SR-900-003 (3)
0RMD:EDD:MR:F:\RESOURCE\SHARE\STAFFREPORTS\ SUPPLEASINGPOLICIES.DOC
Council Meeting: December 5, 2000 Santa Monica, California
To: Mayor and City Council
From: City Staff
Subject: Supplemental Staff Report Regarding Proposed Guidelines for Leasing
City-Owned Non-Aviation Properties at Santa Monica Airport and other
Properties in the Bayside District and at Bergamot Station
Introduction
This report transmits additional information to the Council regarding the establishment
of guidelines for Leasing City-Owned Non-Aviation Properties at Santa Monica Airport
and other Properties in the Bayside District and at Bergamot Station. Several issues
were raised at the November 28, 2000 Council meeting regarding Santa Monica Airport
lease space, which focused on the following themes: quality of the comparables;
condition of space; overall value; and ability to pay. This report addresses those issues.
Discussion
Quality of ?Comparables?
In July 1999, staff received the ?Fair Rental Determination, Airport South Side
Properties, Santa Monica, California? study, which was prepared by Bob Draves of
Buss-Shelger Associates, a respected local appraisal firm. Mr. Draves is a State of
California Licensed Certified ? General Real Estate Appraiser with over 12 years?
experience providing consulting, investment, and valuation services on all types of
vacant and improved property. He was assisted in this study by Ron Buss, who has
nearly 30 years? experience in this industry. This comprehensive 99-page report details
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area information, background, sales and lease data, and a variety of other factors which
affect valuation.
Following the November 28, 2000 Council meeting, which Mr. Draves attended, staff
requested and received additional information from Mr. Draves which validates and
expands upon the content of the original survey. A copy of his letter is attached for
reference. Mr. Draves? letter includes updated information on the comparables used in
the fair market analysis, as well as an explanation of what ?comparable? means, in the
context of a professional appraisal. Additionally, it should be noted that the July 1999
rates assumed ?as is? status, and month-to-month leases only, both of which factors
result in lower value.
Also attached is a current ?Creative Space Survey? prepared by staff with assistance
from the local brokerage community. Outside Santa Monica Airport, the survey
indicates current asking prices for ?creative? space in the Santa Monica area, ranging
from $1.08 ? $3.25 per square foot. It also includes data on actual leases which have
closed this year in Santa Monica, at per square foot prices ranging from $1.60 in 1998
to $2.60 in 2000.
The Airport Non-aviation Tenants Association (ANTA) provided their own research and
suggested rental rates based upon properties they consider comparable, which, upon
detailed examination, are of uneven quality. It should be noted that the report was not
prepared by a certified or licensed appraiser. For example, one item is a space at
Burbank Airport, which would be adjusted downward due to distance from Santa
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Monica, weather, and noise factors, among others, thus accounting for the low rate.
Comparables are not arrived at via mere direct comparison of facilities, but rather
through a series of weighted adjustments based on a variety of factors, which include
condition, amenities, and location. Upon professional review and assessment of the
ANTA ?comparables,? it is apparent that they are, in fact, only marginally relevant due to
their distance from Santa Monica of up to 20 miles, as well as other factors. The Buss-
Shelger report, in contrast, utilizes comparables which are all in Santa Monica, with one
exception. The ANTA-suggested rental rates of $0.90 ? $1.10 per square foot for 3200
Airport Avenue are not only inconsistent with the comparables, but are also low
considering the current tenants are already paying up to $1.50 per square foot.
Market rent is defined as ?the rental income that a property would most probably
command in the open market; indicated by the current rents paid and asked for
comparable space as of the date of the appraisal.? Additional examples of market rate
indicators include staff?s recent receipt of valid offers for the 3026 Airport Avenue
hangar at rates as high as $1.25 per square foot, and actual leases for 3000 Airport
Avenue studio spaces at $1.20 per square foot.
Condition of Space
A number of tenants and subtenants who spoke during the public comment period
referenced spaces with lack of heat or air conditioning; infestations; roof leaks; lack of
running water; having to walk to outside restrooms; and insufficient electrical power. It
should be noted again that suggested rental rates were based on an ?as is? condition.
Converted hangars are uninsulated spaces with few amenities, and are meant as day
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use only spaces. Class-B office structures (low-rise, of frame or block construction) are
typically not equipped with air conditioning. Some tenants, due to cost consciousness,
have also elected not to heat their spaces. Environmentally compatible pest control is
provided by the City at no cost upon request. Staff is not currently aware of any
untreated infestations. Several tenants who mentioned roof leaks have accepted sole
responsibility for their own roofing repairs. The ?outdoor? restroom at one building was
designed by the tenants at that time to maximize indoor square footage and reduce
construction costs. Electrical power is maintained at original levels and is expected to
be enhanced over time, by the Airport, as Capital funds are available.
Many tenants invested in fixing-up the spaces when they moved in. In two studio
buildings, substantial tenant improvement rent credits were granted ? in other words,
the City reimbursed the tenant for approved improvements through abated rent.
However, tenant-specific enhancements, which are of no use to a typical tenant, may
actually result in a loss of value to the Airport; such improvements may have to be
removed and replaced at the cost of the Airport or new tenant. Tenants who have not
received tenant improvement rent credits received correspondingly reduced rental rates.
Quality of space has thus been highly contingent upon the tenants? desire to make
improvements of varying degrees. Variations are due to the vagaries of renting ?as is? ?
tenants inherit the improvements of their predecessors. It is standard practice to base
appraised rates on the existing as-built conditions.
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Overall Value
There are many factors which affect the value or perceived value of a space on the
south side of the Airport including:
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availability of very small spaces ? most landlords would not wish to be
burdened with servicing numerous small accounts
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free and abundant parking, a rarity in any setting, but especially so in Santa
Monica
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the historical nature and unique architecture, along with the campus-like
setting ? each space is unique
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rents based on usable square footage, rather than rentable square footage,
as is more typical in the commercial leasing market; this can result in cost
savings of 10 ? 15% for the average tenant
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quality restaurants nearby
At Santa Monica Airport, the uniqueness of its location is probably the most important
factor in determining valuation. The City of Santa Monica is generally acknowledged as
a highly desirable area in which to purchase or rent real estate. Businesses are tending
to locate in cities where their employees prefer to live, and this trend has resulted in
extremely low vacancy rates and rapidly escalating office rents in this city.
Ability to Pay
Clearly, the ability to pay must be separated from the willingness to pay. Some tenants
noted that, under proposed rental rate increases, their rents would double, for example,
or ?increase by 60%.? In understanding the impact of these numbers, it is helpful to
reference specifics. It is true that some rents ? those at less than 50% of market value
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for many years ? will double. The end rate should still not be seen as excessive.
Similarly, when a tenant is paying $178/month, and faces an increase of that
magnitude, phased in over 3 years, the true increase is only $82/month.
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18 Street Arts Complex, a non-profit organization, charges up to $1.08/square foot for
lease space. The Drescherville community was reportedly stable for years at around
$1.00/square foot (more recently, rates have escalated to $1.50 - $2.00/square foot).
Santa Monica Fine Art Studios provides additional services beyond bare-bones square
footage for art production; however, the net cost to the user is typically $1.50/square
foot or greater, although rents are generally not assessed on the basis of square
footage. When a tenant is currently paying only a small percentage of the market rental
rate, the differences appear more dramatic than they are in reality.
Conclusion
In conclusion, it is helpful to examine all of the relevant issues related to the proposed
non-aviation leasing policy in context in assessing the impact of the proposed rate
increases. Additionally, the data provided by an experienced appraiser is persuasive.
The Airport is located in one of the most desirable marketplaces in the nation. Non-
aviation rental rates have not kept pace with the existing real estate conditions. Some
tenants have not experienced any sort of rent increase in over 10 years while new
tenants pay almost 200% more for equivalent space. The proposed leasing plans bring
a consistent and equitable lease rate to all tenants. Finally, it should also be noted that
staff recommends a slow phase-in of adjusted rental rates, maintenance of existing
tenancies, generous lease term, and an eventual rental rate which, in the year 2003, is
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only 90% of a July 1999 appraisal level. The proposed leasing policy is fair and is
necessary for the self-sufficiency of the Airport.
Recommendation
Staff recommends that City Council consider this additional information when discussing
the adoption of the proposed Leasing Guidelines for City-Owned Non-Aviation
Properties at Santa Monica Airport and other Properties in the Bayside District and at
Bergamot Station.
Attachments: A Creative Space Survey
B Real Estate Consultants Letter
Written by: Jeff Mathieu, Director of Resource Management
Mark Richter, City Real Estate Manager/Economic Development Manager
Robert Trimborn, Airport Manager
Gretchen Kubacky, Senior Real Estate Analyst
Rod Merl, Senior Administrative Analyst
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ATTACHMENT A
Creative Space Survey
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ATTACHMENT B
Real Estate Consultant?s Letter
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BUSS-SHELGER ASSOCIATES
Real Estate Consultants
Kurt S. Shelger, MM, GRE 865 S. Figueroa Street
Ronald L. Buss, MAI, GRE Suite 3300
Russell W. Reynolds, MAI Los Angeles, California
90017
Thomas W. Baaden, MAI Telephone: (213) 388-7272
Robert D. Draves, MM Fax: (213) 388-5276
Anthony M. Mann, MM E-Mail:
bussshelger@earthlink.net
November 30, 2000
City of Santa Monica
Resource Management Department
Economic Development Division
3223 Donald Douglas Loop South, #2
Santa Monica, California 90405
Attention: Ms. Gretchen Kubacky
Senior Real Estate Analyst
Reference: Fair Rental Determination
Airport South Side Properties
Santa Monica, California
Dear Ms. Kubacky,
As a follow-up to the issues raised at the November 27th city council meeting pertaining to non-
aviation tenant rent levels on the airport south side the following comments are relevant.
Appraisal Methodology
In discussing the market data the word ?comparable? is used frequently, however this is an
abbreviated way of saying ?comparable after relevant adjustments?. Additionally some ?comps?
are said to be ?similar? and again this is an abbreviated way of saying ?similar after relevant
adjustments?. Simply placing subject and ?comps? photos side-by-side and discussing physical
similarities does not consider all relevant adjustments.
As a simple example, two houses in the same neighborhood are each sold at the same price of
$500,000. One is a larger two-story house with no yard, the other a smaller house on a large lot
with pool and ocean view. Placing pictures of the two houses side-by-side and calling them
comparable would appear foolish however after all relevant adjustments (yard size, view, etc.)
are considered they would be considered ?similar?, the marketplace confirming this since they
sold at the same price.
Airport tenants inspected the ?similar? comparables apparently focusing on physical attributes
alone, when there are many other considerations. As they relate to the subject properties key
additional considerations include:
The airport physical environment is uniquely desirable due to its low density setting,
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distance from mid and high-rise commercial projects and proximity to a residential
district.
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Page Two
November 30, 2000
City of Santa Monica
Attn: Ms. Gretchen Kubacky
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The airport has an identity with the creative community, clearly more desirable than
many other non-descript Santa Monica industrial/creative office locations.
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The typical airport tenant is a small-space user which increases the rent on a per square
foot basis.
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The airport tenants have ample free parking at their disposal which is a highly desirable
and rare attribute in Santa Monica.
With respect to the city?s leasing policies, tenants are charged on a ?usable? basis, meaning just
the area of their suite. Traditional office users are charged on a ?rentable? basis, which includes a
pro rata portion of hallways, restrooms and common areas. Tenants in the marketplace charged
on a usable basis will pay a higher per square foot price.
Market Conditions
Current market conditions provide additional insight into appropriate rental rates. An updated
brief Santa Monica market survey was made this week focusing on the lowest quality space, to
set a ?floor? of rental rates in the city. The following highlights result.
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1718 22nd Street, industrial space of 3,000 square feet recently leased at $1.40 per square
foot.
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1714 19th Street, industrial space of 4,300 square feet available at $1.90 per square foot.
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2621 Pico Boulevard, rear industrial spaces approximately 2,000 square feet leasing at
$2.00 per square foot minimum.
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1854 14th Street, industrial spaces of 672 square feet currently leasing at $1.39 per
square foot.
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2834 Colorado Avenue, ?garage? industrial spaces of 400-500 square feet to be leased at
$1.25 per square foot by new owner.
Of particular interest is the last data item on Colorado Avenue at Stewart Street relating to low
quality metal and block construction with very limited parking in a non-descript environment.
This recent survey pertains to industrial buildings only, revealing the lower end of the Santa
Monica marketplace. It establishes a ?floor? of the lowest rental rates typically seen in the city of
Santa Monica. Landlords surveyed indicated rising rental rates and strong demand.
Additionally, the Los Angeles Business Journal reports that Santa Monica office rents overall
have increased 27% from mid-1999 to present. Further, Grubb & Ellis brokerage published a
survey indicating Class A office space rents in Santa Monica have increased 10% from mid-1999
to mid 2000 however the lower-tier Class B spaces have risen a staggering 46% during the same
period.
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Page Three
November 30, 2000
City of Santa Monica
Attn. Ms. Gretchen Kubacky
Airport Non-aviation Tenants Association (ANTA) Report
A report was prepared which contrasted the city comparables with the airport properties.
Significant attention was paid to critiquing the city comparables (of which there are 30) although
only three new comparables were offered by the report?s authors to support their position, none
of which are in the city of Santa Monica (and are actually at some distance). Additionally, the
report?s critique addresses only the physical attributes of the city comparables and does not
consider additional very important issues having a substantial impact on rental value such as
location, space size, parking and environment (discussed on this letter?s first page under
?Appraisal Methodology?). The three new comparables provided in the ANTA report are
discussed below.
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Two properties are adjacent to each other off La Cienega Boulevard near Fairfax Avenue
over six miles by freeway from central Santa Monica. They pertain to all-metal industrial
buildings of several thousand square feet, not divided into small spaces, with limited
parking in a heavy industrial environment. These are physically most comparable to 3026
Airport Avenue which was assigned a $1.10 per square foot rental value and not a subject
of their report. It should be noted the city?s report specifically considered only Santa
Monica properties (excepting one at the city boundary on Centinela Avenue in Los
Angeles). The La Cienega location is far removed from the subjects? highly-desired
Santa Monica situs, resulting in a much lower rental rate. Again, their comparisons are
made on the basis of physical attributes alone with no consideration given to the
incomparability of this location to the city of Santa Monica, nor the other attributes of the
airport such as ample free parking, small tenant sizes and desirable environment.
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A better quality property in Burbank is included, apparently due to its proximity to the
Burbank airport, however this location is even further removed from Santa Monica
(twenty miles by freeway) while their comparisons are again made on physical attributes
alone. Adjusting this comparable for its Burbank location would be exceedingly difficult.
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The rental rates indicated by the three comparables are $0.56, $0.65 and $0.87 per square
foot while the updated city of Santa Monica survey indicates rates at $1.25 per square
foot and above.
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The report does not address when the three comparables? leases rates were established.
It is hoped the above comments are sufficient to meet your needs. Please call with any further
questions.
Respectfully,
ASSOCIATES
BUSS-SHELGER
Robert D. Draves, MAI
Vice President
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