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RMD:HSG:J.M:CE:pacshore\staff\pc Santa Monica, Califo~nia
council Meetinq: September 15, 1992
To: City council
From: City staff
Subject: Recommendation Reqardinq the Execution of an Option to
Modify and Extend the Ground Lease of the City owned
Property on the Northwest Corner of Main st. and Pico
Blvd.
INTRODUCTION
This report transmits information and recommendations regarding the
negotiation of an option agreement to extend the ground lease of
the City owned property on the northwest corner of Main st. and
Pico Blvd. , the site of the Pacific Shore Hotel. The report
recommends that the city Council authorize the City Manager to
negotiate and execute an Option Agreement with PAC SHORE HOLDING,
INC. and the Bank of New York extending and modifying the Pacific
. Shore Hotel ground lease pursuant to the terms and conditions set
forth in this report.
BACKGROUND
The City of Santa Monica owns the land on the northwest corner of
Main street and Pica Boulevard, the site of the Pacific Shore
Hotel. On December 19, 1966 the city executed a 55 year lease on
the property to permit the development of a hotel. That lease is
scheduled to expire in 2018.
The Bank of New York has provided the primary financing for the
existing hotel. Their current loan was secured by the ground
lease. In 1991, Pacific Shore Associates Limited Partnership, the
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most recent assignee of the ground lease, defaulted on the loan
payments. Early this year, after several unsuccessful attempts to
transfer the property, the Bank of New York foreclosed on its loan
and purchased the ground lease at the Trustee's Sale.
The Bank is interested in selling the remaining leasehold to a new
owner/operator of the hotel. However, the Bank recognizes that it
is virtually impossible to finance, and thus to market, a ground
lease hotel with significantly less than 50 years remaining on the
leasehold. Therefore, the Bank has requested the city to grant a
lease extension to at least 55 years so that it can effectively
market the property for its full potential value. Staff recommends
that Council authorize an extension pursuant to the terms discussed
herein.
DISCUSSION
The Bank of New York has agreed to a proposal for an option to
extend the lease to 55 years upon the following terms:
1. The City will enter into an Option Agreement which will provide
for a lease modification extending the lease to 55 years and which
will also contain the various terms and conditions which must be
satisfied for the grant of the lease extension. The term of the
Option shall be nine (9) months. If the option is not exercised
within that time period it will expire.
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2. If the Option is exercised the city will agree to enter into
a Lease Modification which shall include the lease term extension
and other lease modifications. The consideration to the city for
entering into this Lease Modification shall be a $2 million dollar
cash payment by the current operator, PACSHORE HOLDING, INC. , a
wholly owned subsidiary of the Bank of New York. One million
dollars would be paid upon exercise of the option agreement. If
the option is exercised, another $1 million would be paid upon the
close of escrow transferring the lease to a new owner or on
December 30, 1993, whichever occurs first. Bank of New York has
further agreed to guarantee the $2 million dollar payments.
3. Other significant modifications to the lease would include a
guarantee by the new lessee of at least $1 million dollars in
improvements to the hotel, additional cash payments to the City of
a percentage of any funds realized by the new owner from a
refinancing or resale of the leasehold during the first fifteen
years of the new lease period, updated insurance requirements, and
a s1gnificantly increased minimum ground rent.
Staff believes that these terms reflect an excellent opportunity
for the City. The proposed agreement not only assists the City
financially but also provides increased security and more municipal
control to guarantee effective, quality operation of the hotel in
the future. The extended lease term of fifty-five years is the
minimum required to render the property marketable. The proposed
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payment to the city of a two million dollar ($2,000,000) premium is
extremely fair and an independent consultant analysis indicates
that it is in the high range of potential premiums. The current
percentage rents are also competitive with comparable ground lease
percentage rents.
The proposed extension of the lease will result in no change of use
in the property or other additional impacts on the city. It will
guarantee that the hotel is maintained and operated at high
standards. And most importantly, it will provide much needed
additional funds for the city during a time when the city will be
dealing with significant revenue cutbacks from the State.
BUDGET/FINANCIAL IMPACT
No financial or budgetary action is required at this time.
RECOMMENDATION
Staff recommends that the city council authorize the City Manager
to negotiate and execute an Option Agreement with PACSHORE HOLDING,
INC. and the Bank of New York extending and modifying the Pacific
Shore Hotel ground lease pursuant to the terms and conditions set
forth in this report.
Prepared by: Jeff Mathieu, Director
Chuck Elsesser, Housing Program Manager
Resource Management Department
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