EXCLUSIVE: Another 101 Ash St Legal Memo Questioned City’s Motives in Using Lease
By Arturo Castañares
A legal memo addressed to the San Diego City Attorney’s office regarding the 101 Ash Street building raised critical questions about the City’s true motives in approving a 20-year lease that the outside lawyers said City Attorney Mara Elliott signed despite being “disproportionately unfavorable to the City”, but the memo, along with a later version, were withheld from the City Council by the City Attorney’s office.
The City acquired the 19-story downtown office tower in 2016 through a controversial 20-year lease-to-own agreement with Cisterra Development who, in turn, simultaneously purchased the building from sellers Sandor “Sandy“ Shapery and “Papa” Doug Manchester.
For over four years, no one involved in the deal has explained exactly why the City chose the more costly alternative of a lease rather than purchasing the building directly, but the newly obtained legal memo from last year concluded that “the rationale provided by City staff in the available staff reports is incongruous and raises questions on its own.“
La Prensa San Diego reported last month on a leaked June 15, 2020, memo written by outside lawyers from the law firm of Burke, Williams & Sorensen LLP, which concluded that San Diego City Attorney Mara Elliott failed to properly vet the 101 Ash Street building deal before she approved it, which later led to the abandonment of the building because of asbestos exposure, over $25 million in lease payments paid for the empty building, over $30 million in renovations, and several pending lawsuits, including a taxpayer challenge to cancel the lease.
The June 15, 2020, memo was the basis of a news report by NBC 7/39 in September 2020 which the City Attorney’s office and others disputed because of one footnote which Elliott contends was “fabricated” and not included in the memo sent to the City, but now an earlier memo seems to bolster the legitimacy of the disputed footnote by asking the same line of questioning included in that comment.
EARLY MEMO ASKED QUESTIONS
The newly obtained memo is dated April 7, 2020, five weeks before the June 15th memo, but is substantially similar in that it too calls out the City Attorney’s office for its lack of due diligence review which “deviated from acceptable standards by failing to conduct further analysis, commissioned on its own, to further explore the presence of asbestos on the Property.“
This earlier version also includes an additional fifth section which posed nine questions to the City Attorney’s office and included eleven requests for documents “that could aid Burke in further analyzing the transaction.”
The April 7th memo asked the City Attorney’s office nine questions to better research and understand the process that led to the City signing the 20-year lease, as well as documents and correspondence regarding the interactions between City staff and Cisterra, and correspondence between City staff and the building’s sellers before the deal was signed.
The questions and requested documents are later referenced in the June 15th memo, re-enforcing the view that the Burke law firm was attempting to understand the facts and exact steps preceding the approval of the lease agreement, and which led their later memo to conclude the lease terms were “disproportionately unfavorable to the City.”
The questions and documents in the April 7th memo concern the issue of why the City chose to acquire the building through a lease instead of purchasing it directly from the sellers or from Cisterra after its purchase, a question not clearly answered by pretextual arguments made by City officials at the time.
The April 7th memo asks “Why did the City not consider simply purchasing the property from Cisterra after it closed, or negotiating directly with the former owner for a higher price?“, questioning why City leaders chose the path that cost taxpayers at least $17 million more than a purchase would have.
“Ultimately, despite the fact that the lease-to-own option would cost approximately $17 million more than the purchase option, the City opted not to pursue the purchase option because language in Cisterra’s agreement with the former owner purportedly disallowed a transfer of Cisterra’s purchase rights,” the April 7th memo states.
Interestingly, the April 7 memo then includes a footnote, number 4, that calls attention to “multiple incongruities” in the explanations City officials have given for choosing a lease over a purchase.
“There are multiple incongruities in this factual history, as discussed later in this Memorandum. For instance, if Cisterra knew it was contemplating a transfer of its purchase rights to the City when it was negotiating with the former owner, why did it agree to a restriction on such a transfer?”
The memo also challenged the position of City officials that the agreement with Cisterra prohibited the City from buying the building directly from the sellers.
“Was the City ever given a copy of Cisterra’s purchase agreement with the prior owner? Did it truly prevent a transfer of Cisterra’s purchase rights to the City as stated in the City’s staff reports? If so, why did Cisterra agree to that if it knew it may seek to transfer its purchase rights to the City?”
After receiving answers and documents requested in the April 7th memo, the Burke lawyers then refined their analysis in the June 15th memo relative to the arguments used by the City to justify a lease instead of a purchase.
“The City also provided Burke with additional documents that it requested after its initial review, including but not limited to (i) the contract by which Cisterra purchased the property from the former owner, (ii) certain City legal analysis relating thereto, (iii) correspondence between the City and Cisterra leading up to the transaction. and (iv) City analyses and external communications relating to alternative proposed deals. In addition, the City’s Director of Real Estate Assets, Cybele Thompson, answered a number of questions from Burke, both in writing and ultimately in a series of telephonic interviews on May 21 and 22, 2020.”
The June 15th memo notes language found in the City’s agreement with Cisterra which specifically stated that Cisterra was “able and willing” to assign its rights to purchase the building to the City, contradicting City officials’ statements.
“If the City ultimately desires to buy the Property directly, using its own financing capabilities, Cisterra is able and willing to assign its rights under the (purchase agreement) to the City.”
The memo then points out that the Purchase Agreement between the sellers and Cisterra specifically contemplated an assignment to the City if it wanted to purchase the building directly, because the agreement states that the seller’s consent is required for assignment, except for transfers “in connection with effecting a City Transaction“, which was defined as “a transaction by which the City of San Diego (‘City’) will occupy the Building.“
The June 15th memo, however, also notes the City Attorney’s office issued a confidential memo to the City Council arguing that there was ambiguity in the Agreement as to whether the term “will occupy” would be met if the City purchased the building to be occupied by its own staff.
Although a plain reading of the language seems clear that the City purchasing the building for use by its employees would constitute occupying the building, the “ambiguity” was cited as the only reason the City would not pursue a purchase instead of a lease.
La Prensa San Diego recently asked current City Council members if they had seen or been briefed on the Burke memo. Four current members said they had not seen the memo until La Prensa published it last month. Additionally, two members who served on the Council last year when the memos were written also said they had not seen the memo.
FOOTNOTE 15 NOW SEEMS MORE PLAUSIBLE
The June 15th memo outlines an “Analysis of City’s Review of Transaction”, and concludes that the “history of the transaction gives rise to other concerns regarding the City’s overall structure and review of the transaction.”
The memo reviews the three main arguments used by City officials to justify the more expensive lease over a purchase, but then concludes that “there are at least some questions raised by these explanations that are not answered by the known facts.“
This is where a comment in a footnote, known as Footnote 15, lays out some lingering questions that could have been answered by interviewing City officials involved in the decision to use a lease, including Todd Gloria, who championed the lease deal when he was still on the City Council in 2016.
“One question is whether Ms. Thompson, Deputy COO Ron Villa, COO Scott Chadwick, and a member of the City Council misrepresented the transaction to the public and other members of the City Council. Apparently on September 16, before the revised transaction was scheduled to be presented to a City Council Committee, Ms. Thompson and Mr. Villa met with Council President Todd Gloria and two of his staff members for an ‘update’ on the transaction; Mr. Gloria had previously been skeptical about the lease-to-own structure when it was used for a prior acquisition, but was supportive of the 101 Ash transaction when it came to the Committee and made the Council motion to approve the Lease Agreement. The discussions during the update could be informative about why the City went forward with the transaction despite the unfavorable language in the lease Agreement, the due diligence materials available to the City, and the substantially higher cost of the lease-to-own structure. However, we were unable to obtain the City Attorney’s approval to interview Mr. Gloria or his staff (all of whom are no longer in the employ of the City).”
NBC7’s inclusion of the footnote in its September 2020 story set off a firestorm of denials and accusations from both City Attorney Mara Elliott and Todd Gloria, at that time a candidate for Mayor. Elliott disputed that any such comments were sent to her office by the outside lawyers, and both she and Gloria disputed that Burke lawyers ever questioned or attempted to question him in relation to the issues raised in the memo.
But the comments in Footnote 15 only stated that the Burke lawyers could not understand the reasoning behind opting for a lease and that interviewing Gloria could be “informative” about why the City chose the more expensive option.
The language of Footnote 15 and its parenthetical usage to clarify statements in the memo seem consistent with the language in other footnotes in the June 15 memo, as well as Footnote 4 in the April 7th memo.
Regardless of Footnote 15, the June 15th memo dedicated four paragraphs in the body to analyzing the public reasons given by City officials for pursuing a lease instead of a purchase.
Now, in the context of the April 7th memo and findings of the June 15th memo, it appears that the lawyers for Burke were still confused as to why the City chose the more expensive and less transparent process of the lease instead of using its cheaper public bond financing to buy the building directly because none of the reasons articulated by City officials provided sound legal or financial justifications for the lease.
The Burke lawyers were not alone in questioning the narrative.
During the discussions of the lease deal at the City Council’s Land Use Committee on September 16, 2016, Councilman David Alvarez challenged City Chief Operating Officer Ron Villa and City Real Estate Director Cybele Thompson as to why the City wasn’t buying the building directly.
“What’s the reason why we can’t buy the building directly?”
Thompson repeated the argument that Cisterra’s Purchase Agreement could not be assigned to the City, then Villa jumped in to say that “the language in that purchase and sale agreement is not clear enough to our bond counsel to be comfortable in making sure that that sale could go through or could be completed and then both parties would be liable.”
Alvarez was still not convinced. He again asked why the City could not buy the building directly from the owners instead of through Cisterra and realize an estimated $16 million or more in additional savings for taxpayers. Thompson and Villa both pushed back that the language was not clear that the City could step into Cisterra’s place to buy the building directly.
In the end, Alvarez backed down from his line of questioning and the lease was unanimously approved by the Committee and later unanimously approved by the entire City Council the following month.
City Attorney Mara Elliott signed the deal on December 19, 2016, just seven days after assuming office.
THE MISSING PIECE TO THE PUZZLE
What Councilman Alvarez didn’t know during that committee hearing on September 21, 2016 -and what the Burke lawyers also didn’t know last year when writing their memos attempting to analyze the decision to pursue a lease instead of a purchase- was that a private meeting had taken place in then-Mayor Kevin Faulconer’s office which shut down any attempt to purchase the building directly, and it was not for legitimate financial or legal reasons.
La Prensa San Diego was the first media outlet to report last year that, during a meeting in his office on September 6, 2016, then-Mayor Kevin Faulconer directed the top officials in the City to only pursue a lease deal instead of a direct purchase so that Faulconer would not be seen as paying the windfall profits from the deal directly from the City to Doug Manchester.
Manchester was one of the two owners of the building but also one of Faulconer’s biggest campaign contributors and an antagonist among Democrats and the gay community over his past support for a state constitutional amendment banning same-sex marriages.
City staffers in that pivotal meeting included Faulconer’s Chief of Staff Stephen Puetz, City Chief Operating Officer (COO) Scott Chadwick, Assistant COO Stacey LoMedico, Deputy COO Ron Villa, City Chief Financial Officer Mary Lewis, Real Estate Director Cybele Thompson, and two additional mayoral staffers.
Multiple people in the meeting confirm that Faulconer directed staff to only pursue a lease to void the political ramifications of paying Manchester directly, and also to not use Manchester’s name in any of the documents or presentations related to the lease deal. Manchester’s name was conspicuously absent from all subsequent discussions of the building.
In fact, two weeks later, during the Council committee meeting to approve the deal, Gloria asked staff how quickly the marque name could be removed from the building without mentioning that the name was Manchester Financial owned by Manchester.
La Prensa San Diego’s revealing story about Faulconer’s directive was published a few months after the Burke memos had been written, leaving the pivotal fact about the true reason for pursuing a lease out of the discussions.
It would appear from the April 7 and June 15 memos that the Burke lawyers could not fully understand or conclude from “the known facts” why the City chose the more costly option because none of the public statements or documents clearly pointed to any justifiable financial or legal reason to do so.
The existence of Faulconer’s directive to pursue of lease for political reasons -not financial or legal considerations- provides the missing piece of the puzzle which could have provided the Burke lawyers much needed clarity into the deal had it been disclosed during their review of the building transaction.
A former high-ranking City official involved in the transaction told La Prensa San Diego that there were no coherent financial or legal reasons to pursue a lease over a direct purchase, but that it was solely Faulconer’s directive which led that decision.
DRIVERS BEHIND THE DEAL
Additional information has come out this year that sheds more light on the transaction and the motives behind using a lease rather than a direct purchase.
After months of avoiding questions, the City’s private real estate advisor, broker Jason Hughes, admitted earlier this year that he received over $4.4 million as part of a profit split with Cisterra on the 101 Ash deal, in addition to another $5 million in splits from a nearly-identical lease deal signed with the City one year earlier for the Civic Center Plaza (CCP) building where the City Attorney’s office is housed.
Emails and documents show that Hughes helped convince the City to execute both leases which allowed him to receive hidden profits instead of traditional broker fees which would have been disclosed in a purchase. Until his admission this year, no one beyond Cisterra and “higher ups” in the City knew Hughes had an economic interest in the leases, seemingly in violation of state conflict-of-interest laws.
The City has filed lawsuits to invalidate both the 101 Ash and the CCP leases based on Hughes’ previously undisclosed profits in the deals. Hughes has since produced a letter he sent to Faulconer’s office in November 2014 stating that he would “seek to be paid customary compensation from any other parties in the [CCP] transaction“, but no records have been made public showing Hughes ever informed the City that he had actually executed a split of profits with Cisterra on that deal, or any such letter sent to the City relating to the 101 Ash deal two years later.
Hughes was first appointed to be an unpaid “Special Advisor to the Mayor” in 2013 by then-Mayor Bob Filner, who highlighted at a press conference “Jason’s commitment to public service in this advisory role, which he will perform without compensation from any party“.
Filner also sent Hughes a letter at the time, thanking him for his “commitment to public service by performing this advisory role without compensation from any party.” We now know Hughes decided to seek compensation from Cisterra about a year after his appointment, but he did not disclose his financial arrangement to City staff who relied on Hughes to help them negotiate the two leases.
La Prensa San Diego has reviewed dozens of emails between Hughes and City staff at the time they were working on both the CCP and 101 Ash deals. The emails span from 2014 to 2017, both before and after he signed his profit split deal with Cisterra. None of those emails reference his financial participation in the leases.
It is now clear that both Hughes and Cisterra worked to convince the City to execute the 101 Ash lease instead of a direct purchase, and both reaped millions of dollars in the deal. The use of a lease helped to mask the true costs of the deal to the City, as well as limit the disclosure of Hughes’ participation in the deals.
The two City lawsuits seeking to invalidate the leases based on Hughes’ conflict-of-interest are still pending.
LEGAL CASES OVER FOOTNOTE 15
Two legal cases are also currently pending related to disputed Footnote 15; one filed by La Prensa San Diego, and the other filed by NBC reporter Dorian Hargrove.
La Prensa San Diego filed a lawsuit in February after the City denied a request under the California Public Records Act seeking copies of the Burke memo. An internal City staff message suggested that several versions exist within the City Attorney’s office. The City Attorney’s office has argued that only one final version of the memo was sent to the City from Burke lawyers, but that the memo is protected by attorney-client privilege.
Two weeks ago, Judge Ronald F. Frazier overruled the City’s motion to dismiss the case, saying more evidence is needed to prove the memo is protected from disclosure.
“A determination as to whether documents are privileged would require the court to evaluate facts and evidence,” Judge Frazier wrote in his decision. “The mere allegation within the pleading that a memo was drafted by an attorney does not conclusively establish it is privileged.”
That case will continue with discovery and depositions.
The other case was filed in federal court by NBC reporter Dorian Hargrove who was damaged after City officials called Footnote 15 “fabricated” which led NBC to retract that part of its reporting, and Hargrove was disciplined for using the contested memo.
Hargrove is suing the City of San Diego, City Attorney Mara Elliott, and Deputy City Attorney John Hemmerling for civil rights violations, defamation, negligent and intentional interference with prospective economic advantage, and intentional infliction of emotional distress for having claimed that he used a “fabricated” footnote without producing any evidence to prove the memo was not authentic. Elliott and Hemmerling were each named in both their official and personal capacities.
Hargrove maintains he had an anonymous source who provided the memo, as well as a reliable and known source within the City of San Diego who he believed corroborated the document, but then later retracted the confirmation as a miscommunication.
The City Attorney’s office has filed motions to dismiss Hargrove’s case, claiming Elliott and Hemmerling have immunity from lawsuits while performing their official duties. Hargrove contends the public lawyers were acting in their own personal capacities and damaged his reputation and career.
The judge is set to issue her ruling this week to determine whether Hargrove’s case continues.
CITY ATTORNEY’S NON-DENIAL DENIAL
La Prensa San Diego submitted a copy of the April 7th memo used in this article to the City Attorney’s office, asking if “this document is an accurate copy of a memo received by your office.”
In response, City Attorney Mara Elliott’s Director of Communications, Hilary Nemchik, wrote, “Legitimate memos issued from Burke Williams Sorensen on 101 Ash were marked “CONFIDENTIAL” as an attorney-client communication and as attorney work product. This document does not have those markings.” The comment was not clear if the City Attorney’s office was calling into question the legitimacy of the memo or simply stating facts.
La Prensa San Diego then requested clarification as to whether the City Attorney’s office was disputing the authenticity of the April 7th memo by asking if Elliott’s office was stating that “this version is not legitimate?” No further response or clarification was received from Nemchik or anyone at the City Attorney’s office.
The City Attorney’s office did not dispute the authenticity of the June 15th memo published by La Prensa San Diego last month as part of an October 11 article. That version of the Burke memo included Footnote 15.
La Prensa San Diego has never received any correspondence from the City Attorney’s office contesting any articles or demanding any corrections or retractions in its reporting.