Since January 2017, San Diego taxpayers have been paying almost $18,000 a day to rent a vacant downtown office building.

City officials say building improvements are more extensive than they expected, but the lease-to-own agreement remains a good deal.

The city’s Independent Budget Analyst and some members of the City Council are skeptical.

What started as an effort to consolidate San Diego city workers in new downtown office space has devolved into a long-term arrangement that is costing taxpayers almost $18,000 a day in rent for a building that is likely to remain vacant for months to come.

Hundreds of city employees were supposed to move into the former Sempra Energy headquarters at 101 Ash St. in July, but various delays have left the 19-story office tower unused since San Diego city officials signed a lease-to-own agreement in January 2017.

At $535,000 a month plus operating and maintenance expenses, the lease has cost more than $8.5 million so far. Such costs will exceed $200 million over 20 years for a building that sold for $72 million in 2016.


Aides to Mayor Kevin Faulconer cannot say when the office tower may be ready to occupy, though they hope sometime during the next fiscal year, which starts July 1. First they have to reconfigure work spaces, deal with an asbestos issue and comply with the Americans with Disabilities Act, among other things.

“Although the building may appear ready for occupancy, the ultimate goal is to maximize the number of staff that will be permanently located in the building and to bring the building up to current code,” Chief Operating Officer Kris Michell wrote in response to questions. “The current timeline is FY 2019.”

City officials presented a different timetable a year and a half ago, when they sought and received approval from the City Council to invest in the property.

According to a report to council members in advance of that October 2016 vote, the former Sempra building was in great condition and would need little more than a $10,000 power-washing before up to 1,100 employees could move in.


“The building is considered Class A (highest tier) office space due to the excellent condition of the interior finishes and the upgraded mechanical systems,” Real Estate Assets Department Director Cybele Thompson and Deputy Chief Operating Officer Ronald Villa wrote.

But that’s not what happened.

Instead of moving employees into the 315,000-square-foot high-rise by July 2017, as planned, the city hired a consultant to redesign the work spaces. During that process, city officials decided to boost the number of eventual workers from 800 to about 1,150.

That meant more renovations to the plumbing, heating, air-conditioning and lighting systems and other changes, Michell told Councilwoman Barbara Bry in a memo this month.


The price tag for tenant improvements rose past $27 million — more than five times what the city received from the seller for that purpose under the lease. With operating costs estimated at $3 million a year and design and other costs piling up, city officials can no longer say how much the Ash Street investment will cost.

“Expenses associated with this project, as well as relocation costs, are still being determined,” Michell wrote to Bry.

The District 1 representative, elected weeks after the council vote to proceed with the lease, criticized San Diego officials for their handling of the project at a meeting of the budget and government efficiency committee last week.

“Normally when you buy a building, you get your space planning done before you buy the building,” she said. “If it’s going to cost millions more, maybe you shouldn’t buy the building … I think it was bungled from the very beginning.”


The plan adopted by the City Council in 2016 authorized the mayor to spend up to $202 million over 20 years on the lease and related costs. The deal included $5 million for tenant improvements paid by the seller.

City officials said the lease-to-own agreement — with annual rental payments of just over $6.4 million — will cost roughly the same as financing a $72 million purchase over multiple decades.

They originally estimated the project would save $44 million over two decades by eliminating payments for other leased work space. That savings projection recently was revised downward to $35 million.

Mid-century high-rise

The office tower at 101 Ash St. dates back to 1968, when San Diego Gas & Electric Co. moved from its longtime address in the nearby Timken Building at Sixth Avenue and E Street.


Over the years, SDG&E sold the property and was acquired by what became Sempra Energy, which relocated in 2015 from Ash Street to a new structure on Eighth Avenue.

The city’s path to eventual ownership took some unusual turns.

SDG&E sold the tower to Liberty Mutual Insurance in 1975 when the utility was seeking extra revenue. The insurance company later sold the property to developer Sandor Shapery, who owned it for years until selling a 49 percent stake to businessman Douglas Manchester in 2015 for $20 milliion.

The partners toyed with the idea of converting the building to a hotel or apartments, but Manchester cashed out the following year.


According to Independent Budget Analyst Andrea Tevlin’s 2016 report, the building owner then approached City Hall with an offer to sell for $100 million — well above the appraised value of $67.1 million.

“Given the $100 million sale price offered to the city, the city did not pursue negotiations to purchase the building directly from its current owner,” Tevlin wrote.

About the same time, Cisterra Development opened negotiations with Shapery to acquire the office tower.

Shapery struck a deal to sell the building to Cisterra for $72.5 million.


Before that deal closed, the development company had signed a separate agreement with the city granting San Diego two options, Tevlin said. The city could buy the building for $110.6 million, financed over 20 years, or acquire it under a lease-to-own arrangement costing $127.8 million over the same two decades.

City officials told Tevlin that because language in the sale agreement between Shapery and Cisterra could prompt litigation if the development company signed the agreement over to the city, staff recommended that the council embrace the lease-to-own option.

The budget analyst wasn’t entirely convinced.

“It is important that the city carefully consider major real estate purchases and long-term agreements in order to ensure that the best interests of the city are protected,” Tevlin concluded in her report.


San Diego spokeswoman Katie Keach said in a statement that San Diego was not in a position to purchase the office tower directly from Shapery.

“The previous owner had offered the building to the city for $100 million,” she wrote. “And Cisterra was offering the building to the city for $72.5 with the ability to enter into a lease-to-own agreement.”

Escalating rents

More than 11,000 people work for the city of San Diego. About 2,500 of them share 800,000 square feet of space in five separate buildings downtown, where city officials forecast a notable increase in rents over the next few years.


San Diego owns about 275,000 square feet of its central-city workspace, split nearly evenly between City Hall on C Street and the operations center two blocks away.

About 520,000 square feet in three other three buildings —Procopio Tower on B Street, the Executive Complex on Second Avenue and the Civic Center Plaza across from City Hall — also house municipal employees, although the city entered a similar lease-to-own deal for the plaza building in 2015.

Keach said current leases on B Street rent for $3 per square foot and higher, and they are expected to keep rising. The Ash Street lease locks in more favorable rates for years to come, even with the five-fold increase in tenant-improvement costs, she said.

“This deal will lead to long-term savings for taxpayers,” Keach wrote.


Bill Shaw, a retired construction company executive and former board member of the city’s downtown redevelopment agency, said city officials dropped the ball in examining how the building would be used and how much the renovations would cost.

“The due diligence done by the city prior to entering the lease, knowing what their space requirements were going to be, was negligible,” he said. “To go out and buy the building without knowing what it was going to cost was negligent.”

Bry wasn’t the only elected official to raise questions about the Ash Street investment at the budget committee meeting last week. Council members Chris Ward, Georgette Gomez and Chris Cate all asked about the delayed opening and higher renovation costs.

“The middle of last year we should have had people in the building, at least a couple of floors,” Ward said. “This is coming at a cost to the city, and I just don’t want to wait any longer.”


They also chastised Michell for failing to keep them abreast of changes to the project, a criticism the city’s COO acknowledged and pledged to fix.

“It probably wasn’t the most elegant process that we’ve engaged on with the city,” Michell told the budget committee. “We probably did not do the best job communicating with the council along the way.”


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jeff.mcdonald@sduniontribune.com (619) 293-1708 @sdutMcDonald