San Diego city council members on Thursday were faced with a daunting set of options over what to do with its now-vacant highrise at 101 Ash Street. No matter which option they choose, it will cost taxpayers hundreds of millions of dollars and take years before the issue is resolved.
Recent reports obtained by NBC 7 Investigates show the city moved forward with the $127 million lease-to-own agreement in 2016 without conducting any independent inspections or review of conditions inside 101 Ash. At the same time, the contract included what independent investigators believed were “strong exculpatory provisions” in the agreement in favor of the seller. Those provisions prevent the city from any recourse, as well as penalizes the city if it chooses to refinance.
In a report presented to councilmembers, the city’s Independent Budget Analyst (IBA) called the 101 Ash Street lease a “horribly one-sided (in favor of the landlord) lease.”
To make matters worse, a new assessment found that the city would have to spend an additional $115 million to get the building up to code and safe for employees, a project that will take an up to four years to complete.
“The City now finds itself in a difficult financial predicament as we begin a challenging fiscal year adversely impacted by the current pandemic,” the IBA wrote.
During an August 6 special meeting, council members discussed options laid out by Mayor Kevin Faulconer and analyzed by the IBA.
Those options include:
Local
Stay the course: Move forward with the massive $115 million renovation of 101 Ash. The $115 million is in addition to $32 million in renovations that have already been completed. If selected, the city would spend over $145 million in renovations for a building it paid $127 million for during a lease to own deal with third-party Cisterra Partners who acted as a liaison in the purchase of 101 Ash with its owners Sandor Shapery and Doug “Papa Doug” Manchester.
If choosing this option, San Diego’s Independent Budget Analyst cautioned, “Unfortunately, this approach also means the City will have made lease payments on the building for seven or eight years before it can be safely occupied by employees.”
SELL AS-IS: Get out and sell the vacant and uninhabitable building for less than it bought it for. However, as the Independent Budget Analyst pointed out, option 2 isn’t without problems.
“The sale of an unsafe building in need of repair would likely result in a much lower sales price; proceeds from this sale are unlikely to recoup much of the borrowing costs; and it does not result in any additional office space for City employees,” reads the August 5 report.
COMPLETE RENOVATION, THEN SELL TO PRIVATE PARTY WITH AGREEMENT TO LEASE BACK: A third and, according to the IBA, most complex option is to complete the renovations and then sell the building to a buyer who would then agree to lease it to the city for employee office space. In this option, the IBA warned councilmembers that it would be difficult to “find a unique buyer in 2023 or 2024 for an older refurbished building interested in leasing the building back to the City.”
RENEGOTIATE WITH CISTERRA PARTNERS: Another option would be to renegotiate with Cisterra Partners. But as NBC 7 Investigates reported, provisions in the lease-to-own agreement make this very difficult and Cisterra has little, if any, motivation to do so.
Wrote the IBA, “It is not clear which of the numerous unfavorable provisions in the City’s lease agreement staff is proposing to eliminate and to what end? Cisterra appears to have little motivation to reopen a profitable lease that is very much written in their favor. More information is required to evaluate this option.”
WALK AWAY: The final option suggested by the Mayor’s Office is to walk away from the building and cut its losses, hundreds of millions of dollars of losses that is.
The IBA warned that in doing so, the city still would have to answer to the lease provisions that, according to one outside investigation report, favors Cisterra.
Added the IBA, “Based on what we now know, this sounds on the surface like the best option; however, there appear to be provisions of the City’s lease that could make this option problematic.”
The budget analyst had other ideas including one that would allow the city to partner with a private developer in hopes of developing the land in exchange for another property, work to get out of the lease as fast as possible, demolish the building and build anew, or rethink the way the city approaches office space by focusing on telecommuting.
And as the city looks to right the sinking ship that is 101 Ash, the ship is getting hit with a steady stream of legal complaints from contractors who say the city put them in harm’s way during its $30 million renovation.
NBC 7 Investigates obtained an additional 20 legal claims from former workers. To date, more than two dozen claims have been filed and more are coming.
“Some of these workers were climbing in and out of the building superstructure covered in asbestos for over a year while the City denied they had any risk of asbestos exposure or need for protective gear,” said attorney Lawrence Shea, who is representing the contractors who filed claims.
Shea says more legal claims will be filed in the coming days.
“We will continue to file claims for workers who discover the City was concealing their asbestos exposure. Even to this day the City falsely denies there was any risk, meanwhile 101 Ash sits empty after being declared a public nuisance, because of asbestos everywhere, and no worker can enter without full hazmat protection.”
