City Council set to vote on 101 Ash, Civic Center Plaza settlement
The San Diego City Council is scheduled to vote Tuesday on a proposed settlement with Cisterra Development and lender CGA over the 101 Ash Street and Civic Center Plaza real estate deals.
The council decided last month to delay the vote on the settlement, referring the matter back to staff to allow for additional public review.
The proposed settlement would transfer ownership of the properties to the city for around $132 million. The decision last month to postpone the matter caused dozens of residents who wished to speak about the item to stream out of the City Council Chamber, momentarily disrupting the meeting.
"I requested the consideration of the proposed settlement agreement to be delayed for further review by the City Council and the public," Mayor Todd Gloria said in a statement in June. "While there is still no ideal outcome to this civic debacle, we have heard clearly that the public should be given more time to review the proposed settlement agreement in its entirety — including all accompanying documents and analyses — and so we are granting that request."
The proposed 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 with the city 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 as proposed, CGA would 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.
When employees began moving into the 101 Ash building following a 2017 lease-to-own deal, it was discovered that the property was unsafe for human occupation due to asbestos. Initially, city staff during Mayor Kevin Faulconer's administration described 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.
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.
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 earlier. "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 also urged the City Council to reject the settlement. A report from the office 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.
Under the proposed settlement, the city will be responsible for all remediation fees to get the building habitable.
According to a statement from the city, San Diego would be entitled to all insurance or third-party reimbursement related to the remediation of 101 Ash under the settlement and would "be able to determine the best course of action to garner the most value from building."
Steve Black, chairman of Cisterra Development, issued a statement saying, "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. 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 ... is the result of all parties working hard to find a fair compromise, which we believe has been achieved," he said.
Jason Hughes — a real estate broker who collected nearly $9.5 million for consulting work on the two leases — would remain a defendant in the city's lawsuit even if the city approves the settlement proposal.
The City Attorney's Office alleges 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 contends in the lawsuit that 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 arrangements.
Hughes' attorney, Michael Attanasio, said in a statement that Hughes' intention to receive compensation was disclosed at the time to a half-dozen city officials. He 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 — have been acknowledged by in court depositions, making it undisputed that the city was fully aware Hughes would be compensated. They also contend the city's claims against Hughes are legally invalid because they were filed beyond the statute of limitations.