Mayor Gloria reveals proposed settlement on 101 Ash Street real estate deal
Mayor Todd Gloria Monday announced a potential settlement with Cisterra Development and lender CGA over the 101 Ash Street and Civic Center Plaza real estate deals that would transfer ownership of the properties to the city.
The settlement — besides transferring ownership of the former Sempra Energy headquarters at 101 Ash St. and the Civic Center Plaza, housing more than 800 city employees — would refund the city $7.4 million in profits Cisterra made in its lease-to-own deal on the 101 Ash property, while allowing the company to keep its $6.2 million in profits from a similar deal with Civic Center Plaza.
In the deal, CGA will waive the "yield maintenance fee" of $11.7 million. The fee is a type of prepayment fee that borrowers pay to lenders to compensate for the loss of interest resulting from the prepayment of a loan or the calling in of a bond.
The San Diego City Council will discuss and vote on the proposed settlement next Monday.
"Because there was no possibility of an ideal outcome from this civic debacle, our aim was to reach a lawful, fair settlement that limits the city's liability and is in the best interests of taxpayers, which is what this proposed settlement is," Gloria said.
Gloria and Jay Goldstone, the city's chief operating officer, said that while some might like to pursue litigation against Cisterra and CGA "to the bitter end," the gamble of paying millions of dollars over the course of the next five to 10 years while the case and its appeals make their way through the courts — with the potential to lose and be on the hook for many millions more — was not a palatable one.
"I continue to feel deceived by the information provided to use at that time," Gloria said, referring to his membership on the council in 2016, when the deal was approved. "Ultimately, I do not believe (further litigation with Cisterra) is in the best interests of taxpayers."
Others disagreed that taking a settlement in which neither party was fully appeased was a good idea.
"This settlement will be a dark cloud hanging over City Hall for decades to come," Councilwoman Vivian Moreno said. "Buying this property doesn't fix any of its problems. There will be a never-ending stream of litigation and other costs stemming from the city's failure to defend San Diego taxpayers from fraud and deception.
"I am fully confident that if the city went to trial, we would prevail and shield taxpayers from further losses, while at the same time finally uncovering the truth of what happened," she said.
The San Diego City Attorney's Office is also expected to urge the city council to reject the settlement, according to a report drafted prior to Monday's hearing.
The report states that the settlement proposal "presents several significant disadvantages to the city and does not adequately protect the city's legal and financial interests."
Among its objections, the City Attorney's Office contends the agreement would allow Cisterra to retain its profits — which the report characterizes as "ill-gotten gains," that the settlement does not offer a cohesive plan for using the 101 Ash building going forward, and that the settlement precludes the city from pursuing further legal actions against Cisterra or CGA even if other alleged law violations are discovered in the future.
Additionally under the proposed settlement, the city will be responsible for all remediation fees to get the building habitable.
When employees began moving into the 101 Ash building, it was discovered that the property was unsafe for human occupation due to asbestos. Initially, city staff during Mayor Kevin Faulconer's administration presented the building as needing $5 million worth of repairs and retrofitting. The bill has already exceeded $26 million by 2020, and an independent review conducted after the deal was inked estimates $115 million more will be necessary — $136 million more than staff presented to council.
The city will be entitled to all insurance or third-party reimbursement related to the botched remediation of 101 Ash and "will be able to determine the best course of action to garner the most value from building," a city statement reads.
City Council President Sean Elo-Rivera expressed anger over the deals.
"The 101 Ash saga has been a civic tragedy that should infuriate every San Diegan," he said. "Lying millionaires and an incompetent previous administration put our city in a terrible position that has cost San Diego years of progress, millions of dollars and eroded public trust."
City Councilman Chris Cate said it was "time to close this chapter" and give taxpayers the "certainty of putting this bad deal behind us."
"Cisterra and our lender have participated with the city in confidential mediation discussions with a goal of resolving this complicated matter without the further uncertainty, expense and delay of ongoing litigation," said Steve Black, chairman of Cisterra Development. "We are pleased to have reached a settlement that opens the door for the city to redevelop the civic core of downtown San Diego.
"The city was a positive counterparty in those discussions and the resolution announced today is the result of all parties working hard to find a fair compromise, which we believe has been achieved," he said.
Gloria said nothing in the settlement would preclude the city and district attorneys from pursuing investigations against Jason Hughes — who facilitated the sale while allegedly pocketing nearly $9.5 million — his real estate brokerage Hughes Marino and other contractors.
"Law enforcement can — and should — continue investigations into anyone who may hold criminal liability as part of this transaction and its aftermath," Gloria said. "What this settlement does is put the needs of the city and its residents first."
The City Attorney's Office alleges in its ongoing litigation that Hughes represented himself to be a "special volunteer for real estate services" who was negotiating the building deals on the city's behalf for free "out of a sense of civic duty." But the city alleges he was actually earning millions of dollars, without notifying the city — an allegation Hughes' lawyers vehemently deny, insisting that multiple city officials were told of Hughes' compensation.
Hughes' attorney, Michael Attanasio, said in a statement that Hughes' intention to receive compensation was disclosed at the time to numerous city officials and called the settlement proposal a "retreat" by city officials.
"Jason Hughes is not a party to any settlements involving 101 Ash Street or Civic Center Plaza for one simple reason," Attanasio said. "He disclosed his intent to be compensated on both city transactions to six senior city officials, including the then-mayor, his chief-of-staff, and the most senior real estate official in city government, Cybele Thompson. Ms. Thompson signed a formal acknowledgment and agreement that approved the compensation plan transparently disclosed by Mr. Hughes. Mr. Hughes is not part of the city's full-scale retreat because he did nothing wrong. He looks forward to his day in court, away from the cynical machinations of career politicians desperate to cover up their own malfeasance."
Hughes' attorneys say the disclosures to city officials — including Faulconer — occurred between August and November 2014 and have been acknowledged by officials in court depositions, making it undisputed that the city was fully aware Hughes would be compensated.
Faulconer, in responding to an audit in 2020 that found San Diego had failed to follow best practices and undergo due diligence before purchasing and leasing buildings since 2015, pushed back on the claims.
"Protecting taxpayer dollars should always be the priority of city officials," he told City News Service. "Having fought to establish the Office of the City Auditor, I am a strong supporter of increased oversight, and it's clear that these matters call for additional independent review as recommended by the auditor.
"All the real estate transactions in question were reviewed by all branches of city government prior to their enactment and the adoption of these recommendations will further ensure accountability and transparency."
Gloria said his office would take accountability.
"The political move would be to push this off to the next administration," he said. "We're here because people put personal needs ahead of the people's. We will not do that."