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Even years after it entered into a 20-year lease-to-own deal for the building at 101 Ash St., the city of San Diego wasn’t sure how much its landlord pocketed and spent to facilitate the 20-year lease agreement. Now, following the revelation that landlord Cisterra Development paid the city’s volunteer real estate adviser for his work on the 101 Ash St. and Civic Center Plaza leases, the company has revealed it expected – at least initially – to walk away with significant profits from both.
The developer reported roughly $7.45 million in what it described as net proceeds in the 101 Ash St. deal and $6.4 million for the Civic Center Plaza deal after requests from Voice of San Diego to open its books. Cisterra said those funds were left over after covering millions of dollars in expenses, including the payments to Hughes, with upfront loans. Other costs included insurance policies, legal bills and loan fees.
Cisterra’s reported expenses and expected payoff in the Ash deal add up to more than $14 million, roughly the same amount the city last year couldn’t fully account for and demanded that its landlord detail.
In both the Ash and Civic Center deals, the city had initially wanted to purchase the buildings itself but ultimately decided it couldn’t. Then Cisterra stepped in. It secured upfront loans, bought the buildings and arranged lease-to-own deals with the city. But how much the company made in the two deals has not been clear until now.
Cisterra said it could not confirm its profits as those won’t be solidified until the conclusion of the two 20-year leases at 101 Ash and Civic Center Plaza, two leases the city is now trying to void.
The numbers Cisterra provided to VOSD differ from the projected profits that the city’s former real estate chief described in an email to other city officials before the City Council voted to approve the 101 Ash lease in fall 2016. At the time, then-city real estate director Cybele Thompson wrote in an email obtained by VOSD after a public-records request that Cisterra expected a $3.6 million profit in the Ash deal and had made $4.4 million on Civic Center Plaza.
Cisterra declined to comment on Thompson’s 2016 email but defended the larger proceed amounts in light of the risks it took and the complexity of two deals that required purchase agreements with the previous building owners, arrangements with lenders who provided upfront cash and 20-year leases with the city.
“Given the tremendous financial benefits and savings to the city from both (Civic Center Plaza) and 101 Ash, the expenses related to the transactions were not only reasonable but represented far better deals than the city could have negotiated itself,” Cisterra spokesman Eric Rose wrote in a statement.
A handful of experts who spoke with VOSD said that the expected payout for Cisterra and most of the expenses the company detailed were defensible because of its work structuring the deals and risks it took, including deposits it made to secure the two properties before the city approved the leases.
One of those experts and some in San Diego’s commercial real estate industry have questioned the amounts Cisterra paid the city’s volunteer real estate consultant in the two deals, payouts that exceed typical broker fees. Cisterra and Hughes’ attorney have argued the checks to Hughes’ company Hughes Marino were appropriate due to more substantial work and solutions he delivered.
Representatives for lenders in the two deals have said they weren’t aware of those payments when they provided Cisterra a roughly $58 million loan for the Civic Center Plaza deal in 2015 and a nearly $92 million loan for 101 Ash St. in 2017.
Indeed, Chicago Title Company loan closing statements obtained by VOSD show payments to Hughes were not called out in the breakdown of various expenses for either deal.
City officials understood that pursuing the lease-to-own arrangements that allowed the city to essentially pay mortgage payments over 20 years would cost more than straight purchases due to various costs associated with that structure, including some profit for Cisterra. The city’s independent budget analyst noted before the City Council approved the 101 Ash lease-to-own arrangement, for example, that the lease would cost about $17 million more than if the city bought the building. But city officials projected below-market rents in both buildings rather than other leases spread throughout downtown would still result in substantial savings – and never got a full accounting of various charges incorporated into the leases with Cisterra.
Now the city is seeking to cancel both leases due to the payments to Hughes, which the city attorney said constitute a conflict of interest. State law bars city officials and even consultants from financially benefiting from deals they broker in their official capacity with a public agency. Lenders, however, are arguing the city’s cases won’t stick due in part to the fact that lenders weren’t aware of any conflicts of interest. Hughes’ attorney has argued his client was an informal adviser rather than an employee subject to the state law and that he took pains to let top city officials know he hoped to get paid for his work on the deals.
The legal fight to void the leases comes a year after a San Francisco law firm hired by the city first spotlighted more than $14 million in unexplained costs in the 101 Ash deal.
James Parker, who the city hired to dig into the 101 Ash deal, explained in a presentation to the City Council that while Cisterra paid $72.4 million for the building, the true purchase price was nearly $20 million more. Parker said that Cisterra baked a $5 million tenant improvement loan into the city’s lease payments and that he had identified about $14.5 million he could not fully account for that included some amount of Cisterra profit and other fees. Parker said those costs were covered by the $91.8 million loan Cisterra sought to facilitate the purchase of 101 Ash and the lease deal with the city.
The city’s chief financial officer later demanded in a September 2020 letter that Cisterra explain $14.4 million the city couldn’t trace.
For a time, Cisterra didn’t give up the goods.
But data it has now released to VOSD shed light on the payoff for Cisterra and expenses that were previously undisclosed.
For the 101 Ash deal, the developer reported more than $7 million in expenses beyond the $72.4 million building purchase and the $5 million tenant improvement loan. Those included about $800,000 in fees to the Maryland company that structured the loan and $1.1 million for a special insurance policy recommended for so-called credit-tenant leases like the Ash Street arrangement. The largest line item was a $4.4 million payment to Hughes. Cisterra then reported $7.45 million in excess cash out of the loan it obtained to facilitate its work.
All those charges – and what Cisterra netted – amount to just over $14 million.
Expenses for the Civic Center Plaza deal were similar.
In the 2015 deal, Cisterra reported $7.7 million in expenses beyond the $44 million building purchase. They included $700,000 for an insurance policy, $500,000 in loan fees and $350,000 in legal bills. Again, the largest check went to Hughes’ company Hughes Marino, which received just over $5 million. Cisterra then says it came away with an estimated $6.4 million.
While Cisterra initially resisted sharing these numbers with the city, an attorney representing the company said it has since done so.
“We participated in confidential mediation with the city for months, and none of the information we shared with you is news to the city,” attorney Michael Riney told VOSD.
Hilary Nemchik, a spokeswoman for City Attorney Mara Elliott, said last week that Cisterra had only provided two estimated closing statements in response to subpoenas issued by the city this spring. Those documents – which Nemchik said Cisterra redacted – listed amounts the company paid Hughes but did not include all the numbers provided to VOSD.
Nemchik wrote in a later email that Cisterra had pledged to hand over unredacted versions of those documents after a request from the city’s outside attorneys.
Real estate and finance experts who reviewed expenses in both deals at VOSD’s request said most of the line items provided to VOSD, including the amounts Cisterra netted, seemed reasonable.
In the Civic Center Plaza deal, Cisterra put $2 million down to secure the high rise. It later put down $700,000 in deposits on 101 Ash following a purchase and sale agreement with the former building owners.
“I think they’re certainly entitled a return for bringing this thing together and holding the deal together,” said Gary M. Tenzer, a Los Angeles-based commercial real estate capital adviser who works with developers and investors.
Mariya Letdin, a real estate professor at Florida State University who previously worked in commercial real estate financing, said Cisterra likely earned its payoff by securing the buildings for what she said seem to be below-market prices, negotiating below-market lease rates for the city and promising lenders a return in the form of the city’s rent payments over 20 years.
Cisterra’s net proceeds were “not uncommon” under the circumstances, she said.
Former commercial banking executive and attorney Brian H. Kelley also found Cisterra’s net proceeds to be justifiable, particularly because rent payments now flow to lenders rather than the city’s landlord due to the so-called credit-tenant lease structure.
“I think they are reflective of the structure of the deal,” Kelley said.
But Tenzer and some in San Diego’s commercial real estate industry have flagged the payments to Hughes and questioned why they were so large.
“It doesn’t seem to be related to any type of brokerage fee that I’m familiar with or I’ve ever seen in a transaction,” Tenzer said. “It’s not a typical market fee.”
Brian Schwagerl, an attorney and former corporate real estate executive who is now a professor at New York University’s Schack Institute of Real Estate, said that fees like those Hughes received can vary widely on so-called triple net leases like the Civic Center and 101 Ash deals.
“They vary because the leases themselves vary,” Schwagerl said. “To the average individual, they can seem like quite a lot of money upfront, but we’re talking about long-term deals.”
Cisterra and Hughes’ attorney have defended the payments. They argue that the city was in a bind in 2014 when the city faced the prospect of losing space for hundreds of employees at Civic Center Plaza when it was unable to go to the bond market to facilitate a purchase on its own and that Hughes offered a valuable solution that the city later pursued again.
“Hughes came up with the idea of the city tapping into Cisterra’s experience with credit-tenant leases and brought the parties together,” Rose, the Cisterra spokesman, wrote. “As the intermediary who brought the parties together with an innovative solution to a desperate problem, Hughes Marino earned a fee.”
Hughes’ attorney Michael Attanasio has said the fees he received reflected value he provided that went beyond that of a traditional broker and that his fees were based on different assumptions.
“This went far beyond routine tenant leasing services for which Jason would be paid a straightforward leasing fee by the landlord, the very fee he waived when he informally advised a series of mayors,” Attanasio wrote in an email to VOSD.
While broker’s fees typically melt into tenants’ lease payments, both Cisterra and Hughes’ attorney have said that was not the case for the 101 Ash or Civic Center Plaza deals.
“The city’s rent payments on (Civic Center Plaza) and 101 Ash would not have been one penny lower if Hughes Marino had not been paid a fee based upon the city’s advance written consent,” Rose told VOSD, referring to a letter that Hughes claims the city’s former real estate director signed agreeing that he could be paid for his work on more complex lease-to-own deals.
Thompson has said she does not recall signing that letter. Cisterra has said it relied on Hughes’ assurances that high-level city officials had agreed he could get paid for his work on the two deals before paying his company.