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SR-407-003-017 . , . . cc J p.~- ..... tf07-- OtJ3-0/-r J~ 3 0 lS~! ~ C/ED:HSG:JM:wp 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) - 1 - cc../PIJ~ ~';":r'l 3 () lC0:~ f . . y 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 - 2 - . . 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. - 3 - . . 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 - 4 - . . 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 - 5 - . . 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. - 6 - . . 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 - 7 - . . 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 - 8 - . . 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. - 10 - . . 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 - 11 - . . 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, - 12 - . . 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 JM:wp:second2 - 13 -