The cost of office space for workers in the city of San Diego varies widely by litigation, study finds

The city of San Diego would need to spend between $228 million and $302 million on office space over the next 30 years, according to a study released Wednesday.

The same report states that the city’s office space needs would likely cost between $190 million and $483 million if the city instead went ahead with lawsuits over two disputed leases that are months away from court hearings.

The 31-page analysis was prepared by real estate consultancy Kosmont Companies, who were hired by the Independent Budget Analyst to study the city’s real estate needs amid ongoing court cases.

The Feb. 22, 2022 report was submitted to City Council earlier this year to help elected officials decide whether to go to court or settle most of the litigation out of court. It was withheld under so-called attorney-client privilege by independent budget analyst Chales Modica until Wednesday.

The release of the audit comes two days after Mayor Todd Gloria proposed buying leases on the 101 Ash St. and Civic Center Plaza office towers for a total of $132 million.

The city council is scheduled to vote on the mayor’s proposal at its Monday meeting.

The Office of the Independent Budget Analyst has not issued a recommendation on Kosmont’s findings or suggested whether the proposed settlement should be approved.

Instead, budget analyst Charles Modica said council members should base their decision on the most thorough information available.

“It is critical that the Office of the Mayor and the Department of Real Estate and Airport Administration provide 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 was prepared or released by the Gloria administration, although 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 contains several details about the two buildings that were not previously known.

Perhaps most notably, the consultants said the Civic Center Plaza needed upgrades and repairs that could cost up to $61 million. That’s in addition to the $46 million the city would spend to buy out the lease.

A property condition assessment, completed prior to the city’s lease of Civic Center Plaza, put the optional modernization cost at just under $1.5 million.

The report also states that the remaining principal balance of the Ash Street lease is $74.4 million. Presenting his settlement plan at a news conference Monday, Gloria said it would cost $86 million to repay that lease.

The discrepancy is largely due to the city’s plan to pay $12 million in rent arrears and nearly $1 million in late fees related to the Ash Street property, the city said in a separate report released Wednesday has been published.

Aside from the rent deposit, 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 about 1 million square feet of office space in a range of owned and leased properties. Some of the buildings that the city fully owns 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 as much as $51 million, the study said.

Kosmont’s cost estimates for the city’s long-term office space needs were based on an assumed market rent rate of $3 per square foot per month, an assumption analysts called conservative.

The report does not contain any specific recommendation on how the Council should proceed.

“The acceptance of the settlement provides certainty about the city’s real estate program,” the February study said.

“Rejecting the settlement could serve to suspend the city’s real estate program pending the conclusion of the litigation, as it may be prudent not to make any significant decisions until the buildings’ fate is known,” she added.

Given the city’s cost of capital, owning office space might be a better long-term solution than renting it, Kosmont concluded, but ultimately that could be a political decision.

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