City Attorney Mara Elliott’s announcement last Tuesday that she would seek to void the controversial lease of the former Sempra Energy headquarters at 101 Ash St. has redefined the city’s legal strategy.
It also has prompted criticism that she should have moved sooner to recover tens of millions of taxpayer dollars spent to lease the vacant building.
Elliott also announced she was amending the city’s earlier lawsuit to include among the defendants Jason Hughes, a special mayoral adviser, a day after The San Diego Union-Tribune reported Hughes was paid almost $10 million by a middleman company for his work on the city’s deals.
She also is seeking to cancel not only the Ash Street lease but also a similar deal Hughes helped negotiate for the city involving the Civic Center Plaza building.
Here is a short recap and explanation of the Ash Street transaction:
What is the Ash Street debacle? The Ash Street deal involves a real estate transaction recommended by former Mayor Kevin Faulconer in 2016. Under the former mayor’s direction the city agreed to lease the former Sempra Energy headquarters at 101 Ash St. for more than $500,000 a month over 20 years. At the end of the lease, the city would own the 19-story high rise free and clear.
When the Faulconer administration proposed the deal in the fall of 2016, they told the City Council that the building was in excellent condition and required little more than a $10,000 power scrubbing before 800 or more employees could be moved in. The plan was to shift hundreds of employees from other leased and dilapidated city properties into the building by July 2017 and potentially save tens of millions of dollars.
Within weeks of closing the deal, in January 2017, city officials learned the property needed far more repairs and upgrades than they previously understood. Not only that, the building was riddled with asbestos that was being disturbed with nearly every renovation. The $5 million in tenant improvements the seller agreed to provide was quickly eaten up and by 2018 the Mayor’s Office was back in front of the City Council asking for an additional $30 million to complete repairs and salvage the investment.
At $535,000 a month for two decades, the original cost of the lease was to be approximately $128 million. Adding in the cost of operating and maintaining the building, as well as the costs of security, renovations and other expenses, the total cost of the Ash Street lease deal would exceed $200 million. The building appraised for $67 million months before the city signed the deal, and a year earlier the building owner sold a 49 percent interest in the property for $20 million.
Why did the city acquire the building? As early as 2014, city officials began identifying the need for additional office space for its downtown-based workforce. Rents had been climbing. Key leases were pushing toward expiration. And city workers in the aging operations building just west of City Hall had complained for years that their workspace was fraught with health and safety concerns.
In 2015, Sempra moved out of 101 Ash St. and set up shop in a new complex along nearby Eighth Avenue constructed by Cisterra Development. Located just north of City Hall, the vacant Ash Street office tower presented a seemingly timely and cost-effective opportunity for the Faulconer administration.
The longtime owner of the Sempra building, real estate investor Sandor Shapery, repeatedly pitched San Diego officials about acquiring the building. He told the Union-Tribune he even proposed a swap in which he would assume control of the City Hall complex for renovation and the city could transfer its headquarters to the midcentury high-rise. The Faulconer administration rejected those offers, saying later that Shapery wanted more for the property than it was worth.
By 2016, Shapery was anxious to get a tenant — or a buyer — for his 300,000-square-foot property. He signed a deal with Cisterra that gave the development company exclusive rights to market the property.
The year before, Cisterra had negotiated a lease-to-own deal with the city for the Civic Center Plaza, another downtown high-rise the city has occupied for years. That transaction saw Cisterra acquire the property from the longtime owner then immediately lease the building to the city — a kind of middleman arrangement that netted the company millions of dollars.
Soon thereafter, Cisterra, the Faulconer administration and Hughes, the mayor’s special adviser, proposed a similar arrangement for the 101 Ash St. property to the City Council. The mayor told the council the deal would save the city $44 million over the years by consolidating workers into lower-cost office space.
Why didn’t the city buy the building outright? When the Faulconer administration first approached the City Council recommending the lease-to-own agreement, council members were told that a traditional purchase was not feasible because the owner sought too high a price. The lease-purchase model allowed the city to nail down specific, cost-effective terms and avoid the process of bond-financing, the Mayor’s Office told the council.
Only later, as a spate of issues prevented the city from occupying the property, did it become clear that the Faulconer team had agreed to pay far above the building’s appraised value. Also the lease-to-own arrangement allowed the city to avoid any mention in public reports that the property had been co-owned by San Diego developer Douglas Manchester — one of Faulconer’s biggest political supporters and a Republican donor. Manchester also owned the Union-Tribune between 2011 and 2015. Later, the newspaper reported that Manchester had bought his nearly 50 percent stake in the 101 Ash St. high-rise for $20 million. An appraisal the city secured in 2016 placed the building’s value at $62 million, and a second valuation pegged the value at just over $67 million.
What’s more, the lease stated in bolded, capital letters on its front page that the city agreed to acquire the property “AS-IS” and was solely liable for all repairs, upgrades, hazardous materials or other costs.
How did the project go wrong? Almost as soon as city officials began preparing to move workers into the building, they found trouble. The property, which had been vacant for more than a year, lacked a functioning fire-suppression system. Its heating and ventilation system was old and in need of upgrading. The electrical network also was suspect. The building was not fully compliant with the Americans with Disabilities Act, and every time construction crews widened a doorway or replaced drywall or ceiling tiles, they risked exposing asbestos.
Some City Council members complained Faulconer did not update the council on the building’s problems. In April 2018, the Union-Tribune reported that the city was spending $18,000 a day to lease a vacant building — with no occupation date in sight. The Faulconer administration insisted they were on top of the situation but conceded that more money might be needed to get the building open.
That August, they presented the council three options: pay about $4 million and move some workers into the building as soon as possible; invest about $23 million to renovate five floors and move more workers in later; or invest an additional $30 million to renovate the entire property and eventually move some 1,100 employees into the building. Council members reluctantly approved Option 3, and the Faulconer administration promised the building would open before the end of 2019.
But the repairs did not go as planned. By early 2019, county regulators began issuing asbestos violations on the property. City officials downplayed the contaminations and insisted the building would open on time and on budget, even as construction work was halted for several weeks over that summer. In December, the city moved hundreds of employees into the building.
The celebration was short-lived. Within weeks, city employees began complaining about working conditions and county regulators issued a new set of asbestos violations. In mid-January, with no public announcement, Faulconer ordered the building evacuated for employee safety. At the next council meeting, then-Chief Operating Officer Kris Michell accepted responsibility for mishandling the property and promised a full investigation.
Who was making key decisions about Ash Street? Clearly there were mistakes at many levels in the Ash Street lease. Under the city’s strong-mayor form of governance, the elected mayor acts as chief executive. Internal emails show then-Mayor Kevin Faulconer directed the city to proceed with the lease-to-own deal even though his aides advised him that a straight purchase would save the city millions.
Other records showed he was in communication with Manchester about the property even after his staff determined Shapery’s offers were not in the city’s best interests. Consultants hired after the city’s evacuation of the building in early 2020 issued stark reports about what happened. One expert said the city failed to perform any due diligence ahead of the transaction and relied almost solely on the seller for documentation about the building’s condition. Another expert estimated it would cost $115 million to make the building safe for occupancy.
It was not until September 2020, though, that Faulconer suspended the six-figure monthly payments the city was making to lease the vacant building — which was after San Diego resident John Gordon sued the city to nullify the lease-to-own contract and recover some $24 million in taxpayer funds.
Elliott, who was elected city attorney in November 2016, signed the lease deal soon afterward. Her office approved the lopsided lease, although most of the legal work was completed under the management of her predecessor, Jan Goldsmith, before she assumed office.
Last week, Elliott filed an amended lawsuit to challenge the lease, after it became public that Hughes collected $5 million for his work on the Civic Center Plaza deal and $4.4 million for his Ash Street consulting.
The lawsuit Elliott originally filed in October only asked a judge to validate Faulconer’s decision to suspend lease payments until the building can be occupied. It did not initially seek to recover any money or to void any contracts.
Mayor Todd Gloria also played a role in the Ash Street missteps. As a city councilman in 2016, he made the original motion to approve the Ash Street deal. Since Gloria was elected mayor in November, he has not answered questions about how he plans to resolve the issue, saying only that he supported the investigations into the deal.
Last week, Gloria for the first time stated that he had been deceived by Hughes and supported Elliott’s plan to nullify both contracts. He has declined to respond to follow-up questions.
Who is Jason Hughes and how is he involved? Hughes has been a fixture in the downtown real estate market for some two decades. His companies, first Irving Hughes and later Hughes Marino, built their reputations by promoting their commitment to tenants — not to landlords.
When former Mayor Jerry Sanders began exploring the idea of developing a new City Hall, Hughes approached the city about helping negotiate a deal — at no cost to taxpayers. Sanders declined the offer of free consulting but his successor did not. Hughes became an adviser to then-Mayor Bob Filner, who ended up resigning amid a sexual-harassment scandal months into his first term. Gloria, who assumed mayoral duties on an interim basis after Filner’s departure, and Faulconer both continued the relationship. Faulconer appointed Hughes to a stadium advisory board convened to help keep the Chargers professional football club in San Diego, although that effort failed.
Records released as part of the lawsuits over the Ash Street lease show that Faulconer continued to rely on Hughes for downtown real estate advice.
Elliott and Gloria said recently they did not know that Hughes was paid by Cisterra. They thought the service and advice he gave came without any financial ties with the parties involved.
Hughes has insisted through his lawyer that people at the highest levels of City Hall knew he expected to be paid. Letters and emails now in the public record indicate he said he would seek to be paid, but not by the city. That said, there are no details in the documentation about who would be picking up the costs or how much he might be paid. Also Hughes did not file the disclosures that public officials, senior appointees, major contractors and others are required to fill out so interested citizens can check on potential conflicts of interest.
What’s next with the property? Whatever happens with the high rise at 101 Ash St. is likely to be determined in the courts. The lease has spawned dozens of legal claims from city employees and contractors who allege they were wrongly exposed to asbestos. It also is the subject of Elliott’s lawsuit, the Gordon complaint and countersuits filed by Cisterra and other defendants.
Except for Councilman Chris Cate, who voted in favor of the lease in 2016, Gloria and Elliott are the only two public officials involved in the deal who are still in office. Faulconer was termed out late last year and now is running for California governor; three of his top aides, including Michell, departed City Hall last year. At least one former official has spoken to the FBI multiple times.
Remediation and renovation work on the property has stalled while the civil litigation persists. No one is eager to invest more money in a building whose legal status is so uncertain, especially if repair costs exceed the value of the property.
Even if the city is successful in voiding the Ash Street lease, it is not clear if the city can recover the $30 million-plus it paid for renovations or the millions of dollars it spent on litigation to date. The Civic Center Plaza, the other downtown high-rise that Hughes helped the city lease, houses the City Attorney’s Office. Neither Elliott nor Gloria have said what might happen with that property if that agreement is nullified.
