A year after civil and criminal settlements, 101 Ash St. continues to haunt San Diego

One year has passed since a head-spinning week of political decision-making all but shuttered the civil litigation and criminal investigation into the former Sempra Energy headquarters at 101 Ash St., now perhaps the most notorious address in San Diego city history.

The last full week of March 2023 began with the City Council agreeing to issue $126 million in bonds to pay off a legal settlement it had approved the previous summer at Mayor Todd Gloria‘s urging.

The new borrowing diverted tens of millions of dollars from previously budgeted spending like flood-control upgrades.

This January, Chollas Creek overflowed during a fierce storm, endangering thousands of residents and causing widespread damage that has yet to be fully repaired.

The same week last March culminated with a guilty plea by real estate broker Jason Hughes, the former volunteer adviser to former Mayor Kevin Faulconer who collected millions of dollars from two lease-to-own deals he helped negotiate.

Hughes received a $400 fine and one year of summary probation for his crime, a misdemeanor conflict-of-interest charge. His probation is due to end this week.

The broker also had to repay almost $10 million he pocketed for his work on the 101 Ash St. transaction and a similar lease for the nearby Civic Center Plaza.

Gloria, members of the City Council and City Attorney Mara Elliott praised the outcome as a good result for San Diego taxpayers. Less than a year earlier, Elliott had advised the council to reject the mayor’s plan to buy out the Ash Street and Civic Center Plaza leases and said the case should proceed to trial.

“This is a moment we ought to celebrate,” Councilmember Joe LaCava said last March, when the settlement with Hughes was approved. It was “an excellent result and an indisputable victory” for the city, Elliott said at the time.

Even District Attorney Summer Stephan said the misdemeanor plea — along with the $9.4 million in restitution Hughes was required to pay — was the best outcome she could get after the city approved a deal that bought out the lease at 100 cents on the dollar and indemnified the seller and its lender.

“We reviewed every potential charge,” Stephen said. “We have to go with what we can prove beyond a reasonable doubt.”

Twelve months after the whirlwind of developments, the 19-story office tower remains unsafe to occupy due to asbestos and a plethora of mechanical issues left over from years of inadequate maintenance.

The property is still costing taxpayers thousands of dollars a day, and will drain the city of millions of dollars every year for decades to come.

After the nine-figure public investment in the unusable building — and tens of millions more coming due in future bond payments — Gloria declared the 101 Ash St. high-rise surplus property.

The mayor is working with a local developer to convert the 315,000 square feet of office space to residential housing, though that deal appears far from certain. Even investors negotiating with the city conceded it may not happen.

“I would peg it at 50-50,” Chad Carpenter of Reven Capital told The San Diego Union-Tribune several weeks ago. “If it doesn’t move forward, it’s really nobody’s fault. It just doesn’t work. It’s too risky to take on.”

In an email last week, Carpenter struck a more optimistic tone.

“We are moving forward and hope to get a signed ENA and then hopefully City Council approval soon,” he said, using the acronym for exclusive negotiating agreement.

Elliott’s office also is confronting a series of lawsuits generated by the Ash Street lease and the city’s handling of building renovations.Earlier this year, San Diego settled most of the claims from one contractor who said he was wrongly retaliated against after reporting asbestos in the building.

But the asbestos-related lawsuits are still pending.

There’s also an ongoing appeal of another case brought in 2020 by San Diego resident John Gordon. A decision on that petition is expected from the Court of Appeal later this year.

The Ash Street settlement approved by Gloria and the City Council in 2022 called for San Diego to assume all liability for future legal costs for the landlord Cisterra Development and its lender, CGA Capital of Maryland.

“The decision to pay the sellers without putting them to the test, as we and the city attorney recommended, is a financial burden on the city that is causing repercussions like the floods,” Shea said. “The flood control budget was one of the sources for the money they paid the sellers.”

No city assessment

San Diego city officials initially planned to acquire the former Sempra Energy headquarters as a way to upgrade workspace for their own employees.

Under a recommendation from then-Mayor Kevin Faulconer, the City Council agreed to a complicated lease-to-own acquisition in 2016 that called for $6.4 million a year in payments for two decades, or $128 million.

The $535,000 monthly lease payments were designed to service a $92 million loan CGA Capital had made to Cisterra Development. The seller’s appraiser said in 2016 that the building had a “hypothetical” value of $67 million.

The Mayor’s Office told the council back then that the building was a Class A property that needed only a $10,000 power scrub before hundreds of employees could move in.

In reality, the property would end up requiring millions of dollars in upgrades.

Then-Councilmember Gloria made the motion to proceed with the “as-is” lease-purchase, and the council quickly approved the deal without obtaining a property condition report or an independent appraisal.

The city was supposed to move in by the summer of 2017.

After years of delay in the renovation plan and a spate of stop-work orders issued by county regulators over asbestos violations, the city finally opened the building to its employees in the last weeks of 2019.

By early January 2020, however, the county issued another asbestos violation inside the building. At this point, Faulconer had seen enough and soon evacuated the building.

The property has been vacant ever since. It has also become the subject of multiple lawsuits, counterclaims and a criminal investigation.

Over the next months and years, the depth of the failures by city officials and others would become clearer through public records, deposition testimony and other sources.

Faulconer had overruled a recommendation to purchase the building outright and chose instead to enter a complicated lease arrangement, internal city emails showed. Elliott’s office had signed off on a questionable lease. Hughes admitted he made millions of dollars from deals he struck while advising the city.

At the same time, one outside consultant told the city it would cost $115 million to make 101 Ash St. safe to occupy. Another expert said the building was worth “virtually zero” because the repairs and upgrades it required would cost more than the property was worth.

“The city did not nail down a reliable condition report; they just accepted a report that said it was good to go,” said Michael Aguirre, the former San Diego city attorney who represents Gordon in the case challenging the city’s handling of the property.

“The public has to ask why our current mayor agreed to buy a building for $92 million that needed $115 million in repairs,” Aguirre said.

Two months after the Gordon litigation was filed, Faulconer suspended the six-figure monthly lease payments the city was making on the vacant building.

The letter explaining the decision said it was illegal for the city to be paying to lease a building that could not be used — citing the same provision of the state constitution that underpins the taxpayer lawsuit.

Forced out of office by term limits at the end of 2020, the mayor left the 19-story problem to his successor.

‘Very, very hard’

A few months after saying Gordon had a “reasonable probability” of winning at trial, Judge Joel Wohlfeil dismissed the taxpayer’s challenge to the Ash Street lease in late 2022 just weeks before it was scheduled for trial.

That’s the decision now pending review at the 4th District Court of Appeal.

Early last year, Judge Timothy Taylor unexpectedly directed the city to enter settlement negotiations with Cisterra and CGA Capital. The order led days later to the city dropping its claims against the seller and landlord, and the criminal case being dropped.

One of the civil lawsuits Shea filed against the city was settled last year for $50,000, the City Attorney’s Office said.

Plaintiff Luis Guerrero accused the city of retaliation and wrongful asbestos exposure in January 2020. The $50,000 payment covered the retaliation part of the claim, not the asbestos allegation.

Two other legal complaints Shea filed on behalf of other workers are pending in San Diego Superior Court and headed to mediation.

The probation term Hughes agreed to last March is due to expire this week, formally closing the criminal case and its aftermath.

However, the California Department of Real Estate is seeking to revoke his broker’s license for working both sides of a transaction, saying he personally profited from a deal he participated in making for the city. Hughes has said he informed at least six city officials that he planned to seek payment.

He is contesting the proposed revocation and testified in public last summer at an administrative hearing, where he denied doing anything improper and grew emotional in describing how the Ash Street experience had affected him and his family.

“They searched my granddaughter’s playhouse,” Hughes said during the hearing. “This whole thing has just been very, very hard on the whole family.”

Regulators also proposed a $4,000 fine, but that recommendation is not yet approved. A final decision by the state Department of Real Estate could be issued at any time.

The lawsuit Aguirre filed on behalf of Gordon has been pushed to the state appellate court. The city is picking up the tab for 11 separate lawyers defending the claim, including attorneys for Cisterra and CGA Capital.

Final briefs in the case were submitted last month, and an opinion from the appeals court is expected later this year.

A decision in Gordon’s favor could effectively set aside the city’s legal settlement with Cisterra and CGA Capital and force the litigants either to negotiate a new agreement, appeal to the state Supreme Court or return to Superior Court for a potential trial.

Meantime, the Mayor’s Office said it is fulfilling its obligation under the state’s Surplus Lands Act to offer the unused property to affordable-housing developers.

“If it is determined that the developer cannot perform, the mayor will end negotiations and include the property at 101 Ash in the larger RFP (request for proposal), which will be issued later this year,” spokesperson Rachel Laing said.

Under that scenario, the building would be folded into the six square blocks the city hopes to remake into a wholly reimagined civic core.

$20,000 a day

The Ash Street office tower has been vacant for all but a few weeks since 2015, when Sempra Energy moved into its new headquarters on Eighth Avenue. That glass and steel structure was designed and built by Cisterra Development.

But even though the civil and criminal cases are over — at least pending the appeal — the building remains on the minds of residents and elected officials alike.

During a hearing last week at the council’s rules committee on a proposed 1-cent sales tax increase, witnesses and one committee member cited Ash Street as an example of dubious spending decisions by city officials.

“People are skeptical because of how we have perceived the city has been spending our money,” said Terry Hoskins, a retired police officer and council candidate who appears headed for a runoff against Council President Sean Elo-Rivera this November.

“We talk of infrastructure deficits, and yet we hear how money earmarked for infrastructure was moved to purchase 101 Ash St.,” he told the committee. “How do people know that this tax will legitimately be used for what is intended for?”

Councilmember Vivian Moreno, who also serves on the rules committee, made a similar point before voting to support the sales-tax measure. She noted the council had agreed to take on $207 million in new debt as a result of the decision to buy a building that cannot be used.

“This total would be enough on its own to entirely solve the budget deficit next year,” Moreno said.

The city is confronting a roughly $170 million budget deficit for the fiscal year that begins July 1 — a financial position that Gloria and other elected officials have said is the result of a structural revenue shortfall that the sales-tax measure would resolve.

Yet the mayor and council agreed to pay $132 million in cash to buy out the Ash Street and Civic Center Plaza leases, $86 million and $46 million, respectively, against the advice of the city attorney.

Most of that money came from previously funded projects that were backfilled by the new borrowing. The city is obliged to pay $7.4 million a year over three decades to service the bonds, almost $5 million of that for 101 Ash St.

Including millions in security and maintenance costs, the city is now still paying approximately $20,000 a day for the vacant building with no clear end in sight.

Staff writer Jennifer Van Grove contributed to this report.