SD CITY ATTORNEY FAILED TO ENFORCE CITY CHARTER TO REPORT DEAL PARTICIPANTS
By Arturo Castañares
[this story has been updated to include a response from Hughes’ lawyer received after the first publication of the story]
New testimony provided under oath revealed that the City of San Diego’s unpaid broker in the acquisition the 101 Ash St building earned over $9.4 million as an equal partner -not as a broker- with the City’s landlord he was supposed to be negotiating against, and the City Attorney’s failure to enforce a provision of the City Charter allowed the scheme to go undetected.
Jason Hughes, President and CEO of Hughes Marino real estate brokerage firm, had served as a Mayor-appointed advisor to the City’s Real Estate Assets Department (READ) since 2013 and helped the City negotiate two 20-year lease-to-own agreements in which he had a secret participation agreement with the City’s landlord, Cisterra Development.
Hughes’ hidden participation was revealed yesterday in a sworn deposition of Jason Wood, a Cisterra principal and partner in both the ill-fated 101 Ash St. building approved by the City in December 2016, as well as a nearly-identical deal in 2015 to acquire the Civic Center Plaza (CCP) building where the City Attorney’s office is housed.
Wood testified that Cisterra had an agreement for Hughes to participate in the profits of the financing deals where Cisterra purchased the buildings and immediately leased them to the City.
Cisterra closed escrow on the 101 Ash building in January 2017 where it simultaneous bought the building, leased it to the City, and mortgaged the City’s 20-year lease for $91.8 million to pay for the building.
After paying the building’s sellers and other costs, Cisterra netted a quick $9.8 million on the deal. The group made a similar profit on the CCP deal in 2015.
Under their previously-undisclosed agreement, Cisterra’s Chairman, Steven L. Black, and Hughes split the profits equally, 45% each, and Wood received 10%. Hughes’ take was not a broker’s fee or commission calculated on the value of the transaction, but was, instead, an equal split with Cisterra’s largest partner.
FOX GUARDING THE HENHOUSE
Hughes, a licensed real estate broker and a leading player in San Diego downtown market, first volunteered to be an advisor to the City soon after Mayor Bob Filner took office in December 2012. Filner appointed Hughes and even bragged during a press conference in May 2013 that he appreciated “Jason’s commitment to public service in this advisory role, which he will perform without compensation from any party.“
Filner abruptly resigned in late 2013 after being charged with sexual harassment, and then-Councilman Todd Gloria became interim Mayor and continued to use Hughes to negotiate real estate deals for the City.
When Kevin Faulconer was elected to replace Filner in February 2014, he allowed Hughes to continue in his role and interacted with him in meetings both in the Mayor’s office and in private meetings outside of City Hall. According to emails, calendar entries, and text messages, Hughes enjoyed routine access to Faulconer and the Mayor’s Chief of Staff, Stephen Puetz.
Unbeknownst to the City, Hughes and Cisterra executed a perpetual confidentiality and non-disclosure agreement on August 1, 2014, which protected the details of any financial arrangements between Hughes and Cisterra, but explicitly allowed for disclosure of their protected information to persons Cisterra “deems necessary to facilitate the transaction” which would included the City as the tenant and purchaser of the buildings.
On November 19, 2014, Hughes circulated a letter to Mayor Faulconer’s Chief of Staff Stephen Puetz and Director of Real Estate Assets Department Cybele Thompson stating that Hughes would “seek to be paid customary compensation from any other parties in the transaction,” but that he “would continue to honor my arrangement with the City.”
The letter includes Thompson’s signature at the bottom acknowledging that she “read, agree with, and accept the foregoing” contents of the letter.
Still, Hughes did not publicly disclose his arrangement with Cisterra or even the existence of the confidentiality agreement until recently when they were forced to through the discovery process in a pending lawsuit.
In 2015, Hughes helped the City negotiate and acquired the CCP building through a 20-year lease-to-own deal with Cisterra. Emails between City staff working on the transaction and Hughes show internal conversations where Hughes appears to be on the City’s side, and none of the emails reflect any reference to his arrangement with Cisterra. The transaction went smoothly and no one ever mentioned Hughes was paid by Cisterra.
The next year, the City began to negotiate to purchase the 101 Ash building outright from then-owners Sandy Shapery and Doug Manchester, one of Faulconer’s largest political contributors.
But in a meeting in the Mayor’s office on September 6, 2016, Faulconer directed the five highest-ranking City officials to execute a lease deal, not a purchase, because he did not want to appear to be paying Manchester directly. Faulconer was advised by the City’s CFO that a lease would cost taxpayers at least $16 million more than a direct purchase, but the Mayor insisted they only pursue a lease-to-own deal.
In response to the Faulconer’s directive, staff again worked with Hughes and used the CCP lease as the template for 101 Ash. The two leases are nearly identical, including an “as-is where-is” disclaim in all capital letters beginning on page one that relieves Cisterra of any liabilities for any defects or deficiencies with the building.
Hughes interacted with City staff as an advisor on the deal, and on several occasions offered suggestions on deal points and even carried on negotiations directly with Cisterra on behalf of the City. City staffers considered Hughes to be part of their team, not knowing he had a financial interest in the outcome.
A lease deal was then presented at a City Council meeting on September 21, 2016, where only a lease was proposed. During the committee hearing, Councilman Todd Gloria publicly thanked Cisterra and Jason Hughes for their “partnership on this proposal” then went on the make very supportive comments about a project that is now mired in lawsuits.
“This seems to be a very smart financial transaction,” Gloria said during the meeting, “partnering with experts in the community and with folks that know how to get things done, everything about this sends a message to taxpayers that we kind of got our stuff together around here,” Gloria said. “I like a lot of what’s going on here and I just thank you very much.” Gloria then made the motion to approve the deal. [WATCH VIDEO]
Everyone seemed to be in favor of the deal: the Mayor, Councilmembers, and especially the City’s largest employee union, MEA, and its leader, Michael Zucchet, who expressed his union’s support during the Council meeting on October 17, 2016.
The final City Council vote to approve a 20-year lease-to-own deal was taken on November 14, 2016. Mayor Kevin Faulconer then signed the lease, but one signature remained to make the deal legally binding: the City Attorney of San Diego.
MALPRACTICE IN FAILING DUE DILIGENCE REVIEW
Councilmembers approved an ordinance that authorized all agreements necessary to carry out the acquisition of the building and allocated the funds necessary to pay for it, but, as with any large transaction, lawyers developed and reviewed the actual legal documents to execute the policy decision of the Council.
In the case of the City of San Diego, the only official who is empowered by the City’s Charter to legally bind the City is the City Attorney by virtue of his or her signature attesting to the legality of a contract or agreement. Absent that signature no City contract is binding.
The 101 Ash deal was negotiated throughout 2016 when then-City Attorney Jan Goldsmith was in his final year of his eight-year tenure. Goldsmith, a former Superior Court judge and State Assemblyman, was termed out of office and was being replaced by one of the career Assistant City Attorneys in his office: Mara Elliott.
Elliott, who did not work on the 101 Ash deal during the year, won the November 8, 2016, election to become the next City Attorney. After the election, Goldsmith treated Elliott as the City Attorney-elect and gave her access to the staff and all documents in the office for the four weeks between her election and her swearing-in on December 12th.
During the entire time between the City Council’s final approval of the 101 Ash agreement and the end of Goldsmiths term, the 101 Ash deal sat unsigned in the City Attorney’s office.
After officially taking office on December 12th, Elliott waited one more week before authorizing the execution of the 101 Ash lease on December 19, 2016. Clearly, the final approval happened under her control.
It is not clear what actions, if any, Elliott took to review the pending deal during the five weeks between her election and when the lease was signed, but it is clear that she failed to follow one of the requirements of the City’s Charter that requires a full disclosure of all parties that will benefit from a contract with the City.
Section 225 of the City’s Charter requires the disclosure of the identified and interests of all parties involved in any contract, lease, franchise, or other rights with the City.
The language of Section 225 that existed at the time the lease agreement in December 2016 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”.
Under the language of Section 225, the names of the owners of Cisterra, its partners, brokers, and even financiers, would have been required to be disclosed. Elliott has already admitted that she did not request that information from Cisterra during her due diligence before signing the lease, but relied solely on a conversation where Cisterra told a staffer the names of the two “owners” of Cisterra.
Elliott, for her part, has repeatedly claimed that the 101 Ash deal was “approved” before she was elected City Attorney, in an attempt to shift the responsibility for the deal to the City Council and her predecessor, Jan Goldsmith.
During a campaign endorsement interview with the San Diego Union-Tribune in October 2020, Elliott said “My administration did not work on 101 Ash, this is a deal that happened months before I took office” and her office released a statement in December 2020 claiming that “As you know, Mara Elliott was not in office when this deal was approved.” Both statements are nuanced, if not inaccurate.
By saying the deal was “approved” and “happened” before her, Elliott was referring to the votes by the City Council in October and November 2016, and the signing by Mayor Faulconer in November 2016, but the final approval signature that made the lease legal was hers.
Elliott’s office signed the lease on December 19, 2016.
This week, Hughes’ attorney, Michael Attanasio of Cooley, LLP, responded to allegations that Hughes failed to disclose his compensation by confirming that no one within the City, including the City Attorney’s office, requested details from Hughes even after his November 2014 letter.
“Despite this specific knowledge of Jason’s intent at the highest levels of the City, nobody at the City ever required or even asked Jason to make further disclosures of any kind,” Attanasio wrote.
FALSE CERTIFICATION OF COMPLIANCE
And even more damning that the lease are two other documents the City entered into the following month which were necessary to complete the acquisition of the building.
An Estoppel Certificate and a Subordination, Non-Disturbance and Attornment Agreement were executed by the City on January 3, 2017, in order for escrow to close on the transaction.
The Estoppel Certificate “certifies” several important components of the building transaction, including that the City will be the tenant for 20 years, will pay the rents due under the lease, and has no knowledge of any event constituting a default by Landlord under the Lease. These are standard terms in building purchase transactions.
But, the most important point contained in the Estoppel certificate states that the City certifies that the City “has made all necessary determinations under, and has complied with all the requirements set forth in, Tenant’s municipal code and charter.”
This provision, signed after the lease was finalized and more than three weeks after Elliott took office, claims the City complied with the provisions of Charter Section 225, which clearly were not fulfilled.
Had Elliott truly complied with the requirements of Section 225, Hughes’ participation would have been discovered and his conflict-of-interest would have been exposed and stopped the final execution of the agreements. The City, and taxpayers, would have avoided what has now become one of the worst financial debacles in the City’s history.
In addition to the City Attorney’s failure to document full disclosure of all participants in the deal as required under Charter Section 225, Hughes’ involvement in the making and approval of the lease agreement created a conflict-of-interest for himself that appears to be in violation of California Government Code Section 1090.
Section 1090, as it is commonly known, limits public officials, staff, and even consultants like Hughes from participating in the formation and approval of government contract wherein they have a financial interest. The set of anti-corruption laws have been upheld in numerous case, including at the California Supreme Court.
In cases where the 1090 statutes are violated, the remedies are onerous.
A conflicted participant may face felony charges and prison sentences for violating Section 1090 and tainted contracts are void without recovery to the other party. If proven, a violation of Section 1090 would invalidate the contract and the City could walk away from the now-unusable building.
In June, after Hughes and Cisterra admitted to his $9.4 million in fees, Elliott filed a lawsuit seeking to invalidate both the CCP and 101 Ash leases solely because of Hughes’ violation of Section 1090.
Critics claim Elliott is pursuing the lawsuit to distract attention from her own failure to enforce the provisions of Charter Section 225 when she signed the deal back in December 2016.
Although both violations of Charter Section 225 and State Section 1090 could invalidate the lease deal, Elliott may not be arguing Hughes and Cisterra violated Section 225 because it would expose her failure to perform her own legal due diligence before signing the agreement, her malpractice as the City’s chief legal advisor, and could lead the building lenders to argue that the City is now trying to benefit from its own mistake by cancelling the 101 Ash based on the City’s own failures to disclose its own conflicted advisor.
POOR CONDITION OF 101 ASH LED TO DISCOVERY
The transaction to acquire the 101 Ash building closed in January 2017 and the City set about remodeling the 19-story tower to accommodate more employees. For nearly three years, as the City invested more than $30 million to ready the building, no one mentioned that Hughes had profited from the deal.
The City moved employees into the building in mid-December 2019 but in mid-January 2020 the County of San Diego Air Pollution Control District (APCD) shut the building down over continued asbestos exposure.
As the true condition of the building started to become apparent, City Councilmembers and the media began to look into the process used by the City to acquire the building to determine if proper inspections and condition assessments were conducted at the time.
More than three years after the second financial transaction between Cisterra and Hughes had taken place, clues as to their relationship began to surface.
In September 2020, La Prensa San Diego was the first media outlet to report that that Hughes had been paid in the 101 Ash transaction based on two sources close to the transaction. Hughes and Cisterra did not respond to repeated requests for comment to confirm whether he had been paid by any party in the transition.
Hughes and Cisterra maintained their silence on the issue for more than eight months until late June when they finally admitted that Hughes had been paid fees on both of the transactions. Hughes continue to maintain that his general suggestion that he would seek compensation was sufficient notice of his potential conflict.
Legal experts maintain that Hughes’ general comment that he would seek compensation does not constitute proper disclosure under Charter Section 225, and that no amount of disclosure waives a violation of Section 1090.
Hughes also failed to file financial Form 700 disclosure reports required by both state law and City rules which would have revealed his financial arrangements with Cisterra.
Photo credit: John Francis Peters for The New York Times