Housing Trust Fund and $700,000 to support the City’s Downtown Plaza and Parking Program.
DSP (Dune, Shopoff, and Praelium) is pursuing the adaptive reuse of the former Nordstrom building to create between 80 and 112 rental housing units, 10% of which would be affordable to moderate-income households earning 80% - 120% of the area median income (AMI). DSP would also make a $1 million public benefit contribution to the City to help revitalize downtown, and DSP would contribute another $700,000 to the City’s Local Housing Trust Fund.
Together, the two projects represent approximately $100 million in private-sector investment. This major reinvestment in downtown revitalization would reactivate longdormant buildings and bring hundreds of residents, employees, and visitors downtown day and night. Yardi Systems’ reactivation of the former Macy’s building will require design review by the Historic Landmarks Commission. DSP’s housing project at the former Nordstrom building is being processed under the City’s Adaptive Reuse Ordinance and will require design review by the Historic Landmarks Commission.
Advancing the project would resolve long-standing legal and financial constraints on the property for the City, align public and private goals, provide community benefits, and position Paseo Nuevo as a catalyst for long-term downtown reinvestment and revitalization.
Discussion:
Background
In the 1980s, Downtown Santa Barbara had become economically distressed, prompting the Redevelopment Agency of the City of Santa Barbara (RDA) to initiate a major revitalization effort through development of the Paseo Nuevo Mall. Conceived as a publicprivate partnership between the RDA, the mall developer, and two department store anchors, the project opened in 1990 and became the centerpiece of downtown’s commercial core.
To facilitate the mall project, the RDA assembled privately owned parcels, while the City contributed surface Parking Lot #1 and right-of-way from a vacated portion of De La Guerra Street to the development. The private developer financed and constructed the mall, including the mall’s parking structure: Parking Lot #1, while the RDA constructed the City’s parking garages (City Parking Lots #2 and #10) to support the project.
The transaction was structured through a Disposition and Development Agreement (DDA) executed in 1987 between the RDA and Paseo Nuevo Associates, followed by the establishment of three 75-year ground leases in 1989. These included:
Council Agenda Report
Draft Terms of Agreement for the Proposed Redevelopment at Paseo Nuevo, including Terms between the City of Santa Barbara and Yardi Systems and between the City of Santa Barbara and DSP
June 2, 2026
The Paseo Nuevo Parcel and Parking Lot#1, leased to Santa Barbara Associates (in-line retail shops, central mall area, and the parking lot); The Macy’s Parcel, leased to Carter Hawley Hale Stores (vacant since 2017); and The Nordstrom Parcel, leased to Nordstrom, Inc. (vacant since 2020).
Under these leases, the RDA retained ownership of the land (fee interest), while the lessees owned the improvements. Upon lease expiration, all improvements would revert to the lessor. The DDA and related agreements also limit use of the site to retail and commercial uses and currently prohibit housing development.
Following dissolution of the RDA in 2012, and subsequent review by the California Department of Finance, ownership of the fee interest transferred to the City in 2016. The City thereby became the lessor under the ground leases, and these then became subject to the City Charter’s 50-year limitation on lease terms, with no opportunity for extension.
The leases currently expire between 2064 and 2065. The City also obtained ownership of other RDA property related to development of the Paseo Nuevo Mall including Parking Lots #2 and #10.
Over the decades, the leased interest in the Paseo Nuevo Parcels changed ownership multiple times. In 2021, the lessees of the Macy’s parcel, the in-line mall parcel, and Parking Lot #1 defaulted on a loan made by Alliance Bernstein (AB). Through a deed-inlieu of foreclosure in 2022, AB acquired those leases—subsequently assigning them to Paseo Propco LLC, an affiliate of AB. Paseo Propco has since managed the mall property and, in consultation with City staff, has explored redevelopment opportunities to reposition the Paseo Nuevo Parcels for long-term economic and community benefit.
Meanwhile, the former Nordstrom parcel, held under a separate lease, was sold in 2021 to DSP, an investment group.
Today, Paseo Nuevo is considered a distressed asset. Retail industry trends have shifted significantly since the 1990s, and while smaller in-line shops may be adapted to current market conditions, the large-format department store buildings are no longer viable for retail use. The current proposal includes retaining the former department store buildings and repurposing them for corporate offices and for housing development. These changes of use to office and residential can only occur if the existing ground leases and related legal encumbrances are modified or terminated to allow for mixed-use development.
Project Overview
The former Nordstrom building has been vacant since 2020 and the former Macy’s building has been vacant since 2017. The negotiated framework would reactivate the Council Agenda Report
Draft Terms of Agreement for the Proposed Redevelopment at Paseo Nuevo, including Terms between the City of Santa Barbara and Yardi Systems and between the City of Santa Barbara and DSP
June 2, 2026
downtown core by introducing complementary corporate offices and housing uses that would significantly increase activity on State Street and for the in-line shops at Paseo Nuevo. Renovating and repurposing the existing structures rather than demolishing and rebuilding them would result in faster activation, less disruption to the surrounding community, and significant environmental benefits from reusing the buildings. The former Macy’s building would be repurposed and converted to Yardi Systems’ corporate offices, bringing hundreds of employees to the center of downtown. The former Nordstrom building would be repurposed into housing along with the potential for commercial floor area likely on the ground level. DSP proposes adaptive reuse of the former Nordstrom building to create a mixed-use development that includes between 80 and 112 rental units, 10% of which would be affordable to moderate-income households earning 80% to 120% of AMI, supporting a 24/7 downtown.
The inline shopping center linking the two renovation projects would continue to serve the community and would be made more valuable by activation of the two significant reuse projects. Nonprofit community uses, including theater and museum spaces at Paseo Nuevo, would remain supported.
Renovation of the Macy’s building and repurposing of the Nordstrom building together would represent a private-sector investment of approximately $100 million in the revitalization of downtown Santa Barbara.
Project Statistics
Existing Proposed (Draft)
Former Macy’s building Vacant retail (vacant
since 2017); ground
lease
Yardi Systems corporate
offices (reuse of existing
building); fee transfer to
Yardi Systems
Former Nordstrom building Vacant retail (vacant
since 2020); ground
lease
80–112 rental units
(adaptive reuse); fee
transfer to DSP
Affordable units (Nordstrom) 0 10% at 80-120% AMI
Inline retail Operating Retained and revitalized,
including museum/theater
space
Private investment — ~$100 million
Public benefit contributions — DSP: $1 million for
downtown revitalization
Council Agenda Report
Draft Terms of Agreement for the Proposed Redevelopment at Paseo Nuevo, including Terms between the City of Santa Barbara and Yardi Systems and between the City of Santa Barbara and DSP
June 2, 2026
and $700,00 for Local
Housing Trust Fund
Yardi Systems: $5 million
for the Local Housing Trust
Fund and $700,000 for the
Downtown Plaza and
Parking Program
Total Local Housing Trust
Fund contributions
— $5.7 million
Parking – Lot #1 556 spaces; ground
lease
Approximately 556 (392
public); fee transfer to
Yardi Systems
Parking Lot #2 560 spaces 80 unreserved permits for
DSP and ~100 unreserved
permits for Yardi Systems)
Parking Lot #10 545 spaces 150 unreserved permits for
Yardi Systems)
Proposed Deal Terms for DSP (location of former Nordstrom building):
DSP – Deal Terms
80 – 112 units of housing developed with former Nordstrom building footprint, including potential for commercial use likely at the ground floor level Fee transfer of Nordstrom parcel
$1 million payment for public benefit contribution and $700,000 to the Local Housing Trust Fund
Covenants prohibiting short-term rentals
Use restrictions under REA terminated. Any use authorized by City General Plan and Zoning will be permitted consistent with prevailing City land use regulations, including residential.
Exclusive use and access to 49 parking spaces in Lot #1 80 unreserved 24/7 permits to be made available in Lot #2 for project, . Payment at prevailing commuter permit parking rates set by City Council.
Housing project to include 10% inclusionary (moderate-income) units onsite.
Proposed Deal Terms for Yardi Systems (location of former Macy’s building, inline shops, and Lot #1):
Yardi Systems – Deal Terms
Renovation of Macy’s building for use as corporate offices; no proposed changes to inline retail shops at present time; any future changes would require approval per municipal code.
Council Agenda Report
Draft Terms of Agreement for the Proposed Redevelopment at Paseo Nuevo, including Terms between the City of Santa Barbara and Yardi Systems and between the City of Santa Barbara and DSP
June 2, 2026
Fee transfer of Macy’s, Inline Retail, and Parking Lot #1 Parcels Parking Lot #1 to remain open for public use (consistent with how it operates today) - 49 spaces dedicated to DSP housing units under former Nordstrom building (monthly fees paid to Yardi Systems)
- 115 spaces dedicated to Yardi Systems under former Macy’s building - Yardi Systems to own and operate lot (remaining spaces available to public at prevailing city parking rates)
200 parking daytime/weekday permits total between Lot #2 and Lot #10 made available for Yardi Systems usage; payment for permits at discounted commuter city parking rates. 50 24-7 parking permits at Lot #2 at prevailing commuter permit parking rates set by City Council . Permit rights terminate if Lot #1 is no longer available for public parking.
Use restrictions under REA terminated. Any use authorized by City General Plan and Zoning will be permitted consistent with prevailing City land use regulations.
City to continue to manage trash removal at Paseo Nuevo $5 million public benefit contribution to the Local Housing Trust Fund $700,000 public benefit contribution to the Downtown Parking Fund Nonprofit community uses, such as theater and museum spaces, at Paseo Nuevo remain supported
Paseo Propco, LLC involvement in property extinguished upon close of escrow Community Benefit Contribution
As part of the proposal, the Paseo Nuevo Redevelopment Project would deliver a combined $1.7 million in public benefit contributions to the City, in addition to a combined $5.7 million to the City’s Local Housing Trust Fund:
DSP contribution of $1 million for downtown improvements. These funds would be set aside for downtown improvements, which could include early catalytic implementation actions identified by the State Street Master Plan once it is adopted.
Yardi Systems contribution of $700,000 to the Downtown Parking Fund. Managed by the Downtown Parking Committee, this would help provide much-needed maintenance to downtown’s critical parking structures.
Yardi Systems contribution of $5 million and separate DSP contribution of $700,000 to the Local Housing Trust Fund. The two development projects would contribute a combined $5.7 million, which can be leveraged to provide a significant increment of new affordable housing units in the downtown area at a range of affordability levels.
Council Agenda Report
Draft Terms of Agreement for the Proposed Redevelopment at Paseo Nuevo, including Terms between the City of Santa Barbara and Yardi Systems and between the City of Santa Barbara and DSP
June 2, 2026
Based on the average City subsidy for three recent affordable housing projects, the proposed Housing Trust Fund contribution could support the creation of between 100 and 200 affordable units targeting households earning 80% of AMI or below. Because the funds are unrestricted, the City could also use them to leverage deed-restricted workforce housing serving households with incomes above 80% of AMI. Workforce housing is typically not eligible for the same subsidies that go toward projects serving lower-income households, so access to these unrestricted funds gives the City considerable flexibility to provide deed-restricted housing for a much broader range of household incomes than is typical for most local housing trust funds.
Beyond these direct contributions, the proposed project would create a mixed-use environment through investment in a unified concept. Activity from new employees, residents, and visitors would have a significant and lasting economic ripple effect, both during the construction phase and as the downtown is repopulated. A recent study of the economic impacts of office buildings operations alone found that for every dollar spent on building operations, the surrounding area gains another $1.90 in economic output, which is a multiplier effect that compounds the direct spending, as described below. Local spending. The Yardi Systems offices will be designed with downtown benefits in mind: because there is no cafeteria, gym, or convenience retail within the building, employees and visitors will be encouraged to patronize local businesses. Combined retail spending by new residents and Yardi Systems employees is estimated to generate between $3 million and $4 million per year, with potential for future growth.
Visitor economy. Yardi Systems currently generates significant year-round activity from clients, employees, and consulting partners coming to meetings and events at their headquarters, including an estimated $1.5 million in annual hotel-room spending plus an additional $1 million in annual visitor spending at local businesses. As this activity becomes even more focused on Downtown, the yearround schedule will help smooth out the seasonal variability of tourism as well as support for local restaurants and stores during weekdays and throughout the year.
Even a small increment of this consistent economic activity will have a significant impact on Downtown businesses.
New City revenue. The City would benefit from increased transient occupancy tax (TOT) and parking permit revenue along with its full share of sales tax and property tax. These combined sources are estimated to generate between $600,000 and $700,000 per year.
Council Agenda Report
Draft Terms of Agreement for the Proposed Redevelopment at Paseo Nuevo, including Terms between the City of Santa Barbara and Yardi Systems and between the City of Santa Barbara and DSP
June 2, 2026
Community use space. Yardi’s plans for the ground floor of the office building includes conference and meeting facilities that could be used by local non-profits and other convenings depending on availability.
Parking
The proposed project would utilize parking in Lots #1, #2, and #10 while leaving sufficient parking to serve the needs of other downtown users and visitors. Lot #1: Of the 556 spaces in Lot #1, 49 would be designated for residents of the DSP project and 115 for Yardi Systems employees, associates, and visitors. The remaining 392 spaces would be available to serve patrons of the inline retail space and the general public, which is a larger proportionate share of spaces available to the inline shops than when both Macy’s and Nordstrom were operating. Lots #2 and #10: Yardi Systems would purchase parking permits in Lots 2 and 10 for Yardi employees, associates, and visitors, and DSP project residents would also park in Lot #2, through residential permits. These permits would generate additional fixed revenue for the Downtown Parking Fund, and the foot traffic created by people walking from their parking spaces to Paseo Nuevo would benefit area businesses. Existing covenant agreements relating to parking for Paseo Nuevo would be terminated.
A New and Distinct Project
The proposal before Council is an entirely new project, not a continuation or amendment of any prior concept. The proposal brought forward in December 2025 was rejected by Council due to the demolition of buildings, separation of affordable units, and significant public parking loss. Following the December Council meeting, this new and different proposal materialized. The current proposal is a different project, with a different program, footprint, participants, and economic structure, advanced through two separate Disposition and Development Agreements with Yardi Systems and DSP. The project now before Council is new in its participants, program, and public benefits, and is presented for review and eventual approval as such.
Negotiation Status and Next Steps
Implementation of the proposed projects requires concurrent approval of numerous agreements. The private parties have agreed to the terms of the transaction, which are all subject to final preparation of documents. The agreements include: a purchase agreement between a Yardi Systems entity and AB as the current leaseholder for the Council Agenda Report
Draft Terms of Agreement for the Proposed Redevelopment at Paseo Nuevo, including Terms between the City of Santa Barbara and Yardi Systems and between the City of Santa Barbara and DSP
June 2, 2026
Macy’s building, Inline shops, and Lot #1 parcels; an agreement between the City, Paseo Propco LLC, and DSP terminating and replacing the existing REA; DDAs between the City and Yardi Systems and the City and DSP; agreements terminating existing leases and restrictive covenants; and several other implementing agreements. Agreements to which the City is a party will be subject to City Council approval. The parties have negotiated and agreed to the terms of the final draft agreements necessary to implement this complex, multi-party effort. If Council so directs, staff will continue working on this proposal and the Disposition and Development Agreements and other related agreements to this transaction will be presented to Council for approval on June 16, 2026.
Staff will engage with residents and stakeholders about the proposed project during upcoming outreach meetings, both in person and virtually.
Should the City Council accept the terms and approve the Disposition and Development Agreements (DDA), the project would advance into the design and entitlement phase.
Following execution of the DDA, DSP will continue to pursue its pending adaptive reuse land use and entitlement application and Yardi Systems will submit its formal land use and entitlement application. If Council approves the DDAs in June 2026, DSP’s land use and entitlement process is anticipated to be finalized this year and Yardi Systems’ entitlement process is anticipated to begin in Summer 2026, with the goal of commencing construction for both projects in 2027.
Budget/Financial Information:
Under the draft framework, the City would receive $1.7 million in combined public benefit contributions, along with a combined $5.7 million to the City’s Local Housing Trust Fund.
These contributions, together with the private-sector investment of approximately $100 million, would support new affordable and workforce housing, economic activity, and downtown revitalization.
New ongoing City revenues associated with the project are estimated to include approximately $180,000 in annual transient occupancy tax, approximately $40,000 in the City’s share of annual sales tax, and nearly $120,000 in the City’s share of annual property tax, in addition to fixed parking permit revenue to the Downtown Parking Fund.
Sustainability Impact:
The adaptive reuse of the former Macy’s and Nordstrom buildings, rather than full demolition and reconstruction, would deliver significant environmental benefits by reusing existing structures and reducing construction waste. By integrating housing, employment, and retail in a walkable downtown location served by existing parking and transit, the project supports reduced vehicle miles traveled and contributes to the City’s greenhouse Council Agenda Report
Draft Terms of Agreement for the Proposed Redevelopment at Paseo Nuevo, including Terms between the City of Santa Barbara and Yardi Systems and between the City of Santa Barbara and DSP
June 2, 2026
gas reduction goals. New construction associated with the adaptive reuse and tenant improvements would be subject to California’s Green Building Standards Code, promoting energy efficiency, water conservation, and waste reduction. Incorporation of high-efficiency fixtures, drought-tolerant landscaping, and potential use of solar-ready infrastructure will support long-term resource conservation.
Environmental Review:
The City Council previously adopted a resolution declaring transfer of the City’s fee interest to be exempt from the Surplus Land Act. The proposed projects are consistent with the City’s General Plan and Zoning and involve the adaptive reuse of existing buildings. Conversion of the former Macy’s building will require interior modifications along with minor exterior work primarily to add windows. The exterior design will require approval by the Historic Landmarks Commission. Building permits for the conversion are ministerial actions. Conversion of the former Nordstrom building to housing will be subject to review and approval under the City’s adaptive reuse ordinance. An application for that conversion has been submitted and has undergone several rounds of staff comments.
Proposed work will be accomplished by modification of existing structures. There is no subsurface excavation or grading contemplated. Any required California Environmental Quality Act (CEQA) documentation or exemption findings will be presented to Council with the proposed Disposition and Development Agreements. No project approval is requested at this time.
Prepared And
Submitted By: Tess Harris, State Street Master Planner
Approved By: Kelly McAdoo, City Administrator