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City leaders on Monday argued the city should swallow bitter medicine to clear the uncertainty surrounding two city buildings now embroiled in lawsuits.
City Attorney Mara Elliott is arguing they shouldn’t.
Mayor Todd Gloria and other city officials on Monday announced that the City Council will formally vote on a proposed settlement next week that would trigger a roughly $132 million buyout of the city’s 101 Ash St. and Civic Center Plaza leases to end a legal fight involving the landlord and lender behind the deals. If the Council approves the settlement agreement next Monday, the city would soon own the buildings and be responsible for as much as $115 million in repairs at scandal-plagued 101 Ash St. The proposal follows 18 months of confidential settlement talks between the city, its landlord and representatives for the lenders.
Before the proposed settlement came together, the city had already poured more than $60 million into 101 Ash St., roughly the equivalent of its annual library budget. It only occupied the high rise across the street from City Hall for a few weeks during the five years since it acquired it, before asbestos violations during building renovations culminated with the evacuation of hundreds of city workers in early 2020. Questions about how the city got into that mess uncovered a series of other revelations, including an alleged conflict-of-interest that ratcheted up the city’s legal fight with its landlord and other players in the transaction.
The settlement stipulates that city landlord Cisterra Development would pay the city the equivalent of the $7.45 million in net profits it received in the 2017 101 Ash transaction, and investors who provided upfront cash to facilitate both leases would waive an estimated $11.7 million in penalties associated with paying off lenders’ debts before the planned 20-year leases conclude.
Gloria argued Monday that the settlement deal – while not ideal – is a more prudent option than waiting years for court rulings on conflict-of-interest suits that could leave the city without workspaces for hundreds of city employees and more spending on attorneys’ fees, among other costs.
Attorneys for the city sought to void both leases following the revelation last year that the city’s landlord paid city real estate adviser Jason Hughes, who was publicly referred to as a volunteer, $9.4 million for his work on both deals. They argued that the payments to Hughes constituted an illegal conflict of interest that infected both deals.
“The question really is, is the potential upside of an unlikely total legal victory, worth years of legal uncertainty, of spending potentially millions of taxpayer dollars in legal fees and leaving our workers in substandard conditions,” Gloria said Monday. “I do not believe that this scenario is in the best interest of taxpayers. It is a gamble.”
The city’s elected city attorney disagrees.
The settlement with the city, its landlord and investors in the two leases includes a section noting Elliott’s disapproval.
“The San Diego city attorney has strongly recommended, in written and verbal remarks, that the Council reject this agreement,” the proposed settlement reads.
For that reason, the signature line on the settlement document obtained by Voice of San Diego notes that Elliott will only sign it “as to form.”
Elliott on Monday sent an analysis to the mayor and City Council explaining her opposition and a laundry list of concerns about the settlement she believes “has several disadvantages to the city and does not adequately protect the city’s legal and financial interests.”
Among her specific concerns: Cisterra isn’t paying back its roughly $6.2 million profit on the Civic Center Plaza deal, the agreement requires the city to take on both buildings along with any defects they may have and absent recent due diligence on the Civic Center building or specific plans for 101 Ash. Elliott also wrote that the city could be forgoing an opportunity to proceed with a settlement when it has stronger negotiating leverage.
Elliott’s office has also argued that the city has a strong conflict-of-interest case against Hughes and Cisterra, a perspective that attorneys for Hughes and Cisterra have disputed. Hughes has emphasized that he told multiple top city officials he planned to seek payment for his work on complex city lease deals and says he got the go ahead from former mayor Kevin Faulconer and other top officials.
So why sign the document? Elliott says she concluded the city charter – essentially, the city Constitution – requires that she sign legal documents unless she deems them illegal.
“The charter does not give the city attorney the power to invalidate a City Council action by withholding her signature for that reason or any reason other than legal sufficiency,” Elliott spokeswoman Leslie Wolf Branscomb wrote in an email.
While Elliott advised city officials on deal points in the mediation and shared her concerns with the key players, Wolf Branscomb said Elliott’s office didn’t participate in recent mediation sessions overseen by retired federal magistrate judge Jan Adler that led to the settlement.
“The City Attorney’s Office participated in initial mediation sessions but stopped attending because the parties wanted to negotiate a ‘business solution’ and preferred not to have our office in the room,” Wolf Branscomb wrote.
Asked by Voice to respond to Elliott’s concerns, Gloria spokeswoman Rachel Laing declined to offer specific rebuttals.
“Reasonable minds can disagree, and in this case, they have,” Laing said.
Another former city attorney also disagrees, as does City Councilwoman Vivian Moreno who issued a Monday statement arguing that the settlement “will be a dark cloud hanging over City Hall for decades to come.”
Former city attorney Mike Aguirre and law partner Maria Severson, who have challenged the constitutionality of the city’s 101 Ash lease in a separate taxpayer lawsuit, argued after the Monday press conference that the city shouldn’t rush into a settlement. Their suit alleges that the city lease violated the state constitution by requiring the city to make rent payments when it wasn’t benefiting from that expense – essentially, paying rent when it wasn’t able to occupy the building. The city halted those rent payments in September 2020.
A key ruling on the merits of their case representing taxpayer John Gordon is expected in late September – and Severson argued a favorable ruling on the alleged constitutional violation could give the city more negotiating power if it waits for the judge to weigh in.
The Gordon case is one of flurry of lawsuits that will likely endure after the city settlement. City officials also clarified Monday they will continue to pursue legal claims against contractors they allege mishandled a remodel at 101 Ash St. and Hughes.
A District Attorney’s Office probe of the 101 Ash St. and Civic Center Plaza transactions also continues.
But Gloria, City Council President Sean Elo-Rivera, City Councilman Chris Cate and interim Chief Operating Officer Jay Goldstone argued at a Monday press conference that the arrangement for the city’s two lawsuits is the city’s best path forward on a debacle that would otherwise stymie city real estate discussions for years.
Gloria said they decided a loss in court would mean making the rent payments that the city halted, millions of dollars in attorneys’ fees, an uncomfortable continued arrangement with a landlord the city had battled with in court and funding an estimated $20 million to $115 million in building fixes at 101 Ash.
A win, Gloria suggested, would mean losing the Civic Center Plaza building now home to hundreds of city employees and losing 101 Ash St. – but still needing to cover upgrades.
The bottom line: A win or a loss would come with significant costs.
In an interview with Voice, Gloria argued the deal gives the city free rein to consider its future footprint downtown.
For now, he said, the 101 Ash debacle is hampering the city’s ability to participate in discussions about envisioned downtown redevelopments including a plan to overhaul a two-block state property near City Hall and a conceptual vision for a new regional transportation hub on a plot that contains the City Hall complex.
The City Council also recently revived a long-running conversation about a new City Hall. At a March City Council meeting, Elo-Rivera and others called for the city to consider new opportunities that city bureaucrats said could come with the sort of public-private partnership the city is now pursuing to redevelop its Sports Arena property.
“We can have all options on the table and really make a full and comprehensive decision rather than the piecemeal approach that I think we’re currently on, particularly if we continue to litigate this matter, over the next five to 10 years,” Gloria said Monday.
As for the future of 101 Ash itself, Gloria said a settlement will allow the city to dig into the state of the building and how to move forward in a way it now can’t. It would give the city more options.
He said one estimate suggested the building could be occupiable with $20 million in upgrades rather than an early $115 million estimate that included asbestos remediation and a slew of needed building system upgrades. He said the settlement will allow the city to do more vetting.
Perhaps, Gloria said, 101 Ash could become a swing space where city employees could temporarily work as other developments proceed or the city could partner with a private developer that could reposition it. He acknowledged the city could even decide to raze the building.
“All of those options can be on the table in a way that really no options (are) on the table currently, other than, you know, long-term expensive, risky litigation with no certainty of outcome,” Gloria said.
Unsurprisingly, representatives for Cisterra and the lenders cheered the Monday announcement after months of confidential negotiations.
Like Gloria, Cisterra chairman Steve Black emphasized the future possibilities for downtown.
“We are pleased to have reached a settlement that opens the door for the city to redevelop the civic core of downtown San Diego,” Black wrote in a statement. “The city was a positive counterparty in those discussions and the resolution announced today is the result of all parties working hard to find a fair compromise, which we believe has been achieved.”