Housing Commission Broker Invested in Company Before $67M Hotel Purchase
A real estate broker the San Diego Housing Commission hired to purchase hotels for homeless housing invested in the company that the agency purchased one hotel from, according to an internal document reviewed by Voice of San Diego.
A real estate broker the San Diego Housing Commission hired to purchase hotels for homeless housing invested in the company that the agency purchased one hotel from, according to an internal Housing Commission document reviewed by Voice of San Diego, a potential criminal violation that further complicates a purchase that had already been scrutinized as too expensive.
Jim Neil, the broker contracted with by the Housing Commission, bought 40,000 shares of Chatham Lodging Trust, a real estate investment trust that through a subsidiary owned the Residence Inn Mission Valley, which the Housing Commission later purchased, according to a memo prepared by the Housing Commission’s legal counsel and reviewed by Voice of San Diego. The purchase was part of a statewide pandemic response program meant to acquire hotels and transition them into stable housing for homeless residents.
Neil’s stock purchase occurred after Neil and the Commission inked a contract that was supposed to pay him $250,000 to locate hotels for sale and negotiate their purchase, but before he negotiated the Housing Commission’s purchase of the Residence Inn Mission Valley for $67 million.
The investment in Chatham Lodging Trust should have disqualified Neil from working on the public agency’s purchase of the property, Housing Commission lawyers concluded in a 16-page memo provided to the City Council and Housing Commission board members that was reviewed by Voice of San Diego.
The investment also could open Neil to criminal prosecution under state law that restricts public officials from having a financial interest in any contract they work on as officials, according to the same legal analysis.
But the allegation opens the Housing Commission to questions as well. The price the agency paid for the Mission Valley hotel had already been scrutinized by the Union-Tribune, which found earlier this year that the per-unit price of the acquisition exceeded the going rate.
Neil’s contract with the Housing Commission stipulated that he not be paid more than a $250,000 commission for the work. Instead, Neil negotiated as part of the purchase that he would be paid $502,500 by the agency.
In an email, a Housing Commission spokesman declined to respond to questions from Voice of San Diego regarding Neil’s alleged conflict of interest and the agency’s handling of the situation.
“The matter for which you are requesting comment is the subject of investigation, and will be the subject of subsequent litigation, at the appropriate time,” wrote Scott Marshall, the Housing Commission’s vice president of communications, in an email to Voice of San Diego. “SDHC has a policy of not commenting upon prospective or active litigation, especially when the matters are the subject of investigation.”
The memo from the law firm Christensen & Spath, the agency’s legal counsel, recommended referring the matter to the district attorney and the city’s ethics commission, and that the Housing Commission seek the return of Neil’s commission.
The district attorney’s office would not confirm or deny any investigation, consistent with its normal policy.
Neil, in an email to Voice of San Diego, said the document presented to the Housing Commission’s board and the City Council included inaccuracies, but did not specify those inaccuracies when given an opportunity.
“I do not believe I violated the law with respect to the Housing Commission’s transaction with Chatham. Nonetheless, I am continuing to investigate your unsupported allegations further,” Neil wrote.
Neil’s Investment and Commission
Last year, on June 11, the Housing Commission and Neil signed a contract. He would help the agency buy hotels, and get paid $250,000 a pop to do it.
By Aug. 5, Neil had helped the Housing Commission enter an agreement to buy the Residence Inn Mission Valley for $67 million.
Sometime between those two dates – the Housing Commission can’t be sure, because Neil never filed his required financial disclosure, called a Form 700 – Neil purchased 40,000 shares of Chatham Lodging Trust, a real estate investment trust, or REIT. An REIT is a company that owns income-producing real estate, like hotels, commercial buildings or apartment complexes, creating an income stream for investors, who can purchase shares of them. The Housing Commission’s legal memo does not specify how the agency learned of Neil’s investment, only that it “became aware” of it on Feb. 23.
Neil’s investment, the Housing Commission estimates in its legal analysis, went for somewhere between $5 and $8 per share, depending on when he executed the transaction. That would put his investment at an overall value of between $206,400 and $329,200.
That’s not what it trades for now, though.
Now, it goes for about $12.70 per share. It’s had a great run since last August, climbing steadily since its recent bottom in late July.
On the last day of trading before the Housing Commission’s legal analysis was written, the stock opened at $13.65, putting the value of his 40,0000 shares at about $546,000, if he did not sell them by that point.
“Today, we can generally estimate that Neil has made approximately between $230,000 and $353,000 on his ill-advised and untimely investment (from the standpoint of the applicable conflict of interest laws),” the memo from Christensen & Spath reads.
The memo also outlines the legal counsel’s conclusion that Neil broke the law. It determined that, as a consultant, he qualifies as a public official, and that his investment in the REIT qualifies as a relevant personal financial interest.
“The conclusion is that the Commission’s decision to purchase the property had a unique and presumably very positive effect on Neil’s financial interest based on his REIT stock purchase just before the property purchase was executed,” the memo reads.
The memo also concludes that Neil had an “unlawful financial interest” under the state’s prohibition against public officials benefiting from contracts they make through their official role.
“Ultimately, had the Commission been properly put on notice of the stock ownership, the Commission could and no doubt would, have terminated its relationship with Neil, and would have retained new representation for the deal to ensure full compliance,” the document reads.
But Neil also made a good bit of money on the sale itself, more than double what his initial contract with the Housing Commission stipulated.
As part of the purchase, Neil negotiated as a specific deal point that the Housing Commission would pay his commission, for $502,500.
“Under this deal point, Neil negotiated his fee to be $252,500 more than the amount he was to receive under the (contract),” the legal memo reads. “No Commission staff or counsel were involved in the negotiations relating to the increased fee.”
But Housing Commission staff also didn’t explicitly tell the agency’s board, during its September meeting when it approved the purchase, that the broker’s fee had doubled as part of the acquisition.
Rick Gentry, the Housing Commission’s president and CEO, and Michael Pavco, the agency’s former senior vice president in the Commission’s real estate division, delivered a presentation to the board in September. The board agenda specified that Neil would be paid $502,500 as part of the purchase, but it did not mention that his contract with the agency capped his commission at $250,000 per property. Neither Gentry or Pavco mentioned it in their board presentation, and no board members asked any questions about it.
In the legal memo outlining the Housing Commission’s next steps, the law firm recommended clawing back the $502,000 payment from Neil. If he does not pay back voluntarily, the memo said, the Housing Commission could await the results of the criminal investigation, which could make it a requirement of any plea deal.
The Housing Commission’s Purchase
On Feb. 21, the Union-Tribune’s Jeff McDonald critiqued the cost of the Residence Inn Mission Valley purchase, which it said had the highest per-room cost of any hotel sold in the county last year.
Marshall, the Housing Commission spokesman, said in response that the Commission would not have been able to secure loans from Chase Bank if its valuations hadn’t been supported by independent appraisals of the properties.
It was two days after the Union-Tribune’s article published, on Feb. 23, that the Housing Commission’s general counsel “first became aware that Neil bought shares” in the company, the legal memo says.
But it turns out, that wasn’t the first time anyone in the agency learned about Neil’s investment.
Pavco and Pari Zaker, the Housing Commission’s vice president of development, learned about the stock purchase sometime prior to Feb. 23, according to a written response to questions provided to members of the City Council and the Housing Commission’s board that was also reviewed by Voice of San Diego.
When legal counsel learned of Neil’s investment on Feb. 23, according to the document, Neil also said that he had previously told both Pavco and Zaker about it “at some time.” Both Pavco and Zaker confirmed to the agency’s lawyers that this was true, but neither could say whether they were told of it before or after the agency agreed to purchase the hotel.
“Ms. Zaker stated that at the time she was told this that she thought to herself that she knew she could not do that but assumed it was ok for him to do it,” the document says.