19 Oct Newly released emails show Faulconer, top aides overruled city real estate director on Ash Street property
Mayor Kevin Faulconer began meeting with the former owners of the high rise at 101 Ash Street in 2014, a full year before Sempra Energy vacated the property, according to a new cache of emails released by the city under the California Public Records Act.
The communications also show the building’s previous owners, Sandor Shapery and Douglas Manchester, enjoyed access to the mayor and his senior aides, allowing them to market their building to city officials.
“Does the shortened 25-year lease option improve the look of the proposal?” Shapery representative Richard Ledford wrote to Faulconer’s then chief of staff, Stephen Peutz, in July 2014. “May we set that second meeting with the mayor on this issue?”
Taken together, the 80-plus pages of emails show more clearly how the city came to enter what is now considered one of the worst land deals in the history of San Diego governance.
Among other things, they show city real estate assets director Cybele Thompson, who was fired in August for her role in the Ash Street transaction, initially did not believe San Diego should acquire the 19-story office tower.
“We don’t think it makes sense for the city to own the Sempra building due to its age, location and inefficient layout,” Thompson wrote to her bosses Jan. 2, 2015, two years before the city signed a 20-year lease-to-own deal that would have costed the city $128 million.
The former real estate director said a shorter lease would better serve the city’s needs because some employees could move in relatively quickly, then officials could solicit redevelopment plans for the entire downtown block.
“A 10-year lease at the Sempra building with two 5-year options probably makes the most sense,” Thompson said.
Mayoral spokesman Craig Gustafson said in a statement Friday that Faulconer meets with thousands of people on many topics every year.
He said it has been well known that Shapery approached the city about a sale or lease long before they reached an agreement. He said the mayor rejected “every offer” because they were for above market value for the building.
He also said Thompson eventually changed her mind about the acquisition and signed the 2016 recommendation to the council.
“There are dozens of subsequent emails in which Ms. Thompson advocates on behalf of the transaction and actively works to get the project across the finish line,” Gustafson wrote.
The communications also show that Shapery made limited progress in direct discussions with Faulconer and his inner circle until mid-2015, when Manchester invested in the mid-century office tower as a minority owner.
Manchester is a San Diego developer and former publisher of The San Diego Union-Tribune who was one of the mayor’s highest-profile supporters and political donors.
Shapery said Manchester approached him about purchasing a share of the building after learning it was available. They immediately listed the building for sale and did not benefit from Manchester’s relationship with the mayor, he said.
“I believe having Manchester as a partner was a detriment to putting a deal together with the city because of the optics of a deal being done with one of the mayor’s big contributors,” Shapery said by email. “This is my opinion only and based simply on my personal observations.”
In October 2016, the mayor’s staff recommended that the city council approve the 20-year lease, saying the acquisition would save the city $44 million by consolidating city employees into a single building.
The reports to council made no mention of Shapery or Manchester.
Council members were told the property needed only a $10,000 power scrubbing and that 800 or more employees could move in by July 2017. Instead, it has been vacant for all but a few weeks last winter due to asbestos violations and other issues.
The city spent more than $50 million on lease payments and renovation costs on the unoccupied building between 2017 and 2020. Faulconer formally suspended payments last month.
Now the property is mired in litigation, including lawsuits challenging the legality of the lease terms and legal claims filed by employees and construction workers who said they were exposed to asbestos.
City officials are not even aware of where all of the money it agreed to pay for the building ended up, documents show.
The emails to and from the mayor’s office also show Faulconer relied on a private-sector broker, Jason Hughes, for advice and negotiating strategy on the Ash Street transaction.
Gustafson said former mayor Bob Filner broughtHughes in as an unpaid volunteer and Faulconer continued the relationship.
“The city has no knowledge of whether (Hughes) had a financial relationship with any other entity,” the mayor’s spokesman said. “If he did, the city was never informed.”
Hughes declined to comment, citing the litigation now surrounding the deal.
‘A tighter time frame’
By early 2015 — months after Sempra executives told state utility regulators it would cost tens of millions of dollars to upgrade the property and remediate the asbestos inside the building — company officials had made the decision to move out of Ash Street.
Shapery again reached out to Faulconer’s chief of staff, the latest emails show. This time he was offering a “favorable lease” of the first two floors as soon as Sept. 1, 2015.
“I now find myself within a tighter time frame within which to be able to provide this opportunity for the city,” he wrote. “Please consider my proposal at your earliest convenience as time is of the essence, but I do want to assure you that I (am) motivated to help you make this happen.”
The pitch from Shapery went back and forth between Faulconer’s aides and various department heads throughout that winter, the emails show.
By late March, however, Shapery had changed his mind and said the only lease he could agree to would be for the entire building. He also informed the city he planned to apply for a rezoning to allow him to convert the property to a hotel or residential use.
Thompson replied the following day, after circulating a draft response among her supervisors.
“Unfortunately, the city does not currently need the entire Sempra building …” she wrote. “We will move forward in evaluating our other options but please let us know if you change your mind!”
Privately, Peutz, the mayor’s chief of staff, traded emails with planning director Mike Hansen, noting how difficult it would be for Shapery to convert the building to apartments due to its zoning.
“Right,” Hansen agreed with Peutz. “It’s actually in an employment overlay zone where at least 50 percent has to be commercial.”
The records show that in late April, Hughes sent Shapery a counter proposal.
“Call me if you have any questions,” Hughes wrote, copying Thompson and some of her bosses. “Thanks.”
The terms of the counter offer were in an attachment to the email that was not made available for public inspection. It also is not clear what became of the proposal.
In June, a handful of senior city officials met to discuss their options for relocating hundreds of Development Services employees, who were then — and still are — working in a dilapidated building just west of city hall.
The officials narrowed their choices to The Terraces office space in Kearny Mesa, the 110 Plaza complex immediately west of the Sempra building and 101 Ash St.
“It should be noted that there has been a little back and forth negotiation on the 2 downtown properties (110 Plaza and 101 Ash), but we feel that we still have room to negotiate lower,” Thompson emailed her superiors ahead of the June 25 meeting.
About the same time, Manchester bought the minority stake in the soon-to-be-vacated Ash Street property, Within days, he was meeting with the mayor and scheduling a visit to the building, records show.
“Dear Kevin and All!” Manchester wrote to Faulconer, Shapery and several others on July 8. “Thank you for your time yesterday and Sandy and I look forward to your tour on the 27th. Warmly, Papa Doug.”
Manchester years ago adopted the nickname “Papa Doug,” even signing payroll checks by that name.
He told the Union-Tribune he had “zero control” over the transaction as a minority partner and was not responsible for disclosing or withholding his interest in the property when it eventually went to the council for approval in 2016.
“After all expenses we lost monies!!” Manchester said by text message earlier this year.
Two days after the Ash Street walk-through with Faulconer, Shapery, Manchester and others, Deputy Chief Operating Officer Ronald Villa outlined the city’s final options for expanding the city’s downtown leasehold.
“110 Plaza has revised their last offer. This is the building to the west of Sempra. Start rate is $1.98 full gross (includes janitorial, utilities, taxes),” he wrote. “Sempra is $1.10 NNN (we pay janitorial, utilities, taxes which adds $1.00 – $1.50 per sf).”
Like Thompson, Villa left city hall earlier this year due to the Ash Street debacle.
Despite the high-level meetings over Ash Street and internal city deliberations over consolidating workers in new office space, no deal was reached until the second half of 2016.
When the mayor’s staff brought the 20-year lease-to-own agreement to the council in October 2016, it was not made clear that the building had appraised for $62 million and later for $67.1 million.
It also was not made clear to the council that efforts to buy the building outright stalled after the city was unable to secure bond financing for as much as $90 million.
Instead, the council was presented a now-infamous “as-is” contract with Cisterra Development — the company that had successfully negotiated the city’s lease-to-own deal for the Civic Center Plaza just across the courtyard from City Hall in 2015.
Cisterra privately reached a deal with Shapery to take over the Ash Street property — contingent on reaching an agreement with the city. The dual transactions closed Jan. 3, 2017.
The so-called double escrow meant Cisterra was more of a middleman. It allowed Faulconer to present the deal as a transaction between the city and Cisterra — and not with Shapery and Manchester.
While the long-running negotiations focused on a long-term lease, there was also discussion about the city buying the property outright, emails show.
“The bond issuance amount is expected to be $80M, but will be a not-to-exceed $90M, just in case the tenant improvement requirement at 101 W. Ash St. comes in higher than currently estimated ($5M is the current estimate,” Thompson said Aug. 12, 2016.
However, the city was unable to secure bond financing after the appraisals came back lower than what San Diego officials agreed to pay. After a hastily scheduled meeting in early September, the acquisition plan reverted to the lease-to-own arrangement.
Questioned about the deal by the city council the following month, Thompson deferred to Cisterra executive Jason Wood, who told the council the deal was a win-win.
“Everything is linked up for this to become a reality,” Wood testified to the council. “And any delay or attempt to renegotiate could seriously jeopardize that transaction and the savings that the city would secure.”
The savings never materialized.
In 2018, Faulconer sought an additional $30 million for unexpected renovations and the council agreed. The city, which late last year announced the repairs were finished, moved workers into the building only to evacuate them a few weeks later due to asbestos.
Now the city says it doesn’t know where the money it agreed to pay for the property ended up.
“To the best of our knowledge, the city did not receive any detailed breakdown from Cisterra of the transaction despite repeated requests,” said Gustafson, who said about $14.4 million of what the mayor agreed to pay cannot be accounted for.
Cisterra did not respond to a request for comment.
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