An audit of the city of San Diego's recent property acquisitions, including 101 Ash Street, found "serious issues" caused by missteps, lack of policies and oversight, and misrepresentation during acquisition proposals to its city council, according to the Office of the City Auditor (OCA).
The audit was brought on by questions surrounding building purchases since 2015 and whether they were in the city's best interest. The OCA said it wanted to find out if city administration followed protocol when making major purchases, and if sufficient building acquisition oversight mechanisms were in place.
"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 OCA said, summarizing its findings.
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The audit focused on the 101 Ash Street, Civic Center Plaza, Housing Navigation Center, Kearny Mesa Repair Facility and Palm Avenue Hotel deals, which totaled more than $230 million. The report was condensed to three major findings:
Finding 1
"The prior City Administration failed to follow real estate best practices due to unclear roles and responsibilities, resulting in costs eclipsing estimates presented to City Council, buildings being underutilized, and the City making major investments in buildings that it did not understand the condition of."
One example of "unclear roles," according to the OCA, was that the city's Real Estate Assets Department (READ) thought the city's acquisitions departments were responsible for gathering missing "key elements of due diligence," and vice versa.
Also detailed in the audit is the City Attorney's Office's failure to present city council with legal risks of the acquisitions, namely 101 Ash Street. "For example, the 101 Ash contract placed the responsibility on the City to understand the building’s condition and limited the City’s options if it discovered issues with 101 Ash later," the audit said.
San Diego City Attorney Mara Elliott filed a lawsuit to void the lease-to-own agreements for 101 Ash Street and Civic Center Plaza in an effort to recoup $44 million from the sellers.
Elliot claims Jason Hughes, owner of commercial real estate firm Hughes Marino, worked as a volunteer consultant for the city and violated the 1090 anti-corruption law when he got paid nearly $10 million dollars in unreported money from the seller on the Ash Street and Civic Center deals.
The OCA audit said by using Hughes as a volunteer and not a contracted advisor, Mayor Faulconer's Office failed to ensure the advisor's loyalty.
When it comes to acquisition decisions, the OCA audit said the city doesn't have a clear decisionmaker beyond the mayor, and said the city only addresses real estate needs as situations arise and without a plan.
Finding 2
"The prior City Administration failed to conduct sufficient due diligence on the major building acquisitions in our scope, limiting the City’s knowledge of the properties and hindering its ability to negotiate."
READ failed to obtain independent appraisals, which may have led the city to pay more for the buildings, the audit said. The department also failed to gather building condition assessments, which would have helped the city better estimate the costs of necessary improvements.
The Ash Street building reportedly needed expensive asbestos abatement, and the OCA said the city didn't conduct asbestos inspections on any of the aforementioned buildings as required by city policy.
Finding 3
"The prior City Administration did not inform City Council and the public of all material facts on 101 Ash and the Housing Navigation Center, limiting the City Council’s ability to perform its oversight role."
READ misrepresented the condition of 101 Ash Street, telling the city council it was "Class A," or in excellent condition and only in need of $10,000 worth of repairs, according to the audit. The building was actually Class B, but the city didn't conduct its own assessment.
"In 2020, after investing $26 million in tenant improvements, City contractors estimated 101 Ash needs $115 million in improvements and repairs," the report said.
The OCA also said READ didn't perform any due diligence of its own and accepts all of the 1010 Ash Street seller's documents, and unreported 101 Ash Street's true purchase price to the city council by $19.5 million.
The OCA's audit includes a list of 10 recommendations for the city to ensure it follows best practices and provides the public and city council with all of the facts. Read them here.
NBC 7 reached out to the offices of former mayor and current gubernatorial candidate Kevin Faulconer, City Attorney Mara Elliot, and Mayor Todd Gloria, who was a city councilmember at the time of the purchases, for comment and is waiting to hear back.
