The city of San Diego would need to spend between $228 million and $302 million on office space over the next 30 years under a proposed settlement of the Ash Street and Civic Center Plaza litigation, a study released Wednesday said.
The same report said the city’s office space needs likely would cost between $190 million and $483 million if the city instead moves forward with the lawsuits over two disputed lease-to-own contracts that are months away from trial.
The 31-page analysis was produced by the real estate consultancy Kosmont Companies, which was hired by the Independent Budget Analyst to study city real estate needs in light of the ongoing lawsuits.
The report, dated Feb. 22, 2022, was provided to the City Council earlier this year to help elected officials decide whether to proceed to trial or resolve most of the legal dispute out of court. It was withheld by Independent Budget Analyst Chales Modica until Wednesday under what’s called attorney-client privilege.
The public release of the examination came two days after Mayor Todd Gloria proposed buying out leases for the 101 Ash St. and Civic Center Plaza office towers for a combined $132 million.
The City Council is scheduled to vote on the mayor’s proposal at a Monday meeting.
The Office of the Independent Budget Analyst did not make a recommendation on the Kosmont findings, or suggest whether the planned settlement should be approved.
Instead, budget analyst Charles Modica said that council members should base their decision on the most thorough information available.
“It is critical that the Mayor’s Office and the Department of Real Estate and Airport Management bring forward a clear and detailed plan for the city’s future downtown real estate needs and how the 101 Ash and CCP properties fit into that plan,” he wrote.
No such plan has been produced or released by the Gloria administration, even though the Ash Street building remains unusable due to asbestos and other problems and the pandemic has reduced demand for downtown office space.
The Kosmont study includes several details about the two buildings that were not previously known.
Perhaps most notably, the consultants said the Civic Center Plaza needs upgrades and repairs that could cost as much as $61 million. That’s on top of the $46 million the city would spend to buy out the lease.
A property condition assessment written before the city leased the Civic Center Plaza put optional modernization costs at just under $1.5 million.
The report also states that the principal balance remaining on the Ash Street lease is $74.4 million. When Gloria introduced his settlement plan at a press conference Monday, he said it would cost $86 million to pay off that lease.
The discrepancy is mostly due to the city’s plan to pay $12 million in back rent and nearly $1 million in late fees associated with the Ash Street property, the city said in a separate report issued Wednesday.
Beyond the lease buyout, the former Sempra Energy headquarters at 101 Ash St. needs up to $115 million in repairs and upgrades, the consultant said.
Kosmont analysts said the city now controls approximately 1 million square feet of office space in a series of owned and leased properties. Several of the buildings the city owns outright also need major renovations, they said.
Repairs to the main city hall, known as the Civic Administration Building, could cost as much as $95 million. Renovations to the City Operations Building west of Golden Hall could cost up to $51 million, the study said.
The Kosmont cost estimates for the city’s long-term office space need were based on an assumed market lease rate of $3 per square foot per month, an assumption analysts said was conservative.
The report does not make a specific recommendation as to how the council should proceed.
“Accepting the settlement provides certainty about the city’s real estate program,” the February study stated.
“Rejecting the settlement could serve to suspend the city’s real estate program until litigation were concluded, as it may be prudent not to make any significant decisions until the fate of the buildings is known,” it added.
Given the city’s cost of capital, owning office space may be a better long-term solution than leasing, Kosmont concluded, but ultimately that may be a policy decision.