A dozen years after first reports, San Diego may adopt recommendations to prevent disastrous real estate deals

One of the key failures that led San Diego to spend more than $200 million and counting on the still-uninhabitable 101 Ash St. office tower was the city’s reliance on an appraisal paid for by the company marketing the property.

Former Mayor Kevin Faulconer and the San Diego City Council never verified the $67 million valuation that had been prepared on behalf of Cisterra Development before they leased the high-rise eight years ago and then bought out the lease in 2022.

Now San Diego officials are considering new policies that would require the city to obtain its own appraisal before moving forward with any major real estate transaction.

The idea is one of nearly two dozen formal recommendations that have yet to be implemented, even though they were raised in four separate reports issued by the San Diego city auditor that date back to 2012.

Earlier this month, the council’s Land Use and Housing Committee unanimously recommended that council members adopt 23 policy changes that would help prevent future real estate failures like the 101 Ash St. transaction.

“We feel it’s a new day for the real estate division,” said Lucy Contreras, the former top deputy to Penny Maus, who was hired by Mayor Todd Gloria in 2021 to reorganize the city’s real estate assets office before she was let go last year.

“These revised policies really are a culmination of a lot of hard work and collaboration, and if approved, it will take multiple audit recommendations from a process to implementation,” Contreras told the committee.

The proposed changes extend far beyond ensuring independent appraisals for any real estate under consideration by the city for lease or purchase.

They include measures such as renaming the “Portfolio Management Plan” to “Real Property Management Plan” and requiring the department to review and update the document every two years — and present it publicly to the City Council.

The new rules also establish clearer guidelines for acquisitions — an effort to promote transparency — and requires that they be followed. Nonprofits that lease public space would have to meet stricter eligibility rules and abide by stricter guidelines.

Also, in another nod to what went wrong in the Ash Street deal, any contractors or advisers who provide “significant” input on real estate deals would be required to file economic disclosures.

Jason Hughes, who advised Faulconer on both the 101 Ash St. lease and another deal for the nearby Civic Center Plaza, pleaded guilty to a misdemeanor conflict of interest charge last year after he collected $9.4 million in fees. Hughes had to return the $9.4 million to the city, pay a $400 fine and serve one year of summary probation.

The updated policies also call for more complete staff reports to be provided to the council ahead of any vote on a real estate acquisition. On the Ash Street deal and in other cases, council members said they were not given all the information they needed to make good decisions.

Policy updates also require real estate division staff to complete a due-diligence checklist for all notable leases and purchases. The checklist also must be provided to, and evaluated by, the city’s independent budget analyst.

Even though that step has yet to be formally adopted, it was employed earlier this year when Gloria promoted a proposed long-term lease for a warehouse north of downtown to house a large homeless shelter.

Gloria recommended a 35-year lease for the vacant property at $3 million a year, with annual 3 percent rent hikes. Independent Budget Analyst Charles Modica said in his report that the cost of the proposed lease was far above market rates.

The project, which also confronted a host of issues beyond its price tag, has since stalled.

The various measures were all brought forward in reports issued by the city’s independent auditor over 10 years beginning in 2012.

The 2012 and 2018 reports were what are called performance audits — periodic reviews of department practices and operations aimed at identifying any weaknesses and recommending improvements.

In 2021, however, City Auditor Andy Hanau issued a scathing report examining a series of problem real estate deals, largely under the Faulconer administration.

That report went far beyond Ash Street, which was leased and purchased without an independent appraisal and has been unable to be occupied due to repeated asbestos violations and other problems.

On Gloria’s recommendation, the San Diego City Council agreed in 2022 to pay 100 cents on the dollar to buy out the lease for more than $86 million, even though City Attorney Mara Elliott opposed that settlement deal. She wanted to take her lawsuit against Cisterra and others to trial.

Combined with $24 million in prior rent payments, some $30 million in renovations and tens of millions more in maintenance, legal fees and bond payments that will continue past 2050, taxpayers will ultimately have spent more than $200 million for a building that currently cannot be used.

The 2021 audit also examined the city’s troubled purchase of a failed indoor skydiving center without the benefit of an appraisal, the lease of a corporation yard in Kearny Mesa that cost millions more than city officials estimated and the acquisition of a Palm City motel.

All of those transactions were included in a 2020 report by The San Diego Union-Tribune examining San Diego’s difficult history in real estate. In 2022, the auditor released a separate study of the city’s lease-management practices.

But even though all four audit findings included specific recommendations — some of which the mayor and his predecessor observed — the suggestions still have not been incorporated into council policies.

In the weeks and months after the 2022 audit, proposed updates to three council policies were exchanged between various city officials and departments.

The revisions were brought before the council’s Land Use and Housing Committee last October and broadly discussed.

But Gloria administration officials sought additional input from Councilmember Joe LaCava and an unidentified consultant before the matter was to be brought back.

The following month, however, Gloria reorganized the real estate department, dismissing Maus after just two years and folding the entire office into the economic development department.

The change in leadership further slowed the implementation of the proposed policy changes. But the City Council nonetheless is expected to consider the updates this year.