City Sues Broker Over Alleged Conflict of Interest in Hotel Acquisitions

Speaker 1: 00:00 Another bad real estate deal is in litigation with the city of San Diego after approval from council city, attorney Mara Elliott announced they are suing the real estate brokers who advise the housing commission to acquire two hotels in mission valley and in Kearny Mesa to house unsheltered people during the peak of the pandemic as the San Diego union Tribune, Jeff McDonald reports. The problem is that the city or better yet you, the taxpayer paid way more for the properties and what they were worth in a deal filled with conflicts of interest. Jeff, welcome to the show. Hello. Thanks for having me. So what prompted this lawsuit and who are the defendants? Speaker 2: 00:41 Just like attorney's office announced yesterday, they were suing the brokers in a deal that the city agreed to last fall to acquire two residents in properties to house homeless, people that were vulnerable to COVID-19, uh, the brokers, it turns out well, one of them is alleged to have had, uh, stock inside of the trading and recommended one of the properties and then invested, uh, you know, about 40,000 shares of that company's stock. So that's problematic because that was not disclosed. And, uh, secondarily another issue is the selling price for the two properties I reported the union Tribune reported early this year that the selling price was notably above what the market rate was bearing because of the downturn in the tourism sector, due to the pandemic. Speaker 1: 01:31 How did this bad deal come to light? Speaker 2: 01:34 The union Tribune reported that the costs appeared high because hotel properties, devalued, uh, notably, uh, last year in the, uh, you know, throughout the crisis. Uh, and I mean, you know, 30, 40, 50%, in some cases, the city based its purchase price for the two properties on pre COVID appraisal. So the city defended the sale price said they were, uh, in terrific condition. They had kitchenettes, they were going to serve the city's needs. Uh, very favorably in may. The voice of San Diego was first to report the stock deal that one of the brokers entered into apparently unbeknownst to the city. So there were two problems with these, uh, with these deals, one being the sales price for the properties and the other, being the personal investments of one of the brokers. Speaker 1: 02:23 You know, and as you mentioned, you previously reported that the city overpaid for these two hotels, uh, that would be used to house people who were homeless. How much did the city overpay? Speaker 2: 02:33 The per room rate for? One of the properties was close to $350,000. That's a lot for, uh, a hotel room, uh, under any circumstance, let alone, when the bond has fallen out of the, uh, you know, the hotel market, the second property sold for about $275,000 per room, which of course is, uh, higher than that higher than most. And I think it was the fifth cost of this transaction in the county all of last year. First one was, uh, was the most expensive hotel per room cost, uh, all year. Speaker 1: 03:04 And, uh, and, and you mentioned that the brokers were also paid high commissions. Uh, what was it? Speaker 2: 03:11 Well, they were paid 500,000, just over 500,000 by the city, which I asked about early this year, because it's not usually the buyer that picks up the broker's commission. Uh, the housing commission told me at the time that that was perfectly appropriate because of the work that the brokers had done. Uh, and that, that commission was deserving. The city attorney's office in its lawsuit yesterday said that was inappropriate, that it exceeded the limits in the, uh, original broker's agreement. And they also noted that the same brokers collected almost $600,000 from the seller. So that's unusual that a broker would get paid from both sides in a transaction. So I think that's going to be something that's litigated and we'll see where that goes. The, uh, the defendants have not commented yet on the lawsuit. They didn't comment to me last, uh, early this year when I looked them up before, Speaker 1: 04:05 When you approached the city about your reporting on all this, what did they initially say? Speaker 2: 04:10 Well, I got directed to the housing commission early this year because it was a housing commission transaction. Uh, I'm not clear on why the housing commission took the lead on purchasing hotel properties on behalf of the city because the city operates its own real estate assets department. Uh, although you may remember that department has been called into question for its decision-making related to the agitate acquisition, and now the civic center Plaza, and some of the, uh, some of the other properties, according to a city audit that was released just late last month, but the, how the commission said that these were good deals and that the city was going to benefit. And they stood by the decision they stood by the sales prices. So we quoted them saying that, and here we are, six months later, the city attorney's office is, uh, publicly questioning that hasn't commissioned decisions for from late last year. Speaker 1: 05:02 Housing commission was responsible for this who was mayor at the time when this deal was, Speaker 2: 05:08 Uh, Kevin Faulkner was the, uh, these deals are made under the your administration. And, uh, it's interesting to note that the mayor is responsible for appointing all the housing commissioners. So I think it's fair to say the buck stops with the city's chief executive. Speaker 1: 05:23 And so now that the city has a new administration and is changing their tune in suing over the deal, what does that say? Speaker 2: 05:31 Well, it does look like the city attorney's office is trying to clean up a, another bad real estate deal or at least questionable. Uh, so you got to give the, uh, the city credit for that. Uh, according to the city attorney's office, they were approached by the housing commission earlier this year to look into the details of the deal. It's not clear when and why that request was made, but you got to give the, uh, the city officials currently in charge of, for looking at the deal in more detail right now. Speaker 1: 06:00 And you have questions about certain checks and balances that just weren't undertaken in these deals under the previous administration. Talk to me about Speaker 2: 06:09 That. Well, it's not clear why the housing commission didn't, uh, request, uh, public disclosures, uh, so-called statements of economic interest by the brokers that were in charge of the deal. Those are supposed to be disclosed by parties to any public transaction, you know, your personal financial interests, just to make sure that you don't benefit financially the way, uh, this brokerage is accused of doing so. So it's not clear why those disclosures weren't made. It's not clear why the appraisals were conducted prior to the pandemic, because the value, you know, the values change and a market conditions changed dramatically in the wake of COVID. So why did the housing commission rely on appraisals that were prior to the market falling out due to the COVID? So those are some pretty basic questions that anyone buying a house or buying a property would normally conduct. Um, and I've asked those questions and, uh, haven't really gotten a straight explanation. Speaker 1: 07:07 I've been speaking with Jeff McDonald, San Diego union Tribune, investigative reporter. Jeff, thank you so much for joining us today. Thank you.