of the San Diego City Council have a serious decision to make come Monday, and whichever path they take is likely to alienate one of the only two public officials elected citywide.
Mayor Todd Gloria wants to spend $132 million to settle with the main defendants in two lawsuits over leases for downtown office towers, one of which his own staff said was valued at “virtually zero.”
Gloria introduced the settlement plan after testifying in a deposition that he was deceived by the building sellers. Nonetheless, the agreement says the city’s Ash Street debt would be “paid in full and completely satisfied.”
The spending also does not include “modernization” needs for the former Sempra Energy headquarters at 101 Ash St. and the Civic Center Plaza that could add $175 million or more to the cost of the properties.
City Attorney Mara Elliott, who argued in court that the leases were illegal and should be voided, took the unusual step of publicly opposing the proposal Gloria announced last week, issuing an 11-page analysis outlining why she thinks it’s a bad deal for taxpayers.
It was the first public break between the mayor and city attorney, who both won election in 2020 in part by distancing themselves from the long-running debate over the Ash Street lease.
Gloria, who made the initial motion to approve the lease-to-own agreement when was on the council in 2016, said the settlement offers the city certainty in its short-term legal risk and flexibility in its long-term real estate planning.
“What this settlement does is put the needs of the city and its residents first,” said Gloria, who is in his first term as San Diego mayor.
Elliott, who was reelected in 2020 and will be termed out of office in two years, sees the proposed resolution much differently. In her report to the council, she spelled out numerous reasons for not recommending its approval.
“This office strongly recommends that the council reject the agreement,” Elliott’s report concluded. “We encourage the council to review the agreement carefully and to ask appropriate questions to city staff.”
The hearing is likely to draw plenty of testimony from of the public who have followed the Ash Street saga since 2018, when The San Diego Union-Tribune first reported the city was paying $18,000 a day to rent a vacant building.
Only one council member remains from six years ago, when the approved the Ash Street lease — Chris Cate, who stood alongside Gloria at his announcement last week and will depart city hall later this year due to term limits.
The others must decide whether to vote with their mayor or their lawyer.
‘Not justified’
The City Attorney’s Office report lays out nine specific reasons to reject the settlement, each one articulated in plain language.
The first notes that the landlord in both leases, Cisterra Development, would be permitted to retain its “ill-gotten gains” even though the transactions could be voided if the city prevailed in court.
According to the city’s lawsuits, the Ash Street and Civic Center Plaza contracts are illegal because Cisterra secretly paid millions of dollars to Jason Hughes, a real estate broker who had been advising the city on real estate on an unpaid basis.
Hughes “had a forbidden financial interest in the transactions and conspired with Cisterra to hide their secret financial arrangement, all to the city’s substantial detriment,” says the city attorney’s report. Hughes acknowledged collecting almost $10 million from the two leases but has said he notified six of then-mayor Kevin Faulconer’s istration that he would seek compensation.
Michael Attanasio, an attorney representing Hughes, said: “Mr. Hughes is not part of the city’s full-scale retreat because he did nothing wrong. He looks forward to his day in court.”
The settlement, Elliott told the council, “would allow Cisterra to retain 100 percent of its profits.”
Cisterra issued a statement last week in of the settlement. “The resolution announced today is the result of all parties working hard to find a fair compromise, which we believe has been achieved,” Cisterra principal Steven Black said.
San Diego’s elected attorney also warned that the proposed settlement puts new legal burdens on the city and its taxpayers.
“The agreement would require the city to defend and indemnify Cisterra, the lender and their respective s with respect to any claims that now exist or may arise,” Elliott wrote — except those related to Hughes or his company.
“The city’s broad defense and indemnification obligation under the agreement is not justified,” the analysis adds. “Further, the city will not recover a dime of the significant attorney fees and costs it has expended thus far.”
Gloria spokeswoman Rachel Laing said in an email the indemnification clause was “a small and limited price to pay in exchange for what (the city) is receiving.”
Elliott also notes that the settlement does not actually resolve the litigation. Instead, it removes Cisterra and its lender, CGA Capital of Maryland, from the existing cases and leaves Hughes and various contractors as defendants.
If approved by the council, “the city would not achieve anything close to a global resolution of the dispute and would not put an end to an ugly chapter in its history,” she wrote.
Repeating mistakes
When San Diego acquired the Ash Street building, it did so “as-is,” meaning the city accepted responsibility for any needed repairs or upgrades.
The concession proved to be problematic. City officials failed to evaluate the property’s condition themselves and the building contained asbestos that was disturbed during renovations undertaken by the city.
County regulators subsequently issued a series of asbestos violations and the building was evacuated. Meanwhile, workers filed a spate of lawsuits against the city, claiming they were wrongly exposed to the cancer-causing material.
Those cases will proceed whether or not this settlement is approved.
In her legal review, Elliott expressed concern that the city will be repeating the “as-is” mistake it made in 2016, when her own staff approved the lease weeks after she was sworn into office.
“The city would assume full responsibility to address any problems or defects, whether known or unknown, with respect to the condition of the properties,” it states.
According to a consultant’s report written in February but released last week, the Ash Street renovations could cost $115 million or more, while repairs and upgrades to the Civic Center Plaza could run as high as $61 million.
Elliott is worried city officials may repeat another earlier mistake: their failure to conduct proper due diligence on a property’s condition before approving a lease.
The Mayor’s Office said the auditor’s recommendations agreed to last year do not apply in this case because the city already entered lease-to-own deals for both properties.
“The settlement agreement is a decision between continuous litigation with an uncertain outcome vs. creating certainty and the ability to move forward with a broader vision,” Laing said.
Elliott also said settling the lawsuits would do away with any deterrence of “future bad acts” harmful to the city.
No set plan
The elected city attorney questioned the timing of the proposed settlement. The litigation is nearly two years old; the cases are set for trial in January, and the city keeps learning more about the deals, she said.
There is “no compelling need to settle before the investigations are completed,” Elliott wrote. The proposed agreement does not bar the defendants from doing future business with San Diego.
“The city will be forever barred from pursuing any legal actions against Cisterra or the lender relating to the dispute, even if the city later discovers new information that divulges a higher degree of culpability,” the city’s lawyer said.
Elliott’s legal opinion also noted that Gloria has not put forward any specific plan for the vacant former Sempra headquarters or the Civic Center Plaza.
City officials have “no determination of what the properties will be used for and to what extent the existing buildings meet the city’s objective,” the legal review notes.
The mayor’s report to the council concedes there is no set plan for the buildings but says settling the lawsuits provides a range of options to city planners.
San Diego “will be able to determine how to optimize them and consider redevelopment opportunities for the civic core that results in positive transformational change for our city and its residents,” the mayor’s report said.
The last point Elliott makes in her advice to council is the lack of opportunity for any meaningful public review of the proposal. The idea was introduced last Monday.
“Sufficient public outreach concerning the city’s plans for use of the properties has not occurred,” she wrote, “and the approval process for the agreement is being fast-tracked without explanation or justification.”
City Auditor Andy Hanau also concluded in a report last July that the Mayor’s Office too often asks council to make important and costly decisions about real estate under unnecessary time constraints.
In a memo Friday, he noted that only one of 10 recommendations from that audit had been implemented and he advised city officials to proceed with care.
“It is still possible for the city to achieve the intent of the framework in the meantime by ensuring that key best practices and due diligence steps are completed, that the City Council and the public are provided with all material facts, and that the city takes appropriate steps to protect itself from conflicts of interest,” the auditor said.
Millions at stake
When he introduced his settlement plan last week, Gloria highlighted several deal points favorable to the city but did not mention some concessions that benefit the defendants.
Specifically, the mayor noted the agreement does not preclude the District Attorney’s Office from prosecuting Hughes criminally. City officials have no say in criminal prosecutions, besides misdemeanor cases filed by the city attorney.
Gloria also showcased $7.4 million in net profits that Cisterra agreed to return, and a $11.7 million “yield maintenance fee” that CGA Capital agreed to waive. He also pointed out the city would keep any money recovered from insurers or other third-party reimbursements.
“Because there was no possibility of an ideal outcome from this civic debacle, our aim was to reach a lawful, fair settlement that limits the city’s liability and is in the best interests of taxpayers,” Gloria said.
But materials provided to the council — and public — days later included other details. For example, the agreement has the city paying more than $12 million in back rent to Cisterra. It also notes that one option for the city is to purchase the Ash Street property, then sell it as-is.
“Given the known asbestos and remediation requirements, the value of the 101 Ash building is virtually zero,” the mayor’s report said. “However, the land does have value, especially with other agencies contemplating redevelopment projects in the area.”
The vacancy rate for downtown office space exceeds 20 percent, another report noted.
Gloria also acknowledged that the city could buy the building, and then tear it down. A city consultant estimated that would cost $28 million and leave the city with a dirt lot valued between $36 million and $42 million.
“Demolishing a high-rise building with asbestos is exceeding(ly) costly because all hazardous material must be removed before the building can be brought down,” the real estate consultant wrote.
Once the settlement is approved and executed, the Gloria istration would work with the budget analyst and return to the council within one year to update the options, the mayor’s staff report said.
‘Indeed legal’
According to the City Attorney’s Office, the City Council is free to ignore Elliott’s legal advice and approve a deal without her consent. The city charter only requires her office to sign the agreement “as to form,” she said.
“The charter does not give the city attorney the power to invalidate a City Council action by withholding her signature,” Elliott spokeswoman Leslie Wolf Branscomb said.
But according to a legal opinion from the City Attorney’s Office in 2008, when Michael Aguirre was the elected city lawyer, the City Attorney’s Office has sole discretion over city litigation.
“In sharp contrast to general-law cities, San Diego voters adopted an autonomous city attorney form of government,” the opinion states. “The city attorney has an express ‘duty’ to ‘prosecute’ ‘all’ lawsuits ‘to which the city may be a party.’”
Aguirre is now a private attorney representing taxpayer John Gordon in a separate Ash Street-related case against the city that is also headed to trial early next year.
He said it is not legal to buy out a contract that is unlawful on its face.
The Gordon lawsuit, which is not part of the proposed settlement, claims the Ash Street lease is illegal because it violates the state constitutional ban on spending money without a direct and timely benefit to the public.
Former mayor Faulconer, who recommended the deal to the council back in 2016, cited that same provision when he suspended the $535,000 monthly payments in 2020.
The current mayor said it is prudent and appropriate to approve a settlement against the city attorney’s advice.
Elliott “may have her own opinion,” Gloria spokeswoman Laing said. “However, her role is to opine on the legality of the settlement agreement, which she has repeatedly said is indeed legal.”
The public hearing is scheduled for 11 a.m. Monday.
