San Diego Business Journal

Operating on a budget that won't cover the cost of a new cruise ship terminal , much less some long overdue repairs , the San Diego Unified Port District has come up with a plan to pay for the capital improvements it says are needed to win more cruise business.

While the agency mulls responses from developers interested in a public-private venture to build a new $30 million terminal plus a hotel and parking garage, Carnival Corp. has agreed to loan it $8 million for some interim fixes.

Terms of the deal with the Florida-based cruise line company are still under discussion, and a repayment plan has yet to be worked out.

But port marketing director Rita Vandergaw said the agency is considering increasing its per-passenger fee from $6.10 to $8.10 or $10.10 and using that additional revenue to repay Carnival's loan. Passenger fees are included in the overall price of a ticket.

The published per-passenger fee for the Port of San Francisco is $9.50. It's $9.82 for the Port of Los Angeles and will increase to $10.31 in July.

The Port District is landlord to about 600 businesses on state tidelands along San Diego Bay and the Imperial Beach oceanfront. It also oversees the finances and operations of the cruise ship terminal and two marine cargo terminals.

Its operating budget for the fiscal year that begins in July is $115.6 million , an increase of 4 percent from this year's budget. Operating revenues for the upcoming year, most of which comes from rent charged to port tenants, are projected to reach $132.7 million, up from $119.5 million this fiscal year. The Port District does not receive a tax subsidy.

Tim Gallagher, a spokesman for Carnival Corp., said it recently sent the port a letter of agreement regarding the loan. Gallagher said he expects terms to be completed within the next few weeks.

While the company doesn't consider itself a maritime developer, Gallagher said it has made construction loans to other ports, including the Port of Miami.

"We're a cruise company and we don't particularly want to be in the port development business," Gallagher said. "But we do get involved in it when there's a need to do it to be sure they have adequate facilities to serve our customers."

Cruise business at the Port of San Diego has increased substantially in the last five years, Vandergaw said. In 2004, the Port District counted 187 port calls that brought 520,000 passengers to San Diego, compared with the 1999 tally, when 95 cruises brought 95,000 passengers.

The port expects its passenger count to increase to 600,000 by the end of 2005. Under that scenario, the agency would generate about $3.7 million if the per-passenger fee stays at the current rate of $6.10. Tacking on an additional $2 would have increased the fee revenue to $4.9 million.

"We're the second largest cruise port in California, behind Los Angeles, and the second fastest growing port in the country, just behind Galveston," Vandergaw said.

Late last year, however, three of the Port District's major cruise line customers, Carnival, Seattle-based Holland America Line Inc. , a Carnival brand , and Florida-based Royal Caribbean International, put the agency on notice that it had to make repairs on its 80-year-old dock and improve the outdated, inefficient terminal or risk losing their business, Vandergaw said.

Although Gallagher declined to be specific about Carnival Corp.'s ship calls, he said it has "some long-term plans for the Port of San Diego."

A Top Berth

Port Commissioner Stephen Cushman, who chairs the board's maritime committee and is president and owner of Cush Automotive Group, said that in addition to reconfiguring some space in the B Street Terminal, the loan would be used to build a new gangway on the south side of the terminal, repair the dock's fenders and rebuild pilings. The additional elevated walkway would make it possible for two home-ported ships to dock simultaneously at the B Street Pier.

As part of the loan deal, Cushman said Carnival would be offered a "preferential basis" for docking its ships on the north side of the B Street Pier, "which is very advantageous" when two ships or more are in port.

On May 10, port commissioners are expected to pare a list of four developers to two, who will then be asked to submit bids to build the new 150,000-square-foot terminal, a 400- to 600-room hotel and a parking facility for as many as 1,700 cars on property the port oversees on Lane Field across from the B Street Terminal.

No estimate has been made on the cost of building the hotel and garage component. That would be up to the developer, Vandergaw said.

Offering a lease concession for the hotel, however, is the port's drawing card for building the less lucrative terminal. The projects have different timetables. But the hope is that the contract to build the terminal would be awarded in December or January and work could begin in early 2007. No timeline has been set for the hotel.

Currently, only about 30,000 square feet of space in the 90,000-square-foot terminal is capable of being used to process passengers and more is needed, Vandergaw said.

Among the developers who threw their hat in the ring in mid-March by submitting letters of interest and earnest money deposits of $50,000 to the port is Manchester Resorts, L.P., headed by real estate magnate Doug Manchester, whose ownership interests include the 1,625-room Manchester Grand Hyatt Hotel in Downtown San Diego.

Another is Lane Field, San Diego Developers, LLC, which combines several companies, including Atlanta-based Portman Holdings, LLC, which has developed hotels, office buildings and other commercial real estate worldwide. Federal Viejas LLC, which includes Viejas Enterprises, the operator of the Viejas Casino in Alpine, is among the group. San Diego-based Hardage Suite Hotels and its affiliate Woodfin Suite Hotels, which owns and operates 17 hotels in 11 states, including the Sorrento Mesa Woodfin Suites in San Diego, also submitted a letter of interest and a check.