Academy of Art to pay $60 million settlement

San Francisco City Attorney Dennis Herrera Monday announced a landmark settlement valued at $60 million from Academy of Art of University stemming from a lawsuit filed earlier this year.

The lawsuit against the for-profit university and an interrelated web of corporate entities alleged that the institution schemed to violate state and local laws for nearly a decade to acquire multiple real estate holdings in the city in order to convert them into student housing.

Monday morning, at a news conference at City Hall, Herrera said the university agreed to pay $20 million in cash and make a major contribution to a program that would help low income tenants, valued at $40 million:

“This was a case where the academy, a privately held for-profit company, amassed a real estate empire while thumbing its nose for a decade at the planning and building department code requirements. These are requirements that every San Francisco property owner must follow.”

Herrera added:

“Again and again, the use of the properties was unauthorized, unpermitted or wholly prohibited by local law. These included converting residential and tourist hotels into student housing and retail and industrial buildings into academic buildings. The academy repeatedly flouted even basic land use requirements, including a code permitted usages, signage, historical preservation, environmental review and more.”

Herrera’s office had said that of the 40 properties owned by the for-profit art school, at least 33 failed to comply with permit, entitlement or authorization requirements. That failure had negatively impacted the city’s housing crisis by removing hundreds of affordable units in the city’s northeastern corner, where most of the university’s properties are located.

Supervisor Aaron Peskin said in a statement:

“For too long, some in The City turned a blind eye to these egregious violations, which have exacerbated our citywide housing crisis, particularly in District 3. … I’m pleased that the city attorney stopped the merry-go-round and reached this landmark settlement.”

The settlement is the largest The City has ever been awarded in a code enforcement case. The $20 million cash portion alone exceeds any monetary settlement the city ever has acquired in such a case, according to Herrera.

Under the settlement, the university would have to provide 160 units of newly available affordable housing on two adjacent properties it owns in the city’s Nob Hill neighborhood.

That includes upgrading one of the properties, building a new affordable housing building on the other property, and maintaining all of the units for 66 years as affordable housing for people who earn half of the area’s median income. That affordable housing benefit is valued at $40 million, Herrera said.

The $20 million that the university must pay would be broken down into annual installments over a five-year period and divided into penalty payments, fees and a contribution.

Of the $20 million, $7 million would go to the Small Sites program, which provides city loans to groups such as housing nonprofit organizations, allowing them to buy smaller, rent-controlled apartment buildings serving low-income residents.

Additionally, $6 million would go to unfair competition penalties, $4.7 million would go to development impact fees, while $1.3 million would reimburse the city for enforcement costs and the remaining $1 million would pay for planning code penalties.

Herrera said:

“This settlement will also govern how the academy houses its students, linking enrollment to the amount of available housing the company has, requiring a higher percentage of its students to be housed on campus to limit pressure on the neighboring housing supply. … The settlement would also make it easier for everyone to get around on our streets, by making it easier to provide Muni passes to students and staff, enhanced bicycle parking and limit its fleet of private buses.”

University attorney Jim Brosnahan said:

“Were very pleased with the result of the resolution because it allows the academy to concentrate on its main mission, which is to educate art students in The City. … The academy worked very hard. We started in December last year and we made it very clear at the beginning that we wanted to resolve everything, all before a lawsuit was filed.”

Brosnahan maintained that he felt the lawsuit was unnecessary.

The university is set to file for an application for a development agreement with the Planning Department today, according to Herrera.

The application filing is the first step in a process that would put the settlement before the Planning Commission and the Board of Supervisors for approval.

The university is headquartered in San Francisco and was first established in 1929 and has more than 8,700 students studying acting, animation, architectural design, fashion, graphic design and music production, among other majors the school offers, according to its website.