San Diego city attorney announces settlement deal in hotel lawsuit without telling council

The front facade of, and a sign outside, the Residence Inn by Marriott located on Kearny Mesa Road
The Residence Inn by Marriott located on Kearny Mesa Road. The San Diego Housing Commission purchased two Marriott hotels in 2020 to convert them into permanent housing for homeless people. (Kristian Carreon/For the San Diego Union-Tribune)

Deal includes return of $1 million in broker fees but does not address allegedly inflated sale costs

https://www.sandiegouniontribune.com/news/watchdog/story/2022-08-09/residence-inn-jim-neil-kidder-mathews-settlement

What was promoted last week as a $1 million settlement that would make taxpayers whole has prompted a public disagreement between City Attorney Mara Elliott and at least one San Diego City Council member.

Elliott issued a press release last week announcing a deal with the broker whom she sued after he recommended a hotel purchase to the city before buying 40,000 shares of stock in the company that would sell the property.

But the public announcement took Councilman Chris Cate by surprise.

“Councilmember Cate found out a final settlement agreement had been reached through a press release,” his spokeswoman Cheyenne Klotz said this week. “No advance notice was given prior to the press release.”

The City Attorney’s Office issued a follow-up statement late Monday saying that the San Diego Housing Commission and City Council were well aware that a deal was forthcoming.

Council members “approved the settlement framework in April and our office updated the Housing Authority and City Council on the final settlement terms again by memo on June 23,” Elliott spokeswoman Leslie Wolf Branscomb said by email.

The settlement, which is expected to be presented to the council for approval next month, would resolve a lawsuit Elliott filed last year against Jim Neil and his brokerage, Kidder Mathews, along with former owners of the two hotels.

In a statement, Neil said he and his brokerage did nothing wrong and called the lawsuit unnecessary. They agreed to the settlement to avoid a costly legal fight, he said, and the hotels he helped the city buy were a benefit to the city.

“Mr. Neil informed the Housing Commission of his intention to purchase the stocks prior to the transaction and he was told there would be no issue with these actions by Housing Commission senior staff,” he said.

The lawsuit was filed after The San Diego Union-Tribune reported that the city appeared to have paid far more for the hotels than they were worth, due to the fact that their appraisals were completed before the COVID-19 pandemic.

San Diego agreed to pay $67 million for the Residence Inn on Hotel Circle and $39.5 million for another Residence Inn in Kearny Mesa in 2020, even though experts noted the hotel market had already plummeted as a result of pandemic restrictions.

The Mission Valley purchase was the most expensive hotel sold that year, based on per-room costs of $349,000; the Kearny Mesa property was the fifth-costliest at $274,000 per room.

The San Diego Housing Commission, which approved the deals, defended them and said the purchases would help reduce homelessness by housing needy people during a public health crisis.

Several months later, the Voice of San Diego reported that Neil bought 40,000 shares of the company that owned the Hotel Circle property after he suggested that the city buy the property for the pre-COVID assessment price.

Last August, Elliott sued Neil and others, accusing them of violating state anti-corruption laws by benefiting financially from a transaction they helped negotiate.

“The facts in 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 a year ago.

Initial terms of the settlement call for Neil and Kidder Mathews to return $1 million to the city.

The City Attorney’s Office said it had found no issues with the purchase prices for the two Residence Inn hotels.

“While our office thoroughly analyzed the appraisals, we found no outstanding issues with regard to the appraisals as they pertained to the actions of either Neil or Kidder Mathews,” Branscomb said.

But two real estate experts contacted last year by the Union-Tribune noted that other hotels in the city and county sold in 2020 for as little as $25,000 per room, although most were in the low six figures.

“For the Residence Inn in Mission Valley the numbers seem to be really, really high,” said Alan Reay of the Atlas Hospitality Group. “I don’t think there are any comps that support it.”

Four other Residence Inn hotels were sold in California in the year before the pandemic was declared for an average per-room cost of $227,300, Reay said.

Commercial real estate broker Adrian Glover told the Union-Tribune that hotel values nationwide fell by up to 40 percent because of COVID-19. He said the city paid too much for both Residence Inn properties.

In her lawsuit, Elliott quoted the appraisal for the Hotel Circle property, acknowledging that it was performed before the virus-related shutdown.

“As of the effective date of appraisal, the hotel market was not yet feeling the effects of the COVID-19 pandemic,” the complaint states.

She also alleged that Neil violated state anti-corruption laws — one of the same allegations she made against the defendants in her litigation over the Ash Street and Civic Center Plaza leases, which she argued in court must be voided.

Asked why Elliott did not seek to void the Residence Inn transactions, Branscomb said: “The litigation concerned multiple causes of action with various legal remedies.”

The proposed settlement is expected to be considered by the council, sitting as the housing authority, on Sept. 13.

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