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

San Diego City deal to acquire former Sempra Energy headquarters at 101 Ash St. It was nothing more than a routine – a $ 92 million tenant loan secured by a property valued at $ 67 million.

Now Mayor Todd Gloria and the City Council majority seem ready to pass one of the most common provisions in American political case law: out-of-court settlement.

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

But the press event was canceled without explanation in the afternoon. When the council adjourned, officials said no action had been taken against the two cities.

This may change as mediation discussions are promoted between the lawyers representing the city, its owner, financiers and other advisers.

But even if out-of-court settlements are reached – something that continues to be expected, according to a senior official who spoke privately – a third and separate lawsuit against the city is pending.

The complaint, filed in August 2020 by San Diego taxpayer John Gordon, alleges that 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 misconception about 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 for whatever happened,” he said. “The only way to comply with Article 16, Section 18 (of the state constitution) is if the city acquires comparable value for each year’s installment and we know that is not the case.”

The Gordon lawsuit, which survived two dismissal attempts by the city’s Attorney’s Office, argues that the Ash Street lease should be canceled because it violates the state constitution.

The two city cases are asking a judge to cancel the leases due to conflicts of interest that have not been disclosed and to award various damages.

In short, the city wants the court to rewrite the Ash Street deal to allow San Diego to withhold rent payments until the building is occupied.

“Hell or high water”

In general, credit tenants’ leases are secured by trust transactions. But they are usually valued based on how much a tenant can pay – not on how much the property is worth under a contract.

They are also known as “hell or high” rentals because tenants are required to pay almost no matter what.

Under the 101 Ash St. agreement, the city assumed full responsibility for the condition of the property, including hazardous materials and falling mechanical systems, without the benefit of an independent inspection.

“The tenant waives any right now or hereinafter confirmed by law or otherwise to waive, terminate or waive this lease or any reduction or deferral of the lease,” the 2016 lease states.

The city agreed to pay $ 535,000 a month for 20 years – a total of $ 128 million – although an estimate made a few months earlier concluded that the 19-story climb was worth just over $ 67 million.

Payments translated into an annual interest rate of 7.25 percent for a $ 67 million 20-year loan – about double the average of 3.65 percent for a standard 2016 mortgage.

In 2015, San Diego agreed to pay $ 270,000 a month – or $ 3.2 million a year – for Civic Center Plaza, but with an annual increase of 2.5 percent.

These terms pushed the city’s total liability to exceed $ 82 million for the building, which was valued at $ 45 million. It was generally equivalent to a fixed interest rate of 6.5 percent 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 he needed $ 115 million in repairs to be able to stay safely.

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

The city suspended monthly payments at the Ash Street office tower in September 2020, just weeks after the Gordon case was filed. The owner never moved to take possession of the building again.

When the city stopped making monthly payments at Civic Center Plaza last year, the owner quickly threatened to evict city officials from the building, and city officials soon resumed monthly payments.

Allegations of corruption

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

They also include real estate agent Jason Hughes, who described himself as a volunteer adviser to former mayor Kevin Faulconer, despite earning $ 9.4 million from the two leases.

The city’s lawsuits allege that state anti-corruption laws are being violated because, according to the city, the defendants did not publicly reveal that Hughes earned millions of dollars from deals that helped the city negotiate.

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

The city is asking a judge to annul the contracts and award damages and other costs. If the Ash Street lease is not canceled, the city is asking the court to rewrite the terms to allow the city to withhold payments until the property is secured.

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

The city’s crews said they had exposed asbestos that was dormant when renovations began that were designed to increase the number of workers that could be housed in the building.

Aguirre said his client’s case is much clearer.

The Gordon lawsuit alleges that hiring a credit tenant violates the state constitution because cities and counties are barred from paying for services during any year they do not receive immediate benefit.

As the Ash Street building is not safe to occupy, the city is not reaping the benefits of its investment, the Gordon case claims.

Among other evidence, Aguirre cited an independent legal opinion on CGA Capital, which specifically found that municipalities could not spend public money that failed to provide immediate benefits.

“The obligation to pay rent depends, and taking into account, the use and enjoyment of the city tenant for that period,” said Los Angeles-based law firm Richards Watson Gershon.

The city prosecutor’s office declined to explain why it did not base its allegations on the alleged constitutional violation.

Efforts to negotiate a settlement on the Ash Street and Civic Center Plaza cases are not new. The claims have been mediated since the beginning of last year, court records show.

“An unfortunate transaction”

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

“From the beginning, the public and members of the then City Council, including me, were deceived,” said Gloria, who was a consultant in 2016 and made the initial proposal to approve Ash Street lease to a Press June 2021. release.

“Questions remain about who else knew about Jason Hughes’s secret payment and what other laws may have been breached,” Elliott told the same press release. “We will continue to look for answers and use every tool we can to return the taxpayers’ funds to the city’s public coffers.”

However, any settlement seems likely to involve significant concessions to Cisterra and CGA Capital, which would mean the acquisition of the two leases or an agreement to cancel the original agreements and sell the two properties in the city.

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

It is unclear what would have happened to Gordon’s lawsuit if the city had agreed to settle its two cases out of court. The complaint is before a different judge.

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

The city said the move was designed to save time and money – and to avoid possible conflicting decisions.

The hearing on the matter is scheduled for July 22.

In February, shortly before the council began discussions on the settlement, Aguirre proposed a resolution on his case calling on the city to move away from Ash Street ownership.

The city prosecutor’s office never responded to the offer.

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

“This is an unfortunate transaction that costs taxpayers,” San Diego resident Paul Krueger told the council. “It will be $ 200 million until this whole thing is completed and we still do not know exactly how and why it happened and who is responsible.”

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

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