What We Learned This Year: San Diego Still Needs to Fix its Real Estate Problem  | Voice of San Diego

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What We Learned This Year: San Diego Still Needs to Fix its Real Estate Problem 

The city managed to find new and different ways to reveal the scope of its problems buying, leasing, and developing property. 

Real Estate San Diego
Top left clockwise: 101 Ash St., a former Residence Inn in Mission Valley and the Pechanga Arena. / Photos by Adriana Heldiz and Megan Wood

There wasn’t a policy wonk in San Diego who would have argued to start the year that the city had an impressive real estate track record.  

Yet somehow, the city managed to find new and different ways to reveal the scope of its problems buying, leasing, and developing property. 

Just in 2021: The city’s ongoing attempt to redevelop the Sports Arena hit a significant roadblock – twice. Its lease-to-own deal for a downtown high-rise stepped into criminal territory. It dedicated $15 million renovating a building it doesn’t own so it can repair fire trucks there, four years after leasing the building for that purpose. Elected leaders learned that a hotel purchased by the city-created low-income housing agency they oversee was done with the help of a broker who had an allegedly criminal conflict of interest – and the agency bought the hotel at the height of the pandemic, while pricing the hotel as if the pandemic never happened. 

Those revelations followed decisions that predate the current mayoral administration. Dealing with those failures, though, has been a major part of Mayor Todd Gloria’s first year in office. 

Fallout from the city’s recurring blunders came all year. District attorney investigators raided the city’s former real estate advisor over the still-unfolding 101 Ash St. scandal. The former mayor was deposed for lawsuits related to the issue as well. A scathing report by the city’s auditor found the city had ignored routine government procedures in its acquisition of $230 million in real estate, leading to increased costs and under-used properties. The city attorney sued the broker who helped the San Diego Housing Commission buy a hotel from a company in which he invested, a case scheduled to go to trial in January.

The year, though, was bookended by two different failures on one major city initiative that showcased the city’s inability to deal with land it owns and land it wants to own or improve. 

In March, the city’s effort to redevelop the Sports Arena suffered its first blow. California’s housing department said the city ignored a state law in 2020 when it picked a developer to build thousands of homes and rebuild or renovate the arena without first offering the 50-acres of city-owned land to affordable housing developers. The Metropolitan Transit System managed not to overlook that same law during its own redevelopment efforts. Gloria had to re-start the process. 

He did that – and then the city learned this month – and on the same day bids were due from that re-started process – that it had broken a different state law when it put a measure on the 2020 ballot to remove the height limit in the entire Midway area, according to a ruling from Superior Court Judge Katherine Bacal. The city is appealing the ruling. Removing the height limit was seen as a key piece of the joint efforts of the city’s planning and real estate departments to revive Sports Arena since 2018. Gloria announced last week that the city will now re-start that process, too. The Sports Arena bidders lay in wait in the meantime. 

Penny Maus, director of the city’s real estate and airport management department, said she took the job in March, leaving a similar position with the Port of San Diego, with her eyes open. 

“When I was considering looking at this job, people were like ‘Are you crazy? Look at what’s going on over there. Are you not reading the news?’” she said in an interview. “I look at it as an opportunity. I want to be part of the solution. That’s where I’m coming from.” 

The July auditor’s report said the city struggled because its structure made it unclear what role different staff were meant to play, that it routinely failed to do basic due diligence that led to increased costs after it acquired property and that decision makers didn’t or couldn’t conduct sufficient oversight because the previous administration didn’t provide full or complete information on major deals. The city lacked a coherent real estate strategy, the audit said, leaving it to make scattershot decisions without clear priorities, and it often did so without complete economic analyses.  

“Overall, we found that a serious lack of policies and oversight caused the City to miss or skip key steps in the acquisition process, and allowed the prior City Administration to leave out or misrepresent key information about building acquisitions when presenting them to the City Council and the public,” the audit said. 

The audit stressed that the errors it reviewed occurred under the previous administration, but the new administration didn’t initially embrace all the changes the city needed to make to stop them from happening again. City staff resisted implementing a checklist of best practices for each acquisition, telling the independent budget analyst ahead of new acquisitions it was aiming for before starting negotiations, confirming that contractors it relies on had completed necessary economic disclosures to prevent potential conflicts and getting an independent appraisal of properties before agreeing to a price. 

In September, though, city staff changed course, after the City Council’s audit committee criticized its response to the report. Maus, in a Sept. 7 memo, told the auditor’s office the real estate department would fully implement the recommended changes. The city attorney’s office, which was also criticized in the audit, maintained its criticism that the audit was an “incomplete investigation,” though it also agreed to implement some changes. 

Maus said her office is now completely re-writing the city’s real estate policies, including the auditor’s recommendations. That will include re-writing the Council policy that covers the city’s real estate operations, but Maus said they’re also inventorying each of the different real estate policies the department has leaned on to re-write and consolidate those as well.  

She said the department had hoped to present their changes to go through the Council’s committee process by the end of the summer. 

Formalizing the acquisition process, Maus said, will make it easier for the Council to oversee the city’s decisions. 

“The changes recommended by the audit and that I quite frankly think are just best practices, will give the tools to the Council to be able to see, if we do or don’t do certain levels of assessment, they can say ‘you didn’t do this type of study, why not?’” she said. 

The real estate department had wins this year too, Maus stressed. It completed a $10 million construction project at Montgomery Field, the city-owned airport in Kearny Mesa, and approved a $16 million redevelopment of the airport with a new 40-year lease, for instance. 

But the department will need to slog through its high-profile problems. 

While the Sports Arena redevelopment is in limbo, the city will spend the next three months negotiating with the five teams who submitted bids on the property before the court ruling imperiled the concept. Maus said the city will go back to each project for additional data so it can compare each of them on a level field. The city’s appeal of the ruling against the height limit removal will progress in the meantime, and Gloria announced the city would conduct the environmental review it didn’t in 2020, which the judge said was necessary before it went before voters. 

“In our notice, we said the outcome of Measure is still uncertain, so every response came in with eyes wide open,” she said. 

Lawsuits – and possible settlements – continue over 101 Ash St., as does the criminal investigation and political consequences over it, and the city’s need for office space that led to the deal in the first place. 

And construction companies have submitted bids to rebuild the Othello Avenue warehouse that the city wants to make into a maintenance yard for the city’s fire trucks. Construction could begin in early 2022, and would be expected to last up to a year and a half. 

“Regardless of what happened in the past, we’re moving forward,” Maus said. 

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