The former Sempra Energy headquarters in downtown San Diego, which has been leased by city government. | Courtesy Shapery Enterprises

San Diego City Council Okays $30 Mil Rehab for Office Building

Morris Newman Government & Public Policy

Adding another twist to an ongoing controversy about an office building leased by the City of San Diego, the City Council on Tuesday approved, by a vote of 6-0, spending $30 million on renovations on the 101 Ash Street building.

The unexpected maintenance and renovation costs add a further sour note to a real estate deal that had already been criticized by some council members as too expensive. In January 2017, the city leased the entire building in a 20-year deal worth a reported $200 million.

Until 2017, the building had been the headquarters of Sempra Energy, the corporate parent of Southern California Gas Co. A second firm, Manchester Financial Group, also had its home office in the building.

Built in 1967, the 21-story, 330,331-square-foot building has been a source of heated discussion both in and out of City Hall. In Tuesday’s City Council meeting, Councilwoman Barbara Bry was particularly outspoken about what she called the shortcomings of the deal.

“An unfortunate series of decisions and events happened, which I won’t recount today, and we are where we are,” Bry said at Tuesday’s meeting. “In business, you look at something (like this) as a sunk cost at this point,” she added.

The fracas over unforeseen maintenance costs in the 101 Ash building, has been an “embarrassment” to Mayor Kevin Faulconer and his staff, according to the San Diego Union-Tribune. Prior to the lease, Faulconer championed the long-term lease-to-purchase deal with building owners Shapery Enterprises and Cisterra Development. (Shapery owns 51 percent of the building, while Cisterra has 49 percent.)

Faulconer’s rationale for entering the lease was to control office-related costs for the city in the long term. At the time the lease was signed, the mayor told the City Council that aging office building was ready to occupy, needing only a $10,000 power wash to the exterior.

Subsequent examination revealed that the building needed upgrades to its heating and air-conditioning systems, needed asbestos removal and modifications to work stations, among other costs, according to Union-Tribune.

In the end, the council settled on the $30 million, following the recommendation of Independent Budget Analyst Andrea Tevlin, who said the figure was the most prudent option at present. Although the city staff might have been able to occupy the building by paying only $4.5 million, the cost of delaying other renovations would have entailed expenses up to $50 million.

In Tuesday’s meeting, Councilwoman Bry observed that the delays in occupying the building are expensive for San Diego. Currently, the city is spending $18,000 a day to lease the building, which is currently empty while it awaits renovation, according to the Union-Tribune.

“Hopefully this was a lesson learned — an expensive lesson learned — but one that hopefully will not happen again.