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SR-900-003 (5)~~~ City Council Report ~ City of Santa Moniea City Council Meeting: November 28, 2006 Agenda Item: lC To: Mayor and City Council From: Martin Kennerly, Acting Director of Resource Management Department Subject: Amendment to Lease with The Richlar Partnership for Property Located at 2715 Exposition Boulevard/1800 Stewart Street. Recommended Action Staff recommends that the City's lease with The Richlar Partnership for property located at 2715 Exposition/1800 Stewart Street, be amended to reflect the following: 1. effective July 1, 2005, the ground rental rate will be $809,184 per year; 2. the method for calcufating future rent adjustments will be every 30 months, based on Consumer Price Index, with adjustments of no tess than 3% per year nor more than 7°lo per year; 3. between July 1, 2005, and December 31, 2007, Richlar Partnership will make partial payments; and 4. the rent deferred from July 1, 2005, through December 31, 2007, in the amount of $1,412,082, will be repaid to the City between January 1, 2008, and December 31, 2010, at 7% interest, with the amount deferred secured by an irrevocable letter of credit. 1 Executive Summary In 1989 the City acquired from Southern Pacific Transportation Company property that was subject to a 50-year ground lease with The Richlar Partnership ("Richlar") for four acres located at 2715 Exposition Boulevardl1800 Stewart Street. The lease with Richlar provides for a rental adjustment on July 1, 2005, and every five years thereafter, until lease expiration on July 1, 2030, based on the property's highest and best use. The proposed rental rate is retroactive to July 1, 2005. City staff and Richlar have been in negotiations and have determined that the property's rental value should be increased from $207,252 to $809,184 per year. Further, staff is recommending two modifications to the lease: to modify the method for determining future rental adjustments from every five years to an automatic increase every 30 months in accordance with the Consumer Price Index, at not less than 3% per year nor more than 7% per year; and, subject to security in the form of an irrevocable letter of credit, to allow Richlar to defer payment of a portion of the increased rent, with repayment of the full amount deferred, plus 7% interest, to be repaid in monthly installments and fully repaid by December 31, 201 Q Rental income is deposited to the Big Blue Bus fund as the property was purchased with transit funds. Discussion Backqround In 1989 the City acquired from Southern Pacific Transportation Company 9.3 acres. The property was purchased using City transit funds, with the intent that the property would 2 be needed to accommodate future light rail transit. Rental income is deposited into the Big Blue Bus fund. At the time of purchase, the property was encumbered with two leases; one to Mor-Flor Industries, parent company of American Appliance Corporation, and the second to The Richlar Partnership. The property leased to Mor-Flor Industries is now Bergamot Station. The Richlar Partnership lease was a fifty year ground lease, expiring July 1, 2030. It covers an area of 168,580 sq. ft. (about 4 acres). The site is improved with a 64,000 sq. ft. warehouse and a 60,000 sq. ft. office building. The lease set the rental rate during the first 25 years. The most recent rental adjustment was set on July 1, 2002, at $207,252 per year. Beginning July 1, 2005, and every five years thereafter, the lease states that the rental rate shall be a reasonable and fair value of the premises at that time, as though the land constituting the premises were unencumbered by the lease and were available for the highest and best use allowed under zoning law then in effect. If the parties are not able to agree on the rent, the lessor may submit the dispute to arbitration. City staff and Richlar have been in negotiations since June 2005. Each party obtained an independent appraisal and each appraisal was reviewed by the other party. Based 3 on these negotiations, staff recommends that the Council approve a land rental increase from $207,252 per year to $809,184 per year, retroactive to July 1, 2005. Staff also recommends two modifications to the lease. The lease provides for rental adjustments every five years based on highest and best use. In lieu of this method, staff recommends that the lease be modified to provide for automatic rental adjustments every 30 months, based on the Consumer Price Index, with adjustments not less than 3% per year, nor more than 7% per year. Revising the lease to provide for a set formula provides more frequent rental increases and gives the Lessee some assurance about future rental rates which will facilitate his negotiations with future tenants. The second recommended modification would allow Richlar to make partial payments, with the deferred amount repaid to the City at 7% interest. Beginning in January 1, 2008, Richlar would begin repayment of the amount deferred, while also paying the full rental amount. The deferred rent in the amount of $1,412,082 would be repaid between January 1, 2008 and December 31, 2010, at 7% interest, in monthly installments. The deferred amount would be secured by an irrevocable letter of credit which could be called upon in the event of default or bankruptcy. At any time that Richlar defaults on regular rental payments, the City may terminate the lease by providing 30 days written notice to cure the default. 4 Alternatives If the proposed lease amendment is not approved, Council may refer the matter to arbitration. Budqet/Financial I mpact Proceeds from the rental of this property are deposited into account 41642.404090. The City will collect $610,878 between July 1, 2005 and December 31, 2007. Thereafter the City will receive the full rent of $809,184, adjusted per the CPI formula. Repayment of deferred rent of $1,412,082 at 7% interest between January 1, 2008 and December 31, 2010, will result in interest income to the City of $314,849. The Budget for rental income for FY 06-07 would be increased by $1,203,864 which reflects the increased payment beginning in January 2007 and the amount of rental income earned under the proposed lease agreement but deferred during the period from July 2005 through June 2007. Prepared by: Miriam Mack, Economic Development Manager Approved: Martin I~enn~ Acting Director Resource Ma agement Department Forwarde o CounciL• P , amont Ewell ity Manager 5 e erence on rac o. .