Former Owner May Have Kept Undisclosed Interest in 101 Ash St. Building
The ownership makeup of the 101 Ash Street building before and after the City of San Diego entered into a 20-year lease-to-own agreement is now under renewed scrutiny.
A 2016 email came to light this week revealing the original owner may still have an undisclosed interest in the building in violation of the City’s Charter that requires full disclosure of all parties “directly or indirectly involved” in the contract -and City Attorney Mara Elliott may have known since last December.
Sandor “Sandy” Shapery had owned the 19-story office tower since 1994 and sold a 49% interest to “Papa” Doug Manchester for $20 million in 2015.
The following year, the City negotiated a lease deal where a middleman company, Cisterra Development, would buy the building and lease it to the City over 20 years, then the City would own the building at the end of the term.
Media reports about the building since 2016 have always referred to Shapery and Manchester as the former owners and sellers of the building.
But an email written by Shapery in November 2016 now raises the prospect that he bought Manchester out before the lease deal then rolled the building into a joint-venture with Cisterra to maintain a carried ownership interest, something that has never been publicly disclosed.
SMOKING GUN EMAIL
Shapery’s email, sent to representatives of Manchester on November 25, 2016, outlined his plan to “transfer the Property to a new partnership controlled by Cisterra and me remaining as a minority partner” in an attempt to reduce or avoid the tax implications of selling the building based on his “very low basis in the property due to ownership for the past 23 years.”
The email outlines Shapery’s offer to buy Manchester’s 49% back in a simultaneous escrow close, then Shapery would transfer his 100% ownership into a new entity in partnership with Cisterra.
Documents reviewed by La Prensa San Diego show that Manchester’s ownership interest in the building was purchased by Shapery and paid in full within days of the close of escrow.
Cisterra created an entity named 101 Ash, LLC on December 1, 2016, weeks before the City’s lease was signed, and weeks after the email from Shapery. Another entity named 101 Ash Member Partners, LLC was created on December 13, 2016. Both entities list the same managing partner and agent of service; David L. Dick, the General Counsel for Cisterra.
But although the email was never made public, it was provided to James Parker, an outside lawyer representing the City on lawsuits related to the building, and the author of a forensic report issued in July 2020.
Parker received a copy of the email on December 6, 2020, more than four months after he delivered his report to City Attorney Mara Elliott’s office on July 25th. The report was released to the public on August 6th.
It is not clear if Parker relayed the Shapery email to the City Attorney’s office, but no update to this report has been issued to reflect the ownership information Parker received in December 2020.
Parker and his law firm, Hugo Parker, LLP, was first retained by the City in October 2019 to help defend against asbestos-related lawsuits. As outside counsel for the City, Parker has a duty of loyalty to the City and must act in its best interest. The City Attorney’s office has admitted that Parker was not hired to conduct an independent investigation, but instead, a confidential report on the history and status of the lease deal.
A phone message and email to Mr. Dick at Cisterra seeking to confirm the status of Shapery as a partner of the 101 Ash St. building were not returned.
A message left on Shapery’s cell phone seeking confirmation of his ownership status in the building was not returned.
WHO SOLD WHAT TO WHOM
Cisterra was described as the buyer of the building and the company offering the long-term lease during the public presentations before the San Diego City Council in September and October 2016.
News reports at the time described Shapery and Manchester as the sellers of the building.
The lease was approved by the City Council in October 2016, and signed by City Attorney Mara Elliott on December 19, 2016, just ten days after she took office.
Since then, the City spent over $30 million in renovations and $24 million in lease payments before the building was subsequently closed down by the County Air Pollution Control District in January 2020 for repeated exposure to asbestos material. The building has sat empty since then and is now the subject of several lawsuits, including one to invalidate the lease, one to avoid lease payments while the building is vacant, and one from the financiers to enforce the lease.
Additionally, several claims for exposure to asbestos have been filed by employees and contractors that worked in the building.
After issues with the building became public, news reports and outside investigations examined and exposed failures in the City’s research and due diligence in determining the condition of the building before the lease, including the City’s apparent reliance on representations made by Cisterra and Shapery as to the existence of asbestos.
In several instances, Shapery referred to himself and Manchester publicly as the “past owners” and “former owners”, and even wrote an article published in the San Diego Union-Tribune titled “I used to own 101 Ash Street” and opens with the statement that “The true story of 101 Ash Street is neither a scandal nor a fraud. It’s just a case of governmental ineptitude.”
“I am the past owner of 101 Ash Street in downtown,” Shapery wrote. “Also, the identities of the building’s former owners were not concealed from the City Council, as has been alleged. I have always conducted myself ethically in my business dealings, and I expect the city to do the same,” Shapery added.
The carefully worded article does not say he is no longer a minority partner in the building or that he bought Manchester out before selling or transferring the building to Cisterra. Shapery is a graduate of the University of San Diego School of Law and was an attorney from 1972 to 2017.
CHANGES CISTERRA’S KNOWLEDGE OF TRUE CONDITION OF BUILDING
Cisterra has maintained that it passed on to the City all information it received from Shapery as to the true condition of the building, including mechanical systems and the existence of asbestos.
And Shapery has said he fully disclosed the existence of asbestos, but that he had not negotiated the lease with the City. As far as what had been made public, Shapery had no direct involvement with the City because he had sold the building to Cisterra who in turn leased it to the City.
But if the plan detailed in Shapery’s email was completed, then Shapery rolled the building into a new venture with Cisterra and instantly became a party to the City’s lease, making him one of the City’s new landlords.
Shapery has described the high rise as a “Class-A” building and bragged in his Union-Tribune article that the building was “well maintained throughout my ownership”, even though assessments conducted during the renovations through last year found that the electrical, plumbing, and fire life safety systems were out of date or even obsolete.
A consultant for Sempra Energy, the previous tenant of the building, testified before the California Public Utilities Commission in 2014 that the costs of necessary repairs and upgrades made the building functionally obsolete.
It now appears that Shapery and Cisterra had negotiated their partnership before the lease deal was signed and that Shapery’s long history with the building and his knowledge of the true condition of the building connected him and Cisterra to having direct knowledge and a duty to disclose such information to the City through their privity in the contract.
Calls and emails to Cisterra and Shapery to confirm a relationship between them were not answered.
CITY CHARTER SECTION 225
Section 225 of the City’s Charter requires the disclosure of business interests of parties involved in any contract, lease, franchise, or other rights with the City.
The language of Section 225 that existed in 2016 at the time the lease agreement was negotiated and signed required “full and complete disclosure of the name and identity of any and all persons directly or indirectly involved in the application or proposed transaction and the precise nature of all interests of all persons”.
City staff and the City Attorney’s office have said the only names that were disclosed at the time and since have been two principals of Cisterra: Steven L. Black, Chairman; and Jason R. Wood, Principal.
But, when City Attorney Mara Elliott was asked on August 6, 2020, by then-Councilwoman Barbara Bry whether full disclosures were made as required by Section 225, Elliott responded in writing by quoting the language of Section 225 as it was amended in November 2018 to only require disclosure of “the names and identities of all natural persons who will receive more than 10% of the contracted amount or who own more than 10% of the entity.”
Under the current language, the names of any minority partners, consultants, brokers, or others who may have benefitted from the proceeds of the lease deal would not be disclosed but would have been under the 2016 language.
Elliott’s memo did not make it clear that the language of Section 225 required a higher level of disclosure at the time she signed the lease agreement.
The language of Section 225 was amended by a ballot measure on the November 8, 2018 election, nearly two years after the lease was signed. Elliott’s office prepared the ballot language and wrote the arguments for the measure. It seems unlikely that Elliott was not aware the language Section 225 was changed by her office.
VIOLATION OF 225 VOIDS CONTRACTS
What is also not clear is why Elliott has not enforced the requirements of Section 225 to require Cisterra to fully disclose all parties who benefited from the contract.
Cisterra has refused to disclose how the entire $91.8 million in financing they received was distributed and to whom.
Documents show Cisterra paid $74,440,000 for the building and applied $5 million toward tenant improvements, but Cisterra still has not disclosed how the remaining $14.36 million in the deal was split up.
Section 225, both in 2016 and the current language, states that failure to properly disclose information would result in forfeiture of “all rights and privileges” under the contract, making the contract void.
“Failure to fully disclose all of the information enumerated above shall be grounds for denial of any application or proposed transaction or transfer and may result in forfeiture of any and all rights and privileges that have been granted heretofore.”
Elliott was required to ensure the disclosure of interested parties before she signed the lease agreement in 2016, or whenever she became aware a failure occurred. Elliott may not have sought full disclosure in 2016 or when Bry asked for confirmation of such disclosures in August 2020, but she most likely became aware last December when Parker was informed. If Parker failed to inform the City -his client- of the disclosure, he may have violated his duty of care.
ELLIOTT CONFLICTS OF INTEREST
The City Attorney has remained involved in the investigations and lawsuits related to the building despite having apparent conflicts of interest.
First, Elliott signed the lease agreement and would not only be a witness in an investigation but potentially a subject of any such inquiries. Any credible independent investigation would look at what people involved in the deal knew at the time of the negotiations and approval of the agreement, as well as actions taken by the City since then.
Also, Elliott has maintained oversight and control over the outside law firms that were assigned to conduct reviews of the deal. Elliott’s office was involved in editing and revising Parker’s report before the Council and the public ever received it, thereby compromising any sense of independence and objectivity of the report. Similarly, Elliott was involved in another report written by the Burke Williams law firm that has still not been released to the public.
And more recently, another conflict was raised when a pending civil lawsuit filed by Shapery accuses one of Elliott’s senior investigators, Keith Sears, and his wife, Susan Sears, of embezzling over $764,000 from Shapery’s business.
Sears, a former La Mesa Police officer, retired from the City Attorney’s office last year, and is currently an adjunct instructor at Grossmont College.
Sears’ wife worked as a bookkeeper for Shapery and documents filed in the lawsuit show that Keith Sears knew of the theft of funds and jointly benefitted from the stolen money. Sears also knew that his wife had embezzled over $400,000 from a previous employer.
The lawsuit claims the couple used money embezzled from Shapery to live “lavishly—gambling huge sums at casinos; making frequent large purchases online; paying for large household expenses; paying for travel for themselves and their family members.”
It is not clear if the pending lawsuit by Shapery has impacted any decisions by Elliott’s office, but potentially investigating Shapery while he is suing one of her former investigators creates the potential for, or at least the appearance of, a conflict of interest.
But, a legal opinion written by Elliott on September 8, 2020, concluded that only she can determine if she may have a conflict of interest with respect to any issue or case, and even then, she argued she would still have the authority to hire and supervise outside lawyers brought in to manage those issues.
Elliott has also decided that neither the City Council nor the independent City Auditor can hire outside lawyers to handle investigations even when she has a conflict of interest.
The Council has not hired any outside lawyers to initiate an independent investigation but lacks any Charter powers to conduct its own investigations. The Council’s Audit Sub-Committee only has the authority to oversee the City’s “auditing, internal controls and any other financial business practices” and for “directing and reviewing the work of the City Auditor and the City Auditor shall report directly to the Audit Committee.”
The City Auditor, Andy Hanau, is empowered by the City Charter to “have access to, and authority to examine any and all records, documents, systems and files of the City and other property of any City department, office, or agency” and “may summon any officer, agent, or employee of the City, any claimant or other person” to answer questions under oath and under penalty of perjury.
A legal opinion by then-City Attorney Jan Goldsmith in 2014 concluded that the Auditor’s power to summon people under oath lacks the enforcement powers of a subpoena, but that the Auditor could petition the Courts to issue subpoenas to compel compliance with his summons.
Elliott’s September 8, 2020, legal opinion was in response to the Auditor’s office asking to hire outside counsel. Elliott’s conclusion that only the City Attorney can provide and oversee outside lawyers would be a conflict of interest if the Auditor were to investigate actions by the City Attorney’s office.
The Auditor does not appear to have any budget allocated to hire outside counsel and currently relies on legal advice and assistance from the City Attorney’s office.
Emails to Mara Elliott asking for comment on Shapery’s email and Keith Sears were not answered.