San Diego’s other bad real estate deal is even worse than we thought



8050 Othello Ave. is the site of the warehouse that the city has rented to maintain the fire trucks. / Photo by Megan Wood

It’s hard to stand out as a bad real estate deal in the city of San Diego, but one that has mostly avoided scrutiny while others have become criminal investigations keeps getting worse.

The city is now preparing to spend $ 15 million to reclaim a facility it leased four years ago, a warehouse where city crews could service fire trucks. He still has to do it on the site. The city now recognizes that it has never explored other options than leasing space for a maintenance facility. The work to make the property useful to the city will be done for almost half of the city’s lease and the completion of the work could potentially increase the city’s monthly rents. At least one member of the city council wants the city to move on and wipe out its losses without spending more.

Background: In 2017, Mayor Kevin Faulconer signed a lease for the city to take over a warehouse in Kearny Mesa. The plan was to use it as a stand-alone facility to repair fire trucks, which share repair space with the city’s garbage trucks. This creates an ineffective and chaotic scene which, according to two consultant reports, needs to be corrected and elected officials agree.

Since then, the city has encountered one problem after another with the property, but never considered changing course.

The last: Now the cost of upgrading the property has almost tripled. And the best case scenario for when the city could fix a fire truck at the site is in early 2023 – nearly half of the 15-year deal.

In addition, the city must pay the improvements in cash, as it cannot borrow money to do work on a building that does not belong to it.

Mayor Todd Gloria is eager to blame the situation on his predecessor, but he doesn’t want to call it a sunk cost. Instead, he’s going ahead with Faulconer’s plan to spend $ 15 million in cash to rebuild a facility the city doesn’t own.

A city spokesperson confirmed this month that the city has never conducted an analysis comparing the cost of renting space to buying a property and building its own facilities. , in response to a request from Voice of San Diego for such an analysis.

“Based on the file review, it appears that the previous administration did not perform a comprehensive cost analysis or consider building a brand new facility related to the lease of the Othello Ave property,” City spokesman Tim Graham wrote in an email.

Since signing the lease, the cost of upgrading the property to meet the city’s needs has dropped from $ 6.5 million to $ 15 million, and the city has spent $ 4.2 million on rents. monthly for a nearly empty building (the city has assigned 73 transportation workers in the 10 percent of the building which is office space, until they start working remotely due to COVID-19).

“It is clear that extensive due diligence, including cost comparison analyzes, was not performed when the Othello property was first identified as a potential solution to the city’s fleet issues,” Graham wrote. “The City agrees that the findings of the most recent OCA report better reflect the appropriate standards related to large real estate acquisitions and the City’s management plan to apply best practices for acquisitions in the future. “

It refers to scathing audit who criticized virtually every decision made by the city in recent major real estate transactions. Coverage of this audit focused on its findings relating to the city’s leases for downtown office buildings – transactions that are now the subject of a criminal investigation – but its description of the search by the Town of a fire maintenance yard was not flattering either.

The audit criticized the city for failing to assess the property to determine the lease was at market rate, or to ensure its planned investment of $ 6.5 million was worth it . He did not assess the condition of the building or inspect it for lead, asbestos or other hazardous materials. And he didn’t make sure the building would meet his needs after equipping it to fix fire trucks, the audit concluded.

“Now that the cost of leasehold improvements has increased, the city is about to make a significant real estate investment in a property it may never own,” the audit said.

But the city’s $ 14.8 million spending could end up costing it even more money over time.

Once the city modernized the property – including building two bays for fire truck repairs, allowing mechanics to perform quick and minor repairs on one truck without having to move another truck that needed more repairs. important – changes belong to the owner, not the city.

And as predicted repair costs increased, the city negotiated a series of lease extensions that could keep it in the building for up to 30 years. But every time the city exercises one of these five-year extensions, the city’s monthly rental cost is reset to the market rate at that time. The same is true if the city decides to buy the property because the owner decides to sell. The city, in other words, could end up paying more to rent the property in years to come because its own expenses made it a more attractive asset.

City staff hope this won’t be a problem.

“These types of improvements don’t generally increase the market value of real estate,” Graham wrote in an email response to questions about the city’s rental agreement.

The workaround: This summer, city council gave final approval to fund renovations to the Kearny Mesa repair facility. The project was one of a group of projects that were to be paid for from bonds – money the city borrowed from investors and will have to pay back with interest over time.

But the city is not allowed to spend borrowed money on a building that does not belong to it. To solve the problem, the city found three other projects that it was going to pay in cash, but that could be paid for with borrowed money, and filled its budget with bond funds. Then he transferred the released money to cover the cost of repairs to Kearny Mesa.

Dissent: City councilor Vivian Moreno voted against the move, issuing a statement at the meeting criticizing the city’s willingness to cover short-term needs with long-term debt, for example by purchasing emergency radio equipment and fire trucks that should only be of use to the city. for about 10 years, with loans he will pay interest on for 30 years.

“This action locks us into the seriously flawed lease of the Kearny Mesa repair facility,” she wrote, saying the city had “cleverly” arranged a way to indirectly use bond funds for a building that ‘she does not have. “This is just the latest red flag for a deal that’s chock full of them.”

In a statement to Voice of San Diego, she said the city should now be looking for a way out of the deal.

“It is not enough to simply accept that a previous administration made a bad deal – especially when it can be terminated,” she said. “We will have five years in a 15 to 30 year lease before the facility can even be used. It’s time to end the lease and find a new location for a repair shop and I would ask that this action be taken as soon as possible. “


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