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City Attorney Mara Elliott says she’s ready to settle the city’s lawsuit against Jim Neil, the broker who helped the city purchase a Kearny Mesa hotel after he invested in the property’s corporate owner.
Under the deal, Neil would return $1 million he collected in fees for brokering the purchase of the Mission Valley hotel for $67 million, and another in Kearny Mesa, during the summer of 2020. Both now house formerly homeless residents.
“San Diego taxpayers will be made whole under the terms of the proposed settlement,” Elliott’s office announced in a Thursday morning press release.
Whether taxpayers really are whole with the settlement is something at least one councilman and member of the Housing Commission fiercely dispute.
The settlement would end the city’s litigation against Neil, and his employer, Kidder Matthews, which alleged that his purchase of 40,000 shares in the company that sold the hotel to the city violated state corruption laws that prohibit public officials from having a financial interest in a contract they helped create. It’s the same law the city is relying on to sue Jason Hughes over his involvement in the city’s acquisition of two downtown high-rises. Neil’s shares increased in value after the transaction.
“This settlement sends the message that my office will not back down from doing what’s right,” Elliott said, according to her office’s press release.
But Elliott’s announcement of a proposed settlement came as a surprise to at least two of the officials who could be asked to approve any settlement.
City Councilman Chris Cate and Ryan Clumpner, vice chair of the San Diego Housing Commission, both said they didn’t like learning of the finalized settlement Elliott negotiated through a press release, and that they have concerns about the deal.
“I have a lot of questions about whether this settlement actually does make taxpayers whole but will address those in closed session,” Clumpner said. “We should not be learning about this via press release. I’m shocked.”
Cate said he learned about the proposed final settlement when Elliott announced it.
“That’s always nice, when we’re not told about things before they’re released publicly,” he said. “I will say, her choice of the words ‘taxpayers will be made whole,’ I’m curious of her definition of that, understanding the circumstances under which the properties were bought. It seems to remain a question whether all that steps that go into purchasing a property were conducted on the level, based on the appraisals, your reporting, and whether we got the best value for that property, knowing that he was working both sides.”
The city began pursuing hotel purchases in spring of 2020, thinking that pandemic-related travel restrictions would decrease their value and make them viable options to house homeless residents in non-congregate settings.
“There’s never been this much of an opportunity, and there’s never been this much of a need,” said then-Mayor Kevin Faulconer said.
With the help of $37.7 million in funds from the state’s Project Homekey, created based on the same logic, the city purchased extended stay hotels in Kearny Mesa and Mission Valley.
But as Voice of San Diego reported last May, after Neil signed a contract with the Housing Commission to help it identify suitable hotels for purchase, he bought 40,000 shares of stock in Chatham Lodging Trust, the company that owned the Mission Valley hotel. He then recommended the commission purchased the Mission Valley and Kearny Mesa hotels and negotiated the commission’s purchases. Chatham Lodging Trust did not own the Kearny Mesa hotel. Voice’s reporting was based on a confidential analysis by the Housing Commission’s legal counsel, and subsequent written questions and answers between the City Council and Housing Commission staff.
The value of the stock spiked after the city’s Mission Valley acquisition, with the legal analysis at the time estimating Neil made between $230,000 and $353,000 on his investment.
How much the city paid for the hotels is a controversy itself, aside from Neil’s alleged conflict of interest in brokering the transactions. His fees are only part of the concern.
The Union-Tribune scrutinized the price the city paid for the hotels, concluding that the Mission Valley hotel was the most expensive hotel sold in the city in 2020, on a per-room basis.
And as Voice reported last year, there was a notable difference between the appraisals for the Kearny Mesa and Mission Valley hotels that were conducted ahead of the transaction.
The appraisal for the Mission Valley hotel explicitly determined what the property’s value was on Feb. 25, 2020 – prior to the onset of the COVID-19 pandemic in San Diego County, and the travel restrictions that came with it.
The appraisal of the Kearny Mesa hotel – the one that was not owned by the corporate owner in which Neil invested – determined the property’s value on July 21, 2020, just before the purchase went through. The same company conducted both appraisals.
The appraisal for the Mission Valley hotel spelled out that hotel values had fallen due to the pandemic, and that by using the earlier effective date, it did not reflect those changes.
“Therefore, we note that the valuation conclusions contained herein represent the market conditions as of the effective date of the appraisal, prior to the onset of the COVID-19 pandemic, and forecasts/expectations as of February 25, 2020, and as of the date of report in August 2020, market conditions and corresponding values for hospitality properties throughout the country have been materially impacted by the onset of the COVID-19 pandemic,” the appraisal read.
A city attorney spokeswoman said the conclusion that “taxpayers will be made whole” by the settlement included a consideration of the hotel’s purchase price.
“The City Attorney’s Office reviewed the Housing Commission’s appraisal information and did not see irregularities,” Leslie Wolf Branscomb wrote in an email.
In a statement, Neil said he agreed to the settlement as a compromise to resolve unwarranted litigation as the city sought tens of millions of dollars in protracted litigation. He said it was not an admission of guilt, and that he and other parties in the lawsuit brought motions in court challenging the city’s claims, but the settlement came before those challenges were heard.
“Further, there was no secrecy by Mr. Neil,” the statement issued by a PR firm read. “Mr. Neil informed the Housing Commission of his intention to purchase the stocks prior to the transaction and he was told there would be no issue with these actions by Housing Commission senior staff.”
That’s consistent with the internal legal analysis, and subsequent written questions and answers between the City Council and Housing Commission Staff, that were obtained by Voice last year.
A former senior vice president of the commission’s real estate division, and the commission’s vice president of development, both confirmed to legal counsel that they had been told by Neil of the investment “at some time.”
“Despite these facts, the City Attorney’s office pursued a massive lawsuit against Mr. Neil and other parties, which drew legal challenges by all the parties involved,” the Neil statement said. “It is under these circumstances that a settlement was struck. Settlement allows Mr. Neil to move forward without further years of costly litigation. As part of the settlement agreement, Mr. Neil affirmed he would never do business with the City again. He has no desire to.”
The Neil lawsuit was the second high-profile city case relating to government code section 1090, the state anti-corruption law that restricts government officials, including contractors, from having a financial interest in a contract they helped create.
On the other one – over the city’s acquisitions of 101 Ash Street and the Civic Centre Plaza – Elliott implored the City Council to reject a proposed settlement and asked for the chance to take the case to trial. After a delay, the City Council last week approved the settlement, over her objections.
The City Council must approve the city attorney’s settlement in this case too. The Council is not scheduled to meet again until September. The Housing Commission will consider the settlement in a closed session Aug. 19.