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This post has been updated to reflect updates made to the proposed settlement after an initial City Council vote on it was postponed. A vote is now set for Tuesday, July 26.
For the last couple years, the dumpster fire surrounding the city’s empty 101 Ash St. high rise has continued to grow.
On Tuesday, the City Council is set to vote on a proposed settlement that Mayor Todd Gloria and other city leaders argue will help contain that dumpster fire, end uncertainty over whether the city will hold onto 101 Ash and nearby Civic Center Plaza and allow it to make future real estate decisions.
Opponents of that proposal, including City Attorney Mara Elliott, contend the agreement with the city’s landlord and lenders behind the two deals is short-sighted and could hamper the city’s ability to get past the years-long debacle that last year expanded to include a second city facility. Elliott has even urged the City Council to reject the proposal.
Gloria has acknowledged that the settlement deal isn’t ideal. He just believes it’s the best of a menu of bad options.
Charles Modica, the city’s independent budget analyst, struck a similar tone in an interview with Voice of San Diego.
“There aren’t really any good or great options here,” he said. “It’s trying to choose the best of a number of bad options before the city. Reasonable people can disagree about what the least bad option is.”
So what’s in the proposed deal and why is there such a divide over it? Let’s walk through what’s on the table.
How we got here: The city in January 2017 acquired 101 Ash St. in a lease-to-own deal, essentially agreeing to pay mortgage payments to own the building after 20 years. The city has since 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. Namely, it was revealed that the city’s landlord at 101 Ash and nearby Civic Plaza had paid Jason Hughes, a city adviser who had previously publicly described himself as a volunteer, $9.4 million for his work on the 101 Ash deal and a similar precursor deal at the nearby Civic Center Plaza
Before the payments to Hughes publicly came to light, city officials began confidential settlement talks with landlord Cisterra Development and representatives for its lenders.
The basics: The settlement calls for the city to spend about $132 million to buy itself out of the two city leases, which would end its legal fight with the landlord and lender behind the 101 Ash and Civic Center Plaza deals. That will cost about $46 million for Civic Center Plaza and $86 million for 101 Ash. Those sticker prices are based on the outstanding amounts the city owes on the leases, not the value of the buildings.
Per the settlement, Cisterra 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.
The settlement stipulates that the deal has to be completed by Sept. 1, or it’s off, unless all parties agree to extend the deadline. Beginning on Aug. 9, the city will be hit with $7,000 a day in late fees for 101 Ash, and more than $4,300 a day for Civic Center Plaza, each day that it does not consummate the deal.
Show me the money: To pay off 101 Ash, City officials proposes using cash previously allocated for other capital projects, the $7.45 million net profit Cisterra is returning to the city, and money it’s been setting aside that had been set to be used on rent payments since September 2020. (The city decided to stop making rent payments because it wasn’t occupying the building.)
The city expects to rely on short-term borrowing and longer-term bond financing to purchase Civic Center Plaza.
What we know about the buildings: Hundreds of city workers and a high school are now headquartered at Civic Center Plaza, but 101 Ash has been sitting vacant for most of the last five years.
A 2020 review by consultant Kitchell found 101 Ash required up to $115 million in fixes, including asbestos remediation and upgrades to various building systems.
The city more recently ordered limited scope appraisals and updated reviews of each building’s needs to assist in mediation talks. The city has released details of those reviews publicly ahead of Tuesday’s council vote but has not provided recent, detailed property condition assessments that would shed more light on building needs. Gloria has said deep dives on 101 Ash will be more feasible after the city buys it.
Appraiser Robert P. Caringella of Jones, Roach & Caringella estimated in his review of 101 Ash that the value of the land now under the building is likely worth $36 million to $42 million and a renovated building could be worth $82.2 million to $92.8 million.
The problem, Patrick Early of Allgire General Contractors found, is that the city would likely need to spend $94 million on asbestos abatement and renovations.
Early’s feedback was incorporated into what Caringella described as a restricted appraisal “to assist the Office of the City Attorney with valuation opinions for use in mediation and settlement discussions” without a separate report detailing his calculations.
In a memo to the City Council, city officials were blunt about what that means: “Given the known asbestos and remediation requirements, the value of the 101 Ash building is virtually zero,” the report signed by city real estate chief Penny Maus and interim Chief Operating Officer Jay Goldstone reads. “However, the land does have value, especially with other agencies contemplating redevelopment projects in the area.”
That means that 101 Ash would likely be more valuable to the city without the 19-story building currently topping it because renovation costs will surpass the value of the building once the work Early projected is done.
Gloria told Voice that the settlement will allow the city to dig more into the realities of the 101 Ash property and its needs, and consider other redevelopment efforts such as a new City Hall or a transit hub envisioned for the area by the region’s planning agency.
“It’s something that we couldn’t do because we may not have been able to do anything about it for five or 10 years, and God knows what those numbers would be over that period of time,” Gloria said. “This broader vision for our assets down here also may make mitigating some of those costs more doable than it would be standing on its own.”
So what about Civic Center Plaza, where more than a dozen city departments now work?
Caringella estimated the market value of the building is $26 million to $41.6 million. Early projected $61 million in upgrades needed for the building. That’s up from the more than $20 million in capital needs the city projected before the City Council approved a lease-to-own deal in 2015. None of that work had been completed as of early 2020.
Maus told Voice that a $4.9 million elevator modernization is underway in the building now, but said the city has in recent history held off on other building fixes due to the uncertainty surrounding litigation.
Other factors the city’s weighing: As suggested in a blistering 2021 audit on the city’s real estate acquisition, the city’s independent budget analyst hired a consultant to help it evaluate the city’s options for 101 Ash and Civic Center Plaza.
Budget analysts asked real estate and economic consultant Kosmont Companies to analyze the situation under the assumption that the city needs 610,000 to 710,000 square feet of downtown office space. The consultant’s report looked at various scenarios should the city accept the settlement or continue to battle with its landlord and the lenders in court.
Kosmont found costs associated with the city’s facility needs over the next 30 years could range from $228 million to $302 million if the city settled with Cisterra and its lenders. By comparison, it estimated $190 million to $483 million in costs if the city continued the court battle and the city’s 101 Ash and Civic Center leases were voided, an aim of the city’s conflict-of-interest suits.
The analysis factors in the reality that both City Hall and the City Operations Building – two other nearby buildings occupied by city staff — also need significant upgrades and that if the city rejected the settlement and lost in court, it may need to seek out other workspace. Kosmont found that City Hall could need up to $95 million in upgrades while the City Operations Building could need up to $51 million in upgrades.
Kosmont also assumed market lease rates at $3 per square foot each month, which it deemed conservative.
“Ultimately, Kosmont found the decision to settle or continue in litigation was heavily dependent on the city’s desire to own the buildings and its risk tolerance, and Kosmont noted that any potential downtown real estate programs of the city could be suspended absent resolution of litigation, as it may not be prudent to make significant real estate decisions until the fate of the 101 Ash and (Civic Center Plaza) buildings is known,” Modica wrote in his review of the Kosmont analysis.
He also wrote that it’s critical that the mayor and city officials “bring forward a clear and detailed plan for the city’s future downtown real estate needs and how the 101 Ash and (Civic Center Plaza) properties fit into that plan.”
City officials have not yet articulated a specific plan for what they’ll do after acquiring the buildings. But Gloria and other city officials argued this week that the settlement will lessen uncertainty and allow the city to move forward with holistic real estate discussions.
City Councilman Chris Cate, who participated in mediation discussions, told Voice that the city has concluded it will likely be stuck with building fixes at 101 Ash regardless of the outcome of its conflict-of-interest suits and that the prospect of losing two city buildings is too much to risk on top of that.
“Part of the impetus for wanting the deal is we’re stuck with the remediation either way and in the midst of that we have in Civic Center Plaza 800 employees that need a home,” Cate said. “If we were to win the case, they could potentially be homeless and need to go somewhere.”
The arguments against the deal: Elliott sent an analysis to the mayor and City Council explaining her opposition and a laundry list of concerns about the settlement.
“This office strongly recommends that the Council reject the proposed agreement, which has several significant disadvantages to the city and does not adequately protect the city’s legal and financial interests,” Elliott wrote.
In that memo, Elliott argued the city is settling too soon and hasn’t done enough vetting. Her office has separately said that it believes the city has a solid case against Cisterra and Hughes, who is not part of the settlement.
Elliott also said she doesn’t believe the city has conducted adequate due diligence at Civic Center Plaza and criticized city staff for pitching a settlement that requires the city take on both buildings “as is” and with any defects they may have. She also criticized the requirement that the city buy 101 Ash “without a plan or timeline for its occupation by City employees or its potential future redevelopment” and the settlement’s failure to demand that Cisterra return about $6 million in profits it made on the Civic Center deal.
Following questions from Voice, Maus countered that the city “has up-to-date, first-hand knowledge of the condition of the buildings” due to regular meetings and contact with contractors who oversee both buildings. Goldstone also noted that the city has occupied Civic Center Plaza for more than 25 years.
Elliott’s office is adamant that city reviews of the buildings weren’t sufficient and were inconsistent with the 2021 city auditor’s report urging key changes to the city’s real estate acquisition process.
“The city auditor recommended the city follow a due diligence checklist that included independent building condition assessments. The auditor should address whether the conversations the city has had with the building manager met the standards he suggested,” Elliott spokeswoman Leslie Wolf Branscomb wrote in an email. “This is a question the City Council will likely want answered before it acquires these buildings.”
City Auditor Andy Hanau issued a memo noting that only one of his office’s audit recommendations has been fully implemented though a handful have July deadlines. He wrote that the city can still take steps to fulfill the intent of those instructions.
“It is still possible for the city to achieve the intent of the framework in the meantime by ensuring that key best practices and due diligence steps are completed, that the City Council and the public are provided with all material facts, and that the city takes appropriate steps to protect itself from conflicts of interest,” Hanau wrote.
Hanau then listed a series of items for the City Council to ask about including independent building and environmental assessments, appraisals and details on how the acquisitions fit into the city’s broader real estate strategy.
He wrote that his office has “no position on the current settlement decision” and must not wade into management decisions to ensure its independence.
When asked whether the city used checklists recommended by auditors to review the latest proposed purchases, Goldstone only said officials were working on it and would update a committee in July.
City Councilwoman Vivian Moreno has gone public with her concerns about the proposed settlement, arguing it “will be a dark cloud hanging over City Hall for decades to come.”
“Buying this property doesn’t fix any of its problems. There will be a never-ending stream of litigation and other costs stemming from the city’s failure to defend San Diego taxpayers from fraud and deception,” Moreno wrote in a statement. “I am fully confident that if the city went to trial, we would prevail and shield taxpayers from further losses, while at the same time finally uncovering the truth of what happened.”
What the settlement could mean for other Ash lawsuits: All 101 Ash St. legal action won’t stop with these settlements.
City officials said they intend to continue the conflict-of-interest suits against Hughes and to try to claw back the millions he was paid. (Hughes’ attorney has argued the city’s case is faulty. He’s 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.)
The District Attorney’s Office has a criminal investigation underway that won’t stop with the settlement either.
The city also plans to continue to pursue legal claims against contractors they allege mishandled the remodel at 101 Ash St. The settlement also won’t instantly halt a taxpayer lawsuit challenging the constitutionality of the 101 Ash St. lease or a slew of legal personal injury claims filed against the city by workers involved in the remodel.
In her memo, Elliott emphasized that the settlement “would not put an end to an ugly chapter in its history stemming from highly imprudent decisions made during the prior mayoral administration.”
“The city would remain responsible for defending current claims and any future claims related to the prior transactions and the 101 Ash renovations, including the plaintiffs’ claims in several lawsuits for alleged exposure to asbestos-containing materials (asbestos),” Elliott wrote.