The ill-fated decision to sign a lease-to-own deal for the former Sempra Energy headquarters at 101 Ash St. continues to cost the city of San Diego big chunks of public funding.
At the recommendation of Mayor Todd Gloria, the San Diego City Council voted Tuesday to pay more than $1.8 million to settle legal claims filed by two companies hired to help renovate the vacant 19-story high rise.
The decision came on a 6-3 vote, with Councilmembers Sean Elo-Rivera, Vivian Moreno and Monica Montgomery Steppe opposed.
“The public deserves a city government they can trust,” Elo-Rivera said just before the vote. “That trust can only be regained with radical transparency. I cannot in good faith support (the settlements) absent an independent investigation. … I’m a no.”
The Mayor’s Office recommended the city pay just over $1.4 million to resolve a claim filed by West Coast General Corp., the Poway construction company the city hired in 2017 to manage major renovations to the mid-century high office tower.
Gloria also sought to pay Argus Contracting just over $400,000 to settle its dispute with the city over rehabilitation work on the property, which has been unusable for all but a few weeks since the city approved the 20-year lease in late 2016.
Both companies performed work under the separate agreements but ran into unexpected problems. Last summer, a consultant identified $115 million in renovations that are still needed.
The pair of settlements pushed the costs of the lease past $55 million since it was negotiated by former Mayor Kevin Faulconer and approved by a former council in 2016.
Asbestos and issues with the building’s mechanical systems have prevented the city from moving 1,100 or more city workers into the building as originally planned. It’s not clear if or when the city will ever occupy the building, given the millions of dollars in unexpected repairs.
The council members who supported the latest expenses said they had no choice but to move forward. Before casting their votes in favor of the new spending, several of them blamed former city officials for their predicament.
“I don’t take responsibility for the missteps of the previous (mayor and council),” Councilman Stephen Whitburn said ahead of his vote. But “approving these mediated settlements is wiser than not approving them, so I will vote yes.”
Councilwoman Marni von Wilpert said she supports the “radical transparency” cited by Elo-Rivera but the city needs to end the legal threat posed by the two companies.
“If this is the best way to save taxpayer money … then I would vote yes,” she said.
Chris Cate, the only Republican on the City Council and the lone member of the board who was seated in 2016 and voted in favor of the Ash Street lease at the time, cast his vote Tuesday without commenting on the additional spending.
Gloria, who also was on the council five years ago, made the initial motion to approve the 20-year lease.
The original idea in 2016 was to consolidate city employees assigned to other leased office space downtown into the former Sempra property just north of City Hall.
Aides to the former mayor told the council that the building was in excellent condition. It needed only a $10,000 power-scrubbing before hundreds of employees could be moved in by July 2017, the council was told, and the deal would save the city $44 million in future lease payments.
In fact, the Faulconer administration was relying on the seller’s representations and failed to conduct any independent evaluation of the property condition. The “as-is” lease the city ended up signing placed all liability for repairs solely on the city.
Meanwhile, city officials decided early in 2017 to move 300-plus more workers into the building than originally planned.
The decision meant significant renovations would need to be made to accommodate the extra employees. The upgrades led to a series of delays and by 2019 county regulators began issuing notices of violations for asbestos contaminations.
In December 2019, the city moved more than 800 employees into the building but they were evacuated the following month after the county issued new asbestos violations.
The city is now being sued by more than two dozen current and employees and contractors who claim they were wrongly exposed to asbestos, which is a known carcinogen.
San Diego City Attorney Mara Elliott also has filed a lawsuit against the seller, 101 Ash LLC, a limited liability company owned by Cisterra Development of San Diego, and the company’s lender, Wilmington Trust. The city also is defending a separate lawsuit filed by taxpayer John Gordon alleging the lease violated state law.
Those cases are proceeding in San Diego Superior Court.
San Diego taxpayers had been spending $535,000 a month to lease the vacant building since early 2017. But last September, amid a flurry of complaints from council members and citizens, Faulconer suspended the payments, although the money is being set aside in a special escrow account while the litigation is pending.
The council decision Tuesday included an agreement to tap tobacco-tax revenue to pay the settlements.
San Diego resident John Stump criticized the council for relying on income from the landmark 1998 agreement with cigarette makers, but Assistant City Attorney Leslie FitzGerald said it was an appropriate use of the money.