Publisher
The festering scandal of the 101 Ash Street building seems to be nearing a final stage where the cover-up will be complete, much to the detriment of San Diego taxpayers, but to the benefit of the culprits and co-conspirators who orchestrated the scheme and have worked to keep their involvement and ill-gotten political and financial gains hidden – all with the help of the one person that was supposed to stop them in the first place.
Of course, we’re talking about the now-empty 19-story office tower the City leased in 2016 thinking it was acquiring better space for over 1,000 employees desperate to escape dilapidated offices in other buildings, but they ended up buying a turd that its long-time tenant -SDG&E’s parent company Sempra Energy- called “functionally obsolete” before they fled for new digs near Petco Park.
In 2016, the City signed a 20-year lease-to-own deal with Cisterra Development, who in turn, used the lease to finance the purchase from sellers Sandor “Sandy” Shapery and “Papa” Doug Manchester.
Nearly three years and over $30 million in renovations later, about 1,000 City staffers were moved into 101 Ash in December 2019, only to be evacuated less than a month later when the County Air Pollution Control District deemed the building to be a public nuisance because of loose cancerous asbestos material in the air.
The building remains empty today, and the City continues to be on the hook for over $545,000 a month in lease payments with more than 16 years left to go. That adds up to over $128 million in lease payments for an unusable building.
Lawsuits have been filed by a taxpayer (challenging the Constitutionality of the lease), the City (to cancel the lease over a conflict of interest), its financiers (to enforce the lease and recover rents), and by whistleblowers (for retaliation for exposing the truth and for exposure to asbestos), but a series of recent secret negotiations suggest that the downtown players involved in the ill-fated deal have a common interest in resolving the fight before any one of them is forced to reveal their respective truths under oath in court.
Each of the insider players has personal and financial interests to cut a deal to resolve the controversial building dispute, even though their interest seem adverse to each other from afar.
In the end, each side has a selfish incentive to come together in what will seem like a concession to the others, but in truth, it would serve to protect each of them from the consequences of exposure. This is a classic deténte where warring sides negotiate instead fighting a war that will assuredly kill them all.
When we look at each party separately, their motives become more clear and the end game more predictable.
CITY ATTORNEY MARA ELLIOTT:
Elliott is driving the lawsuits to invalidate the lease, ostensibly because we found out that the City’s “pro bono” special real estate advisor to the Mayor, Jason Hughes, got paid by the landlord for helping to negotiate not only the 101 Ash deal, but a nearly identical lease two years earlier for the very building where Elliott’s office is housed; the Civic Center Plaza, known as CCP. Hughes now admits he pocketed over $9.4 million in the two deals for his help in convincing the City to sign deals he would profit from.
Elliott claims Hughes violated state law, known as Government Code Section 1090, that forbids someone from participating in the making of a contract where he has a financial interest in the outcome.
There is no question Hughes helped the City negotiate the leases and had a secret (from the public) backend deal to split profits with Cisterra, but it’s still unclear which “higher ups” at the City knew about his partnership with Cisterra and whether that may relieve him of a criminal conflict of interest violation.
But although Elliott claims she is doing everything she can to cancel the lease, she is not alleging Cisterra violated the City’s Charter Section 225, which requires full public disclosure of all parties who stand to benefit from a public contract, and failure to comply could allow the City to terminate the lease.
Elliott won’t make that argument because doing so would reveal that she, and only she, as the City Attorney and chief legal advisor for the City, had the obligation to enforce Section 225’s disclosure requirement.
Had Elliott done her job as the City’s chief legal advisor competently in 2016, Cisterra’s complex deal structure would have revealed Hughes’ participation, which would have forced Elliott to stop the deal and the City would have avoided buying the crappy building in the first place.
A legal memo written by outside lawyers for the City in June 2020, but hidden from the public and the City Council by Elliott (until last week when La Prensa San Diego released a leaked copy) concluded that she approved the lease that is “disproportionally unfavorable to the City”.
The memo proves that the City relied solely on representations and building condition reports provided by the sellers and also agreed to releases the them and Cisterra from any defects with the building by using an “as is- where is” clause that left the City completely at risk for repairs of all future issues. The outside lawyers said the City violated usual and customary practices for a real estate transaction of this size and that their law firm would have handled the negotiations differently to protect the City. Ouch!
But Elliott hid that memo from the Council and the public, claiming it’s privileged and that revealing it would hurt the City’s lawsuits. That’s true, it will hurt the City’s legal position, but only because it would admit and prove that Elliott failed to do her job to safeguard taxpayers from unreasonable risks in the first place. Her coverup of the memo and the corrupt nature of the 101 Ash deal is really just to protect herself.
The corrupt political deals that led to the lease, the undisclosed profiteering, and Elliott’s failures will all be revealed, unless a settlement stops it all.
So Elliott desperately wants a settlement.
THE FINANCIERS
The financing to purchase the building was provided by a consortium of bond holders, mostly insurance companies, who invest in safe, long-term loans to provide security for their investors. CGA Capital, a Maryland-based financing company, arranged the financing for Cisterra, but put none of their own money into the deal.
The real financiers loaned $91.8 million to Cisterra for the $74.4 million purchase of the building, using the $128 million in lease payments as the funding source, with the building serving as the ultimate collateral.
Now, with the building being toxic and non-usable, and the City challenging the underlying lease, the building is worth much less, possibly even nothing, leaving the financiers without strong collateral to secure its debt.
The financiers are suing the City to enforce the lease, claiming they had no hand in whatever conflict Hughes may have had. But recently released documents and emails show that Cisterra had tried to hide Hughes’ payments on CGA Capital’s side of the deal, but that plan was rebuffed.
However, the communications show that the financiers were at least aware of Hughes’ involvement on Cisterra’s side, leaving some uncertainty as to their knowledge of the conflict-of-interest at the heart of the City’s claims.
Without a tenant in the building and facing the potential voiding of the lease because of Hughes’ conflict, the financiers are left to pursue Cisterra for the loan proceeds or sell off the building for pennies on the dollar to help mitigate its damages and still book tens of millions of dollars in losses.
A settlement to make Band-Aid repairs to the building enough for the City to reoccupy it would cost tens of millions of dollars, but could give cover to the City to re-state a new lease for another 20 years, and instantly give the financiers value in their loan again.
Without a deal with the City, the financiers risk losing their entire investment because the underlying collateral – the building- is toxic and unusable for anyone, leaving no value in the lease and little if any value in the building itself. Two local real estate expert estimate the building at near the land value because no one would invest what it really takes to bring it up to market rate standards and still make a profit. And even worse, in today’s post-COVID market, who wants a 19-story office building for lease?
The financiers desperately want a settlement, too.
CISTERRA
As the landlord, Cisterra is now left without a tenant and an unusable building that it cannot re-lease to anyone else. Cisterra, through its single-purpose entity called 101 Ash LLC, is the entity that borrowed the $91.8 million and used part of that money to purchase the building. The remaining money – estimated to be about $14 million- was divided up among Cisterra’s partners, Hughes, and other costs.
If Cisterra’s LLC is sued by the lenders for all or part of the outstanding loan, Cisterra’s wealthiest partner, Steven L. Black, could face the brunt of the financial burden. Black is wealthy and hidden behind several layers of shell companies, but the prospect of returning $91.8 million must be unsettling, to say the least.
But what Cisterra and Black really want is to be part of the Tailgate Park development near Petco Park. When the 2 million square foot mixed-use project was announced in March of last year, the Padres bragged they had “partnered with prominent San Diego developer Cisterra Development.”
Then the 101 Ash scandal hit and Cisterra is no longer listed as a partner on that project. That lucrative development could net Cisterra tens of or even hundreds of millions of dollars, so repaying what they made on 101 Ash would be the easy – and profitable- thing to do to protect the bigger prize of Tailgate Park.
Right now, Cisterra is politically radioactive and still facing potential lawsuit or even worse, criminal investigations for their part in paying Hughes in his conflicted representation of the City. The longer the City pursues its lawsuit to cancel the lease because of Hughes, the more danger Cisterra faces and the longer its name is tied to the now-worst political scandals in decades.
Cisterra and its partners also desperately want a settlement.
JASON HUGHES
The once-superstar of the downtown real estate broker market is now in serious legal and financial trouble for his role in negotiating the 101 Ash deal and a $4.41 million fee for himself while he was at it.
Hughes was, according to his own website, “appointed by the mayor as Special Assistant for Real Estate Services to the City of San Diego” in 2013 by then-Mayor Bob Filner and agreed to “performing this advisory role without compensation from any party”, according to a letter Filner sent to Hughes at the time.
After Filner resigned in 2013 for giving too many headlocks and unwanted french kisses, Hughes stayed on to advise Interim Mayor Todd Gloria, two-term Mayor Kevin Faulconer, and then new Mayor Todd Gloria.
But, it turns out, sometime in 2014, Hughes decided he deserved to wet his beak on the City deals, and inked a secret (to everyone except Cisterra and apparently some higher ups in the City) agreement to share in Cisterra’s profits. A flimsy letter in November 2014 said he would “seek to be paid customary compensation from any other parties in the transaction,” but that he “would continue to honor my arrangement with the City“. It’s now clear he did the first but not the second.
Hughes avoided me and other reporters for months last year when asked point blank if he got paid by anyone in the deal. Only after the City demanded documents in a lawsuit did Hughes and Cisterra admit, reluctantly, that he was paid by the other side while still misrepresenting to City staff that he was on their side.
Hughes is now accused of violating Section 1090’s conflict of interest law that could include criminal charges and jail time, if convicted, and the outright voiding of the lease. His white-collar criminal defense attorney has done a great job of muddying the waters to create just enough doubt as to whether people at the highest levels of the City -possibly even Faulconer himself- knew of his backend deal, and that could get Hughes off the most serious aspects of the violation; criminal intent to conceal his conflict.
But a 1090 violation could also entangle Cisterra because the state law penalizes others for “aiding and abetting” a 1090 violation. Cisterra clearly knew Hughes was helping to negotiate a contract in which he had a financial interest because they’re the ones who gave him the financial interest in the contract. Hughes could take Cisterra down with him, and, at the same time, free the City from a horrible contract of their own doing.
Last month, the District Attorney’s office investigators raided Hughes’ Rancho Santa Fe home, his office, and Cisterra’s offices. People close to the subjects claim the raids were just window dressing to show a tough stance on corruption, but, still, it’s not a good look for Hughes and Cisterra to be raided and under investigations that could snowball into much more serious charges.
A settlement with the City would surely include Hughes returning the money he unscrupulous made off the City, but would end the City’s lawsuit exposing his involvement and stymie the conflict charges. Hughes is surely desperate to avoid going to prison, and any problem you can solve with money, well, isn’t a problem. A mea culpa and restitution are in order and may be enough of a penance to absolve him.
So, Hughes (and Cisterra) desperately want a settlement.
THE SELLERS
Sandor “Sandy” Shapery and “Papa”Doug Manchester “sold” the crappy building to Cisterra in a simultaneous close that then leased it to the City, but we later found out that Shapery just replaced Manchester with Cistera and they (Shapery/Cisterra) jointly screwed the City.
It’s now clear that the building was not a Class-A space and that its mechanical systems were in desperate need of replacement.
There is no way that longtime owner Shapery didn’t know that, and, as new partners, Cisterra inherited his long-term knowledge of the true condition of the building and misled the City. Even worse, they negotiated an “as-is” clause in the lease that protected them from when the City inevitably found out the building was a lemon.
The continuing lawsuit would surely uncover who knew what when about the condition of the building and the overpriced sale to the City for a building that they knew was functionally obsolete. Cisterra, who financed, built, and owns Sempra’s new building near Petco Park, must have known that the utility company needed new space because its 50-year home was in desperate need of repairs.
The lawsuits between the City, Hughes, Cisterra, and the financiers would all end up pointing back to the underlying condition of the building and whether the parties fleeced the City. Shapery and Manchester split $50 million in net proceeds from the sale of the building, and their knowledge of the condition of the building could come back to bite them. They surely don’t want to have to return that kind of cash or be convicted of perpetrating a fraud on the public.
Shapery and Manchester desperately want a settlement, too.
THE CITY COUNCIL
San Diego taxpayers have paid over $30 million in lease payments and another $30 million in renovations for a building no one can use, but the fatigue of another political scandal seems to have set in.
In the end, like the crowd in the ancient Roman Coliseum, all the public wants is for someone to bleed out so the spectacle can come to a close and they can all go home. Spare them the details, just get on with it already, they say.
The members of the City Council may not know or care about all the details, but they’re smart enough to know when they have political jeopardy, and right now, they don’t feel they have any.
They think it’s time to cut a deal on the City’s biggest financial scandal in decades, and get right back to ribbon cuttings, bike lanes that limit handicap parking, and standing by idly as unhoused neighbors get the bum’s rush from the police with no real plan to deal with homelessness.
A “deal” that resolves the lawsuits, “fixes” the building, and claims a pound of flesh from the big bad business guys seems like a “good” solution to the smoldering scandal.
And getting this off their backs also saves their friends Todd Gloria and Mara Elliott, making the eight Democrats on the Council look smart and effective. (Chris Cate said last year the situation “friggin’ sucks” but hasn’t done a friggin’ thing to deal with it either, so he’ll just go along.)
The City Council -at least the majority bloc- wants a settlement, too. The outliers like Moreno and Montgomery Steppe have no incentive to fight the status quo when a backroom deal has already been cut.
BUT WHAT ABOUT THE TAXPAYER
The public seems tired of yet another downtown political scandal that’s difficult to follow and convoluted with dueling accusations and finger-pointing. It feels to the public like it’s time for a resolution.
But, what the public doesn’t yet understand -and it may take years for the realization to settle in- is that a settlement sold to them as the best case scenario for the taxpayers will actually be a very costly one in the long run.
It will purport to end the lawsuits, save money on legal fees, and get the City staff back into a better building after repairs are made.
All of the parties will get together and sing Kumbaya and say everything is great, and fulfill the purpose of the cover-up: Everyone escapes blame and punishment.
But, over the next twenty years, and beyond, the taxpayers the City of San Diego will be paying incrementally for expensive maintenance, repairs, and upgrades to the building that will make it the most costly office tower in the City, by far.
Union boss Michael Zucchet was right -and prophetic- last year when he called 101 Ash “the Taj Mahal of City-Owned Buildings” in an opinion piece in the San Diego Union-Tribune.
But, as it turns out, it’s not a jewel like the one in India; it’s more like the one in Atlantic City. Expensive. Run down. And probably better torn down.
The public should be suspicious of a settlement concocted by the very people that got us into this mess, and with personal and financial motives to strike a deal.
Elliott, as the circus ringleader, is working hard to draw our attention to the juggling act she wants us to see, and obscure her own fault in having allowed this mess to have happened in the first place.
The better solution for taxpayers would be to discard the whole transaction and get our money back. The deal is corrupt at its core and should be voided. Period.
Anything short of that is a classic cover-up.
The US Attorneys office, FBI, and/or the County Grand Jury should be (and may already be) investigating this mess to make sure any final resolution is just, fair, and honest.
San Diego’s taxpayers deserve no less.
