San Diego Union-Tribune (Sunday)
TESTIMONY DISCLOSES WHAT CITY WASN’T TOLD ABOUT DEAL
Exec acknowledges Ash St. transaction involved millions in payments to individuals
Five years ago next month, as San Diego’s elected officials considered leasing the former Sempra Energy headquarters at 101 Ash St., then-councilmember Todd Gloria asked the city’s top real estate expert why they weren’t buying the property outright.
The Real Estate Assets Director at the time, Cybele Thompson, said the timing of the deal made a direct purchase all but impossible. She then invited Jason Wood of Cisterra Development, the city’s would-be landlord in the complicated deal, to explain further.
“Cisterra can maintain the rent presented to you today, if approved today, despite the rising interest rates, and this structure affords the city a win-win,” Wood told the council, reading from a prepared statement as he answered Gloria’s question.
“Everything is lined up for this to become a reality, and any delay or attempt to renegotiate could seriously jeopardize that transaction and the savings that the city would secure,” he said.
That explanation satisfied Gloria, who quickly made a motion to approve the contract.
But according to hours of sworn testimony the Cisterra executive gave in a deposition on Sept. 14, Wood did not disclose many facts about the Ash Street transaction when he addressed the City Council in 2016.
Some of the details Wood acknowl
edged under oath:
Jason Hughes, who held himself out as a volunteer adviser to the city, was under contract with Cisterra and stood to earn millions of dollars once the lease was signed.
Wood and his boss, Cisterra founder Steven Black, both understood that Hughes was working with Cisterra while advising the city, but Wood said he saw no conflict of interest with the arrangement.
Wood made $1.3 million as soon as the deal closed; his boss collected more than four times that amount.
Cisterra’s lender declined to directly pay a “finder’s fee” to Hughes for his role in the Ash Street deal and a similar lease for the nearby Civic Center Plaza; as a result, the payments were rolled into the loans and obscured from the public record.
Wood, a graduate of the Wharton School at the University of Pennsylvania, said he did not know if the city might have trouble selling $72 million worth of bonds to buy a building that had appraised for $67 million.
Many of the revelations have been reported previously by The San Diego Union-tribune and other news outlets, with information trickling out over recent months through California Public Records Act requests, leaks and court proceedings.
But the Wood deposition is the first sworn testimony — evidence presented under the penalty of perjury — from a critical insider in a deal that so far has cost taxpayers at least $60 million for a 19-story high rise that cannot be safely occupied.
When the San Diego City Council embraced Gloria’s motion to approve the leaseto-own contract, council members were told the city would move hundreds of employees into the office tower by July 2017.
Instead, the building remains vacant due to asbestos and a host of other problems.
The city now dozens is confronting of legal claims alleging exposure to asbestos and other charges and little progress has been made toward the $115 million in repairs and upgrades the building needs before it can be occupied.
On advice of counsel
The initial transcript of the daylong Wood deposition, held in a West Broadway conference room with at least 10 lawyers present, shows how divisive the Ash Street lease has become — and how much is at stake.
Wood was deposed by lawyers representing John Gordon, a San Diego resident who more than a year ago sued the city, Cisterra, and others, alleging that the acquisition was illegal because it indebted the city without a public vote.
The suit seeks the return of tens of millions of dollars to the city treasury.
The Wood deposition was led by Michael Aguirre, the former San Diego city attorney now representing Gordon.
He was repeatedly interrupted by objections from lawyers for the defendants and sniping between various attorneys.
For instance, Wood refused to say in the deposition whether he had discussed Cisterra’s relationship with Hughes with an attorney.
“He’s not going to answer a question about whether he consulted an attorney about a particular subject, Michael,” Cisterra lawyer Michael Riney told Aguirre. “Why don’t you ask a question that doesn’t call for attorney-client privileged communications? You know better than that.”
Aguirre tried again: “Did you consult with legal counsel regarding paying Mr. Hughes the amount that you have testified to?” he asked the Cisterra executive.
Wood did not budge. “On the advice of counsel, I will not answer,” he replied.
Hughes, a well-known tenants’ representative in commercial leasing, became a real estate consultant for former Mayor Bob Filner and maintained a similar relationship when Kevin Faulconer was elected mayor in 2014.
The broker and both mayors told the public that Hughes was serving as a volunteer, but Wood made it clear in the deposition it was not true.
He said Hughes was due to receive 45 percent of estimated “excess loan funds” — an agreement that translated to $4.4 million when the Ash Street deal closed.
Meanwhile, Black agreed to share actual profits with Wood on an 82-18 basis, Wood testified.
That resulted in the Cisterra founder collecting almost $6 million while he received $1.3 million, Wood added.
The Ash Street deal was virtually identical to a 2015 agreement the city reached with Cisterra in a lease-toown contract for the Civic Center Plaza, which netted Hughes more than $5 million, Wood stated.
“It was his idea,” the witness explained, referring to Hughes.
Hughes, who was paid just over $9.4 million for the two leases he helped the city negotiate, has said through his attorney that he repeatedly told city officials he expected to be compensated for his work advising the city on its real estate needs.
“I have previously made clear in correspondence to the city that any alternative deal would require me to play a few different roles due to the complexity and time demand,” Hughes wrote to Thompson in 2014. “As a result, I would seek to be paid customary compensation from any other parties in the transaction.”
Unknown to Thompson or other city officials, Hughes had signed an agreement with Cisterra two days earlier preventing him from disclosing that he was consulting with Cisterra on real estate transactions, the Voice of San Diego reported this month.
In all, Cisterra borrowed $92 million to close the Ash Street deal. Much of the proceeds went to former owners San Diego investors Sandor Shapery and Douglas Manchester, but millions of dollars also covered loan costs, insurance, legal fees and other expenses, Wood testified.
All told, Cisterra and Hughes received at least $11.2 million, according to the Wood deposition.
When the deal closed on Jan. 3, 2017, Cisterra assigned the $535,000 monthly lease payments to its lender, CGA Capital. The contract called for the lender to collect $128 million from the city over the next 20 years.
Manchester had purchased 49 percent of the property in 2015 for $20 million. The building was first appraised for $62 million in 2016, but Wood said the valuation was raised to $67.1 million after he discussed the assessment with the independent appraiser.
“I’m not comfortable with the word ‘persuade,’ ” Wood testified when asked if he attempted to influence the appraisal. “We wanted to talk to him about some of his assumptions to make sure that, that he was well-informed.”
Aguirre tried to get Wood to discuss the viability of the deal from a taxpayer’s point of view.
“You think investors would buy $72 million bonds, worth of bonds, for a property that was worth only $67 million?” Aguirre asked.
“I don’t know,” Wood said, after another objection by his lawyer.
‘Intentionally deceived’
City Attorney Mara Elliott sued Cisterra and the others nearly a year ago, two months after Gordon filed his complaint, which prompted Wood’s deposition on Sept. 14.
The city’s suit asked a judge to validate Faulconer’s September 2020 decision to stop paying the $535,000 monthly lease payments, which by then totaled more than $23 million for the vacant Ash Street building.
In May, Elliott’s top assistant told the City Council that an internal review of the transaction was completed and the findings had been referred to “local, state and federal law enforcement agencies along with a request for a thorough and independent investigation.”
By late June, after the Union-tribune reported that Hughes had been paid more than $9.4 million for his work on the Ash Street and Civic Center Plaza leases, the City Attorney’s Office added Hughes to the defendants in the 2020 case and amended the complaint in order to void both transactions.
“We look forward to the opportunity to question all of the parties under oath,” Elliott spokesperson Hilary Nemchik said in a statement.
Gloria, who left the City Council weeks after the Ash Street lease was approved, served two terms in the California Assembly before being elected mayor last November.
The Mayor’s Office said Friday that Gloria supports Elliott’s handling of the lease.
“The mayor continues to believe that the city was intentionally deceived and that law enforcement should aggressively investigate the 101 Ash Street transaction,” Deputy Chief of Staff Nick Serrano wrote in a statement. “He is also confident in the city attorney’s litigation strategy being the best path to unravel this deal and recoup taxpayer dollars.”
It is not clear what became of Elliott’s call for an independent investigation. The District Attorney’s Office, the state Attorney General’s Office and the U.S. Attorney’s Office all declined to say whether they are investigating the transaction.