The city is trying to back out of two real estate deals negotiated by its former volunteer real estate adviser following the revelation that he pocketed a previously unreported $9.4 million from the middle-man developer on the other side of both leases.
The city on Tuesday argued in legal filings that real estate guru Jason Hughes violated a state conflict-of-interest law and thus, the court should void city lease deals to acquire downtown high rises 101 Ash St. and Civic Center Plaza, allow the city to recoup more than $44 million in rent payments and force Hughes to fork over damages.
Hughes’ central defense is that top city officials, including former Mayor Kevin Faulconer, knew Hughes was getting paid and signed off in 2014 as Hughes helped the city negotiate a deal to acquire Civic Center Plaza, a high rise just steps away from City Hall that was already housing hundreds of city workers.
There’s now no dispute over whether Hughes got paid. But there is disagreement over whether city officials, namely Faulconer, knew the purported volunteer was cut into two city deals. If Faulconer, who is running for governor, did know, it would mean he and his staff lied about it over the course of several years and helped Hughes hide the payments he received after being a major part of the city’s real estate strategy even as a volunteer.
But Faulconer and his former staff deny they knew, and held fast to that position Tuesday as Hughes’ attorney presented evidence they approved of the fees.
Hughes’ attorney claims the real estate broker repeatedly told city officials that he intended to get paid – and even had Faulconer, his chief of staff and the city’s real estate chief sign off on his ability to seek payment from other parties in more complex transactions. He presented text exchanges and even a letter, purportedly signed by a top city official, acknowledging and accepting that Hughes would seek payments.
It’s not clear if it is a winning legal strategy in response to the city attorney’s litigation.
Hilary Nemchik, a spokeswoman for City Attorney Mara Elliott, has already argued that it is not.
“Our office has yet to see anything from Mr. Hughes that would help him in a court of law,” Nemchik wrote in an email to VOSD.
The city attorney’s office has also said the city wasn’t aware of any payments to Hughes until it received responses to subpoenas it sent to Hughes and others in April as part of a lawsuit it filed in October asking the San Diego Superior Court to sign off on its decision to stop paying rent on 101 Ash.
Hughes publicly maintained that he wasn’t paid for his city work.
In April 2013, then-Mayor Bob Filner appointed Hughes to serve as a special assistant to advise him on the city’s downtown real estate needs as the city faced the coming expiration of three major city leases. When the two announced a new lease deal they said would save the city up to $15.8 million just a month later, Hughes described the arrangement as charitable effort by his company Hughes Marino.
“We give to more than 70 charities every year and this is one of our ways of giving back so I’m proud to do it,” Hughes said at a May 2013 press conference.
The arrangement with Hughes fell outside the city’s typical approach to seek out contractors or consultants to work for the city. In most cases, a contract goes out to bid and then the city and the contractor it selects agree on what the city will pay and what the contractor will be paid to do. A contract also clarifies that company’s allegiance – and typically would keep a contractor from trying to work for opposing parties in a way that might raise questions about whether taxpayers are getting the best deal.
City officials have said they have been unable to find a formal agreement with Hughes.
Now it turns out that Hughes, a Faulconer donor who also co-chaired the mayor’s 2015 Chargers stadium task force, was paid after all.
Hughes’ attorney Michael Attanasio confirmed that developer Cisterra, which served as a middle-man seller in both the Civic Center Plaza and 101 Ash deals, paid Hughes just over $5 million in the 2015 deal and $4.4 million for the Ash deal consummated in 2017. Those payments were never disclosed to the City Council or in so-called Form 700s, statements that some public officials and even city consultants can be required to file.
The attorney said Hughes had on multiple occasions – both verbally and in writing – explained to city officials that he intended to be compensated for the lease-to-own deals and would have taken other steps to report those payments had the mayor or his staff requested it.
In a statement, Attanasio highlighted an Oct. 21, 2014, email previously obtained and reported by VOSD where Hughes told then-city Chief Financial Officer Ron Villa he’d like to be paid for work on a lease-to-own deal to acquire Civic Center Plaza.
At the time, the city was in a bind. The city’s lease for Civic Center Plaza had gone month-to-month and the owners were impatient as the city’s initial plans to buy the building fell apart.
The idea Hughes floated at the time, which the city ultimately moved forward with and replicated in the 101 Ash deal, was that the city could pursue an arrangement that would essentially allow it to make monthly mortgage payments and own the building after 20 years rather than come up with upfront cash to buy it. It would spare the city from having to borrow a massive amount from lenders, an approach then considered risky amid an ongoing legal challenge.
“This route is really like an investment banking type transaction, so I would seek compensation for this role (obviously not from the City) – but regardless, I have some good ideas that I began working on,” Hughes wrote.
A month later, a text exchange Attanasio provided to VOSD shows Hughes reached out to then-Faulconer Chief of Staff Stephen Puetz to see if he was available to meet.
At the time, Hughes and city officials were preparing for a meeting with Cisterra to discuss potential Civic Center Plaza lease terms. The plan was that developer Cisterra would buy the building and then instantly execute a lease deal with the city. With Hughes’ help, the city and Cisterra replicated this arrangement in the 2017 101 Ash acquisition.
“Can I get 5 min with you and Kevin (Faulconer) later today? – Jason Hughes” wrote in a Nov. 19, 2014, text message his attorney said he sent to Puetz.
Puetz suggested a 4:15 p.m. meeting, according to the thread provided by Attanasio.
Calendar records previously obtained by VOSD after a public-records request show Faulconer and Puetz were scheduled to meet with Hughes at the mayor’s office on Nov. 19, 2014, from 4:15-4:20 p.m. The meeting came a couple months before the City Council voted to approve a lease-to-own arrangement with Cisterra.
A Nov. 19, 2014, letter obtained by VOSD bearing a Hughes Marino letterhead and labeled “Re: Civic Center Plaza” signed by Hughes explains the real estate broker’s plan to seek payments from other parties.
“Since the city asked if I could develop any other potential solutions, I have previously made clear in correspondence to the city that any alternative deal would require me to play a few different roles due to the increased complexity and time demand,” Hughes wrote. “As I result, I would seek to be paid customary compensation from any other parties in the transaction.”
Attanasio told VOSD that Hughes shared the letter with Faulconer and his chief of staff at the Nov. 19, 2014, meeting.
“During that meeting the Mayor and Puetz both personally reviewed and approved the letter in which Jason discloses that he will be paid by other parties on alternative lease-to-own transactions,” Attanasio wrote in an email to VOSD.
Later, Attanasio said Hughes met with former city real estate chief Cybele Thompson and had her review and sign the letter.
A copy of the letter provided to VOSD appears to be signed by Thompson, whom the letter stated acknowledged by signing that she “read, agree with and accept the foregoing.”
The text exchange the attorney provided shows Puetz updated Hughes with a text message about an hour and a half after the mayor’s office meeting.
“Cybell (sic) says it’s fine,” Puetz wrote. “She’ll handle it with you.”
“She says she will have city atty (sic) review,” Hughes wrote back. “Is that necessary? I’m dropping her a hard copy in 10 min.”
“I’ll talk to her again,” Puetz replied.
Puetz did not directly address the text exchange in a statement sent to VOSD but said he and Faulconer had not agreed to allow Hughes to be paid. He also separately told VOSD he did not recall seeing the letter or telling Thompson she needed to sign it.
“A volunteer should not receive compensation in any way from anyone for their services, and the mayor and I never authorized anything to the contrary, and it is standard practice for legally binding agreements to be authorized by the city attorney’s office,” Puetz wrote.
Puetz told VOSD that he believed it was “completely unethical” for Hughes to be compensated for his work with Cisterra and that not disclosing it was a “severe ethical breach.”
Last fall, as VOSD investigated Hughes’ role in the 101 Ash and Civic Center Plaza acquisitions, then-Faulconer spokesman Craig Gustafson wrote in an email to VOSD that the city hadn’t been informed of any financial dealings between Hughes and Cisterra.
“He was working as an unpaid consultant to the city and the city has no knowledge of whether he had a financial relationship with Cisterra,” Gustafson wrote. “If he did, the city was never informed.”
In a December interview, Faulconer told VOSD he couldn’t recall the specifics of his past discussions with Hughes about 101 Ash.
In a Tuesday statement, Faulconer didn’t elaborate on what he may have known – or the November 2014 meeting with Hughes. The former mayor, who is now running for governor, would only say that he supported continued efforts to dig into what happened and noted that he had backed the hiring of an outside attorney last year to probe the city’s 101 Ash acquisition.
“As I said last year when I launched an investigation into this project, I continue to strongly support any efforts by the city attorney to identify and bring forward anyone who wrongfully profited off taxpayers,” Faulconer wrote.
Thompson, the former city real estate chief who resigned last August amid scrutiny about the 101 Ash deal, told VOSD she had no recollection of signing the letter allegedly reviewed by the former mayor or of any conversations with Puetz about it. She also argued she wouldn’t have the authority to sign it without others giving her the go-ahead first.
“It could be that they called and asked about some sort of letter and I said, ‘Send it over and I’ll have the city attorney look at it,’” Thompson said. “That would be a natural response. I don’t remember this letter at all.”
Thompson said she also did not recall meeting with Hughes to sign the letter and could not confirm whether Puetz or Faulconer knew Hughes expected to be paid by Cisterra.
“I don’t know what they talked about in the meetings,” Thompson said, referring to Hughes and Faulconer. “There’s just been so much that came out. They had a very strange liaison and loyalty to each other that transcended any relationships with staff. Everyone was aware of that.”
What Thompson said she can confirm is that Hughes often told others he thought he should be paid for the work he did for the city.
“Nobody knew that he actually was getting paid,” Thompson said.
Eric Rose, a spokesman for Cisterra, said the company later paid Hughes for his work on Civic Center Plaza and 101 Ash deals with complex financing structures after the broker assured Cisterra that the Faulconer administration had agreed he could be paid.
“Jason Hughes represented to Cisterra that he had received written authority from the highest levels of the Faulconer administration to seek compensation from other parties on alternative transactions like the lease-to-own deals for Civic Center Plaza and 101 Ash Street, and Cisterra believes those representations to be true,” Rose wrote in a statement.
Puetz said former Faulconer officials did not approve of that arrangement.
“We believe it is completely unethical for Jason Hughes to be compensated by Cisterra for his work on behalf of the city,” Puetz wrote in a statement. “Mr. Hughes’ role was as a volunteer, just as it was under preceding administrations.”