How California Cities Can Craft Better Office Space Deals

As cities grow, so do their governments. Since the population boom following the Second World War, cities in the American west have grappled with challenges associated with providing adequate space for their employees to work. Optimizing public resources over the long timeframes involved in real estate requires careful planning and sophisticated deal structures.

The logic of public agency office deals

Solving capacity problems with a municipal agency’s administrative space is a long-term project. Especially in California, where real estate costs are so high, any solution will involve a substantial commitment of financial resources. As a result, city planners can expect difficult budget discussions along with the usual public debate about the merits of any given proposal.

Cities often have several options to choose from to find expanded office space. The choice is rarely an easy one. Weighing the risks and benefits of alternative approaches is an important early step. Broadly speaking, these are the most common choices planners consider:

  • Upgrading an existing building can provide a solution at a relatively low cost for agencies that don’t anticipate high growth in the short term. The challenges associated with renovation projects tend to be smaller scale as well. Converting spaces like lightly used meeting rooms into offices is a common strategy. More controversial are approaches that seek to convert public spaces, like recreation centers, into office space.
  • Leasing space from a private owner. By opting to rent instead of buy, an agency avoids the significant costs associated with ownership. That freedom typically comes at a price: building owners will demand high rent and various guarantees before agreeing to a long-term lease that will cut them out of the lucrative commercial market.
  • Buying an existing building. Purchasing a building is expensive, but the benefits can outweigh the risks provided the transaction is managed appropriately. By buying a property, an agency can lock in its financing plan at the start. As the owner, the agency takes full control of the property, which gives it flexibility as time goes on to explore strategies such as leasing unused space to commercial tenants. On the flip side, buying a large building can become a source of significant problems—more on that below.
  • New construction. Many local governments have a supply of empty real estate that could be used for a purpose-built office building. The complexity of planning a new building should not be underestimated: competing needs must be balanced, costs must be analyzed with care, and extensive regulatory compliance steps must be taken before breaking ground.

San Diego’s 101 Ash Street: A Case Study

In 2016 the City of San Diego opted to enter into a 20-year lease-to-buy transaction for an existing building to provide much-needed office space for city employees. The transaction and subsequent controversies offer other agencies a case study of the kinds of problems that can accompany a large real estate purchase.

Previously the headquarters of Sempra Energy, 101 Ash Street would provide city staff with a spacious facility conveniently located in downtown San Diego. Before closing, the city had conducted inspections of the property and prepared valuations to help city leaders evaluate the merits of the transaction. When the deal closed in 2017, the city was looking forward to moving into the building after making a few minor renovations.

A variety of problems have turned 101 Ash Street from a dream come true into a significant source of costs for the City of San Diego. In August, the City of San Diego Office of Independent Budget Analyst issued a report spelling out expensive details that were not anticipated at the time the deal closed. The $115 million of estimated costs include asbestos mitigation and cleanup expenses of about $26 million, and upgrades to the building’s HVAC and electrical systems estimated to require about $37.5 million.

Asbestos at 101 Ash Street has been an especially large challenge for the city. Not long after moving over 1,000 employees into the building last year, the city was forced to remove them after asbestos was discovered throughout the building. Several city employees and construction contractors have filed suit against the city claiming injuries associated with asbestos exposure at the site.

The media and political fallout from 101 Ash have included concerns that the transaction’s terms may have been influenced by relationships between the sellers and city officials. Regardless of the merits of such claims, the impression they give threatens to erode public confidence in local government.

Today the building stands empty as litigation continues and city leaders study their options.

Avoiding a scenario as 101 Ash begins with due diligence 

The 101 Ash situation highlights the complexity that can come from large real estate transactions. There are several lessons city leaders can draw from San Diego’s experience and others like it:

  • The importance of inspections. With real estate, the due diligence process must include an extensive—even aggressive—physical inspection of the premises. Identifying potential problems with a building is essential for ensuring the agency is paying a fair price. It also protects the city’s employees and contractors from unknown hazards.
  • Review the historical documents. Even before you physically inspect the building and grounds, do at least a Phase I environmental review.  When was the building built?  What materials were in common use at the time (i.e., lead paint, asbestos, etc.)? What was the building used for?  What was the use of the site before the current building was constructed?  What about surrounding sites?  Could contamination have migrated from adjoining sites to the premises?  Knowing the history and reviewing the documents will help your inspectors determine what to look for and where.
  • Negotiate aggressively. Having reliable and complete results from an inspection allow an agency to proactively address potential problems with a building in the agreements it negotiates with a seller. Generally speaking, sellers of large urban buildings will have high-caliber representation in these transactions. To protect themselves, cities should hire counsel with appropriate expertise to ensure the deal is fair.
  • Implement ethical screens. Agency leaders should protect the public’s faith in major transactions such as these by ensuring that adequate steps are taken to identify and isolate potential conflicts of interest. Attorneys with transactional experience understand how to implement these screens.

Jones & Mayer serves local government agencies

Jones & Mayer is committed to helping clients understand their obligations and options as they respond to the challenges in our cities and communities. If your agency is considering a major real estate transaction, contact Jones & Mayer to discuss the full scope of considerations before moving forward with the deal. To learn more please contact Jones & Mayer partner Kimberly Hall Barlow, by emailing her at, or by calling (714) 446-1400.