San Diego city officials did not perform their own evaluation of the condition of the former Sempra Energy headquarters before acquiring the Ash Street property and went ahead with the deal even though they should have known the building contained asbestos, an independent review has concluded.
The report, labeled preliminary because the investigation is ongoing, was released this week by Mayor Kevin Faulconer. He ordered it early this year after hundreds of city employees were evacuated from the building due to possible asbestos exposure one month after they moved in.
“The city never conducted an independent assessment of the building’s various systems prior to the acquisition or even before commencing the year-long renovation work,” said the report, produced by the Hugo Parker law firm in San Francisco.
Also, “the city did not arrange for an independent assessment of the building to examine, learn, assess, and appreciate the extent of asbestos-containing materials in the building,” the review said.
The study indicates that city officials relied too heavily on Cisterra Development, a private company that entered into a deal with then-building owner Sandor Shapery to negotiate the 20-year lease-to-own arrangement with the city.
“The seller-landlord, Cisterra, played an outsized role in the city’s acquisition of the property,” the review found. “Cisterra provided all or nearly all the documents the city relied upon for its due diligence.”
Cisterra “insisted that the city accept the property ‘AS-IS, WHERE-IS, WITH ALL FAULTS’ and included strong exculpatory language in the lease agreement precluding any liability of Cisterra,” the report said.
Hugo Parker also concluded that city employees and the public were never in danger from the asbestos.
In a statement, Faulconer said the city will do whatever it can to recover losses resulting from the agreement.
“The city will pursue all legal and financial options to recoup costs, hold able the contractors who worsened the building’s condition, and implement new levels of ability throughout internal operations,” said Faulconer, who recommended the deal to the City Council in 2016.
Both Shapery and Cisterra have said they provided the city all of their records related to the building and its maintenance.
Since January 2017, San Diego taxpayers have been spending $535,000 a month to lease the 19-story, long-vacant building at 101 Ash St.
The Mayor’s Office sought the council’s permission to approve the transaction in order to provide extra office space for the thousands of city employees who work downtown.
The project was supposed to cost just over $200 million, including 20 years of monthly payments, upgrades, maintenance and other costs. Faulconer’s staff said it was a good deal because the city would own the building at the end of the lease.
The City Council was told in October 2016 that the building needed little more than a $10,000 power wash before it could be occupied. They expected to move hundreds of employees into the building that summer.
But the mid-century office tower required more extensive renovations than officials expected, and the upgrades dragged on through 2019. The City Council was asked for — and agreed to spend — an extra $30 million on repairs.
Last December, officials began moving employees into the building despite several open asbestos citations issued by the county Air Pollution Control District. Within weeks more asbestos was found and the building was vacated.
City Council and the public have subsequently criticized the Mayor’s Office for moving ahead with the lease too quickly.
Councilwoman Barbara Bry, who is facing former councilman and state Assemblyman Todd Gloria in a November run-off election to succeed Faulconer, has made Ash Street part of her campaign because Gloria voted to proceed with the project.
The city is now facing multiple legal claims from workers who were directed to move into the building and fear they were exposed to asbestos.
A separate memo released by the Mayor’s Office this week lays out potential responses, including continuing with repairs, selling the building at an unspecified loss, renegotiating the existing lease and abandoning the lease altogether.
“Staff recommends the City Council request that staff return to City Council in the Fall with further refined construction and financial schedules for all options to move forward, and to present the findings of the expanded (building condition assessment) report,” Deputy Chief Operating Officer Alia Khouri wrote to council Wednesday.
In addition to the Hugo Parker review, the Mayor’s Office retained Kitchell Corp. of Phoenix to conduct a full assessment of the building’s condition and possible steps the city could take in the future.
The 105-page study identifies extensive asbestos-containing materials that would require remediation before the property could be reoccupied.
Cost estimates provided in the Kitchell report range from $20 million to encase the asbestos to $35 million to remove the materials. The same analysis estimates that total renovation costs could sur $115 million, including heating, air, electrical and other upgrades.
“The study identifies building systems and materials that are in need of repair, replacement and or removal to allow for safe occupation of the building by city staff,” the Kitchell report states.
In 2014, more than two years before the city agreed to acquire the building, Sempra provided testimony to state regulators that its headquarters required more than $15 million in seismic retrofitting and $25 million in asbestos remediation.
The energy company opted to move to a new building on Eighth Street, built by Cisterra.
Faulconder, who is termed out of office later this year, said it will be up to other elected officials to determine a way forward.
“We cannot stay the current course on this project, and now that we know how we got here we can create a new path forward,” he said in his statement. “Next week, the City Council will be given several options on how to proceed to ensure we protect city employees, taxpayers and the public.”
The City Auditor’s Office is scheduled to perform a full audit of the Ash Street transaction this fiscal year.
