- Voice of San Diego - https://www.voiceofsandiego.org -

City Botched High-Rise Deal from Acquisition to Renovation, Investigation Finds

101 Ash St. / Photo by Adriana Heldiz

A review of San Diego’s handling of 101 Ash St., a downtown high-rise that was evacuated in January following asbestos violations, identifies a number of problems with the purchase of the property and hints at possible legal action against some of the environmental contractors involved in the disastrous remodel.

Written by a law firm that’s already advising the city on asbestos litigation, the 40-page document offers a glimpse into San Diego’s flawed handling of its real estate. Though not complete, the review was released Wednesday [1] ahead of the Aug. 6 City Council meeting.

It is technically one of three reviews being conducted by outside legal experts who are looking not just into the acquisition of the property, but the financial liabilities now hanging over it and the role of the sellers.

From start to finish, 101 Ash St. went haywire under Mayor Kevin Faulconer’s watch. But in a statement, he told VOSD that he asked for the acquisition review “because City Hall has a very long and troubled history with managing its property and sweeping problems under the rug, and I didn’t want that culture to persist.”

Faulconer’s term ends at the end of the year and rather than pass the debacle along to the next administration, he considered it “my responsibility to share information with the public and propose corrective actions that get to the root of the problem,” he said.

Although the report doesn’t explicitly say so, it strongly suggests that the original sin at 101 Ash St. was Real Estate Assets Director Cybele Thompson’s failure to seek an independent appraisal and assessment of the building’s true condition upfront. No one from the city formally inspected the property before the City Council agreed to a 20-year lease-to-own deal totaling $127 million.

Doing so would have likely shown that the HVAC, plumbing, electrical, lighting and ceiling systems at the former Sempra Energy headquarters were all in need of major repair. The city’s remodel would later explode in scope and helped shake loose the asbestos that triggered the attention of the San Diego County Air Pollution Control District.

Instead, Thompson and her supervisor, Ron Villa, who recently resigned over this scandal [2], relied on documentation provided by Cisterra Partners, which brokered the deal between the city and the property owner and which never occupied the building itself. The reports in the city’s due diligence files only touched the surface of the nearly 50-year-old building’s true condition.

One report, from 2014, warned that anyone wanting to do extensive renovations on site should develop an asbestos abatement plan in accordance with U.S. Environmental Protection Agency rules. Another stated that its findings shouldn’t be used to satisfy environmental regulations and other laws.

These were red flags.

But when Thompson pitched a lease-to-own agreement to the City Council in late 2016, she described the building’s condition as excellent and simply in need of a power wash. The description came directly from one of the seller’s reports, which was based on a mere visual inspection of the site.

Once the city took possession of the building in early 2017, it hired design and architecture firm Gensler to figure out how exactly its 1,150 employees would fit inside the building. The firm, and by extension the city, learned in the process what they should have known from the onset — and what the building’s former tenant, Sempra Energy, had already told the public.

In November 2014, Sempra real estate chief James Seifert testified to the California Public Utilities Commission [3] that part of the reason they’d left 101 Ash St. when the lease expired was because the property needed at least $3 million in capital repairs  to keep it operational and upwards of $15 million in the event of an earthquake. He said the building was functionally obsolete and “to remove the existing asbestos and rebuild the impacted space was estimated to cost $16 to $25 million.”

The transcript of Seifert’s testimony, as NBC 7 reported in April [4], was available online through a Google search. Yet the review notes that the city learned of it when a media outlet reached out for comment earlier this year.

Seifert’s testimony is at odds with how the principal owner of the property portrayed the building as the deal was being brokered. In his first written offer to the city, Sandy Shapery said he’d spent “approximately $40 million in maintenance, upgrades and improvements” since buying 101 Ash St. in 1993 and there was “no anticipated capital improvement work expected within the next 10 years.”

There’s no evidence in the review that Shapery — or anyone else — intentionally misled Thompson and others at City Hall. He has repeatedly told VOSD and other media outlets in recent months that he was honest about what he knew at the time and gave the city all the building condition reports in his possession, including details about past asbestos-abatement work by Sempra.

In 2018, after realizing the true scope of the renovations that were needed, Thompson and Villa went back to the City Council, hat in hand. They asked for another $30 million to complete the necessary repairs. Members of the City Council expressed disappointment in how the project was shaping up — it was already a year behind schedule — but agreed that an additional investment was the smartest move over the long haul.

What was sold as a move-in ready deal in 2016 had evolved into a full-blown remodel of all 19 floors.

Hugo Parker, the law firm that wrote the review, put the blame for the next phase of the project on what it described as the “consistent and disturbing pattern of questionable performance by the contractors.”

Specifically, the law firm said decades-old asbestos debris, primarily the fireproofing on beams installed above the ceiling tiles, was shaken loose during construction and not cleaned up.

After air pollution regulators found some of the debris during an inspection in August 2019, the city and its general contractor, according to the review, developed a new asbestos work plan, trained workers and shut down the site for more cleaning.

Despite those efforts, the Air Pollution Control District continued for months to file notices of violation against the city. Between August and December, APCD documented 16 asbestos-related violations in the building, even after the city began moving employees into the building toward the close of 2019.

A team of managers overseeing the renovation noted on an October 2019 meeting agenda that asbestos-related warning signs had been reinstalled due to “contractor negligence.”

At that point, APCD investigators had only found material in areas where city employees were unlikely to be exposed.

Then, in January 2020, after finding debris in a conference room on the seventh floor that was theoretically accessible to city workers, the county issued a public nuisance order. The city responded by voluntarily shutting down the building and evacuating employees [5] who had already moved in.

Two environmental contractors, Argus and Enviro Applications, declined to comment for this story.

More than 20 people who worked on the remodel have filed legal claims in recent months alleging, among other things, they were exposed to harmful materials while at 101 Ash St. Some have claimed that city managers tried to rush through the construction [6] because of pressure from elected officials and embarrassing headlines showing the city was paying almost $18,000 a day [7] for an empty building downtown.

There was undoubtedly a sense of urgency around the completion of the project, but the review pushes back somewhat against this claim and others, arguing that no employee was moved onto a floor at 101 Ash St. until after it had been cleared for asbestos and the fire system was tested.

Hugo Parker is advising the city in a separate asbestos-related matter out of another building involving city employees and is also expected to represent the city in cases stemming from 101 Ash St. At times, the review strikes a defensive tone. It notes toward the beginning: “At no time was there any true health risk to workers, city employees, or the public during the renovation work or during the city’s brief occupancy of 101 Ash.”

Indeed, when the law firm’s contract came up for discussion and expansion in April, City Councilwoman Vivian Moreno questioned whether Hugo Parker could independently evaluate the city’s handling of 101 Ash St. City auditors are also set to investigate why the project was such a shitshow and, potentially, the processes the city has followed with other troubled real estate deals.

The city’s acquisition review was released Wednesday alongside a new building condition assessment [8], completed more than three years after the city took possession of the property.

NBC 7 obtained copies of the two other reviews being conducted [9] by outside law firms related to 101 Ash St., one of which examined the financial liabilities now facing the city. Another addressed the sellers, taking issue with Cisterra’s participation and the lease the city ultimately struck, which shielded the developers from long term liability should problems arise. That review called the terms of that deal “disproportionately unfavorable to the city” for letting the sellers off the hook.

Neither of those two reports are public yet.

The 101 Ash St. debacle is also one of a handful of city real estate deals embroiled in controversy that emerged after the City Council gave city bureaucrats the go-ahead to proceed.

In 2018, for instance, the officials rushed to purchase a shuttered indoor skydiving center [10] to convert into a homeless housing navigation center that didn’t open until almost two years later, a project now getting scrutiny [11] from federal and state officials.

A separate site in Kearny Mesa , which the city began leasing in 2017 as a fire truck maintenance yard, has yet to service any actual fire trucks. Since acquiring the property, officials discovered the cost of needed renovations was nearly three times what they told the City Council. The city has since brought in a new architect and envisions using the facility for its originally planned purchase by early 2022.

In a February memo [10] to the city’s Chief Operating Officer Kris Michell, Independent Budget Analyst Andrea Tevlin also noted the city’s acquisition of the Civic Center Plaza downtown, a building that could need up to $21 million in tenant improvements, the city has no plans to get done.

Tevlin urged Michell to have law firm Hugo Parker assess whether the city’s real estate acquisition processes match up with best practices as multiple transactions have “encountered significant problems that were not foreseen by staff or presented for consideration when the City Council was asked to approve the acquisitions.”

Hugo Parker’s review stuck to 101 Ash St. and is labeled preliminary. The firm noted its work has only begun.

“Since receiving this assignment, we have reviewed hundreds of pages of documents provided by the city and interviewed numerous current and former city employees. However, there are many witnesses to whom we have not yet spoken and documents we have not reviewed,” Hugo Parker investigators wrote. “No doubt more information and context will be provided through such interviews and documents.”

Even before that effort is complete, Faulconer said he would be pursuing “all legal and financial options to recoup costs, hold accountable the contractors who worsened the building’s condition, and implement new levels of accountability throughout internal operations.”

He also said he’d directed “a complete overhaul of how city departments handle property because while the city does many things very well it’s clear that complicated real estate management is not always one of them.”