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Former San Diego Mayor Kevin Faulconer directed the city to proceed with a more expensive lease of the 101 Ash St. high-rise rather than an outright purchase, according to interviews former senior advisers gave as part of an investigation by the city auditor.
The decision added at least $17 million to the cost of the 2016 deal, according to the Independent Budget Analyst. It also kept the name of Faulconer’s longtime political supporter, developer Douglas Manchester, off the agreement and the staff reports that were sent to the City Council.
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“Purchasing the building with bonds was the best option, because the bond rates were low,” former Deputy Chief Operating Officer Stacey LoMedico told city auditors earlier this year.
“The mayor had concerns about buying the building from Manchester due to the political optics and concerns about using bonds to finance the purchase,” she said.
The San Diego Union-Tribune obtained summary notes from the auditors who interviewed Faulconer administration officials about a handful of real estate deals pursued by the two-term mayor who left office last year.
The documents are generally three- to five-page briefings that outline the responses provided by people interviewed for the audit, which was released in July and sharply criticized city leaders for their handling of the Ash Street property and other properties.
The former Sempra Energy headquarters was appraised for $67.5 million by the former owners before the city agreed to pay $535,000 a month over 20 years, or $128 million, for the building.
City officials failed to perform any independent assessment of the property’s condition ahead of the deal, leaving taxpayers responsible for repairs and upgrades that one consultant later said would cost $115 million or more.
The building has been vacant and unsafe to occupy for years due to asbestos and other issues — even though the city spent more than $60 million on lease payments, renovations and maintenance.
The report from City Auditor Andy Hanau concluded that the Faulconer administration misrepresented facts and withheld other information when they sought City Council approval to lease the Ash Street high-rise in 2016.
The auditors’ interviews with former officials illustrate the disparities in what senior aides thought — or were told — about city real estate practices.
Almost no one could explain how Cisterra Development entered the deal for the 19-story tower, an arrangement that made the company millions of dollars when the so-called double-escrow transaction closed five years ago next week.
Cisterra also brokered a similar contract for the Civic Center Plaza in 2015, when they acquired the office tower from its longtime owners and immediately transferred it to the city under a long-term lease.
Real estate broker Jason Hughes was a key player in both arrangements, former employees told the auditors.
The expert in landlord-tenant transactions had told people he was volunteering his services to Faulconer but documents that were disclosed earlier this year show he actually had a secret contract with Cisterra.
LoMedico said she thought Hughes was working for the city at no cost because he hoped to get paid later.
“Stacey did not have any concerns about (Hughes’s) involvement at the time, although looking back on it she does,” the auditors’ notes say. “After the acquisition, Jason thought he would get contracts with the city.”
Earlier this year, Hughes acknowledged collecting $9.4 million in fees from Cisterra for his work on Ash Street and Civic Center Plaza leases.
Both deals are now the subject of a criminal investigation opened by District Attorney Summer Stephan. City Attorney Mara Elliott sued Cisterra and Hughes for fraud and is seeking to void the contracts in civil court.
The auditors’ summary notes also show that most of Faulconer’s key advisers were not interviewed by outside law firms hired to examine how the city ended up buying a mid-century high rise without an independent appraisal or inspection.
“Mary does not know how Cisterra became involved in the 101 Ash transaction,” the auditor’s office said in a summary of an interview with former Chief Financial Officer Mary Lewis.
“It doesn’t make sense (that) the sellers would not sell directly to the city,” the report quoted the departed CFO. “Money is money.”
Lewis told auditors the city could issue bonds for between $70 million and $75 million to buy the property outright. She even drafted a report to the City Council outlining the plan.
Faulconer, who did not make himself available to city auditors for an interview, said through his attorney that the lease-purchase agreement was a good deal for the city.
“Based on legal advice from staff, the best option to acquire the building was through a lease-to-own structure because the purchase method came with legal risk, and therefore a lease-to-own agreement was recommended to the City Council for approval,” said San Diego attorney Ed Chapin, who represents the former mayor.
“The mayor recognized that members of the City Council may have questions regarding Mr. Manchester due to their divergent political positions, but that would be the case regardless of the method of acquisition,” Chapin said.
Faulconer’s attorney said his client did not speak to city auditors because his advisers knew more about the transaction than he did.
“City staff are better positioned to provide all the necessary information the Auditor’s Office needs to conduct (its) review and make recommendations on how the organization can improve,” Chapin said.
The Union-Tribune requested copies of summary notes from current and former city employees interviewed by the Auditor’s Office. The City Attorney’s Office declined to release auditor notes of interviews with city lawyers.
“Senior Deputy City Attorney David J. Karlin is the individual who determined these records are exempt under the California Public Records Act, and has asserted the privileges and protections on behalf of the city of San Diego and the San Diego City Attorney’s Office,” the Auditor’s Office said in a statement last week.
A spokeswoman for Elliott said the attorneys working on the Ash Street lease and subsequent litigation were not available to respond to questions.
The City Attorney’s Office suggested questions be posed to Elliott’s predecessor, Jan Goldsmith, who was the city attorney when the deal was negotiated and whose staff prepared the lease that was signed by Elliott’s staff seven days after she took office.
“The work on Ash Street and (Civic Center Plaza) started in 2014 and concluded by November 2016,” spokeswoman Leslie Wolf Branscomb said by email. “The current city attorney administration cannot speak to the work performed by the prior city attorney administration.”
Branscomb also said Elliott had no role in the decision by the independent lawyers not to interview key mayoral advisers.
“To be clear, the City Attorney’s Office did not ‘control’ the work of the city’s outside law firms who were free to proceed with their review and analysis as they deemed appropriate,” she wrote.
Several Faulconer administration officials interviewed earlier this year said the City Attorney’s Office, or CAO, should have sounded an alarm over the “as-is” language or other terms in the Ash Street agreement.
“The CAO has a lot of power in the city because they have to sign off on all transactions and staff reports to City Council,” former Chief of Staff Kris Michell said. “They can and do stop deals and projects because they refuse to sign off.”
Stephen Puetz, who preceded Michell as Faulconer’s chief of staff, told auditors that the City Attorney’s Office was heavily involved in the 101 Ash St. acquisition.
“If the CAO is claiming they do not get involved, that’s not accurate,” Puetz said during his interview. “The CAO effectively killed deals often by refusing to sign off on contracts that they didn’t think were right.”
Puetz, who told auditors he would arrange for Faulconer to speak with auditors, also blamed others outside the Mayor’s Office for not acquiring the office tower through a straight purchase rather than agreeing to a lease-to-own arrangement.
“Either the City Attorney’s Office or someone in Finance (said) bonds were not an option,” he said. “The mayor trusted the people he worked with and took their recommendations and expertise to heart.”
Former chief operating officer Scott Chadwick, who preceded Michell before leaving San Diego for a similar city position in Carlsbad in 2018, said the mayor was ultimately responsible for the decisions to enter the long-term, costlier leases.
“Purchasing 101 Ash was a mayoral initiative,” the summary notes from Chadwick’s interview state. “In a strong-mayor form of government, all of the decisions fall under the mayor as he is both CEO and mayor.”
Chadwick said the former mayor preferred to reserve the use of bond financing for capital-improvement projects.
The former chief also placed blame on the City Attorney’s Office.
“Had staff told Scott to pump the brakes on moving forward with the transaction, Scott would have come to a halt on the acquisition because the main interest in acquiring 101 Ash was to save the city money,” the auditor notes say.
“In hindsight, Scott believes that the CAO should have advised him of the contract risks and the shortcomings of the building condition.”
The interview notes don’t specify whether Chadwick was referring to the Goldsmith administration or to Elliott. The city audit included a series of recommendations aimed at improving the way the San Diego officials process future real estate leases and purchases.
Mayor Todd Gloria agreed to implement each of the suggestions within his control, but the city attorney declined to adopt recommendations that would require her approval.
Elliott said the audit contained inaccuracies, its legal conclusions were incorrect and its assessments were based on speculation rather than fact.
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