The ongoing scandal from the city’s acquisition and renovation of a downtown high-rise has kicked off a round of finger-pointing in City Hall that has now spilled over into the mayor’s race.
City staff moved into the old Sempra Energy headquarters in December and moved out again weeks later after county air pollution regulators repeatedly cited the building for unsafe levels of asbestos, which is harmful when airborne. That followed years of scrutiny over the city’s lease-to-own deal for the former Sempra headquarters and the unforeseen need for extensive renovations that are at the center of the asbestos trouble.
The city has hired an outside consultant to assess what went wrong and what should happen next, and a key city manager involved in the ordeal is on his way out, with more fallout likely to come. In the meantime, mayoral candidates are attempting to shape the narrative around the scandal, highlighting or downplaying the decisions in which they or their opponents were a part.
Chief among them is City Councilwoman Barbara Bry, who in recent weeks has made the Ash Street project central to her pitch to voters.
In one commercial, she said two of her opponents, Assemblyman Todd Gloria and City Councilman Scott Sherman, “led the charge on the Sempra building fiasco, costing taxpayers millions.” In an email blast, she accused Gloria and Sherman of approving the deal and then walking away from it without consequences.
Days later, Bry said the real problem was that the city had exempted the seller from liability when it signed the lease-to-own agreement. That document states the city is responsible for bringing the building into compliance with environmental and hazardous materials laws, including the handling of asbestos.
Bry wasn’t on the City Council when it approved the deal in October 2016. Gloria and Sherman were. They respectively moved and seconded the motion.
“We don’t know when and if city employees will be able to move back in,” Bry said at a mayoral forum in early February. “We don’t know the cost of it. We are stuck with a building that I’m sure no rational person would buy.”
Since that forum, a better picture of what took place inside the Ash Street property has begun to emerge — and it suggests that the lease wasn’t the problem.
Bry was one of the earliest critics of the project. But it went haywire during the remodel, the scope of which grew much larger than originally planned with the permission of the City Council in 2018. Bry gave her blessing to that remodel. As did Sherman after he expressed some reservations. Gloria was no longer on the City Council then.
At every turn, Bry has hammered her opponents for approving the initial deal to acquire the building. But the facts show that the problems with the property really began as a result of the remodel — an effort Bry voted for.
Commercial real estate experts who reviewed the lease-to-own agreement at the request of VOSD said it was reasonable of the city take responsibility for major renovations and environmental compliance so long as the seller had disclosed everything upfront and the city had an opportunity to inspect the property for itself.
Whitney Skala, an attorney specializing in real estate and business sales, said the standard for large real estate transactions is that buildings are sold “as-is.” That means the buyer takes possession of the property without the seller doing any major work first.
Because the city was planning to own the property at the end of 20 years, Skala said, the rent payments could be viewed as a mortgage. It was the city, not the landlord, “that would have to live with the results of the remediation,” he said.
When city staff pitched the lease-to-own agreement to the Council in September 2016, officials described the condition of the building as “excellent” and noted in a staff report that the maintenance of the previous tenant — Sempra — had been “meticulous.”
The deal included an allowance worth $5 million for tenant improvements. Still, the city’s real estate assets director Cybele Thompson told elected officials the building’s only immediate need was a $10,000 exterior power-washing.
At the time, Gloria expressed skepticism over that claim. He also asked about long-term maintenance because while the building appeared to be in good condition, it was old and would only continue to age.
In the end, though, he approved the deal, saying it seemed to be a smart financial transaction that would save the city money over time because it would own the building outright.
Sherman echoed Gloria’s comments then and said centralizing much of the city’s workforce in a high-rise while getting them out of other buildings in need of repair sent a good message.
The presentations by city officials at the time implied a “take it or leave it” attitude, and the City Council, after some modest inquiry, took it. After the lease went into effect, the scope of the renovations exploded.
In 2017, the city hired an architectural firm to create a “space plan” for work to be done before the property could house hundreds of workers. Thompson later explained that officials hadn’t had enough time to do one upfront. In 2016, Cisterra Development had been in the process of purchasing the property from developer Sandy Shapery and had worked out a lease-to-own deal with the city. Cisterra’s escrow would close in a few months, she said.
Christina Chadwick, a spokeswoman for the mayor’s office, told VOSD that the space plan took seven months to finish. She also shared documents that had been provided by both Cisterra and Shapery showing the presence of asbestos, as well as a history of the work that had been performed on the property over several decades.
The city, in other words, had known about the asbestos upfront, knew it would be disturbed during renovations and included asbestos remediation requirements in general contractor specifications.
While Bry put the blame on the lease at the recent mayoral debate, Gloria identified the expanding scope of the project as the problem.
He left the City Council weeks after approving the lease and headed to the California Assembly.
More than a year later, Bry sent a memo to a top city manager asking for more information about the delays and ongoing costs of the building. Staff at City Hall had decided that the renovation of all 19 floors would be preferable to the original five and had requested bids from contractors — without informing the City Council. The bids were canceled.
In response, city staff laid out a series of options for moving forward. The Council could move in a smaller number of employees quickly, stick to the basic five-floor renovations or remodel the entire building. The elected officials chose the most expensive option, totaling $30 million, based on city staff’s argument that a larger investment would save significant money over the long run.
When pressed about why the city hadn’t done more preparation before the lease was pitched to the Council, assistant chief operating officer Stacey LoMedico cited a failure of communication and expertise.
“Purchasing commercial real estate and doing significant tenant improvements is not part of our core work plan. It happens extremely infrequently,” she said. “We needed to have a member of our public works as part of our team.”
Several elected officials expressed frustration to the way the project was shaping up, including Sherman. He complained at one meeting that officials had painted the City Council into a corner, but he voted yes at a subsequent meeting.
Bry, too, said she was disappointed with how little information the City Council had been given. But she voted yes on the $30 million investment to renovate all 19 floors and said she hoped the city had learned its lesson.
After pulling workers out of the Ash Street building in January, Bry’s campaign sent out an email blast that faulted the city for “$20 million+ in cost overruns for tenant improvements” — improvements she endorsed a year and a half earlier.
In her role as city councilwoman, she also called for an internal audit. Her request is expected to get a hearing Wednesday in front of the city Audit Committee, which is chaired by Sherman.
A spokeswoman said Bry was unavailable for an interview. Instead, she sent a statement in which she said taxpayers deserved to know about “the process by which the building was purchased, the due diligence that was conducted on both the value and the physical condition, and the subsequent handling of the management of this project.”