SR-407-003-017
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City council and
Parking Authority Meeting: 1/30/90
Santa Monica, California
4/0- Olb
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 forty-four (44) SRo-type housing units and a 7,500
square foot space for cultural and commercial use. Staff would
return to City Council during the FY1990-1991 budget cycle for
approval of the lease with CCSM, for approval of resolutions
necessary to transfer the site from the Parking Authority to the
City, and for approval of the Payment Agreement between the
Parking Authority and the City.
BACKGROUND
On April 26, 1988, the city Council and parking Authority
approved in concept the development of a mixed use housing/cinema
project on the City-owned parking lot at 1423 Second street. The
development as originally approved consisted of twenty-eight (28)
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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 "CineLatinol1 Spanish-language
theater which was displaced from the Third street Promenade by
new commercial development. 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 preliminary 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 Parking Analysis
According to the draft Parking Demand Analysis for the Third
Street Promenade prepared by Kaku Associates, the parking
structure adj acent to the proposed mixed use proj ect (Parking
structure Number Six) has a surplus of available parking spaces
over both current and projected demand. Parking structure Number
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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 ground-floor use;
(2) replacing the parking above the 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 "underground" 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
single level of underground parking would cost approximately
$490,000, or $49,000 per space and deliver very little parking.
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Above-Ground Parkinq: Approximately 17 parking spaces could be
built into a third project level over the 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 Parkinq: 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.
Given the extremely high cost of replacing parking on-site, the
relatively low cost of adding parking spaces to adjoining pUblic
parking structures, and the surplus of available parking spaces
in the parking structure immediately adjacent to the proposed
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project, staff has concluded that on-site replacement of parking
spaces in the proposed mixed use proj ect 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 estimated cost of providing 26 new spaces in an existing
structure is approximately $300,000, or $30,000 per year if paid
through a lease payment. 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, with a below market rate
lease payment to the Parking Authority based upon the affordable
rent structure. In order to make funds immediately available to
the Parking Authority, it is recommended that the project, rather
than making the $30,000 lease payment, pay the capitalized
equivalent of the affordable lease payment, i.e. $300,000, to the
Parking Authority. The project can make the proposed $300,000
payment and remain financially feasible.
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
anticipated construction costs of movie theatres, were increasing
the construction costs of the theater over what was originally
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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" in terms of project financing
(i.e. it brings in enough financing to cover its own costs).
The theater component of the project, however, would not break
even with respect to project financing. The theater's projected
revenue would 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 had 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
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
attempting to generate additional project revenues to support
greater private debt financing.
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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. However, these
redesign efforts reduced the construction cost of the theater by
only $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 sufficient
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 and would reduce
the number of housing units which could be built.
Despite extensive staff and developer efforts to eliminate or
reduce the theater's financing gap, there is still a gap of
approximately $660,000 ($1,260,000 if tenant improvements are
done by the developer) between development costs and available
financing. In addition, if revenue from the theater were
insufficient to meet debt service requirements, the theater could
not easily be converted to another commercial use without
considerable additional expenditure. Given the substantial
financing gap and the potential expense of a conversion to a
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subsequent non-theater use, staff have concluded that it is
financially infeasible to include a movie theater in the Second
street mixed use project.
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 developed for a non-theater
commercial or cultural use for approximately $1.2 million, which
would include a tenant improvements allowance of $25 per square
foot. At this cost, the space would break even at a lease rate
of approximately $1.91 per square foot per month. No additional
city capital subsidies would be required to make the project
financially feasible; however, as further discussed below, some
ongoing city subsidy would be necessary to assist a cultural use.
This alternative also results in the number of residential units
being increased to forty-four (44). 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 terms of the required lease, necessary
resolutions, and payment agreements during the FY1990-1991 Budget
cycle.
The discussion below describes the alternative development
proposals for the Second Street site.
Alternative Prolect Proposal
One use which would address the needs of the community for
affordable cultural, artistic, and performance space would be a
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It is recommended that staff also be directed to work with
representatives of the Latino community to further explore the
financial feasibility of the cultural center in the front half of
the ground floor, and to pursue alternative market-rate
commercial uses for the entire ground floor space if further
analysis of the Center's potential costs and revenues indicates
that it cannot be feasibly developed without city subsidies
substantially in excess of what is described above. staff would
work with the developer to identify a CUlturally-oriented
commercial use for the commercially designated half of the ground
floor space and for the remaining space if the cultural center is
determined to be infeasible.
staff will return with the proposed lease with CCSM for City
Council approval in June 1990; however, consideration regarding
any city subsidy for the cultural center component of the
project would not be brought forward to the Council until the
costs, revenues, and feasibility of the the cultural space have
been determined.
Because the space could physically accommodate either a cultural
use or a market rate commercial use, design of the space could
proceed and construction could begin before the ultimate use of
the space is determined. staff will work with CCSM, with members
of the Latino community, and with the appropriate consultants
over the next eighteen months to determine the revenue potential
and identify an operator for the cultural space. If the cultural
use is determined to be infeasible, the space would be rented to
a commercial tenant.
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Need for Timely Determination
A determination must be made by the City Council regarding the
basic 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 been only 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 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 and/or commercial
use, and not to theater use, will allow the project developer to
presume the lower development costs of the non-theater project
and forty-four (44) rather than twenty-eight (28) residential
units. This will, in turn, allow the developer to proceed with
the more detailed architectural and financial analysis necessary
to complete the tax credit applications.
Next steps
Staff will be returning to the city Council and Parking Authority
during the FY1990-1991 budget cycle for approval of the lease
agreement to be executed with CCSM for the project site, for
approval of the resolutions necessary to transfer the site from
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the Parking Authority to the Ci ty , and for approval of the
Payment Agreement between the City and Parking Authority.
FINANCIAL/BUDGETARY IMPACTS
No financial or budgetary impacts are anticipated as a result of
the specific actions recommended in this report. Staff will
return during the FY1990-l991 budget cycle for City Council and
Parking Authority approval of specific lease and payment
agreements. It is anticipated that consideration of any financial
role in the City's SUbsidizing a cultural use will not be brought
forward until the FY 1991-1992 budget cycle.
RECOMMENDATIONS
It is recommended that the City Council and Parking Authority:
1) direct staff to investigate the feasibility of incorporating
a "Community Cultural center" comprising approximately half the
ground floor of the mixed use development to be developed by
Community corporation of Santa Monica at 1423 Second street (the
remaining half will be developed for commercial use), and,
unless any required subsidy is substantially in excess of the
level outlined in this report, prepare a financing proposal for
City Council approval; and
2) direct staff to work with the project developer to identify a
commercial tenant to lease the commercial component of the
project, or, if the required subsidy for the cultural space is
substantially in excess of the level outlined in this report,
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work with the project developer to identify a commercial tenant,
or tenants, to lease the entire ground floor; and
3) direct staff to return with a lease agreement to be executed
with CCSM for the project site; and
4) direct staff to prepare the required City council and Parking
Aqthority resolutions and a Payment Agreement based upon the
transfer of the property to the city as described herein for City
council and Parking Authority approval during the FY1990-1991
budget cycle.
Prepared by: Peggy Curran, Director of ClEO
Nancy West, Housing Program Manager
Jeff Mudrick, senior Development Analyst
Jack D. Gardner, senior Development Analyst
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