San Diego Settles Legal Case Involving Downtown Office Tower It Bought But Can’t Occupy

Lou Hirsh

July 28, 2022

City Agrees to Pay Landlord $132 Million To Exit Lease-to-Own Deals and Take Ownership of Two Buildings

San Diego officials approved a $132 million settlement under which the city will take ownership of two downtown office towers purchased in lease-to-own deals, including a building that the city was unable to occupy after it was found to contain asbestos.

The settlement, proposed by Mayor Todd Gloria and approved 6-3 this week by San Diego Council, was designed to end a two-year legal dispute with the towers’ owner that erupted after the city stopped paying rent on the downtown buildings at 101 Ash St. and 1200 Third Ave. in 2020.

The payment to Cisterra Development is also meant to put aside a situation that exposed flaws in the way the city does due diligence on properties it acquires, according to a city auditor's report, as the city looks to reform those policies.

“Let’s be clear, continuing this litigation does not serve our city well,” Gloria said during City Council’s July 26 meeting before the vote to approve the settlement. “Before you today is the opportunity to put this civic failure behind us.”

Legal fallout came after the city purchased the Ash Street tower “as is” in 2016, but was forced to evacuate city employees in early 2019 after asbestos was found to be floating through the building in the midst of a city renovation shortly after workers had begun to occupy the building.

The city sought to terminate long-term lease-to-own arrangements with San Diego-based Cisterra for the Ash Street tower as well as the Third Avenue building, acquired in 2015 under similar arrangements and currently occupied. It stopped paying rent on the properties in late 2020, spurring Cisterra and its lender, CGA Capital, to sue the city for unpaid rent, though the city resumed payments on the Third Avenue building in late 2021.

San Diego initially sought to terminate the lease-to-own deals on grounds that the volunteer real estate adviser to then-Mayor Kevin Faulconer allegedly received $9.4 million in undisclosed payments from the seller for the deals. While the city said that represented a conflict of interest, the attorney for the adviser, broker Jason Hughes, maintains that multiple city officials were informed of the payment arrangements well before the deals were completed.

Costly Termination

The city will now take over the buildings, spanning about two downtown blocks in total, by spending approximately $86 million to buy out the Ash Street lease and $46 million to exit the Third Avenue lease. Gloria said the city will examine redevelopment or renovations among other alternatives for the properties.

“The mayor and his team deserve credit for stepping up and finding a reasonable solution to a problem that otherwise would have taken years to resolve and likely created hundreds of millions of dollars of liability for the city,” Cisterra attorney Michael Riney said in a statement following the settlement.
The settlement was opposed by the San Diego City Attorney’s Office, which said it did not address actions of Cisterra and Hughes at the time the deals were being planned in 2015 and 2016. City Attorney Mara Elliott also said the settlement does not allow the city to recoup considerable legal costs that have mounted over the past two years.

Other legal matters are still pending regarding the building purchases. They include a taxpayer’s lawsuit seeking to prevent the city from spending more money on the Ash Street building and a probe being conducted by the county District Attorney’s Office concerning the arrangements between Cisterra and Hughes. Both Cisterra and Hughes maintain there were no improper actions.

With the settlement, the city is seeking to cut losses on its involvement particularly with the 21-story Ash Street tower, which was built in 1967 and served as the headquarters of Sempra Energy until the global utilities provider relocated to a new East Village building in 2015.

The 20-year lease-to-own deal for the Ash Street building was intended to save the city millions of dollars in leasing costs. Instead, as of September 2021 it has cost the city more than $50 million in repair, lease, legal and other costs for a building it has yet to occupy.

A consultant hired by the city reported in 2020 that the Ash Street building needs at least $115 million in additional repairs and upgrades before city workers can safely move into it. The building was appraised at $67 million before the city agreed to the lease-to-own deal in 2016.