Another Troubled City Real Estate Deal Is Still Having Troubles

Government

Another Troubled City Real Estate Deal Is Still Having Troubles

San Diego taxpayers will have spent $5.9 million in rent alone by the time a Kearny Mesa facility is ready to be used for its intended purpose. Repairs on the facility were originally expected to run $6.5 million; last week they were pegged at close to $15 million.

The city signed a long-term lease on a property located at 8050 Othello Ave. / Photo by Megan Wood

San Diego is still grappling with its botched acquisition of a downtown high-rise, but another less-noticed disastrous real estate deal is still puttering along, costing the city millions.

In 2017, the city signed a long-term lease for an industrial building in Kearny Mesa so it could turn it into a maintenance facility for the fire department’s trucks. Four years later, not a single fire truck has been repaired there.

Current estimates suggest it’ll be another two years before a city mechanic first fixes a city fire truck at the facility.

So far, the city has paid $4 million in rent on the building, which it has used for storage and as overflow office space for some of the city workers displaced by the city’s other real estate mistakes. San Diego taxpayers will have spent $5.9 million in rent alone by the time the building is ready to be used for its intended purpose.

But first, the city needs to renovate the privately owned building so it’s suitable for repairing fire trucks. When the city inked the lease, that work was expected to cost $6.5 million. Once the city took control of the property, though, officials learned that the construction needs were more extensive than they had estimated, and that cost ballooned. A City Council committee last week greenlit the repairs, which will now run the city about $15 million. The full Council is expected to vote on the spending next month.

The city’s ongoing problems with the Kearny Mesa Repair Facility, first revealed by Voice of San Diego early last year, also made an appearance last week in the city auditor’s report on the scandal-plagued acquisition of 101 Ash St., as an example of the city’s poor real estate track record.

The report said the city needs to start appraising properties it plans to lease before it leases them, especially if there are major repairs needed before the city can move in.

“For example, when the city leased the Kearny Mesa Repair Facility, it did not get an appraisal on the property even though the city anticipated $6.5 million in tenant improvements,” the auditor wrote. “Now that the tenant improvement cost has increased to approximately $14.8 million, the city is poised to make a significant real estate investment in a property that it may never own.”

It also critiqued the city for failing to design the repairs and ensure they were possible before leasing the property, since doing so after the fact led to the 128 percent increase in the cost of repairs. In 2019, the city spent another $812,000 designing the renovations.

“In the interim, the property sits as storage and inefficiencies at the existing repair facility for both fire trucks and trash trucks persist,” the audit said, referring to the project’s goal of creating separate repair facilities for both fire and trash trucks, rather than fixing both at a Miramar facility.

In addition to the accumulating rent payments and the ballooning repair price tag, the city also ran into a financing problem at the Kearny Mesa property.

Specifically, it isn’t allowed to spend bond funds on a property it doesn’t own. Instead, the Council committee last week approved the $15 million in spending in cash, straight from the city’s general fund.

Doing so, though, required a textbook example of the fungibility of government revenue.

The Kearny Mesa repairs are part of a group of capital improvements in the city totaling $148 million. Most of that is coming from bonds – money the city has already borrowed from investors, and will need to pay back over time with interest. But it’s not permitted to do that for the Kearny Mesa repairs, since it doesn’t own the building.

To fix the problem, the city simply identified three projects it was ready to pay for with cash from the city’s general fund – upgrades to the city’s compressed natural gas system, improvements at the Miramar landfill and so-called complete streets projects – and decided to pay for those out of bond revenue. Then it reappropriated the cash that had been set aside for them, and used it for the Kearny Mesa facility instead.

“What’s driving the request for this action is the fact that the (the Kearny Mesa property) is not owned by the city,” said Rolando Charvel, the city’s director of finance, at last week’s committee hearing. “Even if we wanted to use these proceeds to finance that, we can’t. It just doesn’t qualify.”

As the auditor noted in his report, though, that means it’s possible the $15 million in city-funded improvements won’t belong to the city when the lease expires.

The city initially signed a 10-year lease on the property, with two additional five-year options. Two years into the lease, after it had figured out that renovating the property was going to be a problem, the city extended the lease’s initial term to 15 years and added a third five-year option.

That means the city now has 26 years left on the lease. The original lease, though, stipulated that the city could purchase the building at the lease’s conclusion, if the owner decided to sell.

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