Four years after the San Diego Housing Commission bought a Mission Valley hotel without the benefit of a current appraisal, the city’s independent auditor has found that commissioners appear to have paid millions more than the property was worth.
San Diego Auditor Andy Hanau stopped short of concluding definitively that the commission paid $6.7 million more for the 192-room hotel than it was worth at the time. But that was only because his staff could not clearly assess the property’s 2020 value years after the November 2020 acquisition.
More specifically, the audit criticized housing officials for relying on a valuation from February 2020, before the COVID-19 pandemic sent hotel prices plummeting across the country.
The commission paid $67.1 million for the property, which had been appraised at $68.1 million in the weeks before the pandemic was declared.
“By using a retrospective valuation date to purchase the property, the Housing Commission did not follow best practices and consequently may have overpaid for the acquisition by $6.7 million,” the report released this week said.
Commission officials said they previously acknowledged they should have secured a more current property valuation when the purchase was approved but said they already have taken steps to improve their business practices.
“The circumstances involving the appraisal for the Mission Valley property, as discussed in detail above, were an anomaly,” commission president and chief executive Lisa Jones wrote in her response to the audit. “SDHC has acknowledged the error and has already implemented changes.”
Jones also said buying the former Residence Inn on Hotel Circle has proved to be a good deal because it has appreciated in value since the city bought the property. She cited a subsequent 2022 appraisal sought by the commission that pegged the property value at $88 million.
But the audit noted that the 2022 valuation ordered by the commission was based on the property being used as multifamily housing, or apartments, which did not decline in value due to the pandemic.
The audit was performed after The San Diego Union-Tribune reported in 2021 that the city appeared to have paid millions more for both the Mission Valley hotel and another Residence Inn in Kearny Mesa.
That report noted that San Diego agreed to pay almost $350,000 per room for the Hotel Circle property — a notably higher price per room than any other hotel sold in San Diego County that year.
The city also picked up a $502,000 broker’s fee in the deal — a cost normally charged to the seller.
The Kearny Mesa property, a Residence Inn featuring 144 rooms that the city acquired for $39.5 million, cost almost $275,000 per room, records showed. Only two other hotel properties, both in La Jolla, sold locally for more than $300,000 per room.
While both purchases closed escrow on the same day in November 2020, the Kearny Mesa property relied on an assessment dated July 2020, months into the pandemic.
Auditors said San Diego housing officials failed to require the broker to provide a more timely valuation on the Hotel Circle property even after the commission lawyer requested a new assessment.
“We found that the Housing Commission followed industry best practices for the Residence Inn Kearny Mesa hotel acquisition, while the acquisition of the Residence Inn Hotel Circle did not,” the audit stated.
Later in 2021, the Voice of San Diego reported that Jim Neil, the broker who represented the commission in the two transactions, had bought stock in the company selling the Hotel Circle property before the deal closed.
“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,” City Attorney Mara Elliott said in announcing a civil lawsuit against broker Kidder Matthews and its agent, Neil.
By August 2022, the city and Neil reached a deal that called for the broker and agent to pay San Diego $1 million, along with an agreement that he no longer work for the city.
Neil, who collected a $592,000 commission on the Kearny Mesa transaction along with his $502,000 fee for the Hotel Circle purchase, issued a statement at the time saying he did nothing improper.
The 54-page audit and responses included four specific recommendations to the commission.
They advise updating its appraisal policies, completing a review of its appraiser’s performance, updating its strategic plan to include a property-acquisition component and establishing a yearly acquisition goal based on available funding.
Jones agreed with the first three suggestions but dismissed the idea of developing an annual performance metric for properties the commission acquires because there is no identified and reliable funding source.
“If funding is not available for the upcoming fiscal year, the acquisition goal for that year would be zero,” Jones wrote in her response to the audit.
