The City’s Other Troubled Real Estate Deal
The city is gripped with concern over the troubled acquisition and renovation of a downtown high-rise, but there’s another big real estate acquisition that is not going well.
It’s been three years since the city leased an industrial property in Kearny Mesa to turn into a maintenance yard for the city’s fleet of fire trucks. But a mechanic has yet to touch a fire truck on that property, and it will be at least another year before one does.
In the meantime, the city has paid $2.6 million for the nearly three-acre property and warehouse. When the City Council greenlit the purchase, city staff estimated needed renovations would cost $6.5 million. City staff later determined the real price tag was nearly three times that, at $17 million. That’s when the city took a step back, brought in a new architect who drew up plans with a slightly lower price tag – $14.8 million – and the city settled into its current timeline, with renovations expected to begin as early as this summer in hopes of the fire truck maintenance yard operating by early 2022.
That would be five years from the Council’s first hearing on the lease, but the property hasn’t been sitting idle this whole time, either.
Instead, the city has been able to put some employees there to help shoulder the burden from a different city real estate problem. The city has stashed staffers from the Transportation and Storm Water Department in the warehouse’s 25,500 square feet of office space in the property since February 2018 when they were evacuated from the Executive Complex at 1010 Second Ave., where the city leased space for its staff until an asbestos violation forced it to relocate them in office space scattered through the city.
The issues at the Othello Avenue property, the nearly six-acre property with three industrial buildings in Kearny Mesa eyed as a new fire truck repair facility, reflect recurring problems with other recent city real estate deals. It’s a trend called out by the city’s independent budget analyst, Andrea Tevlin, in a recent memo to the city’s chief operating officer, citing a tendency for “significant problems that were not foreseen by staff or presented for consideration when the City Council was asked to approve the acquisitions.”
The most high-profile of those issues is at 101 Ash St., where the city acquired a high-rise to consolidate city workers, only to encounter costlier-than-expected renovations that eventually led to asbestos violations that forced it to evacuate employees shortly after they moved in. It also includes the city’s purchase of an indoor skydiving facility it eventually turned into a homelessness navigation center after a two-year delay, and its acquisition of the Civic Center Plaza downtown, which the city estimates needs up to $21 million in tenant improvements but has no plans to do them.
The Othello Avenue project, though, has flown under the radar as its costs have skyrocketed.
If all goes well, the city will begin repairing fire trucks at the property five years after it first brought the lease agreement to the City Council. That’s five years after city staff told the Council the need to acquire the property was so severe that it could save lives.
Don’t You Let That Deal Go Down
The deal to takeover the Othello Avenue property was supposed to answer a long-running problem for the city.
For years, the city has had a single maintenance yard, in Miramar, for its fleets of fire trucks and garbage trucks. Consultant reports in 2014 and 2016 both said it was a serious problem to repair both fleets of vehicles at the same property, laying out how it led to operational chaos at the facility, inefficiency and diminished services for city residents.
Getting the fire fleet its own maintenance yard presented significant benefits, city staff wrote in a 2017 report to the City Council.
“The ability to resolve Fire fleet’s issues in a timelier manner has the potential to prevent loss of life and property,” the report read.
At a Council meeting, Brad Hawthorn, the deputy director of fleet operations, laid out the controlled chaos underway at the Miramar facility, which often forced city workers to repair fire trucks outside, because there weren’t any bays available to park the trucks in.
To put it in perspective, the Kearny Mesa property that will service only fire trucks is roughly twice the size of the Miramar facility, where the city currently handles two fleets.
A city staff report also explained moving the fire truck repairs would lower the city’s carbon footprint by shortening travel times for the trucks, and improve emergency response times.
In April 2017, the Council first approved a 10-year lease for the property, costing just about $10.4 million. The deal included two five-year renewal options, and would give the city the first opportunity to buy the property at the end of 20 years, if the owner chose to sell.
Goes to Show You Don’t Ever Know
When the city took over the property, it had been functioning as an RV repair facility. Making it suitable to repair fire trucks wasn’t cheap. That would cost an estimated $6.5 million.
It’s been three years since the item first went to the City Council, but the city hasn’t started retrofitting the property yet. It’s spent $2.67 million in lease payments, or about $80,000 a month, while still maintaining and repairing both fire and garbage trucks out of the Miramar location.
That’s because “it became apparent the cost of the improvements would be more than the $6.5 million originally anticipated,” as city staff wrote in a July 2019 report to the City Council.
Once city staff got into the property, the cost of the renovations nearly tripled, to an estimated $17 million, according to a five-year capital infrastructure plan outlook prepared by the independent budget analyst.
It’s that cost spike that the IBA was referring to last month, when it mentioned that Othello, like the 101 Ash St. project, had “encountered significant problems that were not foreseen by staff or presented for consideration when the City Council was asked to approve the acquisitions.”
Last August, the City Council reacted to the ongoing problems by extending the original lease term to 15 years and adding a third five-year extension option. That would give the city up to 30 years to control the property, allowing it to spread out the cost of the expensive renovations over a longer period. Staff also said it thinks there’s a better chance the city could buy the property in 30 years; the owner isn’t interested in selling now, but staff’s hopeful he will be in three decades.
The city now pegs the costs of construction and asbestos abatement at the property at $14.8 million, according to the IBA.
But the city isn’t exactly sure how it’s going to pay for those retrofits.
Last year, the Council approved only $812,000 to design and plan for the improvements. The city will need to find about $13.8 million sometime in the 2021 fiscal year, before it can finalize a construction contract.
“The Fleet Department indicated that they and the Department of Finance are evaluating funding mechanisms,” the IBA wrote in its five-year outlook.
Costs a Lot To Win, and Even More to Lose
Last month, the city brought in a law firm to look into how and why the city’s deal at 101 Ash St. went wrong.
Tevlin used that as an opportunity to suggest the city broaden that assessment to review the city’s process for “acquiring significant real estate property.”
She said it was essential that certain pieces of information that weren’t available for the Othello Avenue property be presented to the City Council before they’re expected to make similar decisions – like bringing in outside experts to determine risks in property condition reports, using third parties to identify necessary tenant improvements before and after acquiring the property, developing reliable cost estimates for those improvements and laying out dependable timelines to finish everything.
In the meantime, city fire and garbage trucks are still being repaired at the same Miramar property.
In the city’s own words, splitting those functions into two locations had the potential to “prevent the loss of life and property.” So I asked: Does that mean unforeseen delays that will force them to continue operating on one site could potentially lead to the loss of life and property?
“Although the city is effectively using the site as currently configured, the proposed changes will make it even more efficient and account for the city’s future needs in terms of vehicles and maintenance to ensure continuity of priority operations (trash and fire),” wrote Alec Phillipp, senior public information officer.