101 Ash St. developer awarded federal subsidies for low-income housing project

The development team promising to transform the city of San Diego’s asbestos-ridden office tower at 101 Ash St. into apartments for low-income families has secured a substantial portion of the federal subsidies required to complete the conversion project.

Last week, the California Debt Limit Allocation Committee awarded the 101 Ash St. project a $63.8 million allocation of tax-exempt bonds. The award means that the 101 Ash Venture LP development entity, which consists of housing developers MRK Partners and Create Dev LLC, is also entitled to $82.2 million in tax credit equity — or $9.6 million in federal low-income housing tax credits doled out annually to project investors, at 86 cents on the dollar, for 10 years.

With the award, the 101 Ash St. developers now expect to close escrow on a long-term ground lease and redevelopment deal with the city before the end of June, and start construction shortly thereafter.

“We’re ahead of schedule, and we’re doing exactly what we said we were going to do,” said Sydne Garchik, president of MRK Partners. “We’re on our path to closing and we’ll do that in the first half of next year. So we’re thrilled. … This is going to be a standout project for the city.”

The bond award comes four months after the city approved a 60-year lease agreement and associated contracts with 101 Ash Venture LP, which gave the developer a two-year window to secure the federal tax credits needed to fund what is currently estimated as a $252 million project. The MRK-Create team has since added nonprofit Pacific Southwest Community Development Corporation, a San Diego-based managing general partner on low-income housing projects.

“The city is thrilled that the MRK-Create development team received a significant state funding award for this historic opportunity to rehabilitate 101 Ash into homes for San Diegans. It’s one of many recent steps giving us great confidence that this positive reuse of a vacant office building will get across the finish line,” Christina Bibler, who heads the city’s Economic Development Department, said in an emailed statement.

The developer last week submitted for project permits, Bibler said. The permits are required before the close of escrow.

Built in 1967, the 21-story office tower at 101 Ash St. takes up a full city block in downtown San Diego and was the longtime home of Sempra Energy until 2015. In early 2017, the city entered into a 20-year lease-to-own deal to acquire the building and use it for a portion of its downtown workforce. The transaction unraveled into a civic embarrassment after a bungled remodel resulted in asbestos contamination. In 2022, San Diego bought out the lease for $86 million in a controversial settlement agreement.

In January, the city selected the MRK-Create team, following an unofficial real estate competition, to remake the office building into a residential complex. The plan calls for 247 units deed restricted for families earning 30% to 80% of the area median income, or what’s considered affordable housing. The project includes three unrestricted manager units, 25,000 square feet of retail space and a 4,000-square-foot child care center.

Six months later, the parties agreed to a 60-year lease and redevelopment deal.

As structured, the city will loan the value of the building, or $45.6 million as established by the developer’s appraisal, to help finance, on paper, the conversion project. The city is not contributing cash to the project. It will issue a seller’s note to recapture a portion of the outstanding note balance through annual payments that are expected to begin 15 years after the project is completed. San Diego will also collect $15,000 per year in base rent, with the amount increasing annually by 3% or the increase to the consumer price index, whichever is greater.

The transaction, however, is contingent on the 101 Ash St. developers securing federal subsidies.

In September, the team submitted a joint application to the state agencies that administer California’s tax-exempt bond and low-income housing tax credit programs, requesting $63.8 million in tax-exempt bonds and anticipating $82.2 million in tax credit equity.

The California Debt Limit Allocation Committee issues tax-exempt housing revenue bonds to affordable housing developers on a rolling basis through a competitive process. The bonds are essentially a mortgage, insured by the U.S. Department of Housing and Urban Development, with applicants able to secure more favorable financing terms from lenders. Projects that receive a bond award are then entitled to 4% tax credits, which are administered by the California Tax Credit Allocation Committee. The developer sells the tax credits to private investors who provide project funding in exchange for the tax benefits.

With last week’s award, the development team is now missing just one piece of its financing puzzle. The group is banking on receiving $34.8 million in federal tax credits associated with historic properties — even though 101 Ash St. has not yet been declared a historic property.

The 101 Ash St. developers have applied for a historic designation. The initial materials were submitted and reviewed by the State Historic Preservation Office, which has recommended approval to the National Park Service, said Jennifer Ayala, a principal at consulting firm Nexus Planning & Research who is working with the development team.

The building, which she refers to as The San Diego Gas & Electric Corporate Office Building, was evaluated under National Register Criterion A and Criterion C. Under the former, the building is said to be associated with downtown reinvestment and modernization efforts in the 1960s, a period that included new high-rise development that defined the downtown skyline. The tower is also an example of New Formalism and is a work of master architect Richard George Wheeler and builder M. H. Golden Construction Company, Ayala said.

The federal historic tax credit process includes two additional steps: a review of the architect’s rehabilitation plans and a post-construction audit of the completed work.

“(The State Historic Preservation Office) recommendation is an important and positive milestone. I remain confident in the process, while noting that the tax credits themselves depend on later review steps and construction compliance,” Ayala said.

Bibler, who led the city’s negotiations with the MRK-Create team, said the developer’s anticipated timeline is reasonable, with the transaction potentially closing as early as late spring.