SAN JOSE MERCURY NEWS - July 31, 2003

Downtown plan dealt setback

Ruling favors parking lot owner

- Rodney Foo

San Jose's plans to invigorate the moribund downtown core were dealt yet another setback after a state appellate court ruled this week that a lower court erred in allowing the city to seize development rights to a key parcel.

The ruling by the 6th District Court of Appeal, the latest twist in a 15-year legal wrangle over the property, temporarily throws the plans of the CIM Group - a Southern California firm selected by the city to redevelop several downtown parcels - into limbo.

The ongoing dispute over the parcel, a 1.4 acre parking lot on Second Street and Fountain Alley, was part of the reason New York-based developer Palladium pulled the plug on a $1 billion downtown redevelopment project last year. CIM's proposal is a more modest $200 million mixed-use plan.

Even though Schlarmann had made payments to the city, it could not be interpreted as rent, the court said. Instead, the "money paid for the acquisition of development rights rather than for use of the parking lot," wrote presiding Justice Conrad Rushing.

The ruling follows a series of financial problems that have sapped the agency's coffers, endangering not Donny downtown projects but affordable-housing proposals. The agency's tax revenue has plummeted by $20 million, and cuts in the state budget could take away millions more.

But on Wednesday, the city and CIM both downplayed the significance of the ruling.

"CIM right now is evaluating its options," said Sharon Landers, assistant executive director of the city's redevelopment agency.

"It's a setback," acknowledged Avi Shemesh, a CIM principal owner. "It's not a real huge problem."

The ruling forces the city and CIM to relinquish control of the development rights to the parking lot and return them to the lot's operator, Al Schlarmann.

The origins of the appellate court's decision stem from a 1987 lawsuit filed by Schlarmann's San Jose Parking Inc., which claimed he had lost millions of dollars when he was denied the opportunity to manage a 650-space garage that was never built by the city.

Eventually, the two sides settled in 1997, entering into a pact that Schlarmann insisted granted him exclusive rights for 10 years to negotiate development agreements for the lot, located in the heart of downtown's historic commercial district.

But the city read the contract differently. Last year, a Superior Court judge ruled the city could use its eminent-domain powers to acquire Schlarmann's rights. The lot was then turned over to CIM.

But Schlarmann appealed the ruling, and on Tuesday the appellate court sided with him.

The court determined eminent domain used to condemn real property rights could not be extended to take away contractual rights that belonged to Schlarmann.

Even though Schlarmann had made payments to the city, it could not be interpreted as rent, the court said. Instead, the "money paid for the acquisition of development rights rather than for use of the parking lot," wrote presiding Justice Conrad Rushing.

"As far as we're concerned," said Schlarmann's attorney, Peggy O'Laughlin, "CIM has to take a back seat."

Schlarmann also has a second legal action pending against the city - a lawsuit alleging breach of contract. No trial date has been set.

City Attorney Rick Doyle said it will be up to the city council to decide whether the decision should be appealed to the state Supreme Court.

Meanwhile, the redevelopment agency and CIM officials are contemplating the ramifications of the ruling.

Landers said it is unclear how quickly the parking lot could be redeveloped, saying much depends on the speed of Schlarmann's actions.

But she said Schlarmann's renewed hold on the lot might affect CIM's ability to secure financing to redevelop a parcel located next to the San Jose Repertory Theatre on San Fernando Street between So ut Second and Third streets.

However; CIM officials said they remained committed to the downtown projects. CIM always understood that Schlarmann could regain control of the Fountain Alley lot, based on its contract with the city, said John Given, vice president of development.

"Our commitment to the area is long term," given said, "and is not something that we have to finish right away."

CIM's proposals for the lot next to the theater and another next to Zanotto's market do not have any dates set for groundbreaking, Landers said.