San Diego city attorney sues brokers over hotel deals city officials defended 6 months ago – The San Diego Union-Tribune

The city is suing the real estate brokers who advised the San Diego Housing Commission to acquire two residential hotels in Mission Valley and in Kearny Mesa to house homeless people 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 all hotels sold in the region last year.

City Attorney Mara Elliott announced the legal complaint Tuesday, hours after the City Council voted in closed session to approve the litigation.

“The facts of this case are appalling, and the City Council is determined to get to the bottom of how millions of public dollars were spent,” Elliott said in a news 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 from both companies and Neil did not respond to requests for comment 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 making.

“The housing commission’s brokers engineered a stock-market windfall on top of more than $1 million in commissions while their client was trying to protect hundreds of unsheltered people from a devastating pandemic,” Elliott said, referring to the city.

The lawsuit involves a pair of Residence Inn hotels the city bought last November, more than eight months into the coronavirus pandemic.

The San Diego Union-Tribune reported in February that the city appeared to pay well above the market rate for each property, a 144-room complex in Kearny Mesa and a 192-room facility in Mission Valley.

The idea was to use the hotels to protect homeless people from COVID-19 by relocating them from a makeshift shelter set up inside the San Diego Convention Center into more permanent and supportive housing.

The per-room costs for each of the properties were among the highest of all hotels changing hands in San Diego County last year. The Mission Valley hotel sold for $349,000 per room and the Kearny Mesa hotel was $274,000 per room.

The San Diego Housing Commission relied on valuations by CBRE that said the Hotel Circle property was worth $68.1 million and the Kearny Mesa center was valued at $39.6 million.

The reports noted that the COVID-19 pandemic had sharply reduced hotel values.

The city paid $67 million for the Mission Valley hotel and $39.5 for the property in Kearny Mesa. County records showed the hotels were then 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 Vice President Scott Marshall defended the sale prices when questioned about the costs in February.

“If the appraisals conducted for Chase Bank had not supported the value and purchase price of the properties as reflected in the CBRE appraisals, Chase Bank could not have legally funded its loans,” Marshall told the Union-Tribune then.

The housing commission did not respond to follow-up questions Tuesday, such as why the city did not demand disclosures prior to the close of escrow, why city lawyers signed off on the purchases and why city officials initially defended the transactions.

The lawsuit filed by the City Attorney’s Office alleges that the acquisition costs for both properties were inflated, in at least one case to justify a larger commission.

A spokeswoman for Elliott said the City Attorney’s Office never signed off on the hotel acquisitions because the housing commission is an independent city agency that relies on its own legal advisers, the Christensen & Spath law firm of San Diego.

“Our attorneys have no independent knowledge of SDHC work product, do not attend open or closed sessions of the board of commissioners and do not advise its staff,” spokeswoman Hilary Nemchik said by email.

“Like our office, the housing authority was not aware of the facts that led to this lawsuit, which the housing authority directed our office to file to protect the city,” she added.

Walter Spath, one of the housing commission lawyers, said he was not aware of anything in the legal complaint that suggested Christensen & Spath overlooked anything in the Residence Inn transactions.

In February Marshall also defended the broker’s fee of more than $500,000 when asked by the Union-Tribune why the buyer was picking up that cost.

The housing commission’s “payment of the broker’s commission was part of the negotiations for the complex purchase of the Hotel Circle property, which included requirements that the seller deliver the property to SDHC at the close of escrow without any residents,” he said.

The City Attorney’s Office now says that fee paid by the city was improper.

“Neil also earned commissions on both deals that exceeded the $250,000 limit set in the signed broker agreement,” the statement said.

“In negotiating the deal to acquire the Residence Inn Kearny Mesa, Neil took a $592,500 commission from the seller, inflating the cost of the hotel to the detriment of his client,” it added. “The housing commission paid Neil’s $502,5000 commission on the Hotel Circle acquisition even though it exceeded limits.”

The city’s lawsuit comes about two months after a report in the Voice of San Diego online news organization that Neil had purchased tens of thousands of shares of stock in the company that owned the Mission Valley hotel.

The value of those shares may have increased by as much as $250,000 since the sale, according to the City Attorney’s Office.

City lawyers said Tuesday that the state Government Code strictly prohibits public officials — and their agents — from participating in financial transactions in which they hold any personal interests.

“Despite being public-agency consultants, neither Kidder Mathews nor Neil filed the legally required statements of economic interest that would have disclosed their conflicts of interest,” the press release stated.

“They also failed to comply with disclosure requirements set out in the broker agreement that would have revealed the conflicts and allowed the housing commission to use a different broker,” it added.

The lawsuit is not seeking to return the properties to the original sellers. Both Residence Inn properties would remain owned by the city, operating as supportive housing for needy people.

The lawsuit seeks regular and punitive damages from both transactions and a court order voiding the Hotel Circle agreement.

The case against the brokers and the Mission Valley hotel seller was announced barely a month after Elliott filed a similar lawsuit against the landlord of the city-leased high rises at 101 Ash St. and the Civic Center Plaza.

That lawsuit said those two deals involved consultant Jason Hughes collecting nearly $10 million for advising the city on lease-to-own contracts even though both he and former Mayor Kevin Faulconer represented that the advice he gave city officials and the mayor was free of charge.

The City Attorney’s Office announced that lawsuit one day after the Union-Tribune reported the seller in both deals, Cisterra Development, paid Hughes $9.4 million in commissions.

Cisterra and Hughes have both said city officials were aware of the payments for his Civic Center Plaza and 101 Ash St. efforts. The city’s case seeks to void each of the leases, which were approved in 2015 and 2016, respectively.