City officials remain uncertain exactly how much middleman seller Cisterra Development pocketed and spent to execute the controversial 101 Ash St. lease-to-own deal months into an investigation of the debacle surrounding the building and nearly four years after entering into the arrangement.
But emails obtained by Voice of San Diego after a public records request shed new light on Cisterra’s potential payoff for a building it purchased and handed over to the city the same day. They also highlight the city’s inability to nail down where millions of dollars in the transaction ended up years after the deal was consummated.
The emails reveal Cisterra told the city it expected to make a 5 percent profit on the deal, likely equating to nearly $4.6 million based on a loan the developer sought to finance the arrangement.
A Voice of San Diego analysis of other estimated expenses that Cisterra reported to the city as it negotiated the transaction found about $218,000 in potential other expenses that Cisterra detailed – leaving about $9.5 million in unexplained costs that the developer has thus far also refused to disclose to VOSD.
The city understood that Cisterra had paid $72.4 million for the building. More recently, it has come to understand that its acquisition cost was nearly $20 million more. The city has recognized that $5 million was tacked onto the deal cost in the form of a tenant improvement loan. But the city never got a finalized accounting of another $14.4 million in costs that an outside investigator has said includes some amount of profit and other fees charged by Cisterra. All were baked into a $91.8 million loan Cisterra sought to finance the arrangement.
The city is now demanding to know what happened to roughly $14.4 million it can’t account for.
In a Sept. 14 letter obtained by VOSD, city CFO Rolando Charvel urged Cisterra to explain itself.
“The underlying loan used to determine the monthly rent under the lease agreement is well in excess of the purchase price of the property, including the funds for tenant improvements,” Charvel wrote. “Please share with the city, in the spirit of transparency, a detailed breakdown of all fees, profit and other costs that comprise this additional excess, estimated to be approximately $14.4 million.”
The $14.4 million in unexplained costs was first spotlighted in an analysis by San Francisco law firm Hugo Parker, which the city tasked earlier this year with digging into the 2017 acquisition and city-ordered construction that led to a series of asbestos violations and a rushed January evacuation of hundreds of city employees.
As the Hugo Parker investigation continues, the city has stopped paying rent on the building. Investors who essentially loaned Cisterra $92 million to finance the deal are now demanding to be paid.
The city has yet to clarify exactly what expenses it agreed to cover when it signed the nearly $128 million lease-to-own arrangement with Cisterra effective in January 2017.
Investors in the deal claimed this week they don’t have answers, either.
In response to Charvel’s letter, a principal of the financing firm that has stepped up to represent investors following the city’s decision to stop paying rent said lenders also weren’t privy to all of Cisterra’s expenses.
“The financial information you are seeking regarding all of the uses of proceeds by the borrower (101 Ash Street LLC) is not something we believe exists in our possession,” Kyle Gore, managing director of Maryland-based CGA Capital, wrote in a Monday email obtained by VOSD. “Admittedly, we do not believe this relates to the failure of the city to pay rent as and when due.”
A few months before the City Council voted to approve the deal in fall 2016, emails released by the city show Cisterra principal Jason Wood provided a laundry list of expected expenses to then-real estate chief Cybele Thompson and city real estate consultant Jason Hughes.
In the July 2016 email, Wood said Cisterra expected to seek a roughly $90 million loan to finance the transaction to cover both the roughly $72 million building purchase and items that then totaled $17.7 million, including a $5 million tenant improvement loan and several other line items such as Cisterra profit, loan fees and legal costs.
Wood did not provide specific amounts for charges other than the tenant improvement allowance.
In the days that followed, Thompson shared multiple estimates of closing costs she said Cisterra had provided. One list of potential expenses totaled $218,200 and another just $50,000.
Emails provided by the city show Cisterra’s reported profit was later disclosed to the city’s Office of the Independent Budget Analyst ahead of a City Council committee review of the lease-to-own proposal.
“The estimated profit Cisterra will make from the lease-to-own is about 5% of the purchase price of $72.5M or about $3.6M,” Thompson wrote in a September 2016 email to Independent Budget Analyst Andrea Tevlin and others.
VOSD’s estimate of expected profit – just under $4.6 million – is higher than that estimate because outside attorneys hired by the city have since concluded the city should have focused greater attention on the $91.8 million loan Cisterra sought to finance the arrangement.
Craig Gustafson, a spokesman for Mayor Kevin Faulconer, wrote in a statement this week that the city could not provide additional information about the deal points.
“The mayor has asked investigators conducting the ongoing forensic review to examine the finances of this transaction to answer these questions,” Gustafson wrote in response to inquiries from VOSD. “To the best of our knowledge, the city did not receive any detailed breakdown from Cisterra of the transaction despite repeated requests.”
Mark Roberts, executive director of the Texas Real Estate Center at the University of Texas at Austin’s McCombs School of Business, said Cisterra’s reported profit margin is reasonable in light of the role the developer played in the transaction.
Rather than simply serve as a broker representing the buyer or the seller, Cisterra lined up financing and negotiated with both the city and former owners Sandy Shapery and Doug Manchester.
Cisterra also put down significant cash before consummating deals with the city and Shapery and Manchester on the same day.
A Chicago Title Company closing statement obtained by VOSD shows Cisterra made $700,000 in deposits on the downtown high-rise to retain its rights to the property after signing a June 2016 purchase and sale agreement. The deposits were ultimately included as credits when the sale closed in January 2017.
That purchase and sale agreement, which VOSD also obtained, revealed Cisterra saw a $2,500 increase in the purchase price for each day beyond Sept. 1, 2016 that it had not closed on its purchase of the building. That mandate increased the sale price from $72.1 million to $72.4 million.
“The developer had some equity at risk,” Roberts said. “It wasn’t the city’s money they were putting up.”
Nathan Moeder, a principal of real estate consultancy London Moeder Associates, agreed. Moeder’s firm worked with the city and Cisterra on a similar lease-to-own deal for Civic Center Plaza, in 2015. The city and Cisterra opted to use the same arrangement more than a year later to acquire 101 Ash St. Moeder’s firm represented the owner that sold the property to Cisterra, which then turned around and executed a deal with the city. “Cisterra did a lot more than just arrange the financing. They took risk,” Moeder said. “They had to work with the seller. They had to work with the buyer. They served as a middleman and they had to put money down.”
John Casey, a former city real estate official who also worked on the Civic Center Plaza deal, said he found the reported 5 percent cut for Cisterra reasonable under the circumstances.
“That sounds about right given the size of the deal and the risk to Cisterra,” Casey said.
He estimated Cisterra may have had an additional $724,400 in fees and legal charges associated with the loan it sought to finance the transaction and perhaps another $61,200 for an insurance policy.
Moeder and Casey said Cisterra may have also been required to establish a reserve fund per its agreement with lenders.
Cisterra may have also had additional interest charges associated with its $92 million loan that could have added to its costs, Casey said.
Yet Cisterra and its representatives have repeatedly refused to lay out additional expenses despite requests from both the city and VOSD.
In interviews with VOSD over the summer, Wood, the Cisterra principal, insisted the city would ultimately recognize that the lease-to-own arrangement was a good deal given the rent savings it will reap over decades.
At the time, Wood would only say that Cisterra’s profits were not worth the blowback it has received from City Council members including Councilwoman Vivian Moreno, who has alleged potential fraud.
“We didn’t make enough that I think we would want to do it again, given the opportunity to go back in time, given what’s happened,” Wood said.
A few months later, Cisterra and its attorneys still aren’t showing their cards and the city and investigators it has hired are digging in as legal challenges, including one that paved the way to stop making lease payments, pile up.
A spokeswoman for the city attorney’s office, which is supervising an outside probe by San Francisco firm Hugo Parker and other firms, said Friday that investigation continues.
“Outside counsel Hugo Parker is continuing its review of the 101 Ash transaction, including the components of the $20 million Cisterra charged the city above and beyond the $72 million building cost,” Hilary Nemchik wrote in a statement. “A complete understanding of Cisterra’s costs, profits, and payments to third parties will inform the city’s legal position as it assesses recovery of taxpayer funds from Cisterra and others.”