Monday, Jan. 14, 2008 | The red neon letters spell EL CORTEZ when they’re all working, launching a beacon from the stately white building atop its namesake hill on the edge of downtown San Diego.
But when the letters are on the fritz, as they are now, they flash and blink, muddling the sign’s message and portending another: all is not right with the landmark.
The building has seen major changes in the most recent of its eight decades of existence, most of which were spent as a hotel. Developers Peter Janopaul and Anthony Block rode to the building’s rescue in the late 1990s, toting out-of-town historical building renovation experience and — to the delight of San Diegans with rosy memories of high school proms and Beatles visits at the old hotel — plans to revitalize what had become an eyesore.
But the building, now spliced into 85 residential condos, some commercial and office space, and the restored Don Room for entertaining, is now facing a mutiny from within and the external pressures of the slumping housing market.
The building is mired in litigation between homeowners and the developers. The homeowners association and individuals in various suits are suing over construction defects, parking agreements, HOA reserves, disclosures on property tax agreements and the building planned for next door.
And of the five units in the building currently for sale, four are being sold for about half of their original selling price by lenders who repossessed them. The other is listed for less than is owed on the mortgage.
Take unit 405, a two-bedroom, two-bath condo that sold in November 2005 for $625,000. It’s been repossessed by the lender and is now listed for sale with an asking price of $290,000 — a 54 percent price reduction.
Another bank-owned unit that once sold for $405,000 is now listed at $199,000. Another one, No. 304, sold in February 2006 for $699,250. Now it’s listed as a bank-owned sale for $294,500 — a 58 percent difference.
And though sales have slumped countywide, buyers are especially scarce on this project. Lenders, already reviewing each deal more meticulously, are extremely averse to making mortgages on buildings in litigation. The banks selling the repossessed properties are forced to keep lowering the prices until a buyer can pay cash or work out some other deal with a lender.
The litigation and some unexpected maintenance cost increases mean the rest of the homeowners pay about 30 percent more each month on their association dues than they expected to when they moved in, placing the dues for most units in the $600 and $700 range. That conflates with the developers’ plans to build another condo tower right next door to make the building a tough sell.
The building is distinctive, its architecture different from the throng of downtown condo towers that sprung up in the city’s core in recent years. But a look at the trouble in one of the region’s most well-known buildings — and the fight over the one to come next door — yields some universal truths about real estate here: the fallibility of real estate investment and the tension between planners, developers, homeowners and neighbors.
“We want our building fixed, to what it was supposed to be,” said Joe Roth, vice president of the homeowners’ association. “It looked real nice, but they didn’t go deep enough.”
But the developer dismisses the homeowners’ concerns, boiling their frustration down to crying over lost views — or the potential for lost views when the developer puts up another condo tower on the adjacent parcel.
“At every single step, they’ve made it their life goal to do everything they can to stop the project,” said Michael Zucchet, vice president for real estate at J. Peter Block Cos., the developer.
‘It’s Gone Downhill From There’
With a loan from the city of San Diego’s redevelopment arm in 1999, Janopaul and Block fixed up the old building for rent as luxury apartments. After a few years, they paid back the loan and converted the apartments for sale as condominiums. The units came on the market right at the peak of an unprecedented, lengthy boom in San Diego County’s housing market. The deals closed in late 2004 and early 2005, as investors bought pieces of the distinctive downtown building. Some would live there, some would find tenants and some would try to sell for a profit.
But the market in San Diego turned, and condo owners trying to sell units in the El Cortez have not found immunity from slumping sales and prices. And falling prices have left some who used unconventional financing in foreclosure.
Meanwhile, the homeowners association and some individuals have filed numerous lawsuits against the developers, protesting what they see as a general neglect of some major problems — nailed home several times when bursting pipes have flooded the hallways — and a failure to describe how much work needed to be done on the building when they moved in.
Any warmth there was in the relationship between the homeowners and the developers, whose offices remain adjacent to the front lobby in El Cortez, has been decisively frozen by all of the litigation and the mutual suspicion.
“It was a cooperative, hip place” at the start, Zucchet said. “I think it’s fair to say it’s gone downhill from there.”
The proximity of the developers in their offices to the angry homeowners only augments the situation.
“That’s really where I think the venom comes from,” said Peter Dennehy, local real estate analyst. “I think if they’d just gone away after they sold their condos, this would be different.”
‘You’ll Never Have to Give Directions Again’
The J. Peter Block Cos. played up the building’s distinctiveness in marketing the condos a few years ago. “Live here and you’ll never have to give directions again” proclaimed a brochure, a nod to the fact that the sign’s so distinctive even passengers landing at Lindbergh Field can see the neon letters on the building from the air.
At the same time, the developers assured buyers in promotional materials that the homes had been fit with “new plumbing, electrical, heating and air-conditioning systems.” That claim is now a focus of litigation with homeowners alleging the systems were actually five years old at that point. When those systems began breaking down, with backed-up plumbing and pipes bursting, the homeowners association filed suit in January 2006. Trial is set for April.
“Everybody seems to be in agreement that there are these defects and that they need to be repaired,” said Eric Dubin, attorney for the homeowners association on the construction defects suit. “Simply, all we want is to live in a defect-free home.”
But Zucchet said the kinks were to be expected. The homebuyers signed every paragraph of a thick disclosure document for those reasons, he said.
“You’re buying a building that was built in 1927,” he said. “It’s beautiful, it’s historic, but it was built in 1927.”
The homeowners were especially aware of the historicity of the building when they bought their units under the assumption they’d enjoy a hefty tax break thanks to the Mills Act, a property-tax discount for homeowners of historic properties. The developers received Mills Act designation on the block in 2002 from the city of San Diego, and selling agents touted the discount to buyers.
But the designation of the block ran counter to the city policy that such designations for properties within the area managed by the Centre City Development Corp. must be approved by that agency, because of the loss in revenue to CCDC such a tax break would give. So CCDC wrote letters to the homeowners in 2004 saying their units would not qualify for the designation, and the discount would be incrementally removed over the years until 2014.
“It was just an oversight,” said Brad Richter, the El Cortez project manager for CCDC, of the city’s granting the designation.
But some buyers talked themselves into higher monthly HOA dues for services like the doorman and a 24/7 valet because they were saving on their property taxes. Now they don’t have the tax savings, and the HOA had to levy higher dues to keep up with the maintenance needs, and to address the severe shortage in the association’s reserves, as described in another lawsuit against the developer. Many of those extra services have been cancelled.
The tax break incentivized Max Coates to purchase his unit in late 2004. Coates has filed suit against the developer and the city, alleging the company knew about the non-renewal status but didn’t disclose that to buyers. Coates has fond memories of the hotel as a kid, riding with his dad in the glass elevator that was one of the first in the world. But now Coates has moved out of the building and leased his unit to a tenant.
‘Where Was the Public Good in That?’
When they received permission to convert the hotel, the developers also subdivided the block for development and began submitting plans to build more condos and commercial space alongside El Cortez. At first, the plans called for a more muted seven-story building.
But CCDC wanted more density, while the city’s historical resources board and other interest groups wanted the building to be architecturally interesting. A massive gleaming condo tower would dwarf El Cortez, they said. And the neighbors chimed in, as did some El Cortez homeowners, who claimed an agreement filed in 1999 gave them a say in what happened on the site as part-owners of the property.
And they say sales people teased out a notion from that agreement when pitching the building — sure, the developer retained rights to break ground next door, but they wouldn’t until 2025.
Now the developers plan to build a new 12-story contemporary building with 78 units. That project has been whittled and massaged in 20-some public meetings in the last two years, and heads to the Planning Commission for approval in February.
But that the developers want to build anything at all is enough of a shock to some. Others say they won’t believe the developers’ promise of interim parking spots for the spaces that are lost during construction until they see it. The parking situation is another matter under litigation, and further aggravated in homeowners’ minds when they see Janopaul’s flashy cars parked in his reserved spaces at the front.
“You certainly can’t blame the developer for wanting to develop his property to the most profitable end, but there are some quality of life issues there,” said Jim Abbott, a veteran real estate broker in the downtown market.
“[Janopaul and Block] have been called the saviors of these historic sites, and I also think they have enriched themselves greatly on this project — I’m not saying those are mutually exclusive things,” Abbott said. “But if they got some big tax benefit or investment assistance from the city, you’ve got to wonder, where was the public good in that?”
Homeowners in the building don’t expect their values will all plummet to match the asking prices of the bank-owned units right now. They expect their litigation will wrap up this year.
Zucchet called the homeowners’ volume when decrying the problems with the building an “odd strategy.”
“You’re cutting off your nose to spite your face, trashing the El Cortez when you own the El Cortez,” he said. “Good luck protecting your property values.”
But the homeowners say the litigation is necessary to make the building what they believed it would be when they bought it. They believe the values will come back.
And Roth, whose bathroom sink fell off his wall once due to the construction problems, said he, too, has a happy ending in sight.
“I’m optimistic,” he said. “When you’re on the side of right, all you need is a big flashlight.”
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