Ash Street deal, now mired in litigation and a criminal probe, was changed weeks after City Council approval
Newly disclosed records show transaction changed from ‘purchase and sale’ to ‘refinance’ for tens of millions more than property was worth
Weeks after the San Diego City Council approved the lease-to-own agreement for the office tower at 101 Ash St. the sellers changed the transaction — a deal that is now the subject of multiple lawsuits and a criminal investigation.
The council approved what’s known as a double-escrow transaction in October 2016. The plan called for former owners Sandor Shapery and Doug Manchester to sell the downtown high-rise to Cisterra Development, which would simultaneously lease it to the city.
But according to newly disclosed emails and other documents, Cisterra and Shapery terminated their purchase-and-sale agreement after the council vote. They swapped in a proposal to refinance — rather than sell — the building.
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“I want to get you guys in the loop as soon as possible,” Cisterra lawyer David Dick told Chicago Title officials in a Nov. 30, 2016 email. “... We’re going to be replacing the Purchase and Sale Agreement with a Contribution Agreement.”
The restructuring, which apparently was not disclosed to city officials, meant that Cisterra was no longer buying the building from Shapery and Manchester in order to execute the 20-year lease-to-own arrangement the council approved.
Instead, Cisterra and Shapery created a new entity — 101 Ash Members LLC — to “contribute” the property to 101 Ash LLC, the initial subsidiary that Cisterra formed to manage the lease.
“The borrower/ buyer/ landlord is going to be 101 Ash LLC, a single-member Delaware limited liability company, the sole member of which is/will be 101 Ash Member LLC, a Delaware limited liability company that will be comprised of a Cisterra-sponsored entity and some of the current ownership of the building (specifically the Shapery entities),” Dick wrote in the same email to Chicago Title.
Title companies are third-party experts that review real estate deals to search for and insure against any liens and other encumbrances on the property involved.
The change allowed Shapery to reduce his tax liability. It also allowed 101 Ash LLC to borrow $92 million from investors on the promise that the city was guaranteed to pay $535,000 a month for the building over the next two decades — or $128 million.
The former Sempra Energy headquarters, which remains vacant and cannot be safely occupied due to asbestos and other issues, had been appraised at $67 million in the months before the council agreed to the lease.
A separate appraisal prepared for Cisterra said the building was worth $94 million — strictly as an investment — once the city approved the lease. That evaluation was not provided to city officials.
In their report to the City Council, aides to former Mayor Kevin Faulconer said the lease would save $44 million over 20 years by consolidating city employees into the Ash Street building rather than renting other office space.
The changes to the deal that were made after the city approved the lease raise questions about whether the arrangement should have been returned to the council for a second vote.
The ordinance the City Council enacted in October 2016 includes terms that never materialized, including a reference to the pending purchase by Cisterra.
In addition, the city charter requires the council — and members of the public — to know who specifically is doing business with the city.
The City Clerk’s Office declined to say whether the Ash Street ordinance should have been reconsidered by the council. It referred questions to the City Attorney’s Office.
A spokeswoman for City Attorney Mara Elliott would not say whether the change required the lease to be returned to the council for a follow-up vote. But she did say there is no evidence Cisterra informed city officials about the change.
“We have no indication that the city knew about this restructuring,” spokeswoman Leslie Wolf Branscomb said in an email.
Mayor Todd Gloria, who made the original motion to approve the lease while he was serving on the council in 2016, did not respond to questions about the changes made to the Ash Street transaction.
Both Cisterra and Shapery downplayed the switch from sale to refinance, saying it had no impact on the city’s bottom line.
“The city was a party to a lease agreement — not the building purchase or financing arrangements,” Cisterra spokesman Eric Rose said in an email. “The city’s lease agreement remains exactly as it was approved by the City Council in October 2016.”
Shapery, who paid Manchester $25 million for the 49 percent stake he bought for $20 million in 2015, said the changes made after the council signed off on the deal did not mean he retained control of the building.
“In order to structure the transaction to gain the proper tax impact for all the parties, Manchester was replaced by Cisterra at the moment of close,” Shapery said by email. “The property was then transferred to an entity controlled by only by Cisterra.”
Records detailing changes to the deal were obtained by former San Diego city attorneys Michael Aguirre and Maria Severson, who represent taxpayer John Gordon in a lawsuit challenging the 2016 lease.
They alerted council members to the restructuring in a letter earlier this month that included dozens of pages of emails, financial documents and a private legal memorandum outlining how the transaction could work.
“This ‘refinance’ without any purchase is contrary to Cisterra’s representations to the city that Cisterra was purchasing the property at $20 million less,” Aguirre said in the May 6 letter.
“Because the nature of the transaction appears to have been concealed by Cisterra when it was presented to the city in 2016, we respectfully renew our request for a public hearing to address these issues,” Aguirre added.
Council President Sean Elo-Rivera did not respond to the request.
“Since this topic is related to ongoing 101 Ash litigation, he has no comment,” his spokesman, Christopher Chan, said in an email.
The Ash Street deal has grown into a serious legal and political problem for the city since the Faulconer administration asked the council to approve the “as-is” lease nearly six years ago.
City officials failed to perform any independent assessment of the property’s condition before approving the contract even though the agreement specifically made the city responsible for all repairs, renovations and other improvements.
The deal recommended by Faulconer and approved by the council allowed the city to spend up to $201 million on the Ash Street high-rise. The money included monthly lease payments, upgrades and operations, and maintenance costs.
To date, the city has invested at least $60 million in the property, including $30 million in renovations, $23 million in lease payments and millions of dollars in legal fees and settlements.
A consultant the city hired in 2020 said the office tower needs $115 million in additional work before it will be safe to occupy. Lawyers for the seller and its lender say the city caused most of that damage when it was remodeling.
Gordon, a San Diego restaurant analyst, sued the city, 101 Ash LLC and its lender, CGA Capital Credit Lease Backed Pass-Through Trust Series 2017 CTL 1, in August 2020.
His legal complaint seeks to void the lease on the grounds that it violated the state constitution by spending revenue without benefitting taxpayers and by indebting the city without a public vote. It survived an early legal challenge and is scheduled for trial in January.
Three weeks after Gordon filed his claim, Faulconer suspended the $535,000 monthly lease payments.
The city filed its own suit against 101 Ash LLC and the lender in October 2020, asking a judge to affirm that the city should not be required to make lease payments while the building is unusable.
That legal position changed last summer, after former mayoral adviser Jason Hughes publicly acknowledged making $4.4 million on the Ash Street lease and $5 million on a similar deal for the nearby Civic Center Plaza in 2015.
The city amended its lawsuit against 101 Ash LLC and the lender, and filed a new complaint against Hughes.
The revised claims accuse defendants of violating state anti-corruption laws by reaching a confidential agreement to share profits from real estate deals at the same time Hughes publicly represented himself as a volunteer adviser to the mayor.
“Remember that Cisterra was not sharing important information with the city at this time, including what it knew about the condition of 101 Ash or that it had secretly hired the city’s own broker to act against the city’s interests,” Branscomb, the city attorney’s spokesperson, said by email.
For much of the past year, city officials met with Cisterra lobbyist Christopher Wahl in an effort to resolve the Ash Street litigation out of court. Wahl raised tens of thousands of dollars for City Council members in recent years, his lobbying disclosures show.
Despite three closed-session meetings in the past three months, two of which stretched past four hours, the City Council has not approved any proposed settlement.
The Ash Street transaction has not escaped the notice of District Attorney Summer Stephan.
Her office acknowledged it was conducting a criminal investigation into the deal last fall, when her agents executed search warrants at Cisterra’s headquarters in Carmel Valley and Hughes’s downtown San Diego office.
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