SAN FRANCISCO (CBS SF) — A deal between the city of San Francisco and developers building the new Transbay Terminal has become unraveled, opening the possibility for legal action by developers, and leaving the future of a $2.6 billion Caltrain extension to Downtown uncertain.

At issue is a special tax district the city was counting on to help finance the terminal in exchange for zoning changes it made to accommodate the size of the project in the South of Market.

City Hall and developers had worked out a formula for the district, but one of six developers dropped out. That caused Board of Supervisors to pass an older form of the deal, which developers said would tax them at a higher rate and be too costly.

“Everyone had a different understanding of what was agreed upon a few years ago, what the rates looked like. I think there was a lot of surprise in the rise of real estate values and property values,” said David Chiu, President of the San Francisco Board of Supervisors.

In an 11-0 vote on Tuesday, the Board of Supervisors agreed to form the tax district at 2014 market rates.

Supervisor Scott Wiener said he hopes the developers don’t sue, but the city needs the money to extend Caltrain downtown and state’s planned high-speed rail.

“Anyone can threaten to file a lawsuit and it happens all the time and we shouldn’t let that back us down in terms of doing what they want us to do, which is to drain hundreds of millions of dollars which will be pretty devastating to our ability to deliver the Downtown extension,” Weiner said.

The tax district plans were forming between 2006 and 2007, before the recession, and developers were given approval to “up-zone” skyscraper height limits and were set to fund the development.

In 2012, after the recession, the rezoning and the formation of the Mello-Roos district were restarted. But with real estate roaring in 2014, the tax burden has doubled. Developers allege it’s an effort by the city to “pass on cost overruns to developers.”

KCBS, KPIX 5 and Chronicle Insider Phil Matier said the cost overruns are similar to the those for the eastern span of the Bay Bridge.

“It started with one price, it’s just grown astronomically and now they’re saying you’ve got to pay this other amount and some of the developers are saying:’that will bust us; it’s not going to work,'” he said.

LISTEN TO ENTIRE PHIL MATIER INTERVIEW:

But Wiener said that properties have just exploded in value because of the up-zoning, and the point of the assessment district is to capture a portion of that value.

“I think it’s a very weak lawsuit but regardless I don’t think we should be bullied into giving up a huge amount of critical transit money because a group of developers don’t want to fulfill their obligation,” Weiner said.

Some of the developers involved are Boston Properties, TMG Partners, and Hines.

Boston Properties and Hines are developing the Salesforce Tower, which at 61 stories will be the city’s tallest building.

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