Audit reveals former mayor and staff twisted Ash Street facts, withheld key details from city council

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Former San Diego Mayor Kevin Faulconer and his staff withheld information from city council and misrepresented the facts about several properties acquired by the city in public reports or presentations, an independent audit released Thursday concluded.

The study released by the municipal auditor’s office also found that the Faulconer administration failed to perform due diligence before closing real estate deals worth more than $ 230 million.

“The previous municipal administration reduced the city council’s monitoring capacities on major real estate acquisitions by failing to provide complete and precise information,” the audit revealed.

The report included many recommendations to prevent future real estate acquisitions from being mismanaged. Senior advisers to Mayor Todd Gloria accepted many of these suggestions, but rejected some proposals to improve oversight.

Auditors also said the city attorney’s office failed to systematically document or communicate the legal risks associated with real estate transactions, some of which were purchases and others long-term leases.

City attorney Mara Elliott challenged several of the audit findings, drafting a seven-page response that largely defended the city attorney’s office under her and her predecessor’s leadership.

Much of the 117-page audit report focuses on Sempra’s former headquarters at 101 Ash St., where Faulconer planned to consolidate city employees who worked in other rented and city-owned offices. downtown.

Asbestos and other issues with the Ash Street building have kept the city from occupying the property for a few weeks since the lease was approved in 2016. In the meantime, the total costs of the deal have exceeded $ 264. million dollars for a property valued at $ 67.1 million, auditors said.

The former mayor’s staff said that “the building at 101 Ash Street was a Class A building,” the audit said. “Staff also told City Council that the city had obtained a Property Condition Assessment Report which showed 101 Ash to be in excellent condition and the only immediate need was for an exterior wash and caulk. $ 10,000.

“However, the assessment of 101 Ash that staff relied on at the time indicated that ‘even in a rehabilitated state the property in question will still be a Class B building’,” the auditors said.

When city officials finally carried out their own needs assessment for the 19-story skyscraper, the cost of all necessary repairs, upgrades and asbestos removal fell to more than $ 115 million, according to the report.

The city paid more than $ 23 million to rent the vacant property for nearly four years before Faulconer suspended monthly payments of $ 535,000 last September. The transaction is now mired in litigation.

Faulconer and two senior assistants did not participate in the interviews requested by the auditors.

“When we interviewed the former chief of staff of the former mayor, we asked for an interview with the former mayor and he agreed to help us organize this interview,” a footnote read in the audit. “However, the former chief of staff to the former mayor did not respond to several subsequent emails requesting an interview with the former mayor.”

Faulconer, who is now running for governor of California, has repeatedly refused to answer questions about the Ash Street deal, which has made unflattering headlines since the San Diego Union-Tribune reported for the first time in 2018 that the city paid $ 18,000 per day to rent vacant accommodation. building.

The former mayor’s campaign did not respond to a request for comment on the audit findings on Thursday.

Last month, after the Union-Tribune reported that real estate expert Jason Hughes raised $ 9.4 million from the seller after advising the former mayor on Ash Street and another property, the Civic Center Plaza, Faulconer released a statement implying that he did not know Hughes had been paid.

“I continue to support all efforts of the city attorney to identify and report anyone who has unfairly benefited taxpayers,” Faulconer said in a statement.

The audit indicated that the city should have signed a formal agreement with Hughes over its services.

“If the councilor had had a contract with the city, the contractor’s duty of loyalty to the city would have been clearer,” the report said.

Hughes, through his lawyer, insisted on telling Faulconer and others that he expected to be paid for his services.

City Attorney Elliott is now seeking to rescind both the Ash Street lease and the lease-to-buy agreement the city signed for the Civic Center Plaza, although these legal maneuvers may take years to resolve.

In addition to the Ash Street building and Civic Center Plaza, the City Auditor’s investigation looked at three other real estate transactions he said were mismanaged, delayed, or more expensive than they should have been. .

Specifically, the review focused on a failing indoor skydiving facility that Faulconer recommended that the city purchase. The city bought it from a trust a day after the trust bought it from one of Faulconer’s political supporters, San Diego financier David Malcolm.

The city bought the property, which had been seized in foreclosure proceedings, for $ 7 million without benefit of an appraisal, to use as a “housing navigation hub”. The mayor’s office said it was suitable for office use, despite two giant wind tunnels towering over the interior.

The Housing Navigation Center program designed to alleviate homelessness has since closed and the building is now in use by the San Diego Housing Commission.

Auditors also examined a property in Kearny Mesa that the town leased to serve as an operating yard for maintenance of fire trucks and a former South Bay motel that the town purchased to serve as transitional housing for the elders. drug addicted offenders.

Both of these projects exceeded initial cost estimates and fell behind schedule.

Improvements required at the repair yard have increased from $ 6.5 million to $ 14.8 million.

“The city will have a lease of 15 to 30 years before it can potentially use the facility to repair fire trucks, which was the main need for the facility,” the audit said of the deal. Othello Avenue construction site.

Although the former Super 8 Motel on Palm Avenue is valued at $ 5.95 million, the city has agreed to pay $ 6.65 million for the property. City officials estimated the building improvements would cost $ 4.5 million, but those expenses rose to $ 6.5 million, according to the audit.

“The (city’s) portfolio management plan did not identify the need for the hotel,” the auditors said. “The city did not do any building condition assessment prior to acquiring the building. “

In total, the audit cited three specific findings: the Faulconer administration did not follow best practices in acquiring major real estate; Faulconer and his associates did not perform due diligence on the properties they acquired, and the Faulconer team diminished the board’s oversight capacity by not providing complete and accurate information.

To avoid similar failures in the future, the report included 10 recommendations.

One suggestion is to create a best practice checklist that the real estate asset department would present to a designated oversight committee to ensure all due diligence items are accounted for prior to any acquisition.

Senior advisers to Mayor Todd Gloria have not embraced the idea of ​​imposing a single checklist for every future deal.

“We don’t agree with a standard checklist that prescribes the due diligence that must be conducted in an acquisition, because no two real estate transactions are the same,” wrote Penny Maus, Director of the Real Estate and Airport Management Department, which is the new name of the old Real Estate Assets Department.

Instead, she said, the office would take a closer look at each agreement, recommend board policy updates as needed, and do a better job detailing their plans to board members.

“We also expect that our staff reports will be more transparent in the future,” wrote Maus.

Another recommendation asks the city to ensure that every consultant or advisor providing a significant contribution is under contract and checked for potential conflicts of interest.

The Gloria administration agreed to get signed agreements with suppliers and consultants, but said other parts of the auditor’s suggestion were too vague.

“To implement, the recommendation would need to be more specific as to the types of ‘consultants or advisers’ that would fall under this recommendation,” said the Gloria administration’s response.

The mayor’s office also opposed a suggestion that city officials alert the independent budget analyst before future real estate negotiations to ensure that future deals are not mismanaged.

City auditor Andy Hanau took the unusual step of rebutting several positions of Gloria’s administration, including the idea of ​​a standardized checklist for everyone to follow.

“The time spent explaining the few due diligence items on our basic checklist that may not be necessary for every purchase is well worth avoiding the risk of a similar debacle in the future,” a- he writes.

Hanau also said that the errors made by the Faulconer administration in the five transactions examined in the audit justified a set of new, stricter internal controls that Gloria agreed to implement.

“We believe that the city administration’s planned approach continues to put the city at risk,” says the rebuttal.

In his response to the audit, City Prosecutor Elliott said the report was based on an incomplete investigation and did not distinguish between his decisions as the city’s best lawyer and those of the former district attorney. the city Jan Goldsmith.

She also defended Goldsmith’s management of the Ash Street property and the Civic Center Plaza.

“There is no evidence presented in the audit that the former city attorney knew that the condition of Building 101 Ash was anything other than what the management of the city and (the real estate assets) represented in the written and verbal remarks to the board, ”she wrote.

The auditor also rebutted Elliott’s comment, particularly with respect to the “as is” rental terms his office agreed to as part of the Ash Street deal.

“Knowing that the contract included an” as is “clause and that the city management had not carried out an independent assessment, this should have triggered a red flag to disclose the risks incurred to the city council” Hanau replied.

The mayor’s office said it plans to implement the recommendations it accepted by July 2022.

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