S.D. COUNCIL SETTLES ASH ST. BUILDING SUIT
Move ensures no more payments until troubled high rise can be used
The city of San Diego has agreed to settle a lawsuit over the troubled Ash Street property, ensuring that no more payments will be made on the vacant downtown high rise until it can be safely occupied, The
San Diego Union-Tribune has learned.
The agreement was narrowly approved during a closed session of the City Council Tuesday, but has not been publicly announced. It passed 5-4, with council members Barbara Bry, Jennifer Campbell, Scott Sherman and Vivian Moreno opposed.
A copy of the stipulation obtained by the newspaper shows it was signed Thursday by City Attorney Mara Elliott and by Aimee
Faucett, Mayor Kevin Faulconer’s chief of staff and the acting chief operating officer.
“The city will not make further payments under the lease agreement or a revision thereof until and unless the building can be occupied as contemplated in the lease agreement, there is no basis for abatement of rent payments, or the court orders otherwise,” it states.
“Nothing in this stipulation restricts the city’s ability to engage in good faith negotiations with the landlord and/or lender to reach a mutually satisfactory agreement so long as it satisfies the abovestated conditions of payment,” the agreement adds.
Elliott said the settlement will help reset what has become a vexing problem for the city.
“Cleaning up the Ash Street mess I inherited is a top priority, and this is an important first step in recovering taxpayer funds,” she said in a statement.
Elliott was elected in November 2016, one month after the council first approved a 20-year lease-to-own deal for the former Sempra Energy headquarters at 101 Ash St., just north of City Hall.
She assumed office weeks later and is now running for re-election. Elliott’s opponent, San Diego attorney Cory Briggs, has sharply criticized her office’s handling of the lease.
Michael Aguirre, the former San Diego city attorney who sued the city on behalf of a resident claiming the lease is illegal, credited city officials for agreeing to the deal.
“The mayor, the City Council and the city attorney have put the city on the path to solving the Ash Street building problem,” he said. “We hope we can take the next step, which is to get the building occupied by city employees.”
The settlement sets up a legal showdown between the city, the building ’s former owner and a San Diego development company that acted as a broker in the transaction.
The lawsuit was filed in August by San Diego resident John Gordon, who alleges that the lease violated the state constitution because public funds cannot be spent on goods or services that are not delivered.
City officials planned to move up to 1,100 employees into the 19-story office tower. But despite spending more than $53 million on lease payments and renovations, it remains unusable because of asbestos concerns and other problems.
Under the lease, the city had been paying $535,000 a month for the vacant building.
Including 20 years of payments, building upgrades and operating costs, the property was set to cost the city more than $200 million. It appraised for $62 million in 2016, and then $67.1 million days later after city officials worked to secure a higher estimated value, the UnionTribune reported last month.
The city executed the lease in January 2017, about two and a half months after the initial council approval.
Officials expected to move hundreds of workers into the building that July, largely be
cause the Mayor’s Office told the council the mid-century building was in good condition and needed only a $10,000 power scrubbing before it could be occupied.
Faulconer last month reversed course and suspended the monthly payments. His office did not respond Thursday to a request for comment on the stipulation.
The Gordon lawsuit targeted the city, City Treasurer Rolando Charvel, several companies owned by former majority building opener Sandor Shapery, Cisterra Development, a local builder that brokered the deal between Shapery and city officials, and 101 Ash LLC, the limited liability company set up to process the transaction.
“I have no knowledge of any settlement of the suit,” Shapery said by email Thursday. “I was never served and didn’t participate.”
A spokesman for Cisterra did not immediately comment on the stipulation.
The lawsuit did not name as a defendant the property’s former minority owner, developer Douglas Manchester, who is one of Faulconer’s major political supporters and whom Shapery said the mayor did not want directly involved in the deal. Manchester is a former owner and publisher of the Union-Tribune.
The transaction was complicated. It called for Shapery and Manchester to transfer the property to Cisterra, which turned around and leased it to the city on the same day. The mayor’s staff report to the council in 2016 made no mention of Manchester’s interest in the property.
The city’s decision to settle the case was not a complete surprise. Lawyers for most of the parties in the case participated in private settle
ment discussions held with Judge Kevin A. Enright on Sept. 22 and again last Thursday, court records show.
The council decision effectively aligns the city with the plaintiff, setting up a legal dispute over who will pay for making the building suitable for city employees.
One consultant’s report released by the Mayor’s Office this summer pegged the cost of opening the building at just over $115 million — including remediating all of the asbestos, upgrading the heating and air conditioning and making a host of other improvements.
Another consultant criticized the city for agreeing to a lopsided deal weighted heavily in favor of Cisterra, which negotiated a similar lease-toown deal for the city involving the Civic Center Plaza building just across from City Hall in 2015.
With the city now committed to not making any additional lease payments until the building can be occupied, it remains to be seen who will pay for the tens of millions of dollars in needed repairs.
Because the transaction was structured as a lease-toown deal, the city’s decision to suspend payments and settle with the plaintiff likely means the former owner and broker will have to negotiate with the lender secured by Cisterra.
In its current condition, the building may not be worth the total amount borrowed to close the deal, which could be as much as $92 million, a consultant said.
The Gordon complaint remains active and has been assigned to Judge Joel R. Wohlfeil. Aguirre and his law partner, attorney Maria Severson, requested an ex parte meeting with the judge for next Wednesday, according to court records.