Investors in the city’s controversial 101 Ash St. lease-to-own deal are demanding to be paid three weeks after the city decided to stop paying rent on the downtown high rise.
Maryland-based CGA Capital, acting on behalf of the trustee for investors Teachers Insurance and Annuity Association of America, Assurity Life Insurance Company and its own interest in the deal, said late Friday its servicing affiliate has filed a notice of claim against the city for its failure to make September’s nearly $535,000 rent payment.
Kyle Gore, managing director of CGA Capital and affiliate CGA Servicing LLC, wrote in a statement to Voice of San Diego late Friday that CGA also sent a notice of default to the city’s landlord, Cisterra Development.
“While the lender remains open to having a constructive and proactive dialogue with the city concerning this unprecedented situation, the lender will continue to pursue any and all remedies available to lender to protect all of its interests, including but not limited to lender’s rights to continue to receive all unpaid and remaining rent and other charges and amounts due under the 101 Ash St. lease,” Gore wrote. “In addition, (the) lender will take any and all necessary actions to ensure that the city performs all of its other payment and performance obligations under the 101 Ash St. lease.”
A trust representing TIAA, Assurity and CGA Capital provided the loan for Cisterra Development’s January 2017 purchase of 101 Ash St. Cisterra Development the same day entered into a 20-year lease-to-own arrangement with the city. In exchange for its investment, the trust and the entities it represents were promised roughly $128 million in monthly lease payments over the 20-year deal.
Each investor is a major financial player. TIAA is a Fortune 100 financial services nonprofit with for-profit subsidiaries that reports representing roughly 5 million retired and working members – many of them educators and public service employees – and more than 15,000 institutions. Insurance provider Assurity last year reported $22.3 billion in active life insurance policies and $2.6 billion in assets. And CGA Capital has reported closing more than $22 billion in real estate transactions with a focus on corporate and government net leases, including properties housing the National Institutes of Health and the U.S. Veterans Administration, over the last three decades.
Mayor Kevin Faulconer on Sept. 1 ordered city officials to halt 101 Ash rent payments less than four years into the deal, which was designed to allow the city to eventually own the former Sempra Energy headquarters, an arrangement financed upfront by the investors who have now come calling. But city workers haven’t worked in the building for months.
Faulconer said in a statement earlier this month that the city’s inability to use the building to house city employees years after the initial deal led him to make that call. Faulconer’s decision – and the precursor to a lawsuit that investors sent to the city Friday – follow 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. An outside contractor has estimated the building could need $115 million in repairs. City leaders have for weeks been reeling over the steep tab to eventually allow city workers to occupy the building or walk away from a building that has sat vacant for months.
Faulconer made the call to stop paying rent in the wake of an Aug. 21 demand letter from former City Attorney Mike Aguirre and partner Maria Severson calling for the city to stop paying rent. Severson, Aguirre and attorneys Thomas Girardi and Larry Shea last month filed a lawsuit alleging 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 and prior 101 Ash St. owner Sandy Shapery.
In a Sept. 1 letter to Cisterra that was also sent to the investors’ trust, Charvel cited that lawsuit and wrote that the city was assessing a passage in the California Constitution raised in the suit barring municipalities from taking on debt or liability without a benefit in the year that debt was incurred. Charvel also wrote that the city was continuing to assess whether the lease complied with state law.
A lawyer representing 101 Ash LLC, the corporation a Cisterra principal created to facilitate the lease-to-own deal, previously pushed back against similar arguments in an Aug. 28 letter sent to Aguirre and Severson.
La Jolla attorney Michael H. Riney argued that the legal challenge that paved the way for the city’s decision to stop paying rent was baseless and that not paying rent 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 for the investors. The investment sponsored by CGA Capital, based in the Baltimore area, was sold with pledged monthly lease payments.
“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 did not specify those investors – TIAA, Assurity and CGA Capital – in his letter.
Credit rating agency Moody’s Investors Service recently issued a statement saying the city’s halted rent payments have “limited implications for the city’s credit quality and publicly issued debt” though it dubbed the 101 Ash debacle a “governance breakdown.”
The controversy surrounding the acquisition, delays and challenges as contractors worked in the building and now, debates about what the city should do next, inspired the city to hire outside attorneys to investigate and has led to finger-pointing about who was at fault. On Tuesday, the City Council voted 6-3 not to continue having property manager CBRE working at 101 Ash St. amid continued frustration about the city’s predicament. The city’s lease with Cisterra requires a third-party manager work in the building, meaning the city is now also violating that portion of the contract.
Now the investors are weighing in.
Per the city’s lease with Cisterra, it fell into default five business days after opting to stop making payments, allowing the city’s landlord – who now forwards all rent payments to investors – to terminate the city’s rights to the building, potentially charge additional rent or pursue other legal remedies.
The lease also calls for the city to bear the costs of efforts to address the breach.
Faulconer spokesman Craig Gustafson said he could not immediately comment on the notice of claim.
A spokesman for Cisterra declined to comment.
Aguirre, one of the attorneys who urged the city not to pay rent, also declined to comment Friday. Spokespeople for City Attorney Mara Elliott could not immediately be reached.
Gore of CGA Capital hinted that the trust that facilitated the 101 Ash St. deal will be demanding a response from the city.
“Sole control over 101 Ash St. has always been and remains with the city pursuant to the lease and related agreements negotiated, reviewed and approved by various city agencies, the City Council and the mayor,” Gore wrote.