America's Cup- What turned the tide in favour of San Francisco?

by Richard Gladwell on 1 Jan 2011
The decision to name San Francisco as the venue for the 34th America's Cup is a big turnaround from just over two weeks ago when the lead negotiator for the Defenders, Oracle racing's Chief Operating Officer, Stephen Barclay, described their team as being 'exasperated' with San Francisco's City Hall.

San Francisco was accused of using a 'bait and switch' negotiating technique - where you negotiate a deal on one set of expectations, and then switch key elements in the deal once the other party has taken the bait.

The bait, in this instance was a four month negotiation over use of the central piers including Pier 50, which in return for investment in reconstruction, the America's Cup organizers would obtain long term rights to the use at very favorable commercial terms. The cash-strapped City would also be required to make a substantial investment in the range of $50-100million.

That price tag while modest by international standards was too much for City Hall and they re-jigged the deal, putting up a new location to the north, using piers that had a life of just 5-10 years. That was a deal that had significant commercial risk for Oracle Racing, and they re-ignited the suspended discussion with Newport, Rhode Island and Rome, Italy.

The so-called Northern Alternative was endorsed by the San Francisco Finance Committee and then passed by the Board of Supervisors with an unprecedented margin of 11-votes to nil.

It was a great deal for the City - picking up an estimated 8,000 new jobs, $1.2billion of Economic Benefit and by one calculation, made a profit on the deal of about $20million.

The Defenders had a lot of downside - being saddled with a 12 month period of planning hearings and process before they even knew that the construction would be allowed to proceed; required to make an investment of $100-150 million to reconstruct piers they had hardly seen; and offered a very loose means of investment recovery. It was deal that did not seem to have too much upside, and while Oracle Racing were happy with the cash-strapped San Franciscans being given the chance to get a break even deal, the America's Cup Defenders felt it only fair they should have the same opportunity.

The Defenders, who decide the Venue for the next match under the 19th century Deed of Gift that governs the America's Cup competition, also took the opportunity to see what other deals were going in the America's Cup venue market.

While the initial signs looked promising with Newport, Rhode Island, many of the issues inherent in the San Francisco situation were also present on the East Coast venue. In their favor, a very progressive leadership in Rhode Island was much easier to deal with than their West Coast counterparts, however time was always against the Newport deal. Earlier this week, officials raised the white flag, saying they could not get a firm bid together in the time available and were hoping for an extension into the New Year.

The Italian bid - despite having a new marina already under construction, and a large rumored Event Fee - could not be pulled into providing a concrete bid to satisfy the requirements of Oracle Racing. 'For a large part of 2010, the Italians were our #1 favorite to be the Venue, but in the end were not able to contribute the certainty we needed,' said Barclay. 'With a purpose built marina under construction a decision in their favor would have been relatively easy six months ago', he added.

In Sail-World's http://www.sail-world.com/NZ/Americas-Cup:-BMW-Oracle-negotiators-exasperated--by-San-Francisco/78031!earlier_story it was clear that if the Northern Alternative did proceed (and it was attractive to Oracle Racing, moving the racing closer to the team bases and spectators) then the investor, Oracle Racing, had to see how they could get their money out at the conclusion of the America's Cup(s) in San Francisco.

While that process was alluded to in the agreement - by way of rental credits - it seemed that Oracle Racing had not been consulted properly, and was unclear as to how that recovery would work, to their satisfaction - rather than just staying within City Hall's comfort zone.

The fact that Oracle Racing's billionaire owner, Larry Ellison was a San Francisco resident was a double weakness in that many in the city believed he was obliged to stage the 34th America's Cup in his home-town, and secondly given his wealth and the City's indebtedness, Ellison should be happy about funding the deal too.

'We had to get the risks under control,' said Barclay. 'It was too risky for us. We had some long chats with their team, and we got the opportunity to get the risks under control, and that gave us to the opportunity to say 'Yes'.

'We hadn't even had a chance to have a good look at the Northern Piers. Everyone said we had to spend some money. The original agreement had no way of dealing with that. It was silent on how we would be repaid for any of the work done on those piers. The new agreement says that investment is now treated the same as any other - we recover through rental credits that we get for legacy use.'

'We think we have given ourselves a good chance of getting our books back in balance, and are very confident that have to a large extent de-risked the project,' he added.

'There was no guarantee that if we made the investment in the reconstruction of the piers that we would get the rights on a long term basis.'

Oracle Racing will not be signing the agreement passed by the Board of Supervisors before Christmas. Instead a new agreement will be drafted and signed by the parties. Barclay is adamant that the new agreement is within financial fences of the previous agreement in terms of financial cost to the City.

However the City is not out of the woods yet. the next crunch date will come in a year's time - at the end of 2011 the necessary CEQA approvals must be obtained, to allow construction to commence in January 2012.

If that process does not proceed at the pace expected then other venue options will be considered, and the talks with Newport over the plan to rejuvenate the historic Fort Adams site into an America's Cup Centre will continue.