Mayor Kevin Faulconer has decided to stop paying rent to the city’s landlord at 101 Ash St. in a bid to try and untangle one of the worst real estate debacles in its history.
For weeks, city leaders have been reeling over the hundreds of millions of dollars it could take to fix or walk away from the downtown high rise that has for months sat vacant.
Now Faulconer and other city officials have decided to go on offense.
“After consultation with the city attorney’s office and the city’s financial team, I have directed staff to suspend lease payments for the 101 Ash St. property because the city is unable to use the building for the intended purpose,” Faulconer wrote in a statement. “By suspending payment, the city will also have the ability to assess all financial and legal options to ensure taxpayers are protected and hold all parties accountable for their roles in this agreement.”
The city’s choice to halt rent payments comes less than four years into a 20-year, $128 million deal designed to allow the city to eventually own the former Sempra Energy headquarters. It also follows a series of debacles that climaxed with the city scrambling in January to evacuate city employees after more than a dozen asbestos violations amid a major renovation that spiraled out of control. The building now needs an estimated $115 million in repairs.
The city has been hit with more than two dozen legal claims tied to the fiasco. Tuesday’s decision could result in more litigation, a risk that city officials say they considered before deciding not to continue making nearly $535,000 payments each month.
The city’s decision to not to pay rent when it came due Tuesday follows an Aug. 21 demand letter from former City Attorney Mike Aguirre and partner Maria Severson calling for the city to stop paying rent.
Severson and Aguirre are part of a team of attorneys representing city resident John Gordon in a lawsuit filed last month that alleges waste of city funds and a “misrepresentation and concealment of material facts” that led the city to enter into a one-sided real estate deal. The suit targets the city, CFO Rolando Charvel and business entities operated by middleman seller Cisterra Development and prior 101 Ash St. owner Sandy Shapery.
Charvel cited that lawsuit in a Tuesday evening letter to Cisterra informing the developer that it would be suspending lease payments for 101 Ash St. He wrote that the city was paying particular attention to a section in the California Constitution raised in the lawsuit barring municipalities from taking on debt or liability in the year without a benefit in the year that debt was incurred.
Charvel told Cisterra the city is also continuing to review the lease to “assess its compliance with state law.”
A lawyer representing 101 Ash LLC, the corporation a Cisterra principal created to facilitate the lease-to-own deal with the city, pushed back against similar arguments from Aguirre and Severson in a Friday letter obtained by Voice of San Diego.
La Jolla attorney Michael H. Riney argued that the legal challenge that paved the way for the city’s decision to stop paying rent is baseless – and that halting rent payments would harm the city.
Riney noted that the city’s rent payments don’t go to Cisterra but instead to a Baltimore office of Wilmington Trust, a national investment management firm that serves as a trustee to investors who supplied upfront cash for the lease-to-own arrangement. The investment sponsored by CGA Capital, based in Maryland, was sold on the promise that the city would make monthly lease payments over two decades.
“Those certificate holders are amongst the country’s largest buyers of public debt, and a decision to withhold payments owed to those institutions would negatively impact if not totally eliminate the city’s access to the public debt markets for years to come,” Riney wrote.
Riney could not immediately be reached for comment.
Lakshmi Kommi, the city’s debt management director, told VOSD the city doesn’t expect significant market implications in response to its decision not to pay rent because the decision has not been made as a result of financial challenges.
“We don’t anticipate any material bearing on the city’s credit or bond ratings,” Kommi said.
In an effort to be transparent, though, Kommi said the city planned to issue a voluntary Securities and Exchange Commission notice Tuesday evening about its decision.
But James Parker, an outside attorney the city hired to lead a review of the 101 Ash St. deal seemed to raise concerns about risks the city could face with the approach in a public hearing last month.
“This is a one-sided contract. It protects Cisterra in full,” Parker said in an Aug. 6 hearing. “And a decision to claim that Cisterra committed fraud, or that there’s some legal method to stop the payments because of dissatisfaction which is very understandable about this deal poses, I think, great legal risks to the city and it’s something that I would urge the Council to be very, very careful about.”
City Councilwoman Barbara Bry, who is running for mayor, has for months argued the city should stop making rent payments and force Cisterra back to the table to negotiate. She has had more company recently.
Yet city officials and attorneys had questioned whether that could present more challenges for the city. After all, not paying its monthly rent would put the city in breach of its contract – and there is little incentive for the landlord to give the city a better deal.
Jason Wood, a Cisterra principal who helped cut the deal, previously told VOSD the company might return to the bargaining table if the city was willing to negotiate rather than simply expect Cisterra to take all the losses.
Wood, like the developer’s attorney, said investors ultimately expect to be paid.
“I don’t have anything to give,” Wood said last month. “We don’t have any control over the bond financing.”
Wood declined to comment Tuesday evening.
The city’s decision to stop paying the rent will likely force Cisterra back to the table in some way.
Decisions to stop paying rent haven’t always gone well for the city.
About five years ago, the city decided not to pay the $10.5 million it still owed businessmen who owned the rights to the plot of a potential Convention Center expansion. That decision later forced the city to race to cut a deal with Fifth Avenue Landing to facilitate a potential expansion.
But as Riney noted in his letter to Aguirre and Severson, any legal wrangling over the 101 Ash St. lease could come with an additional catch: The city’s current lease with Cisterra calls for the city to defend it against any legal claims.