This post has been updated.
Lenders behind the city’s Civic Center Plaza lease are demanding that the city pay rent or give up the downtown high rise that houses hundreds of city workers within 10 days. The city recently decided to stop paying rent on the property.
In a Wednesday letter, an attorney representing investors in the city’s 2015 lease wrote that the city must fork over its $313,118 monthly rent check and additional default fees or risk eviction from a building that serves as the headquarters of more than a dozen city departments.
“If tenant fails to pay the monetary obligations set forth above or to surrender possession of the Civic Center Plaza Building within 10 days, lender will exercise all rights and remedies under the lease, indenture, (assignment of lease and rents), other loan documents and applicable state law including, without limitation, seeking eviction of the tenant from the Civic Center Plaza Building,” Phoenix-based attorney Craig Ganz wrote.
City Chief Operating Officer Jay Goldstone notified the city’s landlord Cisterra Development and representatives for its lenders in a July 1 letter that the city would stop making rent payments amid its legal actions to try to void the city’s Civic Center Plaza and 101 Ash St. leases. City Attorney Mara Elliott and other attorneys for the city allege that the landlord’s payments to real estate consultant Jason Hughes for his work on the two deals amounted to a conflict of interest since state law bars city officials and even contractors from benefiting from deals they broker in their official capacity.
The city also stopped paying rent at 101 Ash St. last year, arguing that the city shouldn’t send monthly checks for a building it was unable to use. After all, city officials and attorneys argued, city employees only briefly worked in the building before rushing to move out after a series of asbestos violations. Attorneys for the city followed up with a lawsuit essentially asking the Superior Court to bless that decision.
Now the lenders who made the city’s Civic Center Plaza lease possible are tangling with the city over a building that it has used for decades.
The pushback from lenders reflects the unique structure of the 20-year 101 Ash and Civic Center leases. Instead of the city buying the buildings outright, lenders put up tens of millions of dollars in cash to facilitate Cisterra’s upfront purchases of the two buildings and its lease deals with the city. The lenders made those investments with the promise of city rent payments over two decades.
The city’s move to void both leases now means investors are on notice that the city doesn’t plan to fulfill its end of the bargain. They aren’t happy.
In his letter to the city, Ganz argued that the city’s claim that the payments Hughes received for his role in the deals should void the Civic Center Plaza lease faces multiple pitfalls, including investors’ alleged lack of knowledge of the payments to Hughes.
“The legislative history of Section 1092.5 confirms that the purpose of Section 1092.5 is to protect Lender in this circumstance, noting that Section 1092.5 protects ‘a lender who had no knowledge of illegality in making the contract [who] might [otherwise] have his trust deed security placed in jeopardy if the public agency or another party sought to avoid the contract,’” Ganz wrote, citing state government code.
In a Wednesday statement, Elliott spokeswoman Hilary Nemchik wrote that the lenders’ letter wasn’t a surprise and would be another item for the court to review. She did not directly respond to the claims Ganz made in his letter.
“The law does not reward people for skillfully hiding their misconduct. If Jason Hughes had properly disclosed his $9.4 million in commissions, the city would not have needed to issue subpoenas to learn of his conflict of interest,” Nemchik wrote. “The city has a strong case and is not deterred by these threats. We will continue to fight for San Diego taxpayers.”
Elliott’s office has said it only recently learned of the payments to Hughes following subpoenas it issued in April as part of its case related to its decision to stop making 101 Ash rent payments.
Hughes and Cisterra, meanwhile, have said top city officials including former Mayor Kevin Faulconer signed off those payments, an argument that former Faulconer administration officials deny.
The city’s next steps are unclear.
The 18-story Civic Center Plaza now houses more than a dozen city departments and about 850 employees, including the staffs of the city’s real estate, sustainability and treasury departments. City attorneys also work at Civic Center Plaza.
The city rushed to execute a lease-to-own deal with developer Cisterra for the building in 2015 after its building lease went month to month and a legal challenge stalled efforts to seek bond financing to buy the building itself.
It’s unclear how a growing movement of city employees working from home during the pandemic might lessen the burden on the city if it lost access to the building.
Goldstone told VOSD last week that the city has been evaluating its office needs and considering potential changes in recent months.
“The city is exploring options to allow telecommuting for employees who work in (Civic Center Plaza) and other city buildings and who can effectively perform the functions of their jobs while working remotely,” Goldstone wrote in an email to VOSD.
The city’s Civic Center Plaza lease also covers King-Chavez Community High School, a charter school that now has about six years remaining in its sublease with the city.
In his Wednesday letter, Ganz clarified that lenders don’t plan to force out the school as it fights with the city.
“Please be advised that, at this time, lender does not seek to interrupt the operations of the King-Chavez Community High School that occupies the adjacent building that composes part of the premises,” Ganz wrote. “As such, nothing herein shall be construed as a demand by lender, at this time, for King-Chavez Community High School to surrender the adjacent building.”
Representatives for the school have not responded to inquiries from VOSD over the last week.
Spokespeople for Mayor Todd Gloria and the city did not immediately respond to requests for comment.
Kyle Gore, managing director of Maryland-based CGA Capital, which has previously acted on behalf of investors in the city deals, declined to comment on the notice the lenders’ attorney sent Wednesday.
In a statement earlier this month, Gore promised lenders wouldn’t sit quietly on the sidelines amid the city’s decisions to withhold rent payments and hinted that it may take legal action in coming weeks.
“The lender is reviewing recent legal filings from the city and will consider their claims but will ultimately vigorously pursue any and all remedies in a court of law,” Gore wrote.
Update: This post has been updated to add a statement from the city attorney’s office provided after this post initially published.