The city is suing real estate brokers who advised the San Diego Housing Commission to acquire two residential hotels in Mission Valley and Kearny Mesa to house the homeless during the COVID crisis.
The lawsuit comes six months after city officials defended the purchase prices of the two hotels, which were among the highest per room costs of any hotel sold in the region last year.
City attorney Mara Elliott announced the lawsuit on Tuesday, hours after city council voted behind closed doors to approve the lawsuit.
“The facts of this case are appalling and city council is determined to shed light on how millions of public dollars have been spent,” Elliott said in a press release.
The lawsuit targets Kidder Mathews Inc., a real estate broker, agent Jim Neil, and Chatham RIMV LLC, the former owner of the Residence Inn on Hotel Circle, as defendants.
Officials at both companies and Neil did not respond to requests for comment on Tuesday.
According to the city attorney, Kidder Mathews and Neil made fraudulent representations to the housing commission, violated conflict of interest laws and had a prohibited financial interest in one of the contracts they participated in.
âHousing commission brokers created a stock market boon in addition to over $ 1 million in commissions as their client tried to protect hundreds of homeless people from a devastating pandemic,â Elliott said, referring to in the city.
The lawsuit concerns a pair of Residence Inn hotels that the city purchased last November, more than eight months after the start of the coronavirus pandemic.
The San Diego Union-Tribune reported in February that the city appeared to be paying well above the market rate for each property, a 144-room resort in Kearny Mesa and a 192-room property in Mission Valley.
The idea was to use hotels to protect homeless people from COVID-19 by moving them from a makeshift shelter installed inside the San Diego Convention Center to more permanent and supportive housing.
The costs per room for each of the properties were among the highest of any hotel that changed hands in San Diego County last year. The Mission Valley Hotel sold for $ 349,000 per room and the Kearny Mesa Hotel sold for $ 274,000 per room.
The San Diego Housing Commission relied on CBRE’s assessments that the Hotel Circle property was worth $ 68.1 million and the Kearny Mesa center was valued at $ 39.6 million.
Reports noted that the COVID-19 pandemic has severely reduced the value of hotels.
The city paid $ 67 million for the Mission Valley hotel and $ 39.5 million for the Kearny Mesa property. County records showed the hotels were worth $ 63.4 million and $ 28.9 million, respectively.
City officials used a series of state and federal grants – and a $ 50 million loan from Chase Bank – to close the deals.
Housing Commission deputy chairman Scott Marshall defended selling prices when asked about costs in February.
âIf the appraisals conducted for Chase Bank had not supported the value and purchase price of properties as reflected in CBRE’s appraisals, Chase Bank could not have legally funded its loans,â said Marshall at the Union-Tribune.
The housing commission did not respond to follow-up questions on Tuesday, such as why the city did not require disclosure before the escrow closed, why city lawyers approved the purchases, and why the city initially defended the transactions.
The lawsuit filed by the city attorney’s office alleges that the costs of acquiring the two properties were inflated, in at least one case to warrant a higher commission.
A spokeswoman for Elliott said the city attorney’s office never approved hotel acquisitions because the housing commission is an independent municipal agency that relies on its own legal advisers, the firm of San Diego attorneys Christensen & Spath.
“Our lawyers have no independent knowledge of SDHC’s work product, do not attend open or closed sessions of the Council of Commissioners, and do not advise its staff,” spokeswoman Hilary Nemchik said by mail. electronic.
“Like our office, the housing authority was not aware of the facts that led to this trial, which the housing authority ordered our office to file to protect the city,” she added.
Walter Spath, one of the Housing Commission attorneys, said he was not aware of anything in the legal complaint that suggested Christensen & Spath neglected anything in the Residence Inn transactions.
In February, Marshall also defended the broker’s fees of over $ 500,000 when the Union-Tribune asked him why the buyer was bearing that cost.
The “payment of the broker’s commission by the housing commission was part of the negotiations for the complex purchase of the Hotel Circle property, which included the requirement that the seller deliver the property to SDHC upon closing of the escrow without any resident, âhe said.
The city attorney’s office now says the fees paid by the city were inappropriate.
“Neil also earned commissions on the two transactions that exceeded the limit of $ 250,000 set in the signed brokerage contract,” the statement said.
“In negotiating the deal to acquire the Residence Inn Kearny Mesa, Neil took a commission of $ 592,500 from the vendor, inflating the cost of the hotel to the detriment of his client,” he added. “The Housing Commission paid Neil’s commission of $ 502,500 on the Circle Hotel acquisition even though it was over limits.”
The city’s lawsuit comes about two months after a report in the online Voice of San Diego news agency that Neil bought tens of thousands of shares in the company that owns the Mission Valley hotel.
The value of those shares may have increased by up to $ 250,000 since the sale, according to the city attorney’s office.
Lawyers for the city said Tuesday that the state government’s code strictly prohibits public officials – and their agents – from participating in financial transactions in which they have personal interests.
“Although they are consultants to public agencies, neither Kidder Mathews nor Neil have filed legally required declarations of economic interest that would have disclosed their conflicts of interest,” the press release said.
“They also failed to comply with the disclosure requirements set out in the brokerage agreement which would have exposed the conflicts and allowed the housing commission to use a different broker,” he added.
The lawsuit does not seek to return the properties to the original sellers. Both Residence Inn properties would remain owned by the city, functioning as supportive housing for those in need.
The lawsuit seeks regular and punitive damages from both the transactions and a court order rescinding the Hotel Circle deal.
The case against the brokers and seller of the Mission Valley hotel was announced just a month after Elliott filed a similar lawsuit against the owner of the city’s leased high-rise buildings at 101 Ash St. and Civic Center Plaza.
That lawsuit said those two deals involved consultant Jason Hughes raising nearly $ 10 million to advise the city on capital leases, although he and former mayor Kevin Faulconer said the advice he had given to city officials and the mayor were free.
The city attorney’s office announced the lawsuit a day after the Union-Tribune reported that the seller in both deals, Cisterra Development, had paid Hughes $ 9.4 million in commissions.
Cisterra and Hughes both said city officials were aware of the payments for its efforts at Civic Center Plaza and 101 Ash St. The city’s case seeks to cancel each of the leases, which were approved in 2015. and 2016, respectively.