The Morning Report
Get the news and information you need to take on the day.
One of the peculiar aspects of the ongoing controversy about 101 Ash St. — the high rise the city controls but can’t move employees into — is that it was acquired with a lease-to-own deal.
Why lease to own? Why not just buy? Why did a third party need to purchase the building from its owners to then arrange to transfer ownership to the city of San Diego over many years?
The answer may be found in the deal on which the 101 Ash Street purchase was based, a carbon copy of the transaction the city carried out two years before to lease to own another high rise.
Years before the city entered into a disastrous financial relationship to take control of 101 Ash St., it acquired Civic Center Plaza, a high rise right across the pedestrian plaza from City Hall. It used the exact same lease-to-own language the city would use for 101 Ash St. The same developer served as a middleman.
The city did that because city officials decided they couldn’t risk trying to borrow money the way municipalities traditionally have. Facing legal challenges to their ability to borrow money, city officials and their advisers discovered a new way to essentially borrow the money through the sellers. And they would go on to replicate the arrangement.
A review of how the city came to take control over another high rise illuminates many of the reasons why the city made essentially the same deal years later for 101 Ash St. and key differences that may have led to the problems they’re grappling with now.
In 2014, San Diego real estate officials faced the prospect of potentially having to move hundreds of city employees out of a downtown building if they couldn’t come up with a solution.
The city’s lease for Civic Center Plaza had gone month-to-month. City officials wanted to buy the building, but the owners were impatient.
The city first moved into Civic Center Plaza in 1991 and by 2014, it was paying rent with no real long-term commitment, at a rate of $1.15 a square foot per month to the New York-based beneficiaries of a trust organized under Chase Bank. The family behind the trust had made its wealth off the dice game Yahtzee.
City leaders wanted to borrow money to buy the building. But they decided they couldn’t.
A lawsuit filed that same year by attorney Cory Briggs had argued the city couldn’t keep borrowing money as it had without a vote of the people. City lawyers were confident that he was wrong but the uncertainty of court battles to come meant that the city was reluctant to take its pitch to investors in the bond market.
San Diego had planned on buying the property outright with the help of bond financing, and even signed a letter of intent for both Civic Center Plaza and the nearby King-Chavez Community High School building.
But it fell apart as Briggs challenged the lease-revenue bond process, a financing tool the city has long used to get loans without a public vote that Briggs has argued is required for long-term debt.
The trustees threatened to put the building on the market for $20 million more than the city had offered and gave officials weeks to decide. The city, however, didn’t have that kind of cash.
The negotiations between the city and the trust had stalled in part because of the personalities involved. The city was at the mercy of its own bureaucracy and individual family members who made up the trust had different views of what they should do with the property.
“I had an unwilling buyer and an unwilling seller,” said Gary London, a real estate analyst hired by the trust to do market research.
A breakthrough came in the form of an idea — a new financing scheme where the city would lease to own the building — and a new facilitator: Cisterra Development..
“Everybody seemed to be resisting the deal until Cisterra came in,” London said.
John Casey, then the city’s ballpark administrator who also helped with major real estate deals, said he kicked around potential solutions with Jason Hughes, a commercial real estate broker and unpaid city adviser. They discussed whether Cisterra, which had recently helped Sempra Energy move out of 101 Ash St. and into its new headquarters in East Village, could help.
Perhaps, Casey remembered thinking, Cisterra could take over the city’s agreement to buy the property and quickly execute a deal that would eventually allow the city to own the building . The approach would also allow the city to bypass property taxes, which Casey estimated would save at least $600,000 a year.
“They were brought in as a savior,” Casey said.
Hughes declined to comment for this story.
Cisterra quickly put together a plan: The company would buy Civic Center Plaza and the King-Chavez high school building, put down a nonrefundable deposit and allow the city to pay rents that essentially amounted to a monthly mortgage and own the buildings after 20 years.
City managers jumped at the opportunity. But because the trust had said the deal needed to close by March 2015, officials bypassed the usual approval process. No committee reviewed the arrangement before it went to the full City Council for a vote in January 2015.
Cybele Thompson, who had months before taken over as the head of the city’s Real Estate Assets Department, told elected officials that if the city signed off, it would ultimately save $9 million over 20 years rather than go on the open leasing market. But it needed to close immediately. Essentially: Take it or leave it.
Members of the City Council and the city’s independent budget analyst were not pleased with the quick pace of the transaction.
“We remain concerned that Council has only had a short period to evaluate the proposed lease-to-own agreement for the (Civic Center Plaza) and King-Chavez buildings, and has not had the opportunity to publicly request additional information or suggest potential amendments to the proposed agreement,” then-budget analyst Charles Modica wrote in a report released the Friday before the Monday City Council hearing.
Thompson acknowledged that the final Civic Center Plaza lease had been negotiated in a mere two weeks, but she cited the trustees’ March deadline. She noted that City Council members had been briefed individually on different iterations of the agreement over the past few months. Still, she sounded almost apologetic.
“That’s not how we plan to do business, and we understand that you all have many other matters to consider besides our matters so to not give you adequate time to review doesn’t work to anybody’s benefit and we don’t plan to do that going forward,” Thompson said.
Several members of the City Council expressed frustration. Then-Councilman Todd Gloria, the assemblyman who is now running for mayor, questioned the numbers. Thompson had said the deal would save money over the long term, but also suggested that the property would need $15 million to potentially accommodate another 245 employees and make other capital improvements, including asbestos remediation.
“I understand the complexities of the situation,” Gloria said. “But it’s also, as a legislator, not the position I want to be in, particularly for a $44 million purchase.”
Despite his and others’ reservations, the City Council unanimously approved the deal to make the March deadline. But one of Cisterra’s principals, Jason Wood, said the deal didn’t actually close in March.
Wood said the Civic Center Plaza transaction was ultimately consummated in June because the trustees wound up requesting an extension of their own to allow them to take advantage of a tax benefit.
The buyers complied.
City leaders were thrilled: They had successfully maneuvered around a legal obstacle to secure a long-term deal for office space in record time.
They were ready to do more deals.
How Civic Center Informed 101 Ash St.
With the perceived success of the Civic Center Plaza behind them and still needing more space long term for its workforce, the city started looking at the property only a few feet away. Thompson had been in talks during the summer of 2015 with real estate investor Sandy Shapery, the majority owner at 101 Ash St., but by October the negotiations had fizzled.
Since then, Shapery has cited his partnership with Doug Manchester, a political lightning rod and donor to the mayor, as a major obstacle. The mayor’s office has said Shapery made unreasonably high offers.
Wood remembered calling both Shapery and Thompson in late 2015 with a familiar idea. Would the city be willing to try another lease-to-own arrangement? The city was initially reluctant after months of talks with Shapery.
But by summer 2016, Wood had helped Shapery and Thompson settle on terms that the city found more agreeable. Again, it would mean the city didn’t need to borrow a big chunk of money and would eventually own a building capable of housing hundreds of employees for decades.
Cisterra offered to buy and sell the 101 Ash St. building for $72.5 million, less than what Shapery had offered the year before. A lease-to-own deal would ultimately cost about $127 million over two decades. The city bit.
Everyone assumed the same lease from Civic Center Plaza could just be replicated at 101 Ash St. without problem.
“You’ve already reviewed the lease. You already went through the language,” Wood remembered thinking. “This should be easy.”
Erik Caldwell, one of the city’s deputy chief operating officers, noted in a statement to VOSD that templates are common in commercial real estate transactions, which are typically revised to reflect the specifics of the arrangement.
“This is particularly true when the landlord and tenant are the same entities in more than one transaction,“ Caldwell wrote. “Any agreement, though, can be called into question when issues arise with a property’s condition that were previously unknown or undisclosed, such is the case with the Ash Street building.”
In the end, the differences between the Civic Center Plaza and 101 Ash St. leases were minor by design. The document in both cases includes the same clauses placing the burden on the city if things don’t go as planned. If city officials or its attorneys had any concerns at the time, they didn’t voice them publicly.
“We thought the city had competent real estate people,” Wood said. “We thought they were doing the work they needed to do.”
A draft of the 101 Ash St. lease went to the city attorney’s office in mid-August 2016. Five weeks later, it went before the City Council’s land use committee and got unanimous approval.
Though the city had never occupied 101 Ash St., Thompson would go on to assure the full City Council in October 2016 that the building needed a $10,000 power wash and little else. In making this determination, she’d relied exclusively on documents turned over to her by Cisterra.
But those documents were based on a mere inspection of the site — which is why Thompson told elected officials that the only necessary repairs were cosmetic.
Things quickly fell apart. After the city realized the true scope of the needed work and made a decision to maximize its space to fit even more employees into 101 Ash St., it faced a series of construction delays and asbestos violations. The public nuisance complaint came down in January 2020, triggering the evacuation.
A more recent assessment of the property suggests that the city will actually need around $115 million worth of repairs before any city employee can move in. Unless something changes in the original agreement, the financial responsibility for making those repairs will continue to fall on taxpayers.
The building continues to sit empty, costing the public, as the Union-Tribune reported in 2018, nearly $18,000 a day. City Council members have kicked around the possibility of demolishing the property and starting from scratch.
Briggs, who is now running for city attorney, pushed back at the notion that his 2014 lawsuit may have helped pave the way for the 101 Ash St. debacle and said the blame instead should fall on city officials.
“Any suggestion that my clients or I have any responsibility in the city’s decision to buy this money pit is a convenient political deflection,” he wrote in a statement.
Wood still maintains that the 101 Ash St. deal — and the Civic Center Plaza agreement — will benefit the city over the long haul because of the savings the city will ultimately reap by owning rather than renting properties.
“Big picture, the way I’m looking at it, I’m gonna go to my grave thinking I helped the city save millions and millions of dollars by helping the city secure control of two long-term assets,” Wood said.
Casey had a more nuanced view of the two lease-to-own deals, particularly 101 Ash St.
The deal structure wasn’t the problem, he said. “The problem was that they picked the wrong building.”