Tuesday, July 15, 2008 | In summer 2004, the city of San Diego knew the tax breaks given to a historic building in downtown San Diego had been granted in error and would have to soon be phased out. But what had been a relatively simple contract between the developer and the city was about to get exponentially more complex: At the same time the error was discovered, the building had been split up for sale as 85 residential condos.
That meant a group of homeowners purchased their downtown condos on the false assumption that they’d qualify for property tax savings of up to 70 percent under the program.
E-mails between city officials at the time show tense conversations over the tax breaks. Of greatest concern: How (or if) the city should directly notify new owners at El Cortez, many of whom bought expecting the tax breaks to continue.
“I am concerned that whatever is done be done IMMEDIATELY, as I can only guess that the Owner may have represented this reduction in taxes as an incentive to potential condominium buyers,” wrote Pam Hamilton, former project manager for El Cortez at the Centre City Development Corp., in an Aug. 24, 2004 e-mail to the city’s Planning Department and the City Attorney’s Office.
The owner she was referring to: El Cortez developer Peter Janopaul. An angry Janopaul wrote Hamilton on Sept. 1, threatening legal action. He said the city’s decision to phase out the tax breaks would delay all of his pending condo sales by 30 days because he would have to change disclosures to account for the change.
“With $30M in closings pending in the next few days, and $12M more in the works, the magnitude of the damage is huge and the implausibility of being able to put this back together again is total,” he wrote.
“This is a sad and reckless thing you have done, Pam,” he added.
The error had allowed the developer of the landmark to benefit from two overlapping public subsidies: an unprecedented rehabilitation loan from CCDC, the city’s downtown redevelopment department, and two years of tax breaks because of the Mills Act program from the city Planning Department. Because the building is located in a redevelopment area, and the developer had already received a city loan, the Mills Act program was not supposed to apply there.
While the developer had benefited from two subsidies, and from the ability to use the Mills Act as a sales pitch, scores of condo owners found themselves immediately facing skyrocketing property taxes.
The city — the agency that had granted the Mills Act erroneously — filed a formal notice with Janopaul at the end of September and required him to disseminate notice to the condo buyers that the program would end.
But homeowners didn’t hear directly from Janopaul for two months after Hamilton discovered the error Aug. 23 while researching another issue. He mailed them a vague notice in late October that the tax program would expire in 2014, but the notice contained no mention of the phasing-out of the tax savings.
And in those two months, at least 30 homeowners bought condos at the landmark building thinking they’d benefit from the tax breaks before they received the letter from Janopaul, according to a chronology from the building’s homeowners association. Instead of receiving the widely touted tax relief, homeowners who purchased units there saw their property tax bills immediately jump up to 60 percent.
Under the Mills Act, the city gives homeowners a property tax break in exchange for preserving a home’s historic character. The city or the homeowner can choose not to renew the agreement for any reason. If one party or the other chooses to do that, the tax savings are phased out over the next 10 years. Officials decided to phase out the tax break program on the building.
It’s another contentious front in an ongoing battle at the San Diego landmark, a stately white building once seen as the place to be with a whole hill named after it on the edge of downtown San Diego. Property values have plummeted by half or more, the relationships among the building’s residents and developers have frozen, and homeowners claim all over the place they were sold something they didn’t receive.
This issue is different from many of the others in that the main target of the homeowners’ complaint is the city, not the developer.
“The city screwed up, gave the Mills Act to the developer,” said Tina Dameron, a downtown real estate agent and owner of a penthouse in El Cortez. “The developer got the full benefit of it for two years. Then the city realizes its mistake, and we the owners, who had nothing to do with this, get penalized. It’s ludicrous.”
Dameron’s taxes have increased by about $600 a month because of the change in the agreement.
Citing the e-mails, at least one condo owner in the building has formally asked the city to immediately reinstate the full tax breaks for the homeowners at El Cortez. A demand letter sent on behalf of homeowner Joe Roth to the city’s Planning Department last month claims the e-mails show “what seems to be a collusive effort on the part of CCDC, the city, and the then owner of the El Cortez to keep purchasers uninformed regarding the true status of the Mills Act.”
Roth provided the e-mails, obtained from public records by the homeowners, to voiceofsandiego.org, along with his demand letter.
While the city figured out how to address the error, numerous escrows closed with buyers thinking they would benefit from substantial Mills Act tax savings, contended Roth’s attorney, Matthew Butler.
CCDC was responsible for the original rehabilitation loan, but not for the decision to grant the Mills Act. That was a mistake made by an office worker in the city Planning Department.
City officials assert they appropriately responded to the mistake without getting in the middle of private transactions between developer and buyer.
The original mistake is indisputable. Granting a Mills Act contract to El Cortez specifically violated a City Council policy limiting when such contracts can be signed on properties in redevelopment areas. The tax reductions are very rarely and carefully granted to properties in such areas, because tax income generated there goes straight to redeveloping those neighborhoods.
El Cortez’s tax reduction was approved by accident in 2002, officials said. The error was especially egregious because the developers had already received a $5.85 million rehabilitation loan from CCDC, the largest such public assistance loan ever granted by CCDC.
The intent of that loan is the same intent of the Mills Act: to rehabilitate the historic building. Janopaul had benefited from two financial incentives to accomplish the same goal of rehabilitation, and that city policy says the Mills Act can only be granted for a property in a redevelopment area if the property requires rehabilitation.
Soon after Hamilton discovered the city’s error and the city decided to send Janopaul a notice, the developer’s attorney apparently contacted the city and asked the city “not to send it out for a couple of weeks,” according to a conversation alluded to in a Sept. 2 e-mail to Hamilton from Doug Humphreys, then-deputy city attorney.
Indeed, the city apparently acquiesced to that request, and did not issue the official notice to the developer until Sept. 29. Another month passed before Janopaul sent his letter to individual homeowners and condo buyers in the El Cortez.
Hamilton has since left her post at CCDC. Reached at home Friday, she defended the city’s response.
“From my perspective, the city made a mistake, the city corrected a mistake and used the (Mills Act) agreement itself to correct it,” she said. “The El Cortez is just a very unfortunate situation, but CCDC did not create that situation and the city didn’t intentionally create it. It made a gigantic mistake.”
Hamilton pointed out the city contacted Janopaul, the person whose name was on the Mills Act contract, and stayed out of the individual transactions with homebuyers.
“I can tell you that any governmental entity has to be very, very careful about getting in the middle of any transactions between third parties,” she said.
The homeowners’ complaint about the delayed notification about the Mills Act counts among a slew of other complaints about the building. Homeowners and the developers of the project are embroiled in a number of lawsuits centered around issues including the construction of the building, parking agreements, homeowners association reserves and an entire new condo structure planned for next door.
Homeowners association fees have spiked because of legal fees and unexpected maintenance issues. Owners face huge losses in their property values because of the pressures from the slumping housing market. Banks are skittish about lending mortgages for units in the building because of the ongoing litigation.
As such, repossessed condos in the building are selling for bargain prices. A two-bedroom condo sold for $240,000 a few weeks ago. It sold in 2006 for $699,250.
And because the Mills Act immediately began to be phased out when they assumed ownership of their units, homeowners’ taxes have jumped. With all of those stresses, what some homeowners see as the city’s failure to fill them in fuels their frustration.
City Attorney Mike Aguirre said that the homeowners should have filed their complaint within six months of them learning about not receiving full Mills Act benefits. It’s too late to file an action now, he said. But Aguirre said the situation, even though it’s been labeled a mistake, raises a larger question.
“They should’ve never gotten the Mills Act in the first place,” he said. “Then the question becomes, if this is true, why did the city go along with the developer getting something that was completely inconsistent with the whole concept of redevelopment?”
The complexity of the situation doesn’t end with what happened years ago, but extends to the future options for the homeowners and the city agencies.
The developer, Janopaul, appears on the side of the homeowners on the issue — a rare occurrence in a relationship marked by controversy and litigation.
“We believe Pam Hamilton was in error when she unilaterally decided to not renew the Mills Act at El Cortez, and we think it should be reinstated immediately,” Janopaul said in a statement e-mailed by his spokesman, Michael Zucchet.
The homeowners have also caught the attention of Lori Saldaña, state assemblywoman. She has asked CCDC to reinstate the Mills Act, while acknowledging the issue is not in her purview.
“We’ve met with the residents and Lori, she shares their concerns,” said Joe Kocurek, Saldaña’s spokesman. “She believes they were promised something they didn’t receive.”
CCDC legal counsel Helen Holmes Peak said that that agency and Hamilton were not responsible for ending the Mills Act benefits, but was rather pointing out the city’s mistake.
Moreover, a decision to reinstate the full Mills Act benefits to El Cortez homeowners would be complicated especially because of the building’s location in the downtown redevelopment area.
Hamilton acknowledged the building has faced more than a few frustrations. But she said demanding the tax breaks back would extend the unfairness to the taxpaying public.
“I don’t know what the equity would be to the taxpayers or to the taxing agency is if the response is, ‘You shouldn’t have had [a Mills Act contract] in the first place so now we’re going to give you one,’” she said.