GLORIA, OFFICIALS WANT TO BUY OUT TWO LEASES
$132M deal for contracts to be debated at hearing; city attorney urges rejection
Mayor Todd Gloria and members of the San Diego City Council are proposing to buy out a pair of controversial leases for two downtown office towers that were supposed to save taxpayers millions of dollars, but instead became symbols of government ineptness and possible fraud.
Gloria and two council members announced Monday that they have agreed to settle key parts of two lawsuits filed by the City Attorney’s Office over the lease-to-own deals for the forimmediately mer Sempra Energy headquarters at 101 Ash St. and the nearby Civic Center Plaza.
In a major wrinkle hours later, City Attorney Mara Elliott released a report saying the deal was not good enough for taxpayers and should be rejected.
“While the agreement provides certain benefits to the city as outlined in the staff report, the agreement presents several significant disadvantages to the city and does not adequately protect the city’s legal and financial interests,” the report said.
The Mayor’s Office did not respond to Elliott’s recommendation.
The proposed settlement, which only applies to landlord Cisterra Development and its lender, CGA Capital, is scheduled to be debated at a public hearing next week and voted on by the City Council.
If it is approved, the city will pay $86 million to buy out the lease for the Ash Street highrise and $46 million to pay off the Civic Center Plaza.
Taxpayers also will be on the hook for up to $115 million in repairs that a consultant said are needed at the Ash Street building before it can be safely occupied.
In all, the city would be spending more than $250 million on the vacant Ash Street tower, including lease payments, repairs, maintenance and legal fees and other costs.
When the City Council initially approved the lease in 2016, the building was appraised for $67 million.
Officials said then that the lease-to-own transaction would save taxpayers $44 million by consolidating employees into the former Sempra building and
reducing the need for other leased office space.
“There’s no perfect outcome,” Gloria said at an afternoon news conference. “Nothing in this proposed settlement absolves anyone from criminal prosecution.”
The mayor said the deal calls for Cisterra to pay the city $7.4 million, an amount he called the net profit collected by the company as a result of the initial lease. He also said CGA Capital agreed to forsake $11.7 million in a pre-payment penalty.
Elliott did not attend the news conference; nor did anyone from her staff. For almost a year, Gloria and Elliott publicly insisted they were deceived by Cisterra and other defendants and they were committed to protecting San Diego taxpayers and recovering any illegal profits.
“What this settlement does is put the needs of the city and its residents first,” Gloria said Monday.
Cisterra and CGA Capital issued a joint statement Monday saying they support the agreement reached after 18 months of confidential mediation talks.
“We are pleased to have reached a settlement that opens the doors for the city to redevelop the civic core of downtown San Diego,” Cisterra principal Steven Black said in the statement.
Black was presumably referring to a recent proposal from the San Diego Association of Governments to use all or part of the property as a central “mobility hub.”
At the same time, another development company called The Michaels Organization is negotiating with the state of California to develop two blocks along Front Street that would include a new city hall, council chambers and fire station. The would-be Ash Street and Civic Center Plaza settlements were co-introduced by Council President Sean Elo-Rivera and Councilmember Chris Cate.
“It’s time to close this chapter,” said Cate, the only remaining council member who voted to approve the two leases.
Elo-Rivera placed blame for the Ash Street lease squarely on former Mayor Kevin Faulconer, who collected thousands of dollars in campaign donations from financier Doug Manchester, who in 2015 bought 49 percent of the building for $20 million.
“The 101 Ash saga has been a civic tragedy that should infuriate every San Diegan,” Elo-Rivera said. “Lying millionaires and an incompetent previous administration put our city in a terrible position.”
Faulconer did not immediately respond to a request for comment Monday.
Councilmember Vivian Moreno indicated in a statement Monday that she would not support the settlement plan. She predicted the city would prevail at trial and shield taxpayers from millions of dollars in added costs. She also said proceeding to trial would uncover more facts about what happened.
“This settlement will be a dark cloud hanging over City Hall for decades to come,” she wrote. “Buying this property doesn’t fix any of its problems.”
The planned settlement would not end the litigation. Rather, it would remove Cisterra and CGA Capital from the city’s two lawsuits. Real estate broker Jason Hughes, the former mayoral adviser who volunteered his consulting services to the city and later collected $9.4 million from the two leases, remains a defendant.
Hughes has said he informed at least six city officials, including Faulconer, that he intended to seek payment for his consulting, though he also signed a confidential agreement with Cisterra in 2014 to work on real estate deals to their mutual benefit.
“Mr. Hughes is not part of the city’s full-scale retreat because he did nothing wrong,” defense attorney Michael Attanasio said by email. “He looks forward to his day in court.”
Several contractors also remain defendants in the city’s lawsuits. They worked on the Ash Street property before the building was evacuated due to multiple asbestos violations issued by county regulators.
The cases are scheduled for trial early next year.
A separate lawsuit filed against the city two years ago by taxpayer John Gordon is not part of the proposed settlement.
Gordon, a San Diego restaurant consultant, filed his lawsuit in August 2020, alleging that the Ash Street lease violated the state constitution by indebting the city without a public vote.
Lawyers for Gordon said the settlement announced Monday is not likely to affect their case, which is being heard by a different judge.
“It just compounds the problem,” Gordon attorney Michael Aguirre said outside the news conference. “I would like to ask them not to do it.”
The city also faces dozens of legal claims from city employees and contractors who allege they were wrongly exposed to cancercausing asbestos while they were inside the Ash Street property.
The lease-to-own contract for 101 Ash St. was recommended by the Faulconer administration and approved by the council in 2016, one year after the city acquired the Civic Center Plaza in a similar arrangement.
It was supposed to cost the city $534,000 a month for 20 years — or $128 million — and save taxpayers $44 million by consolidating city employees into a single building and closing out other leased office space. But the 19-story office tower vacated by Sempra in 2015 has been unusable for all but a few weeks due to asbestos and other issues.
The city paid more than $23 million in monthly rent before Faulconer suspended lease payments in 2020. It also spent more than $30 million to repair and maintain the property, which remains unsafe to occupy.
The Ash Street and Civic Center Plaza transactions are now the subject of a criminal probe by District Attorney Summer Stephan, whose investigators executed at least five search warrants at offices run by Cisterra and Hughes last fall.