather quickly, without demolition and lengthy construction disruptions, and the city would stand to gain $7.4 million in combined contributions from the developer groups in the process.

Terms of the agreement dictate that Yardi Systems make a donation of $5.7 million in total, with $5 million going directly to the city’s Local Housing Trust Fund and $700,000 toward the Downtown parking fund. DSP would contribute $1.7 million, with a million to downtown parking and $700,000 to the housing fund. The city would transfer its share of ownership over the ground under the mall, and the two companies would be responsible for the estimated $100 million in costs for construction and tenant improvements.

Much of the debate about the Paseo Nuevo development was regarding the true value of the city’s piece of ownership. It’s estimated that the city’s redevelopment agency spent up to $42 million buying up the downtown land needed to build the mall in the late ’80s. That money was spent in hopes the mall would bring in consistent revenue over time.

Since opening, the mall has never brought the city a dollar of lease revenue, and while the city still owns the land, the leases give operation and ownership control to the lessees, leaving the city with little more than a veto for a change in use.

State assessors valued the land at zero dollars due to the complicated ownership structure. A previous financial report estimated that the value of the city’s portion would potentially be worth nearly $35 million, though that figure was based on a future where the land was no longer tied up with so many encumbrances.

Assistant City Attorney Dan Hentschke warned against using the hypothetical figure in weighing the real-world value of the property.

“You have to look at the legal encumbrances that are placed on the property,” Hentschke said. “You can’t ignore them. Legally, that property is constrained for the next 40 years.”

In addition to the direct contributions, city staff estimate that the two reuse projects could bring in more than $700,000 a year in combined revenues from transient occupancy taxes, sales taxes, and property taxes.

While the council was mostly supportive of the proposal, there were multiple questions. Councilmember Kristen Sneddon worried that offering discounted parking passes to Yardi Systems as part of the deal could be seen as unfair to other downtown business owners.

City staff explained that the parking arrangement would allow Yardi Systems to keep the mall parking lot open for public use, while giving company employees and visitors spaces nearby. And while they would be discounted, the hundreds of guaranteed additional permits would bring in extra money the city doesn’t currently have.

“To clarify that and put people at ease: This is a net positive for the parking system and for the city,” Mayor Randy Rowse said.

Councilmember Wendy Santamaria was the only member of the council to abstain from the vote. Santamaria said she had concerns about whether the city properly looked into all alternatives, including leasing the land directly to Yardi Systems or creating a community land trust.

City staff explained that both Yardi and DSP refused to work on a deal that did not allow them to own the properties (due to the financing needed to complete construction), and that a community trust would not result in any additional control due to the current encumbrances on the land.

The council approved the details of the agreement in a 6-0 vote, with Councilmember Santamaria abstaining. The agreement would return on June 30 for ordinance adoption, and the city would officially transfer the fee titles after the close of escrow on July 30. Yardi Systems and DSP could submit formal applications later this year, and both projects would be subject to design review through the Historic Landmarks Commission. With approval the projects could begin construction in 2027.

“I really believe that this is the best deal that there is,” said Councilmember Meagan Harmon. “We needed a miracle, and this is our miracle.”