The real story started in 2012. The City of San Diego was facing an impending crisis related to providing decent office space to its more than 2,500 employees in Downtown San Diego. The buildings it owned – the City Operations Building (COB) at 1222 First Avenue and the City Administration Building (CAB) at 202 C Street – were rundown, neglected and filled with asbestos. COB alone had a “deferred maintenance repair estimate of $94 million.”  CAB was, and still is, no better. The buildings the City rented – Civic Center Plaza, 525 B Street and Executive Complex – were near the end of their leases and rental rates were expected to climb significantly (Source: Report to the City Council, 10-13-16).

It was then that Jason Hughes of the real estate brokerage firm Hughes Marino volunteered to provide free real estate advice to the City. Then-Mayor Bob Filner accepted his offer (Source: Filner Takes Free Help, 4-10-13). When Mayor Kevin Faulconer took office in 2013, he chose to accept Hughes’ offer to continue in that volunteer role. Shortly thereafter, Hughes was asked to help develop a long-term strategy that would allow the City to control and eventually own the office space it occupied, rather than continue to pay rent for subpar office buildings with rising rents (Source: Report to the City Council, 10-13-16).

That strategy resulted in Mayor Faulconer, dozens of City staffers, two different City Attorneys and the San Diego City Council verifying legal compliance and due diligence of two transactions – Civic Center Plaza in 2015 and 101 Ash in 2016 (Sources: San Diego To Gradually Take Ownership Of Civic Center Plaza Office Building, 1-26-15 and 101 Ash Lease Agreement, 1-3-17). These transactions were essentially identical and, at their outset, financially sound. After receiving advance written approval from then-Real Estate Assets Director Cybele Thompson, Hughes Marino was paid a fee for Jason Hughes’ services. The fee was justified in a letter from Hughes to Thompson disclosing its payment based on the statement that Hughes’ service went well beyond the advisory services he had originally volunteered to provide for free in 2012. Thompson acknowledged and approved that arrangement by countersigning the letter (Source: Hughes-Thompson Letter, 11-19-14). The media has reported that on the date of the letter, “Calendar records previously obtained by VOSD after a public-records request show Faulconer and Puetz were scheduled to meet with Hughes at the mayor’s office on Nov. 19, 2014, from 4:15-4:20 p.m.” (What Faulconer Knew Is Now the $9M Question, 6-29-21). Text messages released to the media appear to confirm Thompson was directed to sign the letter by then Mayor Kevin Faulconer’s office (Source: Puetz-Hughes Texts, 11-19-14).

But, after finalizing the lease-to-own transaction for 101 Ash in 2017, the City changed its original occupancy plan and decided to expand the capacity of 101 Ash through an extensive remodel that was done in 2018 and 2019. The lease required approval from the landlord and lender, which was not requested or obtained. During the remodel, the City’s contractors negligently discharged so much asbestos into the building that the City says it cannot be occupied without spending tens of millions of dollars to remediate the damage caused by the City’s unauthorized remodel. The City’s own documents acknowledge how massively the City botched its own remodel (Sources: Hugo Parker Report and Kitchell Building Condition Assessment, July 2020).

In August 2020, the City stopped paying rent and filed a legal claim against the landlord and lender asserting it should be allowed to stop paying rent, despite having caused the problem through its own misconduct and negligence (Sources: Guerrero Complaint, 1-11-21 and City of San Diego Rent Suspension Letter, 9-1-20). Four months later, in December 2020 and after his term as Mayor expired, Mayor Faulconer announced his intention to explore a bid to be elected Governor of California (Source: Kevin Faulconer Announces Run for Governor, 2-2-21).

Now, the City wants to void its leases and has stopped paying rent for 101 Ash and Civic Center Plaza, putting thousands of City employees and hundreds of students at King-Chavez Community High School at risk of immediate eviction.

The City is trying to walk away from the mess it created because Hughes Marino was paid a fee after receiving the Faulconer administration’s advance written authority to be paid for Hughes’ role in helping the City control two downtown high-rise office buildings that the City deemed essential to its future (Source: San Diego City Attorney Press Release, 6-29-21).

Despite recent statements to the contrary, the City knew that the Civic Center Plaza and 101 Ash lease-to-own transactions would cost the City millions more than purchasing the properties directly. And the City also knew that Cisterra expected to profit from those transactions, just as the City knew and authorized Hughes Marino to seek payment for Hughes’ role in facilitating these two critical transactions that the City would not be able close without private sector help.

• The City asked for Cisterra Development’s help with Civic Center Plaza.
• Cisterra has been active in downtown commercial real estate for the past 20 years. Recent projects include two of the three most recently completed high rise office buildings: DiamondView Tower, completed in 2007, and Sempra Energy Headquarters, completed in 2015. Cisterra has several major downtown developments upcoming, including 7th & Market and the Radian/Target project (Source: Cisterra Development Project List, 2021).
• The new Sempra Energy Headquarters was developed by Cisterra using a credit-tenant-lease arrangement. It has been a major success story (Source: ‘Alonzos’ Share in Downtown Success, 11-6-15).
• By 2014, the City of San Diego was facing multiple challenges with its own downtown office space. Numerous City office leases had expired or were about to expire and rents were rising. Buildings the City itself owned were in poor condition because the City had deferred maintenance for years (Sources: Report to the City Council, 10-13-16 and 101 Ash Street is the Taj Mahal Compared to Other City Property, 8-17-20). The City was also in litigation that prevented it from accessing the public bond market to build or buy space for its employees due to past financial misdeeds (Sunny San Diego Finds Itself Being Viewed as a Kind of Enron By the Sea, 9-4-04).
• One of those leases was for Civic Center Plaza. The City’s lease had expired and it was engaged in a multi-million dollar rent dispute with the building owner. The City faced the prospect of immediate eviction with nowhere to relocate the 800+ City employees who worked there (Source: Report to the City Council, 1-20-15).
• Civic Center Plaza was an immediate crisis. Jason Hughes inquired whether a credit tenant lease structure like the Sempra Headquarters arrangement could be used to solve that crisis. Cisterra was asked by the City of San Diego to help solve the problem (Source: Hughes-Lewis Email, 10-21-14).
• Cisterra applied its experience with credit tenant leases to help the City create a lease-to-own agreement that resolved the Civic Center Plaza crisis. That lease-to-agreement was processed by City staff and leadership as well as verified as legally compliant by the then-City Attorney (Sources: Report to the City Council, 1-20-15 and Estoppel Certificate, 6-1-15).
• That lease-to-own solution allows the City to continue to occupy and control the entire building at rental rates that are, when compared to the market, extremely competitive for the entire 20-year term, at the end of which the City  gains 100% ownership of the building at no additional cost (Source: Report to the City Council, 1-20-15). This is an incredible deal for the City – make under-market lease payments for 20 years and then, at the end of the term, own the building outright.
• Even before accounting for the value of Civic Center Plaza at the end of the lease, the City estimated that the lease itself would save the City $27 million versus the cost of renting comparable space in other downtown office buildings (Source: Report to the City Council, 1-20-15).

• Starting in 2014, the City tried to lease or buy 101 Ash Street to relocate approximately 850 employees from several different buildings with expiring leases or tens of millions of dollars in deferred maintenance. The then-owners of 101 Ash were asking the City for $100+ million to buy the building, and the City decided that price was too high (Source: City of San Diego Independent Budget Analyst Report, 10-12-16).
• 101 Ash Street was eventually listed for sale with an international brokerage firm. Based on the success of the Civic Center Plaza transaction, Cisterra inquired if the City would be interested in a lease-to-own transaction for 101 Ash (Sources: Eastdil Email, 10-14-15; Wood-Thompson Email, 12-7-15).
• The City was interested and asked Cisterra to proceed. Ultimately, Cisterra entered into a contract to purchase 101 Ash for approximately $72.4 million (Source: 101 Ash Purchase and Sale Agreement, 6-29-16).
• Once under contract, Cisterra offered the City two options: (a) assume Cisterra’s purchase contract and purchase the building directly for $72.4 million; or (b) enter into a lease-to-own agreement modeled after the Civic Center Plaza transaction (Source: City of San Diego Option Letter, 7-21-16). Under the City’s own analysis, the lease-to-own structure was projected to save $44.4 million over the 20-year lease term compared to the cost of continuing to rent space in alternative buildings for those 20 years and this does not include the added value of owning a $112 million building at no additional cost upon completion of the lease-to-own term (Source: City of San Diego Independent Budget Analyst Report, 10-12-16).
• The City chose the second option: a lease-to-own alternative when it determined that it might not be able to move fast enough to meet the seller’s terms of sale.
• Cisterra gave the City a copy of its purchase agreement, and the City Council was told in writing before the Council approval that the lease-to-own alternative would cost the City $17.2 million more than the direct purchase alternative (Sources: Wood-Thompson Email, 7-13-16 and City of San Diego Independent Budget Analyst Report, 10-12-16).
• Like Civic Center Plaza, the 101 Ash lease-to-own arrangement allowed the City to lease the entire building at competitive rates. In the case of 101 Ash, flat for the entire 20-year term, and then own the building, valued at $112 million, at the end of the lease for no additional cost (Source: 101 Ash Lease Agreement, 1-3-17). This structure made it a sound financial transaction for the City.

• Instead of occupying a move-in-ready building, the City made plans to increase the occupancy capacity of 101 Ash. The City botched the remodel, disturbing large amounts of encapsulated asbestos that destroyed building systems and made it unsafe for occupancy.
• The City knew before it leased the building that, like Civic Center Plaza, CAB, COB and almost all buildings of similar age, 101 Ash contained asbestos (Source: Hugo Parker Report, July 2020). It is common knowledge in the real estate industry that all older buildings in downtown San Diego have encapsulated asbestos. With that knowledge, the City leased the 101 Ash building “AS-IS.” The City also acknowledged it was familiar with and knowledgeable about the physical condition of the building and agreed the condition of the building was satisfactory for its purposes (Source: 101 Ash Lease Agreement, 1-3-17).
• When the City took control of the building, it was move-in ready and configured to accommodate approximately 850 employees as the City had planned. The building had been well maintained by its owner and its prior occupant Sempra Energy for 40+ years. All building systems were in working order (Sources: City of San Diego Staff Report, 5-17-18; 101 Ash Video, 10-28-15; AEC Property Condition Report, 3-10-16). The lease-to-own transaction even included Sempra’s office furniture (Source: 101 Ash Lease EXHIBIT A, 1-3-17).
• But after it took control of 101 Ash, the City came up with a new plan to increase the occupancy of the building from 850 to more than 1,100 employees. The new plan required substantial alterations to the entire building (Source: Hugo Parker Report, July 2020).
• Before it leased the building, the City received written reports warning that disturbing the asbestos could create risks and an EPA-level assessment would be needed before renovation work could be planned or done (Sources: Hugo Parker Report, July 2020 and AEI Property Condition Assessment Report, 11-25-14).
• In violation of the lease, and without obtaining the required approval of the landlord and its lender or even notifying them, the City began a $30+ million program of demolition and remodeling of 101 Ash (Source: 101 Ash Lease Agreement, 1-3-17).
• The City’s unauthorized alterations released asbestos throughout the building. The City has said its contractors were negligent (Sources: Guerrero Complaint, 1-11-21 and City of San Diego Rent Suspension Letter, 9-1-20). By its own estimate, the City’s misconduct and the contractor’s negligence caused more than $100 million in damage to 101 Ash, rendering the previously move-in-ready building uninhabitable (Sources: Hugo Parker Report and Kitchell Building Condition Assessment, July 2020).
• Under the lease, the City accepts full responsibility for any losses and costs, directly or indirectly, resulting from the release of asbestos at 101 Ash, regardless of the cause or when the release occurred (Source: 101 Ash Lease Agreement, 1-3-17).

• In 2014, the City faced eviction from Civic Center Plaza. With the City unable to complete a deal on its own to continue occupancy, the City directed Hughes to explore alternative solutions to solve its dire situation.
• Aware of Cisterra’s experience with credit tenant lease financing, Hughes and City of San Diego representatives asked Cisterra if it could help the City with a credit tenant lease-to-own arrangement allowing the City to remain in, and eventually own, Civic Center Plaza (Source: Hughes-Lewis Email, 10-21-14).
• In an October 2014 email, Hughes told the City that credit tenant lease-to-own deals are investment banking-type transactions and outside the boundaries of his offer to provide free services to the City. As a result, he would seek compensation from parties other than the City for his role in putting together any lease-to-own transactions (Source: Hughes-Lewis Email, 10-21-14).
• In a November 2014 letter, Hughes reiterated that “any alternative deal” required him to play multiple roles. Hughes would, therefore, seek “customary compensation from any other parties in the transaction” (Hughes-Thompson Letter, 11-19-14).
• Cybele Thompson, then-Director of Real Estate for the City of San Diego, acknowledged and agreed to Hughes’ proposal by countersigning Hughes’ letter (Hughes-Thompson Letter, 11-19-14).
• Hughes advised Cisterra that he was authorized by the City to be compensated for lease-to-own transactions (Hughes-Thompson Letter, 11-19-14).
• Cisterra paid Hughes a market rate consulting fee of approximately $5 million for his role in the Civic Center Plaza transaction and a similarly market-rate $4.4 million for his role in the 101 Ash transaction (Source: Lawyers: City’s ‘Volunteer’ Consultant on Ash Street Deal was Paid Millions by Seller, 6-30-21).

• Cisterra was fully transparent with the City regarding the fact it would earn a profit on the Civic Center Plaza and 101 Ash transactions.
• Cisterra told the City in writing that completing a lease-to-own transaction would generate approximately $90 million in loan proceeds and therefore there would be roughly $17.7 million more than the purchase price. The first $5 million would go to the City in the form of a $5 million tenant improvement allowance with the balance for transaction expenses and “Cisterra profit” (Source: Wood-Thompson Email, 7-13-16).
• Jason Hughes disclosed and received advance written approval from then-Real Estate Assets Director Cybele Thompson that he would be paid a fee for his services. The media has reported that on the date of the letter, “Calendar records previously obtained by VOSD after a public-records request show Faulconer and Puetz were scheduled to meet with Hughes at the mayor’s office on Nov. 19, 2014, from 4:15-4:20 p.m.” (What Faulconer Knew Is Now the $9M Question, 6-29-21). Text messages released to the media appear to confirm Thompson was directed to sign the letter by then Mayor Kevin Faulconer’s office (Source: Puetz-Hughes Texts, 11-19-14).

• The 2015 lease-to-own deal arranged by Cisterra, and requested by the City, for Civic Center Plaza avoided a major real estate crisis for the City. It resulted in the City controlling the entire building where hundreds of City employees work on very favorable lease terms and allows the City to eventually own the building for no additional cost.
• The 2016 lease-to-own deal for 101 Ash was essentially identical to the Civic Center Plaza lease-to-own arrangement. It allowed the City to control an entire office building it had identified as essential to its future operations on very favorable lease terms and allows the City to eventually own the building for no additional cost.
• The City violated the 101 Ash lease and completely botched its unauthorized remodel of the building, releasing asbestos throughout and causing, by its own estimate, more than $100 million in damage (Source: Hugo Parker Report, July 2020).
• Now, the City wants to try to walk away from the mess it created because Hughes Marino was paid a fee after receiving the Faulconer administration’s advance written authority to be paid for Hughes’ role in helping the City control two downtown high-rise office buildings that the City deemed essential to its future (Source: San Diego City Attorney Press Release, 6-29-21).
• The City is legally liable for the contamination of 101 Ash and needs to accept that responsibility, repair the damage it caused and pay the rent it owes (Source: 101 Ash Lease Agreement, 1-3-17).

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