SAN DIEGO — Days after San Diego's Independent Budget Analyst questioned the finances behind Mayor Todd Gloria's proposal to enter into a 30-year lease for a 1,000-bed homeless shelter, the City Attorney has now come forward with potential legal issues if the city moves forward as is.
Editor's Note: This story was originally published without requesting a response from the Mayor's office on the City Attorney's report. The full response from the Mayor's Deputy Chief of Staff, Nick Serrano has been added to this article.
On Monday, July 22, the city council will vote on whether to enter into a 30-year lease for a warehouse located at the intersection of Kettner and Vine in San Diego's Middletown neighborhood.
If the council approves the contract as currently written, the city will lease the 65,000 vacant warehouse at $1.95 per square foot for the next 30 years, with a 3.5% annual increase when beginning in 20 months. The contract also requires the city to pay $13 million in improvements needed before it can occupy the property.
If all goes according to plan, as it is currently written, the city will then begin to pay rent as well as an estimated $30.7 million a year to operate the shelter for the next three decades.
However, San Diego's City Attorney has issued a warning to city council members about several red flags concerning the lease.
The first red flag is the Mayor's request, and the city council's willingness, to forego the usual voting procedure and expedite it by moving it to July 22.
Doing so, said the City Attorney's Office, prevents the office from reviewing the lease in its entirety.
What the City Attorney has reviewed doesn't look so good for taxpayers.
The first issue is the city will take possession of Kettner and Vine in its "as-is" condition.
The City Attorney's Office said it expressed many of these issues during the negotiations but the proposed revisions were not included in the current proposal.
"On July 12, 2024, the Landlord’s attorney forwarded to the City’s negotiating team a revised 'final' draft of the Lease, signed by the Landlord, restoring many of the provisions previously flagged as problematic. City staff confirmed that they viewed the lease as 'final' as of July 12, 2024," reads the report.
But that is not all. The City Attorney's Office also found issues with landlord Douglas Hamm's insistence that the city begin paying rent after the city completes the $18 million renovation project ($13 million city-funded and $5 million landlord-funded). The City Attorney found that if something were to happen in that time then taxpayers could potentially be on the hook.
Reads the report, "Based on our experience, it is highly unusual for a tenant to commence payment of rent until the tenant can occupy the premises, especially when the current condition of the premises requires substantial renovations (here, the Property consists of an abandoned warehouse and deficient building systems, among other known defects)."
In response to the City Attorney's report, the Mayor's Deputy Chief of Staff, Nick Serrano issued this statement:
"The City Attorney’s Office has been part of the lease negotiations for months and has discussed the risks with the administration. Let’s be clear: any big project carries risk and we have worked hard to have responsible protections for taxpayers in this agreement.
The question before the City Attorney’s Office is: is this lease agreement legal? Based off the memo released from their office today and the fact that the City Attorney’s Office drafted the lease agreement, reviewed and signed-off on all of the documents for the City Council’s consideration, the answer is: yes.
The real liability for the City and its taxpayers is continuing to leave thousands of people unsheltered on our streets – people who are hungry, sick, and even dying. Hope@Vine is a way to address this liability and deserves the City Council’s support.”
Included in the report was this footnote:
"The City’s bargaining position has been weakened in several ways: (a) holding a press conference at the Property on April 4, 2024, to announce that the parties had struck a good deal for the City when the proposed terms strongly favored Landlord and did not take into account direction from the Council on price and payment terms; (b) informing Landlord that City staff would bring an initial, Landlord-signed form of the Lease to the Council’s Land Use and Housing Committee on April 18, 2024, then reneging, resulting in a complete reopening of negotiations; (c) issuing a public memorandum on July 12, 2024, stating that the administration opposes the use of eminent domain to acquire alternative homeless shelter sites, thereby forgoing the City’s most effective, legally permissible tool to obtain fee title ownership of land at a fair price equal to the land’s appraised fair market value; and (d) abandoning further negotiations of the Lease beyond July 12, 2024. These actions empowered Landlord to refuse to engage in meaningful discussions about the potential sale of the Property to the City and to make overly ambitious demands to the City on the rent amount and numerous other Lease provisions."
The footnote also states that while the City Attorney does have concerns, the office believes the City "improved the deal terms considerably."
Another issue is a clause that indemnifies Hamm if there are any environmental issues at the property following the renovation. The warehouse is the former home to a large-scale printing operation and contamination has already been discovered on the neighboring property. Despite the landlord knowing this before purchasing the property, the city will assume all responsibility if additional contamination is discovered.
Lastly, the City Attorney's review of the lease found that there are no assurances that the city can hold on to the property after the 30-year lease expires. Because of this, the legal review found that a different approach such as a 20-year lease with four five-year extensions.
In conclusion, the legal review states, "As currently written, the proposed Lease does not adequately protect the City’s legal or financial interests, and the City would benefit from further negotiation, legal analysis, and due diligence."
