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SR-CC/PA-2 , \. J . . cC/PR -~ . JAN 9 1990 C/ED:HSG:JG:wp Santa Monica, California City council and l' , r', ;j { (p Parking Authority Meeting: 1/9/90 ~ ~ -~ - 1....,.- . TO: Mayor and city Council Members Chairperson and Parking Authority Members FROM: city staff SUBJECT: Recommendations Regarding the city-Sponsored Mixed Use Development at 1423 Second street INTRODUCTION This report transmits information and recommendations regarding the mixed use project to be developed by Community corporation of Santa Monica on the City-owned surface parking lot at 1423 Second street. The report recommends that the city council and Parking Authority direct staff to examine the feasibility of alternative non-theater uses for the ground floor of the project which will consist of thirty (30) SRO-type housing units and a 7,500 square foot space for non-residential use. In addition, the report recommends that the City Council authorize the City Manager to explore the possibility of programming spanish-language cinema in an existing movie theater in Santa Monica. Staff would return to city Council in June 1990 for approval of the ground floor use in , the Second Street project and for approval of an agreement pertaining to Spanish-language programming in an existing theater. BACKGROUND On April 26, 1988, the City Council and Parking Authority approved in concept the development of a mixed use housing/cinema - 1 - C;/ff!. ~ -~ -- - . . . project on the City-owned parking lot at 1423 Second street. The development as originally approved consisted of twenty-eight (28 ) O-bedroom SRO-type housing units for very low income households and a two-screen movie theater with a total of five hundred (500) seats. The project was approved both to help meet the critical need for affordable housing in the downtown area of Santa Monica, and to partially replace the "CineLatino" Spanish-language theater which was displaced from the Third Street Promenade by commercial redevelopment. Community Corporation of Santa Monica (CCSM) was designated by the city Council and Parking Authority to be the developer of the project. Subsequent to City Council and Parking Authority conceptual approval of the project in April, 1988, City staff have worked closely with CCSM, its construction and theater consultants, and the proposed theater operator to refine the project program and to develop working drawings and cost estimates. In August 1988, information was transmitted to the City Council regarding the structural and financial infeasibility of replacing the existing parking on-site. The infeasibility of replacing the existing parking, and the results of the Kaku Associates parking demand study are discussed below. DISCUSSION Replacement Parkinq Analysis According to the draft Parking Demand Analysis for the Third Street Promenade prepared by Kaku Associates, the parking structure adjacent to the proposed mixed use project (Parking - 2 - - . . . . . structure Number Six) has a surplus of available parking spaces over both current and projected demand. Parking structure Number six will have 46 or more surplus parking spaces at all times, even after accounting for increased demand resulting from projects under development nearby. Pursuant to City Council direction, staff also analyzed the feasibility of replacing the twenty-six (26) public parking spaces currently on the Second street site within the proposed mixed use project. The results of this analysis were transmitted to City Council in August 1988, and are discussed in greater detail below. Three possible replacement scenarios were analyzed: ( 1) replacing the parking underground, beneath the theatres or other ground-floor use; (2) replacing the parking above the theatres or other ground-floor use, with access from the adjoining public parking structure; and (3) replacing the parking on grade, eliminating any other ground-floor use. The following describes the estimated cost per parking space of each of the scenarios. Underground Parking: The size limitations of the Second street site reduce the number of parking spaces which could be provided under any scenario. The "undergroundll parking scenario is the most limited in this respect because ramps would occupy a great deal of the site, leaving room for only approximately 10 parking spaces per level. Given the high cost of excavation and shoring adjacent structures, the project architect estimates that a - 3 - . ; . . single level of underground parking would cost approximately $490,000, or $49,000 per space. Above-Ground parkinq: Approximately 17 parking spaces could be built into a third project level over the theater or other ground-floor use, with access from the third level of the adjoining parking structure. These spaces would cost a total of approximately $500,000, or $29,400 per space. However, serious questions exist regarding the level of acoustic insulation that would be required to soundproof the housing and ground-floor use from the noise and vibration of the parking. On-Grade Parking: After providing for stairs, an elevator, and utility rooms for the housing component of the project, approximately 16-18 parking spaces could be built on the ground floor of the project if any other ground floor use was eliminated. The project architect has preliminarily estimated the cost of on-grade parking at $410,000, or approximately $24,000 per space. The cost of replacing parking spaces on-site in the proposed mixed use project ranges from approximately $24,000 to $49,000 per parking space, depending on the location of the parking. In contrast, the cost of expanding city-owned parking structures is estimated to be approximately half or less than this cost, based on the recent expansion of Parking structure Number Five on Fourth street. Gi ven the extremely high cost of replacing parking on-site, the relatively low cost of adding parking spaces to adjoining public - 4 - . . parking structures, and the surplus of available parking spaces in the parking structure immediately adjacent to the proposed project, staff has concluded that on-site replacement of parking spaces in the proposed mixed use project is both financially infeasible and unnecessary. However, the sale of the property from the Parking Authority to the City will provide the Parking Authority with funds which could be used for the provision of additional parking through expansion of the adjacent structure. The city Council and Parking Authority action on April 26, 1988 approved in concept a transfer of title from the Parking Authority to the city, and a below market rate lease payment to the parking Authority based upon the affordable rent structure. The proposed project would support a lease payment of $30,000 per year. In order to make funds immediately available to the Parking Authority, it is recommended that the project, rather than making a $30,000 lease payment, pay the capitalized equivalent of the affordable lease payment to the Parking Authority, equal to approximately $300,000, or about $11,500 per existing space. This is equal to the estimated cost of providing new spaces in an existing structure. Development Cost of Theater After preliminary drawings were prepared for the project and development costs were estimated by CCSM's construction consultant, it became apparent that the inherent difficulties of developing on the designated site, as well as higher than - 5 - . . anticipated construction costs of movie theatres, were increasing the construction costs of the theater over what was originally projected in 1988. Due to development difficulties and high movie theater construction costs, the development cost of the project is estimated to be approximately $4,435,000. The housing component of the project makes up approximately . fifty-five percent (55%) of the total development cost, or $2,445,000. Given the various sources of financing available to the housing component, including private debt financing, tax credit syndication, and local housing trust fund loans, the housing component "breaks even tl in terms of project financing (i.e. it brings in enough financing to cover its own costs). The theater component of the project, however, does not break even with respect to project financing. The theater's projected revenue does not support enough private debt financing to cover its construction costs, leaving a project financing gap of approximately $660,000. This shortfall exists despite the fact that the proposed theater operator has tentatively agreed to provide approximately $600,000 for tenant improvements. These funds would be used to both finish the theater's interior construction and to install seats, a ticket booth, a concession counter, and sound and projection equipment. In an effort to close the project's financing gap, City staff have worked closely with CCSM, its construction consultant , the project architect , and the proposed theater operator in both redesigning the project to reduce construction costs, and - 6 - --- -- . . . attempting to generate additional project revenues to support greater private debt financing. The theater's redesign consisted of minimizing subterranean square footage, reducing the number of theater seats, reducing the number of levels in the complex from three to two, and reducing the square footage of the lobby. These redesign efforts reduced the construction cost of the theater by approximately $200,000, reducing the project's financing gap from $860,000 to $660,000. CCSM and City staff also examined the possibility of adding market-rate uses to the project in order to increase revenue and thereby increase the private financing the project could support. For example, the addition of one or two floors of market-rate office space or market-rate residential units to the project was analyzed as a potential means of making the project break even. Unfortunately, while such additions would generate suffic.lent revenue to cover their own costs and provide some return on investment, they would not generate enough extra revenue to substantially reduce the project's financing gap. Despite extensive staff and developer efforts to eliminate or reduce the theater's financing gap, there is still a gap of approximately $660,000 between development costs and available financing. Given this financing gap, staff have concluded that it is financially infeasible to include a movie theater complex in the Second Street mixed use project. - 7 - . . Pursuant to making the above described determination of financial infeasibility, staff has begun examining alternative ground-floor uses. According to cost estimates prepared by CCSM's construction consultant, the ground floor could be develop for a non-theater cultural use for approximately $798,000. At this cost, the space would break even at a below-market rate of approximately $1. 53 per square foot per month, with no additional City capital subsidies required to make the project financially feasible. In addition, the nulnber of residential units could be increased to thirty (30). It is recommended that City Council direct staff to investigate the feasibility of the alternative uses described below, and return to the city Council for approval of the use and the terms of the required lease in June. The discussion below describes the alternative development proposals for the Second street site and an alternat1ve approach to providing Spanish-language cinema in the area. Alternative Proiect Proposals One use which would address the needs of the community for affordable cultural, artistic, and performance space would be a "community Cultural Center" providing performance space for music and live theater, meeting space for non-profit and public agencies in Santa Monica, and a central location in the downtown area for community cultural and artistic activities. The revenue generated by the cultural space would depend on the operator selected and the specific use of the space. Over a short-term start-up phase a cultural Center probably would not generate - 8 - . . . . sufficient revenue to cover the break-even lease rate of $1:S3. In developing final recommendations for the ground floor use, staff will determine the revenue potential for a Cultural Center accomodating a range of uses, and determine whether or not such a use would be financially feasible over the long-term. While the Center represents the most desirable use of the ground floor space, it is recommended that staff also be directed to pursue alternative market-rate commercial uses for the space if staff's further analysis of the Center's potential costs and revenues indicate that it cannot be feasibly developed without excessive City subsidies. staff will examine potential market-rate retail uses for the space, which could include bookstores, a musical nightclub, or an affordable restaurant or cafeteria. staff will return with a specific lease proposal for the ground floor space for City Council approval in June 1990. Need for Timely Determination A determination must be made by the city Council regarding the composition of the proposed Second Street mixed use development as soon as possible. In order to maintain project feasibility, the developer must obtain an allocation of 1990 Federal and state low income housing tax credits from the California Mortgage Bond and Tax Credit Allocation Committee. The tax credit program has only been temporarily extended by the U.s. Congress, and competition for tax credits will therefore be intense. Therefore, in order to maximize the probability of receiving a tax credit allocation, an application for tax credits must be - 9 - ----~ -- -- ~--- . . , . . submitted to the Allocation Committee as early as possible in 1990. A determination by the City Council that the ground floor space be dedicated to cultural or retail use, and not to theater use, will allow the project developer to apply for tax credits before the end of February, 1990 presuming the lower development costs of the non-theater project and thirty (30) rather than twenty-eight (28) residential units. Potential Alternative Spanish-Lanquage Cinema In order to continue to address the local need for Spanish-language cinema, staff has begun exploring the possibility of arranging for an existing movie theater in Santa Monl.ca to program spanish-language cinema on an on-going basis, whereby specific programming choices could be guided by an advisory group from the Latino community. city staff have met on a preliminary basis with Mr. Robert Laemmle of the Laemmle Theatres regarding such an arrangement, and Mr. Laemmle has expressed a high level of interest in pursuing the concept further. On the basis of these preliminary discussions, it appears that arranging for Spanish-language programming on an existing theater screen in Santa Monica would be a much less expensive option for preserving such cinema in Santa Monica than SUbsidizing the construction of a new theater complex for this purpose. In order to proceed with exploring the possibility of arranging Spanish-language programming in an existing movie theater in Santa Monica, staff recommends that the City council authorize - 10 - . , . . the City Manager to initiate more formal discussions with Mr. Laemmle and other existing theater operators in Santa Monica regarding the potential costs, revenues, and format of such an arrangement. Next steps Staff will be returning to the City Council and Parking Authority in June, 1990, with a final recommendation regarding the ground floor use of the Second street mixed use project (Cultural Center or market-rate commercial use), and for approval of the lease agreement to be executed with CCSM for the project site. In addition, staff will be returning for city council approval of an agreement with an existing theatre operator in Santa Monica for Spanish-language film programming if negotiations prove satisfactory. FINANCIAL/BUDGETARY IMPACTS No financial or budgetary impacts are anticipated as a result of the specific actions recommended in this report. staff will return in June 1990 for City Council and Parking Authority approval of specific lease and payment agreements. RECOMMENDATIONS It is recommended that the City Council and Parking Authority: 1) direct staff to investigate the feasibility of incorporating a nCommunity Cultural Center" on the ground floor of the mixed - 11 - . . . . . use development to be developed by Community Corporation of Santa Monica at 1423 Second street; and 2) direct staff to return with a lease proposal 'either for the community Cultural Center, or for an alternative cultural or retail use if staff determines the Center is infeasible to develop; and 3) direct staff to prepare the required City council and Parking Authority resolutions and a Payment Agreement based upon the transfer of the property to the City as described herein. It is further recommended that the city council authorize the city Manager to explore arranging for an existing theatre in Santa Monica to present Spanish-language cinema on an on-going basis in partial replacement of the ICineLatino" theatre which was displaced from the Third street Promenade by commercial development activity and return with lease proposal if negotiations yield an acceptable arrangement. Prepared by: Jeff Mudrick, Acting Housing program Manager Jack D. Gardner, Senior Development Analyst Department of Community and Economic Development JG:wp:second2 - 12 - -- -~ - - -