S.D. PROSECUTING AND DEFENDING LAWSUITS OVER ASH ST. BUILDING
The lease-to-own deal for the former Sempra Energy building downtown has cost the city tens of millions of dollars so far and has yet to provide any benefit to the public. It also has pushed San Diego city officials — and their lawyers — into the awkward position of defending one lawsuit over the botched agreement while prosecuting another.
City officials were accused of wasting public funds in a lawsuit filed last August by resident John Gordon, who claims that the contract calling for the city to pay $128 million over 20 years for the downtown office tower is illegal.
Former Mayor Kevin Faulconer and his staff initially said the city would save $44 million by acquiring the midcentury high rise at 101 Ash St. as additional work space and consolidating up to 1,100 city employees from other leased office space into the
building.
But a series of asbestos contaminations and lapses in the property’s mechanical systems prevented workers from moving into the building until December 2019.
Within a few weeks, however, county regulators continued to find asbestos in the building and evacuated hundreds of city employees by mid-January.
An independent consultant later concluded that the city had failed to conduct its own assessment of the building ’s condition before signing the lease agreement and instead had relied on the seller’s representations and documents.
The city continued to make lease payments until September.
Now Gordon and his lawyers want the $23 millionplus the city paid on the lease refunded. The city hired an outside attorney to defend itself.
The other legal complaint was filed by City Attorney Mara Elliott against the building seller and landlord weeks before Elliott was re-elected on Nov. 3.
That suit is not demanding any money back.
Instead the city’s lawsuit asks a Superior Court judge to validate the city’s decision in September to suspend the $535,000 monthly lease payments it had been making for the 19-story high rise, which has been unusable since the city signed the lease four years ago.
Both cases were scheduled to hold confidential settlement conferences on Tuesday.
But last week the city’s lawyer canceled negotiations because Gordon’s attorneys had updated their initial complaint to add an additional defendant — the Wilmington Trust National Association, which has been collecting the city’s monthly payments.
“Due to the recent filing of the amended complaint, the city of San Diego has canceled the Jan. 12 settlement conference before Judge (Kevin A.) Enright,” wrote Dick Semerdjian, the lawyer hired by the city to handle the Ash Street litigation. “It is off calendar.”
The other settlement conference in the city’s case against 101 Ash LLC — the company formed by Cisterra Development of San Diego to transact the lease — also
was called off last week.
The two lawsuits are next scheduled for a case management conference in late April.
A spokeswoman for Elliott declined to comment on the canceled settlement talks and on Elliott’s decision not to sue for a refund of the millions of dollars the city has paid for the vacant building.
Elliott did issue a statement saying the city wants its money back.
“The City Attorney’s Office remains committed to recouping as much money for taxpayers as possible from the 101 Ash transaction,” spokeswoman Hilary Nemchik said by email. “We are unable to comment on this ongoing litigation.”
Elliott’s office previously stated that the city may amend its initial lawsuit against the landlord in an attempt to recover some or all of the money already paid.
Mayor Todd Gloria, who was sworn in last month, also declined to comment on the city’s legal strategy for the Ash Street property or on who may eventually be responsible for up to $115 million in upgrades officials say the building needs before it can house city employees.
A senior Gloria aide issued a statement saying the mayor’s goal is to minimize the risk for the city and taxpayers while also protecting the safety of city employees. Deputy Chief of Staff Nick Serrano also placed the blame on the previous mayor.
“We are continuing to better understand the previous administration’s choices that led us to this point,” Serrano said. “As we learn more about this complicated issue, it is our commitment to be transparent with the facts we uncover and hold accountable those who are responsible for this fiasco.”
The Mayor’s Office statement made no mention of Gloria’s role in the transaction. While serving on the City Council in 2016, Gloria made the original motion to approve the acquisition.
Gloria also was one of a handful of council members in 2016 to attend confidential briefings on the lease-toown deal, which was structured after plans to buy the building outright fell apart, city documents show.
Earlier that year, an independent property assessment concluded that the building was worth $62 million. Later the same appraiser increased his valuation to $67 million.
The lease-to-own arrangement — a 20-year deal with a $128 million price tag — was drafted after it became clear the city would not be able to issue bonds to
finance the purchase.
Under terms of the lease, which included the words “AS IS” in bold letters on the first page, the city is required to pay for all repairs or remediation needed before the building could be occupied.
The City Council approved an additional $30 million to pay renovation costs for the Ash Street property in 2018, but that ran out quickly. A consultant hired by the Faulconer administration last year estimated that additional repairs would cost up to $115 million.
Now the Gordon lawsuit alleges that spending public funds to lease a building that cannot be occupied violates state law.
San Diego attorney Maria Severson is one of several lawyers representing Gordon in the lawsuit against the city, 101 Ash LLC and Wilmington Trust. She said her client’s claim is fundamentally different from the one filed by the City Attorney’s Office.
“Unlike the city case, the Gordon case seeks both to recover for taxpayers the $23 million paid out by the city for an empty building that could not be occupied and to void the agreement altogether with no future payments,” she said.
Semerdjian, the lawyer hired by Elliott to litigate the Ash Street lawsuits for her office, sought to get the Gordon lawsuit dismissed under the legal argument that the complaint lacked validity.
Judge Joel Wohlfeil rejected that contention and allowed the case to proceed.
“Even if the lease language requires the city to bear the costs associated with removing and remedying the asbestos, it is unclear whether it also requires the city to continue paying rent during the period of time in which the building is made uninhabitable,” the judge ruled last month.
The building at 101 Ash St. was formerly owned by developer Sandor Shapery and was used as the world headquarters of Sempra Energy, a Fortune 500 company and parent of San Diego Gas & Electric.
Shapery brought in partner Douglas Manchester in 2015 and by 2016 reached a deal for Cisterra to assume ownership of the building contingent on successfully leasing the property to the city.
The so-called double escrow transaction closed Jan. 3, 2017.
City officials said at the time that the building was in excellent condition and they expected to move in employees by that July.