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The revelation of Cisterra’s payments to Jason Hughes for his work on the Civic Center Plaza and 101 Ash St. deals and disputes about whether the amounts he was paid were fair offer a window into the unique dynamics of the commercial real estate industry.
The revelation that a downtown real estate broker who volunteered to help the city was in reality paid millions of dollars by a developer that negotiated two lease deals with the city has left San Diego’s commercial real estate industry reeling over the steep payouts he received.
The disclosures have left many wondering just how broker Jason Hughes managed to make $9.4 million on the deals – a sum far higher than typical broker fees. His lawyer says he was paid based on other more substantial services and even risks Hughes took but declined to elaborate, further stoking the intrigue.
Years ago, Hughes agreed to help the city with its real estate deals without seeking commissions that he and other real estate pros usually get for negotiating office leases. But after attorneys for the city issued subpoenas to nail down more details of two city lease deals, Hughes and Cisterra Development, the city’s landlord at Civic Center Plaza and 101 Ash St., acknowledged the company paid Hughes just over $5 million for his work on Civic Center Plaza and another $4.4 million for the 101 Ash lease.
The city entered into almost identical lease-to-own agreements for both towers.
Attorneys for the city are now seeking to void both agreements, claiming that those payments to Hughes created a conflict of interest barred by state law since Hughes financially benefited from leases he helped negotiate.
Hughes and Cisterra argue the fees were reasonable given the solutions that Hughes provided in two 20-year lease deals that also required arrangements with the prior building owners and the lenders who provided upfront funds for Cisterra to purchase the two buildings before it turned around and leased them to the city. They also say top city officials, including former Mayor Kevin Faulconer, signed off those payments, an argument that former Faulconer administration officials deny.
But the deal has brought a spotlight onto the commercial real estate industry. Others in the industry say that the payments to Hughes seem to exceed typical fee schedules and raise questions, including a former city real estate official who worked with Hughes on one of the deals.
Had Hughes been acting as a normal tenant representative in a typical lease deal, a Voice of San Diego analysis applying fee structures provided by multiple sources suggests he would have been paid closer to $1.5 million in the Civic Center Plaza deal and about $2.6 million in the 101 Ash deal. Had he represented Cisterra – a move that would likely have required the city’s approval per a state law Hughes himself pushed – Hughes might have received about $1.2 million for his work on the Civic Center lease and $1.9 million for 101 Ash.
In the end, though, payments to any advisers in real estate deals are negotiable. Common fee schedules for brokers often set the stage for more discussions.
Hughes’ attorney argues that his client provided far more value in both deals than a traditional broker and earned higher fees based on different assumptions.
“This went far beyond routine tenant leasing services for which Jason would be paid a straightforward leasing fee by the landlord, the very fee he waived when he informally advised a series of mayors,” white-collar defense attorney Michael Attanasio wrote in an email to VOSD. “To compare the two is a misguided apples-to-oranges exercise.”
Attanasio has also said that the fees were “customary as measured by industry standards for structured transactions in which the adviser accepts risk and develops an ‘investment banking solution’ for the parties.”
But Attanasio would not elaborate on the risks Hughes took in the two deals, provide additional details on how the fees he described might be calculated or share other examples of those fees in similar deals.
The claim that Hughes took risks and provided investment banking solutions further deepens the mystery surrounding his relationship with Cisterra.
Former city real estate official John Casey, who worked with Hughes on the Civic Center Plaza deal, disputed Attanasio’s arguments. He said he appreciated Hughes pitching the idea that the city could pursue an arrangement that would allow it to essentially pay monthly mortgage payments to own the building after 20 years as the city grappled with its inability to swiftly go to the bond market to buy the downtown high rise as originally planned.
But Casey said Hughes’ work seemed to amount to that of a traditional broker since he essentially acted as a matchmaker and assisted with negotiations. He said the city and Cisterra executed the deal.
“I would say he was way overpaid,” said Casey, who acknowledged he was not privy to all the work Hughes did on lease-to-own deal approved by the City Council in early 2015.
“He may have done things I don’t know about, but I can’t imagine what they would be,” Casey said.
The city and Cisterra went on to pursue a nearly identical deal to acquire 101 Ash St. in 2016.
Emails obtained by VOSD after public-records requests show Hughes indeed proposed the lease-to-own concept as the city struggled over what to do about Civic Center Plaza and connected the city with Cisterra. He later sat in on meetings between city officials and the developer as they finalized the lease deal. Then he helped bring Cisterra to the table again in 2016 after talks fell apart with prior 101 Ash owners Sandy Shapery and Doug Manchester. He weighed in less often over email than he had in the previous deal as the city hammered out a lease agreement with Cisterra.
The revelation of Cisterra’s payments to Hughes for his work on both deals and disputes about whether the amounts he was paid were fair offer a window into the unique dynamics of the commercial real estate industry.
The state Department of Real Estate doesn’t dictate the fees brokers should be paid for their work on leases, leaving individual deals subject to negotiation.
Hughes is a tenant representative and made a business case that he was uniquely independent compared with other brokers, who he alleged often accepted kickbacks from landlords and otherwise didn’t always have the tenant’s interest – and their interests alone – in mind. But tenant representatives like him are still typically paid by landlords rather the tenants who hire them. Landlords then bake those fees into the monthly rents they charge tenants.
Attanasio, Hughes’ attorney, said Hughes’ work and fees on the 101 Ash and Civic Center Plaza deals did not follow those industry norms.
Attanasio argued Hughes’ efforts not only went beyond those of a traditional broker but that the payments he received were not incorporated into the city’s lease payments as they would have been in a typical deal.
He pointed to a November 2014 letter Hughes claims the city’s former real estate chief signed stating that parties other than the city could pay him for his work on more complex lease-to-own arrangements like the Civic Center Plaza deal. That letter included a pledge that Hughes would “make clear with any eventual landlord” that his fees shouldn’t be included in the city’s rent structure. (Cybele Thompson, the city’s former real estate chief, has said she does not recall signing the letter.)
“Jason earned his compensation by providing a creative solution that allowed the city to enter lease-to-own transactions for two buildings that were of enormous value to the city,” Attanasio wrote in an email to VOSD. “The solution that Jason structured allowed the city to solve its office space challenges, avoid its own economic challenges and inability to enter the public bond market, and save tens of millions of dollars.”
Cisterra has also defended its payments to Hughes.
“Cisterra paid Hughes a market-rate consulting fee of approximately $5 million for his role in the Civic Center Plaza transaction and a similarly market-rate $4.4 million for his role in the 101 Ash transaction,” the company wrote on a website it debuted last week defending its work on both deals.
The company has not responded to VOSD’s requests for more specific details on the work and value Hughes provided.
Brian Schwagerl, an attorney and former corporate real estate executive who is now a professor at New York University’s Schack Institute of Real Estate, said the debates over Hughes’ fees reflects industry variations when it comes to so-called triple net leases like the Civic Center and 101 Ash deals.
In both cases, Cisterra executed an agreement with lenders who provided an upfront loan to fund its purchase of the two buildings and other costs, a building purchase and then a so-called triple-net lease agreement with the city that left the city on the hook for building maintenance and other issues.
Schwagerl said the details of deals can vary considerably and that there is room for negotiation on everything from tenant improvement commitments to payouts for those who work on those deals. He also noted that large fees for advisers who work on deals can seem steep to outsiders but are common in the commercial real estate industry.
“There’s really not a standard when it comes to commission fees for triple-net leases,” Schwagerl said. “They vary because the leases themselves vary. To the average individual, they can seem like quite a lot of money upfront, but we’re talking about long-term deals.”
Still, Schwagerl said, both Hughes and Cisterra should have been more transparent about those fees – and how they were calculated.
“What they should really explain in this transaction, which is in the public arena, is how that number was reached,” Schwagerl said.