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Grand jury rips county housing agency over San Jose real estate blunder

Housing agency took big loss by wheeling and dealing on office building

Office building at 3553 North First Street near the corner of Rio Robles in north San Jose.  
Office building at 3553 North First Street near the corner of Rio Robles in north San Jose. {Newmark)
George Avalos, business reporter, San Jose Mercury News, for his Wordpress profile. (Michael Malone/Bay Area News Group)

SAN JOSE — A grand jury has scorched a Santa Clara County housing agency for blunders in its attempts to wheel and deal on a San Jose office building that became a money-losing odyssey of lost opportunities.

“Flawed information, flawed decisions” is the title of a new civil grand jury report on the county Housing Authority’s botched efforts to handle the purchase and sale of an office building on a prominent north San Jose corner that the housing agency had once eyed as its headquarters.

The Housing Authority’s purchase of the office building and the agency’s subsequent sale of the empty property triggered a stunning $16.2 million loss in less than two years for the county organization, the grand jury determined in its June 10 report.

The office building in question is located at 3553 North First Street, a two-story structure that totals 86,100 square feet — but just as importantly, occupies a choice six-acre parcel next to a busy light rail line.

The county housing agency’s blunders arose from its efforts to find a future headquarters for its staff and client meetings.

In December 2020, the Housing Authority paid $37.5 million for the office building — which, ominously, was once occupied by LeEco, a China-based tech company whose Silicon Valley operations imploded without warning.

At the time, Katherine Harasz, Housing Authority executive director, described the office building purchase as a deal that would provide “much-needed expansion space for staff” and plentiful parking for visitors and clients.

Harasz retired in 2021 and was replaced by a new Housing Authority executive director, Preston Prince.

In September 2022, the Housing Authority sold the office building — which the county agency never occupied — for only $24 million. That was a core loss of $13.5 million.

Insurance, maintenance, deferred maintenance and other costs tacked on another $2.7 million, which produced the overall loss of $16.2 million for the office building, the Grand Jury report found.

The Housing Authority’s quest for a new headquarters began because its downtown San Jose offices at 505 West Julian Street were too old and cramped.

An early option was constructing a new headquarters on East Santa Clara Street near the downtown. The Housing Authority deemed that project’s $100 million cost prohibitively expensive.

That eventually led the Housing Authority to the 3553 North First site, a property purchase that became a financial fiasco for the county agency, the grand jury report found.

The Housing Authority created an ad hoc committee composed of three members of its board to review the options for the future of the office building it had bought in late 2020.

“The board (of the Housing Authority) and the (ad hoc) committee had a fiduciary obligation to examine all viable options for using or repurposing the (3553 North First Street) property to maximize long-term value to the organization and to further the Santa Clara County Housing Authority’s mission,” the grand jury stated in its report.

Instead, the Housing Authority’s top brass, led by Prince, failed to fully present the options that the county agency could pursue regarding the office building, the grand jury report found.

“Santa Clara County Housing Authority executive management presented,” the grand jury stated in its report “financially flawed analyses, and evaluated only options to sell the property without seriously or rigorously considering alternatives.”

County Housing Authority officials defended the decision to sell the building.

“We reviewed the location through a resident and community-centered lens, analyzed the options, and made an informed decision to sell the building,” County Housing Authority executive director Prince said. “The loss was not taken cavalierly.”

Prince noted that the Housing Authority board and community members supported the recommendation to sell the office building.

“There were turbulent market conditions post-COVID, and we wanted to respond to the needs of our residents and the affordable housing crisis in Santa Clara County,” said Jennifer Loving, chairperson of the Housing Authority’s board. “The board of commissioners stands united behind our leadership and staff.”

Among the possible alternatives to a sale, according to the grand jury:

— occupy the property until office market prices rebounded and sublease surplus space.

— lease the property until prices rebounded. This was viable because the Housing Authority paid cash for the office building and wasn’t under pressure to repay a real estate loan.

— rezone the property to enable affordable housing development on the entire site.

— rezone the property for a hybrid development. This option would have retained the existing office building and constructed affordable housing on part of the six acres.

Instead, the Housing Authority’s executive management steered the agency’s board into a narrow set of options.

“Executive management selectively filtered information to present only what they thought should be reviewed by the board,” the jury’s report stated. “The civil grand jury learned that executive management informed members of the committee and the board that the only viable option was to sell the property quickly.”

The muting of certain options appears to be a severe failure, in the view of Bob Staedler, principal executive with Silicon Valley Synergy, a land-use consultancy.

“This report shows a lack of governance by the Housing Authority board over (executive director) Preston Prince and his executive staff,” Staedler said. “They have both failed the Santa Clara County Board of Supervisors in their role.”

In 2022, Staedler suggested that the civil grand jury launch a probe into the real estate debacle.

“The lack of transparency and misrepresentation of the material facts cannot be excused,” Staedler said.

The report also determined the five-member county Board of Supervisors took a lax approach in reviewing the Housing Authority’s floundering commercial real estate adventures on North First Street.

“The civil grand jury was surprised to learn that some county supervisors were unaware the Housing Authority had lost millions on the property,” the scathing report determined. “(Other county supervisors) were indifferent to the Housing Authority’s financial loss because the loss did not come from county funds.”

The errors were compounded by what seemed to be lax oversight by the county Board of Supervisors while the housing agency floundered with the North First Street site, the grand jury stated.

“This laissez-faire attitude is concerning to the civil grand jury,” the report stated. “The county Board of Supervisors must be acutely aware that any significant loss of public funds for housing is a lost opportunity for the county to address the overwhelming need for affordable housing opportunities.”