San Diego agrees to lease 101 Ash St. to developer for low-income housing

The city of San Diego will hand over its asbestos-plagued office tower at 101 Ash St. to a development team that believes that it can turn the currently unusable high-rise into something city leaders say they desperately need — rent-restricted apartments for low-income families.

Tuesday, San Diego City Council members voted unanimously to approve a 60-year lease agreement with 101 Ash Venture LP for the property.

The vote means the city will soon enter into a ground lease disposition agreement with the development team, which consists of housing developers MRK Partners and Create Dev LLC.

The umbrella contract defines how the parties will move the project forward during the window of time between council approval and the close of escrow, which could be as long as two years and is contingent on the developer securing federal tax credits to fund the $267.6 million project. The agreement also lays the foundation for the parties to execute the drafted lease agreement once escrow closes.

The developer plans to convert the 21-story office building into a residential complex with 247 units deed restricted for families earning 30% to 80% of the area median income, or what’s considered affordable housing, at a cost just shy of $1.1 million per unit. The project includes three unrestricted manager units, 25,000 square feet of retail space and a 4,000-square-foot child care center.

Council members, who acknowledged the tower’s unflattering history and its many deficiencies, said they are not only anxious to offload the financial burden of the building’s upkeep, but are comfortable with the deal’s overall structure given the promise of future apartments.

“There are those (who) insist on this building weighing down the city in perpetuity, and they seem to find some odd joy in that. What would make me happy is seeing the 247 families move in to affordable homes. And instead of wallowing in the past, this building is an opportunity to move forward and see what can happen by reimagining an old office building,” Council President Joe LaCava said. “For those that say it cannot be done, well today is the first step in proving them wrong. … I’m confident that this is the right project for right now and in the right building downtown.”

The city’s decision allows the developer to later this year seek $87.8 million in low-income housing tax credits, which are doled out on a rolling basis by the California Tax Credit Allocation Committee. If the developer is awarded the tax credits, it would sell them to private investors to secure project funding. The group is also banking on receiving $36.1 million in tax credits associated with historic properties even though 101 Ash St. has not been declared a historic property.

“San Diego’s working families need and deserve beautiful, safe and affordable housing,” said Kelly Moden, the president of Create Dev and the chair of San Diego’s Planning Commission. “Today’s council approval gives us the green light to transform a city-owned liability into a legacy. We are honored to have the trust and confidence of the San Diego City Council as we turn our attention to meeting September’s state and federal affordable housing deadlines, which will keep our timeline and financing moving forward.”

Built in 1967, the 21-story office tower at 101 Ash St. takes up a full city block in downtown San Diego and was the longtime home of Sempra Energy until 2015. In early 2017, the city entered into a 20-year lease-to-own deal to acquire the building and use it for a portion of its downtown workforce.

The transaction turned into a civic disaster after a bungled remodel resulted in asbestos contamination. In 2022, San Diego bought out the lease for $86 million in a controversial settlement agreement. The city continues to spend millions annually on building upkeep and security, although the office tower remains uninhabitable.

The city has spent $96.1 million on the building to date, according to a report from city consultant Keyser Marston Associates Inc. The calculation includes the acquisition price, maintenance costs from 2022 through 2026, administrative costs and consultant fees, but excludes legal costs and financing charges.

The deal, as structured, means the city will lease the property to the developer for what Noah Fleishman, a financial analyst in the Office of the Independent Budget Analyst, described as a negligible sum — or $15,000 per year. The base rent amount increases annually by 3% or by the increase to the consumer price index, whichever is greater.

San Diego will also help finance the project — but only on paper.

The city has agreed to loan the value of the building, or $45.6 million as established by the developer’s appraisal, at a simple interest rate of 4%. The city is not contributing cash to the project. It will issue a seller’s note to recapture a portion of the balance due through annual payments that are expected to begin 15 years after the project is completed.

In total, San Diego will receive $2.3 million in base rent payments over the life of the lease, according to the KMA report. The firm also estimates that the city will receive a total of $86.4 million in payments toward the balance and interest on the city note, as well as take home $1.6 million when the development team refinances the project, likely in lease year 17.

However, the total compensation of $90.2 million has a net present value of just $3.6 million, using a 10% discount rate to reflect the time-value of money, the KMA analysis determined.

Council members largely brushed off criticism from a chorus of public speakers who asked the city leaders to abort the deal.

“The proposal before you today raises serious procedural, economic and ethical considerations,” said Richard Bailey, who is the former mayor of Coronado. “Economically, this deal simply doesn’t pencil out. And we know it doesn’t pencil out because at a projected cost of $1.1 million per unit, it is significantly more expensive than luxury residential buildings selling for $430,000 to $750,000 per unit nearby.”

Procedurally, he said, the city did not solicit competitive bids for the property.

In 2023, the city put the Ash Street block on the market alongside its four-block, Civic Center complex. It received interest in the Ash Street property, but the city eventually cut ties with the developer then proposing to convert the office building into subsidized housing. In 2024, the city received three unsolicited proposals for the empty high-rise. In January, San Diego agreed to move forward with the MRK-Create team.

The project presumably raises ethical concerns because of Moden’s involvement.

Michael Aguirre and Maria Severson, partners at Aguirre & Severson LLP who have sued the city over its past dealings with the building, threatened additional litigation. They alleged violations related to public noticing requirements and argued that Moden’s financial participation in the deal is illegal.

Moden stands to collect a portion of the $32.7 million developer fee. The fee is calculated using a state formula for the low-income housing tax credit program, which allows the developer to take home 15% of the eligible basis. Eligible basis is the total amount of project costs eligible for generating tax credits. The development team will pocket nearly $3.8 million up front and collect the rest when the project is refinanced.

“The chairperson of the city Planning Commission is perpetrating a fraud on the people of San Diego … . She has a prohibited financial interest,” Aguirre said. “I’m going to have to go back into court, because this is a fraud.”

San Diego’s Ethics Commission said last year that there is no conflict of interest because the project did not go before the Planning Commission.

Fleishman, the IBA financial analyst, helped make the case for the city leaders to approve the deal. Fleishman said that the developer’s financial assumptions are reasonable and that its tax credit application will likely be competitive. The project’s high per-unit cost is not the best metric, he said, because the cost doesn’t adequately reflect the higher costs associated with building the project’s 68 two-bedroom units and 62 three-bedroom units.

Council members also appeared swayed by the fact that the city is not contributing any cash in the deal. They also approved of contractual language that puts the onus on the developer to accept the building as is and remediate the asbestos.

The council members voted 8-0 to approve the transaction. Councilmember Vivian Moreno was absent.