One thing was clear from San Diego Mayor Kevin Faulconer’s staff presentation Thursday on the troubled Ash Street purchase: No one on the City Council was happy about how the transaction has been handled.
Aides to Faulconer — who in 2016 promoted the deal to acquire the 19-story high rise as a way to save taxpayers tens of millions of dollars and consolidate the city’s downtown workforce — presented the council with five options for moving forward Thursday night.
None of them were received well.
The city has been paying $18,000 a day to lease the former Sempra Energy headquarters at 101 Ash Street since early 2017, even though it has been unusable due to its poor condition.
After recounting the events that led to the current situation —a $200 million-plus investment for a building that was appraised at $72 million and still needs $115 million and years of construction — the council’s frustration was palpable.
Councilwoman Vivian Moreno called the 2016 deal an outright fraud and suggested the city stop paying the lease and instead deposit the monthly payments into an escrow until the building condition and the city’s legal position are fully ascertained.
“This could not have been the result of incompetence; this was a deliberate fraud,” she said. “This was clearly fraud, and we should not be afraid to say so.”
Specifically, Moreno and others wanted to know why the identity of the property’s former owners was withheld from council four years ago, when the council was deciding whether to lease the building. Developer Doug Manchester, one of the mayor’s biggest political ers, and investor Sandor Shapery were previous co-owners but their names were not given to the council.
A section of the city charter requires all partners in city contracts to be publicly disclosed.
Chief Operating Officer Kris Michell, seated in the front row of council chambers, did not respond. Instead, a hired attorney said he had not specifically examined whether the charter section was complied with, and he warned the council not to withhold lease payments because of potential legal ramifications.
“This is a one-sided contract,” attorney James Parker said of the lease-purchase deal.
Councilman Chris Ward said the whole situation left him feeling frustrated and insulted.
“Ultimately it feels like a dereliction of duty coming from the Mayor’s Office,” he said.
But in the end, the only action the council took was to order monthly updates on the building status and more detailed cost estimates for each of the five options presented by the mayor.
The vote was 5-4, with Moreno ing Monica Montgomery, Barbara Bry and Georgette Gómez in opposition. But even those council who approved the motion were unhappy with their options.
“This whole thing, it friggin’ sucks,” Councilman Chris Cate said. “Everything under the sun needs to be evaluated at this point.”
The Mayor’s Office presented the council five options, including investing another $115 million to complete the needed repairs on the building.
Other options include walking away from the project — a move that city officials conceded could lead to litigation and adversely affect the city’s credit and bond ratings.
The Mayor’s Office also suggested possibly working to renegotiate the lease, but that idea was given little hope of leading to a successful outcome.
The council also was told it could consider buying out the lease after five years — sometime after January 2022 — and then selling the building to the highest bidder.
The last option was dubbed the “Get a New Landlord” plan. It involves purchasing the building outright, selling it and then negotiating a new lease-back arrangement with the new buyer.
“Having the city as a long-term tenant will likely serve as an attractive opportunity due to the duration of our lease commitment and the stability of our business operations in a post-COVID real estate market,” the Mayor’s Office told the council.
Two years ago, council reluctantly agreed to provide $30 million in additional funding to complete repairs and renovations that the Mayor’s Office said was needed to move into the building.
This time, they balked at the idea of spending an additional $115 million or more to upgrade its plumbing, heating, elevators, electrical and other systems — and clear out asbestos that has kept the city from moving in since 2017.
If the new costs are eventually approved, the city’s total investment in the Ash Street building would sur $300 million — a jaw-dropping amount considering that the former owner sold a 49 percent stake in the property for $20 million four years ago.
The $115 million in new construction would be financed over the next 20 to 30 years, adding additional and unspecified interest payments on the new debt to the city’s overall investment.
The work also would take up to four more years to complete, meaning seven-plus years would have elapsed between the lease-g and permanent occupancy.
Independent Budget Analyst Andrea Tevlin pointed to other possible options not proposed by the Mayor’s Office, including demolishing the building and constructing something new, or exploring some kind of public-private partnership to resolve the property issues.
Tevlin also blamed the Mayor’s Office for failing to keep the council informed about problems with the Ash Street building. She suggested monthly updates going forward and that no decision could be made this week with so much still unknown.
“The council is being asked to request staff return to council in the fall with project financing plans for selected options which have barely been described in the staff report,” she wrote. “We believe this is a premature and unnecessary request at this time.”
The Mayor’s Office last week released its preliminary “forensic review” of what happened — an independent blueprint outlining the various errors and missteps that landed the city in the position it is now confronting.
According to the analysis by the San Francisco law firm Hugo Parker, no one at City Hall conducted an assessment of the building’s condition before Faulconer pitched the 20-year lease-to-own deal to the City Council.
That lapse in judgment may be questionable enough. But consultants also said city officials relied too heavily on representations from Cisterra Development, a San Diego builder that acted as a broker between the city and the former property owners.
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,” said the review, which is open and ongoing.
The same report says the purchase cost was $92 million — not the $72 million indicated to the council four years ago. The legal consultant said the difference was due to the city’s agreement to repay $5 million in tenant improvements over the life of the lease.
So far, personal ability for the failures has been limited.
Early this year, a deputy chief operating officer was allowed to retire after employees who had been moved into the building had to evacuate a few weeks later because of asbestos.
This week, the city’s real estate assets director resigned suddenly and without explanation.
The mayor issued a statement promising to do whatever he could to recover what damages he could and blamed construction crews for what went wrong.
“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,” the statement said.
Faulconer may be delegating a final decision to his successor — and to the next council.
He and five council are due to leave office in early December. More detailed information and cost estimates needed to chart a path forward will not be available until sometime this fall. No more specific timeline was provided.
The Ash Street property has grown increasingly political as the losses have mounted.
Councilwoman Bry already has made the transaction an issue in her mayoral run-off election in November against Todd Gloria, the state assemblyman was served on the council in 2016 and made the original motion to approve the deal.
Gloria said in a statement Thursday that he was not the only one who voted to invest in the Ash Street property.
“Councilmember Bry has focused exclusively on the initial vote to purchase the building,” he stated. “But what about her vote to spend $30 million to renovate it? She had more information than I did and still made that costly vote.”
The series of blunders also has touched the city attorney run-off election between incumbent Mara Elliott and challenger Cory Briggs.
Briggs has criticized Elliott for her handling of the transaction, while Elliott last week threatened to open a criminal investigation into how a reporter obtained a confidential report critical of the Ash Street deal. She then promptly closed the case.
Even if the building is upgraded and workers are eventually able to move in, the city is still facing higher costs related to the transaction.
At least 27 workers have filed legal claims against the city, alleging they were improperly exposed to asbestos when they worked inside the building. Those cases are not likely to be resolved in court anytime soon.
