After 101 Ash St. mess, auditors gave San Diego a blueprint to avoid real estate debacles. They wish the city would use it.

The lease would last six decades, if approved. It calls for spending hundreds of millions of dollars on a vacant mid-century high-rise that has not been safe to enter, let alone occupy, for years.

Turning the 101 Ash St. office tower into affordable housing — a plan the San Diego City Council will consider on Tuesday — would push the public’s investment in the building that Sempra Energy abandoned 10 years ago past $500 million.

But even though the latest Ash Street project is a huge and expensive commitment, Mayor Todd Gloria and his lieutenants have not taken advantage of best-practices recommendations made by the San Diego city auditor after a parade of flawed real estate deals.

The new $267 million plan, which relies almost entirely on public funds and loans backed by tax credits, also raises questions that have not yet been fully explained.

Council members and taxpayers have had only a matter of days to digest the complicated lease and financing information. A review by the city’s independent budget analyst — a critical step in any major revenue or spending decision — was not released until Thursday.

That 11-page report raised some concerns but said the project “appears financially and economically feasible.” And the Mayor’s Office said the lease needs speedy approval to meet a looming September tax-credit application deadline.

Among the issues San Diego officials have not fully disclosed or discussed are the property’s current condition, how it can qualify for historic-preservation funds and why the project was awarded to a political appointee, rather than put out to competitive bid.

Records the Gloria administration provided to the City Council also lack any detailed discussion of the hefty per-unit cost of building the homes — some $1.1 million for each of hundreds of apartments.

Rather, the documents say the 101 Ash St. renovation “promises a transformative, adaptive reuse and full redevelopment of the property” and will revitalize a moribund block in the center of downtown San Diego.

“The project not only aims to address the need for affordable housing but also seeks to provide significant commercial and public benefits, thereby revitalizing the area and enhancing the quality of life for its residents,” the report says.

But four years ago, after an outside review of city real estate practices exposed serious lapses in a host of transactions, Gloria and other city officials pledged to do more research and release more findings before plunging into major deals.

In 2021, following a report by The San Diego Union-Tribune that examined questionable city real estate transactions, including the original Ash Street acquisition, City Auditor Andy Hanau issued a scathing report aimed at avoiding future debacles.

His review found that former Mayor Kevin Faulconer and his staff had withheld information and misrepresented facts when they sought approval for key land purchases and leases.

The audit made a host of suggestions aimed at protecting taxpayers going forward, and Gloria and other city officials agreed to implement those practices for every big purchase or lease they proposed.

Among other things, the city is supposed to create a due-diligence checklist for each significant acquisition to ensure that every aspect of the lease or purchase is properly vetted and evaluated.

Officials also agreed to prepare an independent property condition report before approving major real estate deals. But because it is not an acquisition, the plan for 101 Ash St. has avoided much of the scrutiny and public debate that City Auditor Andy Hanau recommended.

The 2021 audit largely regarded property acquisitions — purchases or leases. Under the current Ash Street plan, the city is seeking to rent out a building it already owns; it would be the landlord, not the tenant.

The Mayor’s Office said the proposed conversion to affordable housing complies with city policies and meets the suggestions that were brought forward in 2021.

“The city has fully implemented and always follows the auditors recommendations on real estate transactions, this one included,” Gloria spokesperson Rachel Laing said by email.

Hanau said his office has no role in the latest plans for the troubled Ash Street building, which has been shuttered due to asbestos and other concerns for all but a few weeks since Sempra vacated the 19-story high-rise in 2015.

But he said the findings and recommendations his office produced four years ago should be followed in city deals generally, even those that are not purchases.

“Our 2021 audit on acquisitions highlighted the need for management to provide the City Council, the city attorney, the IBA and the public with all material information to make an informed decision — and provide enough time to review that information,” he said.

“While the audit focused on acquisitions and not leases of current property, the same principle would apply to any major decision the council is asked to make,” Hanau said.

A separate audit released last year found the city had issued millions of dollars in contracts without City Council approval despite prior audit recommendations.

Former acting San Diego auditor Kyle Elser said the audit recommendations were made to ensure the city performs due diligence on all major real estate deals.

“There should be a cost-benefit and risk analysis performed to understand the risks involved,” he said,. “We also recommended the city attorney should report on legal risks associated with deals like this, whether it’s a lease or a purchase, whether you’re the landlord or the tenant.”

Elser also questioned the hurry toward approving the contract on the council’s last day in session before its August recess.

“The City Council and IBA should never be rushed,” he said. “They should be given plenty of time to make an informed decision.”

‘Economically feasible’

Faulconer was looking for new office space for city employees when he sought council approval to acquire the longtime Sempra headquarters.

But acquisition, renovation and maintenance costs soared into the hundreds of millions of dollars before the city abandoned the project. The city has since leased other office space for millions of dollars a year, even as it is paying off two sets of bonds issued for the Ash Street project.

Now, facing security and other costs that reach millions every year, the plan to convert the 315,000 square feet of office space into affordable housing may be the best of only bad options, one expert told the Union-Tribune last week.

“The city should do this deal because (101 Ash St.) is an albatross around their neck,” said Norm Miller, a real estate professor emeritus at the University of San Diego. “I think it’s a sweetheart deal for the developer, but I don’t see a lot of good alternatives for the city.”

The quarter-billion-dollar deal with a newly formed company called 101 Ash Ventures is almost exclusively funded through public funding and private borrowing backed by state tax credits.

The contract under consideration by the council Tuesday gives the developer two years to put together the financing, which includes $157.4 million in direct costs, $42.3 million in indirect costs, $22.3 million in borrowing costs and a $45.6 million promissory note from the city.

The principals behind 101 Ash Ventures — Sydne Garchik of MRK Partners and Kelly Modén of Create Dev — stand to collect $32.7 million in fees after making an initial deposit of $100,000.

The independent budget analyst report released Thursday says the conversion plan and its financial projections appear reasonable, even conservative.

“Our office’s review of this proposal, after consultation with our independent real estate consultant Kosmont Companies, finds the proposal appears financially and economically feasible and that it provides a clear public benefit in providing needed affordable housing,” it said.

The analysis does point out some elements of the arrangement that could prove to be problematic for San Diego taxpayers if the project flops.

“The city would need to forgive or write off the remaining balance (of the promissory note) if it is not repaid,” it said. And “the total development cost and per-unit costs are higher than council has seen for many recent affordable housing deals.”

The report also notes the tight approval timeline from the Mayor’s Office. Rather than recommend a delay to provide more time for council members and the public to study the deal points, the IBA suggests greater scrutiny going forward.

Charles Modica, the city’s independent budget analyst, told the Union-Tribune he generally prefers to release his analyses at least one week before a council vote, but he’s comfortable with the timetable in this case.

“We have been able to brief each council office on our analysis this (past) week and continue to be available for questions from them,” he said. “Similarly, we respond to questions from the public when they come in as well.”

‘A lot of risks’

Laing, the mayor’s spokesperson, began negotiations with Garchik and Modén last July, after city experts were unable to strike a deal with a previous developer.

The plan before the council — 250 apartments, 25,000 square feet of commercial space and a 4,000-square-foot childcare center — comes in the wake of a failed solicitation the city issued in 2023.

That effort, which lumped 101 Ash St. in with six city blocks pegged for a broader downtown makeover, attracted no bidders. But the city received three supplemental bids for the Ash Street building — one of which resulted in the current proposed lease.

Laing did not respond to questions about why the Ash Street property on its own was never put out to bid, or why no property condition report has been made available for public inspection.

The urgency driving the council decision now, Laing did say, was a September deadline to apply for 2025 tax credits.

“If the developer fails to perform by the end of the escrow period, the city will have explored the opportunity, received the non-refundable $100,000 and can then resume efforts to pursue a long-term public benefit for the property,” she wrote.

Garchik said in an interview that she and her partner spent months crunching the numbers and putting together a project and funding mix that will work. She and her advisers donned hazardous-materials suits to inspect the building so they would know how much the repairs and upgrades will cost, she said.

“There are a bunch of guarantees that go along with this project,” Garchik said. “Sometimes it gets overlooked, but there are a lot of risks on the developers. It’s really a question of how well we do our job.”

The 101 Ash Ventures LP partner said she is confident the old Sempra headquarters will qualify for historic tax credits and the $36.1 million in borrowing that would allow.

Garchik also said the internal property condition report will become a matter of public record once the company’s tax-credits application is filed with the state.

She also rejected suggestions that Modén’s seat on the planning board could represent any conflict.

“This project has no discretionary approval needed,” she said. “Because it doesn’t require approval from the commission, it doesn’t involve any conflict of interest. The fact that she wants to create affordable housing in her hometown is really commendable.”

To former assistant city attorney Maria Severson, there is little question Modén’s involvement in the deal poses a conflict of interest.

Severson said the mayor’s request for council approval of the Ash Street project includes a waiver of state environmental regulations, and she said that without such an exemption, the project would normally call for Planning Commission consideration.

“This is a project that should go to the Planning Commission,” Severson said.

Last year, when the Union-Tribune asked the San Diego Ethics Commission about any potential conflict with Modén bidding on the Ash Street makeover, then-executive director Sharon Spivak said the bid presented no issue because it was not part of the planning process.

But the proposed lease is different from the bid submitted last year. Bryn Kirvin, who succeeded Spivak as executive director earlier this year, said the commission has not reviewed the 235-page contract and attachments for potential conflicts, or the appearance of one.

“It is not our role to review the details of the contract,” she said. “We provide ethics guidance to officials upon request.”

The hearing before the City Council is scheduled to begin at 2 p.m. Tuesday.