Government

Real Estate Debacles Loomed Large on Faulconer’s Watch

At least three major deals during Mayor Kevin Faulconer’s tenure were characterized by problems that could have been avoided. Each suffered from a lack of scrutiny, costly delays and uncertainty for city employees and taxpayers.

illustration of mayor kevin faulconer and San Diego buildings
Illustration by Adriana Heldiz

Buildings have always held an outsize place in San Diego city politics – whether it’s stadiums, the Convention Center or more mundane structures like office space to hold city workers. On Mayor Kevin Faulconer’s watch, multiple real estate acquisitions devolved into scandal, costing the city time and taxpayer money.

In one of the biggest disasters of his administration, city employees aren’t working out of 101 Ash St. four years after the city acquired the downtown high-rise in a controversial lease-to-own agreement, and the city has since been hit with costly renovation bills, asbestos violations and an explosion of legal claims. A shuttered East Village indoor skydiving facility the city purchased in early 2018 to transform into a homeless service hub has been embroiled in controversy over questions about whether the city paid too much for the building, a prominent Faulconer supporter’s connection to it and the city’s plans for the facility. And a Kearny Mesa industrial property the city leased in 2017 at a cost of about $80,000 a month to use as a maintenance yard for the city’s fire trucks couldn’t accommodate those vehicles after all, and the renovations haven’t yet begun nearly four years later, as costs have soared.

All three deals were characterized by problems that could have been avoided. Each suffered from a lack of scrutiny and issues that weren’t flagged before they were approved by the City Council, costly delays and uncertainty for city employees and taxpayers.

In each case, Faulconer and his team have minimized his involvement. They have suggested the transactions were driven by city bureaucrats rather than the leader responsible for signing off on those deals per the city’s strong mayor form of government. And in an interview with Voice of San Diego last week, Faulconer claimed he couldn’t recall the specifics of his interactions with two prominent supporters tied to the 101 Ash and navigation center deals.

In the messy aftermath of those deals, the city real estate chief resigned and the mayor said he has directed city officials to consult outside experts on real estate transactions. The city has also sought a consultant to assess and recommend changes to the city’s real estate operation. City auditors have begun digging into the city’s acquisition and due diligence processes too.

“There needs to be a fundamental rethinking of how (real estate) is handled, and as we’ve said, we’re working on this,” Faulconer said last week. “I believe we absolutely should have outside experts and consultants to manage real estate transactions for the city. When we’ve done that, I think it’s suited us very well.”

Faulconer said the city’s sale of its Mission Valley land to San Diego State following a 2018 ballot measure, as well as with bidding processes to redevelop city-owned Tailgate Park in East Village and the Sports Arena property in Midway show the city can get better deals when it works with outside experts.

Mayor-elect Todd Gloria will ultimately decide how to proceed with the Tailgate Park and Sports Arena projects, and how to deal with the messes.

He must decide what the city does with 101 Ash, a building the city once thought would house hundreds of city employees that one early estimate suggested could need $115 million in repairs to do so. Gloria also must decide whether to stick with the homeless navigation center concept and its unusual home, and how to proceed with the Kearny Mesa property.

Real Estate Issues Have Long Dogged the City

The city has long grappled with real estate challenges. They were documented in a blockbuster 2006 Union-Tribune story revealing the city’s inability to accurately track its various properties and in a 2014 outside consultant’s report that also called for the department to better manage its properties and better communicate with other city departments.

Faulconer hired Cybele Thompson to be the city’s real estate assets director in 2014 with the hope that the commercial real estate industry veteran could address the department’s long-running challenges.

Thompson left the city in August following a new set of high-profile debacles. Former Assistant Chief Operating Officer Ron Villa, Thompson’s supervisor, was also forced to leave the city over 101 Ash St. in February.

Yet as questions have swirled around the deals executed by the two, Faulconer has largely avoided speaking publicly about the debacles and has declined interview requests from VOSD through spokespeople, preferring to have other city officials be the ones to engage with reporters investigating the 101 Ash deal in particular. He is barely mentioned in a 47-page preliminary outside investigation of the 101 Ash transaction presented to the City Council in August.

That’s despite significant questions about calls Faulconer may have made behind the scenes on the 101 Ash and navigation center deals in particular, both of which had ties to longtime political supporters and seemed to bypass usual safeguards meant to ensure the city was getting a good deal.

There have been fewer questions about Faulconer’s dealings on the Kearny Mesa property though it has been hit with significant challenges. The city’s independent budget analyst noted in a February memo that, like other troubled city acquisitions, issues surfaced that “were not foreseen by staff or presented for consideration” when the City Council approved the lease.

Indeed, the city has made more than $3 million in rent payments on the so-called Othello property since the City Council gave the go-ahead on plans to use the industrial property as a maintenance yard for the city’s fire truck fleet in April 2017.  At the time, city officials estimated renovations would cost $6.5 million. They have later decided the price tag is closer to $14.8 million but have yet to start work on the property despite earlier hopes that construction might start this summer. The city moved some employees to the property, so it hasn’t sat idle, but it has yet to fulfill the purpose the city intended – and it’s unclear when exactly it might.

7950 Othello Ave. / Photo by Megan Wood

Faulconer spokesman Craig Gustafson said this week that the pandemic changed the city’s priorities and it now expects to release a revised project schedule soon.

101 Ash St.

The 101 Ash investigation conducted by a San Francisco law firm emphasized the city’s failure to seek an independent assessment of the building’s true condition upfront, or to conduct its own formal inspection before the City Council approved a 20-year, $128 million lease-to-own deal. Doing so would have revealed a slew of needed repairs. Instead, Thompson dubbed the building in excellent condition in presentations to the City Council in fall 2016.

In 2018, city officials asked the City Council for another $30 million to accommodate more city staffers at a building already a year behind schedule. That same year, the Union-Tribune repeatedly highlighted the $18,000 a day the city was spending to lease a building it. The stories seemed to trigger panic at City Hall.

After the bad press, documents obtained by VOSD suggest renovations were rushed and mismanaged. As the work continued, asbestos repeatedly shook loose, triggering the attention of the San Diego County Air Pollution Control District.

101 Ash St. / Photo by Adriana Heldiz

City employees began moving into the building in December 2019 only to scramble to move out a month later after the county issued a notice of public nuisance. City workers haven’t returned, and a consultant this summer made an initial estimate that 101 Ash could need $115 million in repairs that could take up to four years to complete. In September, after an avalanche of legal claims and questions about the transaction, including millions of dollars in costs the city can’t fully account for, Faulconer decided to stop paying monthly rent on the building, a decision that Cisterra and investors in the lease are challenging. The city has also filed suit against Cisterra and lenders in hopes of confirming it doesn’t have to pay rent on a building it can’t use and has hinted it will battle contractors who worked on 101 Ash in court.

Faulconer told VOSD last week that he was disappointed with how the debacle has played out but did not reflect on what he could have done differently.

“I interact with the team all of the time and what I expected in terms of a building that the staff could occupy wasn’t delivered. That performance did not happen,” Faulconer said. “And I vowed to hold not only internal folks accountable, but also external, and that’s why we’re moving so aggressively again on some of all of the lawsuit issues as well, because it’s about recouping costs. It’s about holding contractors who worsened the building’s condition, holding them accountable. It’s looking at making sure how that does not happen again in terms of how the city departments handle property and how do we come to a resolution that is in the best interest of taxpayers and our employees on a go-forward basis.”

Faulconer said he was following city officials’ recommendation when, at a pivotal September 2016 meeting, he directed staffers to proceed with a lease-to-own arrangement to acquire the building rather than a direct purchase that would have saved the city an estimated $17 million. The lease-to-own arrangement put the onus on the city to handle repair costs that have skyrocketed while traditional leases leave those costs and responsibilities to landlords.

Faulconer said he and city bureaucrats were focused on delivering offices for city workers that were higher quality than current city buildings and more economical than the multiple leases the city had throughout downtown, and that those bureaucrats believed lease-to-own was the best.

“You can talk about certainly about the execution, but the goal has always remained: how do we have a quality work environment for employees and save money on leases? And that’s why staff wanted to do that,” Faulconer said.

In the aftermath of the deal, there’s been much speculation about Faulconer’s directives and potential concerns about the optics of doing a direct transaction with former 101 Ash minority owner Doug Manchester, a major supporter of Faulconer’s political campaigns and the 2008 state proposition to ban gay marriage.

Calendar records released after a public-records request show Faulconer met with Manchester in the mayor’s office 10 days before the first City Council vote on the lease-to-own arrangement with middle-man seller Cisterra Development. Cisterra had cut a deal with then 101 Ash majority owner Sandy Shapery and Manchester to purchase the building. Cisterra executed the lease arrangement with the city on the same day the sale was consummated.

The mayor’s calendar shows a 30-minute meeting with Manchester and fellow developer Perry Dealy on Oct. 7, 2016, labeled “Pacific Gateway/101 Ash Office Bldg.”

Aimee Faucett, a longtime Faulconer staffer now serving as interim chief operating officer who did not work for the city at the time, interjected in an interview with VOSD last week to say that the meeting focused on the waterfront Pacific Gateway project. Faulconer later said he did not recall conversations during the meeting but thought Faucett was correct.

Gustafson told VOSD this fall that 101 Ash had come up in the meeting, though the discussion largely focused on Pacific Gateway.

“During the meeting, Manchester expressed his disappointment that the city had entered into a lease-to-own agreement with Cisterra after Shapery/Manchester had agreed to sell to Cisterra,” Gustafson wrote in an email to VOSD.

Gustafson added that the city had considered Shapery’s past offers to the city unreasonable because they “often topped $100 million” while Cisterra paid $72.4 million for the building.

Manchester told VOSD he does not remember the details of the 2016 discussion and was not privy to specifics of the lease-to-own deal since he was not directly involved in the transaction with the city.

Dealy, the Pacific Gateway project manager, said he didn’t recall 101 Ash being discussed at the meeting, though he acknowledged that wasn’t his own focus.

The Homeless Navigation Center

About a year after the 101 Ash St. acquistion, the city rushed to purchase a downtown skydiving facility has also been dogged by questions about a Faulconer supporter’s ties to the building.

In 2017, Faulconer faced scathing international press coverage over a deadly hepatitis A outbreak that battered the city’s homeless population. Until that fall, many of Faulconer’s homelessness initiatives had stalled and the mayor was eager to show results.

Real estate financier and Faulconer supporter David Malcolm had long urged the mayor to pursue a service hub for homeless San Diegans.

In September 2017, just as Faulconer faced embarrassing headlines, an East Village skydiving business that Malcolm’s son helped manage had failed and county records show Malcolm’s mortgage company took possession of the property. A month later, Malcolm updated records to clarify that his company hadn’t put up the money for the skydiving facility.

That November, Malcolm told the mayor and two other top city officials about the building. City real estate officials later hurried to set the stage for a purchase, bypassing their usual process of seeking an appraisal.

Instead, they described an appraisal that concluded the skydiving center was worth $15 million to $22 million. They didn’t clarify that they were summarizing  reviews passed along by the seller, or that at least one of those analyses had factored in furniture and equipment in the building still outfitted with two 30-foot wind tunnels.

Residents fill out paperwork at the city’s homeless navigation center in East Village. / Photo by Adriana Heldiz

The rush allowed Faulconer to announce the city’s planned purchase during his 2018 State of the City address focusing on his action on homelessness and the hepatitis A crisis.

The City Council later unanimously approved using $7 million in federal block grant funds to buy the building.

Malcolm has for years declined to speak with VOSD about his specific role in the transaction, citing a legal battle involving his mortgage company and the former owner of the skydiving center. Malcolm also did not return a message left by VOSD early Wednesday.

After criticism from City Council members about Faulconer’s plans for the building, the facility didn’t end up operating as a service hub until December 2019 despite Faulconer’s pledge that it would open within months of the purchase.

Then, this October, the city ended its contract with operator Family Health Centers of San Diego, whose CEO alleged that the project was “orchestrated more as a public relations undertaking than a needed and important component of a homeless continuum.”

The San Diego Housing Commission is set to take over operations of the building it is now calling the homelessness response center. The agency has said it hopes to reopen the facility early next year.

As Housing Commission staff considered how to proceed with the building this fall, the city finally secured an independent appraisal for the skydiving center that showed the facility was worth $200,000 more than the city paid in 2018 at the behest of federal Department of Housing and Urban Development scrutinizing the purchase.

Investigators concluded that the city’s purchase met HUD requirements and that the acquisition “was a reasonable and eligible cost,” according to a Sept. 23 letter obtained by VOSD.

But HUD told the city to improve its real estate processes.

“(HUD) has asked the city to strengthen its procedures to ensure that, in the future, appraisals are obtained in advance of property acquisition and are current to accurately reflect the market value,” Rufus Washington of HUD’s California Office of Community Planning and Development wrote.

Despite the blowback the purchase and the project, Faulconer stands by it.

“I think it’s incredibly necessary. One of the things that we’ve absolutely learned (at the Convention Center shelter operation during the pandemic) is that if you have everybody under one roof and the right mix of folks – from job training, housing navigators, mental health, county services – it can work,” Faulconer said. “That was the promise of the navigation center. And as we transfer out of the Convention Center, we now have the place, in a location that can do life-changing work.”

But Faulconer said he couldn’t recall past conversations with Malcolm about the property though the real estate financier aggressively lobbied the mayor to pursue the concept and then ended up delivering a building for it.

“You’re asking me about conversations that go back years ago,” Faulconer said.

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