As I understand it, it comes down to two things.
1. That property is considered by some to be the "Gateway to Boulder." They don't want anyone to build there because planting a bunch of shiny buildings there would mess up the view and the natural-ness of it all.
2. The most relevant reason though is most likely that South Campus is the ONLY card the city has that trumps the University. Since the University is basically the state, it can tell the city to pound sand on just about anything. CU can pretty much build what they want, how they want, wherever they want it and there's nothing Boulder can do about it. With South Campus though, there's nothing CU can do without water and the city controls the well. There's no way the city is going to give that up without extracting some sort of massive compromise from CU. Whether it's more control over the building process, money, or something else, the right to build on South Campus will not come cheap.