One of the major failures in relying on the city of San Diego spending more than $200 million on the still-uninhabited office tower at 101 Ash Street is that the city relied on the valuation paid by the company selling the property. That’s what happened.
Former Mayor Kevin Faulconer and the San Diego City Council once leased the high-rise building eight years ago, and the $67 million valuation created on behalf of Systerra Development before subsequently buying the rental property in 2022. was not verified either.
San Diego officials are currently considering a new policy that would require the city to undergo an independent evaluation before moving forward with large real estate transactions.
The idea is one of about 20 formal recommendations that have yet to be implemented, despite being raised in four separate reports issued by the San Diego City Auditor in 2012. be.
Earlier this month, the City Council’s Land Use and Housing Committee unanimously recommended that councilors adopt 23 policy changes that would help prevent future real estate failures like the 101 Ash Street deal.
“I feel like it’s a new day for the real estate sector,” said Lucy Contreras, Penny Mouse’s former chief of staff. She was hired by Mayor Todd Gloria in 2021 and worked on restructuring the city’s Department of Real Estate Assets until she was fired last year. .
“These revised policies are the culmination of a tremendous amount of effort and collaboration, and if approved, will require multiple audit recommendations from process to implementation,” Contreras told the committee.
The proposed changes go far beyond ensuring the city has an independent appraisal of properties it considers renting or purchasing.
These include renaming the “portfolio management plan” to the “real estate management plan” and requiring the department to review and update the document every two years and make it available to city council.
The new rules also establish clearer guidelines for acquisitions and require them to be followed, in an effort to promote transparency. Nonprofits that rent public space will have to meet stricter eligibility rules and follow stricter guidelines.
Also, in another indication of what went wrong in the Ash Street deal, contractors and advisors who provide “material” information regarding real estate transactions will be required to file financial disclosures. Dew.
Jason Hughes, who advised Mr. Faulconer on the lease at 101 Ash Street and another deal for the nearby Civic Center Plaza, filed a disclaimer of conflict of interest after collecting $9.4 million in fees last year. Pleaded guilty to the crime. Hughes was required to repay $9.4 million to the city, pay a $400 fine and serve one year of summary probation.
The updated policy also calls for a more complete staff report to be submitted to Congress before voting on property acquisitions. Regarding the Ash Street deal and other incidents, councilors said they were not given all the information they needed to make good decisions.
The policy update also requires real estate staff to complete a due diligence checklist for all notable leases and purchases. The checklist must also be provided to and evaluated by the city’s independent budget analyst.
The measure, which has not yet been formally adopted, was adopted earlier this year when Gloria pushed for a long-term lease for a warehouse north of downtown to house a large homeless shelter.
Gloria recommended leasing the vacant property for 35 years at $3 million a year, with rent increases of 3 percent each year. Independent budget analyst Charles Modica said in a report that the cost of the proposed lease is well above market rates.
The project also faced a number of problems beyond price, and has since stalled.
The various measures were all laid out in a report issued by the city’s independent auditor over a 10-year period starting in 2012.
The 2012 and 2018 reports are so-called performance audits, regular reviews of the department’s practices and operations aimed at identifying weaknesses and recommending improvements.
But in 2021, City Auditor Andy Hanau released a scathing report examining a series of questionable real estate transactions that occurred primarily under the Faulconer administration.
The report went far beyond Ash Street, which was rented and purchased without an independent assessment and has been unoccupied due to repeated asbestos violations and other issues.
Following Gloria’s recommendation, the San Diego City Council will pay 100 cents on the dollar to buy the leased land for more than $86 million in 2022, despite City Attorney Mara Elliott’s opposition to the settlement. agreed. She wanted to take the case against Cistella and others to trial.
Combined with $24 million in rent payments to date, approximately $30 million in renovation costs, and tens of millions of dollars in maintenance costs that will continue beyond 2050, legal fees, and security deposit payments, taxpayers will have to pay for the building, which is currently unusable. It would ultimately cost more than $200 million. .
The 2021 audit also examined issues such as the city’s purchase of a failed indoor skydiving center without the benefit of an appraisal, the lease for a corporate yard in Kearny Mesa that was millions of dollars more expensive than city officials estimated, and Palm City’s The acquisition of motels was also investigated.
All of these deals were included in a 2020 report by the San Diego Union-Tribune that examined the troubled history of San Diego’s real estate industry. In 2022, auditors released another investigation into the city’s rental management practices.
However, even though all four audit findings included specific recommendations (some of which were observed by the Mayor and his predecessor), the recommendations remain not incorporated into City Council policy. .
In the weeks and months following the 2022 audit, three City Council policy updates were exchanged between various City officials and departments.
The amendment was submitted to the City Council’s Land Use and Housing Committee last October and was widely discussed.
But Gloria administration officials sought additional opinions from City Councilman Joe LaCava and an unidentified consultant before revisiting the issue.
But the next month, Gloria reorganized the real estate department, firing Maus after just two years and consolidating the entire office into the economic development department.
Changes in leadership further delayed implementation of the proposed policy changes. But the City Council still plans to consider the update this year.
