USA News

As settlement talks persist, new details emerge on city’s Ash Street lease

The city of San Diego’s deal to acquire the former Sempra Energy headquarters at 101 Ash St. was anything but routine — a credit-tenant lease for $92 million secured by a property appraised at $67 million.

Now Mayor Todd Gloria and a majority of the City Council appear poised to approve one of the most common dispositions in American civil jurisprudence: settling the dispute out of court.

City officials were preparing for a press conference last Tuesday as the City Council met in closed session to discuss the Ash Street lawsuit and a similar legal complaint filed over an earlier credit-tenant lease for the nearby Civic Center Plaza.

But the press event was canceled without explanation in mid-afternoon. When the council adjourned, officials reported that no action had been taken on the two city lawsuits.

That may change as mediation discussions push forward between lawyers representing the city, its landlord, financiers and other advisers.

But even if out-of-court settlements are reached — which continues to be expected, according to one senior official who spoke privately — a third and separate lawsuit against the city is headed for trial.

That complaint, filed in August 2020 by San Diego taxpayer John Gordon, claims the Ash Street lease violates the California constitution because the city paid millions of dollars for a building it could not occupy.

“There is a fundamental misunderstanding of what this transaction involved,” former San Diego City Attorney Michael Aguirre, who represents Gordon, told the council last week.

“The lease was unconditional; the city had to pay no matter what,” he said. “The only way to comply with Article 16, Section 18 (of the state constitution) is if the city gets comparable value for each year’s installment, and we know that is not happening.”

The Gordon lawsuit, which survived two dismissal attempts by the City Attorney’s Office, asserts that the Ash Street lease must be voided because it conflicts on its face with the state constitution.

The city’s two cases are asking a judge to void the leases due to undisclosed conflicts of interest and award various damages.

Short of that, the city wants the court to rewrite the Ash Street deal to allow San Diego to withhold rent payments until the building can be occupied.

‘Hell or high water’

Generally, credit tenant leases are secured by deeds of trust. But they are typically valued on the amount a tenant is able to pay — not on the amount the property under contract is worth.

They are also known as “hell or high water” leases because the tenants are required to pay virtually no matter what.

In the 101 Ash St. deal, the city assumed all liability for the property’s condition, including hazardous materials and falling mechanical systems, without the benefit of an independent inspection.

“Tenant waives all rights now or hereafter confirmed by statute or otherwise to quit, to terminate or surrender this lease, or to any abatement or deferment of rent,” the 2016 lease states.

The city agreed to pay $535,000 a month for 20 years — a total of $128 million — even though an appraisal done a few months earlier concluded the 19-story high rise was worth just over $67 million.

The payments translated to an annual interest rate of 7.25 percent on a 20-year loan for $67 million — roughly double the 3.65 percent average for a typical mortgage in 2016.

In 2015, San Diego agreed to pay $270,000 a month — or $3.2 million per year — for the Civic Center Plaza, but with annual 2.5 percent increases.

Those terms pushed the city’s total obligation past $82 million for the building, which had been appraised at $45 million. It generally equated to a 6.5 percent fixed rate on a 30-year mortgage.

The Ash Street property has been vacant for all but a few weeks since Sempra moved out of the building in 2015. In 2020, a consultant said it needed $115 million in repairs before it could be safely occupied.

The Civic Center Plaza also was acquired “as-is,” but the city has been a tenant there for decades and the property remains in satisfactory condition.

The city suspended the monthly payments on the Ash Street office tower in September 2020, a few weeks after the Gordon case was filed. The landlord never moved to retake possession of the building.

When the city stopped making monthly payments on Civic Center Plaza last year, the landlord quickly threatened to evict city employees from the building and city officials soon reinstated the monthly payments.

Corruption allegations

The targets of the city’s lawsuits are business entities created by Cisterra Development of San Diego and CGA Capital of Maryland.

They also include real estate broker Jason Hughes, who described himself as a volunteer adviser to former Mayor Kevin Faulconer, even though he made $9.4 million from the two leases.

The city’s legal complaints allege violations of state anti-corruption laws because, the city says, the defendants did not publicly disclose that Hughes earned millions of dollars from deals he helped the city negotiate.

Hughes has said in his defense that he informed at least six city officials, including the former mayor and his chief of staff, that he planned to seek compensation for his expertise.

The city is asking a judge to void the contracts and award damages and other costs. If the Ash Street lease is not voided, the city wants the court to rewrite the terms to allow the city to withhold payments until the property can be safely occupied.

Lawyers for Cisterra and CGA Capital argued that the Ash Street property was in good condition when the city took over the building.

They said city work crews exposed long-dormant asbestos when they initiated renovations designed to increase the number of employees that could be housed in the building.

Aguirre said his client’s case is much more straightforward.

The Gordon lawsuit claims that the credit tenant lease violates the state constitution because cities and counties are prohibited from paying for services during any year in which they do not receive a direct benefit.

With the Ash Street building unsafe to occupy, the city is receiving no benefit from its investment, the Gordon case claims.

Among other evidence, Aguirre cited an independent legal opinion prepared for CGA Capital specifically finding that municipalities cannot spend public money that fails to secure a direct benefit.

“The obligation to pay rent is contingent on, and in consideration of, the city-tenant’s use and enjoyment for that period,” states the opinion from Los Angeles law firm Richards Watson Gershon.

The City Attorney’s Office declined to explain why it has not based its claims on the alleged constitutional violation.

The attempt to negotiate a settlement to the Ash Street and Civic Center Plaza cases is not new. The claims have been in mediation since early last year, court records show.

‘An unfortunate transaction’

Gloria and City Attorney Mara Elliott say they were never told about the payments to Hughes.

“From the beginning, the public and the members of the then-City Council, including myself, were deceived,” said Gloria, who was a councilman in 2016 and made the initial motion to approve the Ash Street lease, in a June 2021 press release.

“Questions still remain about who else knew of the secret payment to Jason Hughes and what other laws may have been broken,” Elliott said in the same news release. “We will continue to dig for answers and to use every tool we can to return taxpayer funds to the city treasury.”

But any settlement appears likely to include significant concessions to Cisterra and CGA Capital, meaning buyouts of the two leases or an agreement to void the original deals and sell the two properties to the city.

The San Diego Union-Tribune reported last week that the city recently ordered title searches for the two buildings — a step that generally is taken only when a sale or purchase is imminent.

It’s not clear what would happen to the Gordon lawsuit if the city agrees to settle its two cases out of court. The complaint is before a different judge.

Earlier this month, attorneys for the city of San Diego filed a motion to consolidate all three lawsuits into a single proceeding before Judge Timothy Taylor.

The city said the move is designed to save time and money — and to avoid potentially conflicting decisions.

A hearing on that matter is scheduled July 22.

In February, just before the council began settlement discussions, Aguirre proposed a resolution to his case that called for the city to walk away from the Ash Street property.

The City Attorney’s Office never responded to the offer.

During the public portion of the council meeting last Tuesday, several speakers urged the council not to approve any settlement of the Ash Street case.

“This is an unfortunate transaction that is costing taxpayers,” San Diego resident Paul Krueger told the council. “It will be $200 million by the time this thing is all wound down and we still don’t know how and why exactly it happened and who is responsible.”



File source

Tags
Show More

Related Articles

Back to top button
Close