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SR-080988-6LCA:RMM:moxs156/hpw City Council Meeting 8-9-88 STAFF REPORT AUG 9 1988 Santa Monica, California ,~ >• ~ ~. . ~ . ,,.- l „- T0: Mayor and City Council FROM: City Staff SUBJECT: Recommendation to Authorize Execution of Modification to Lease Agreement Between City of Santa Monica and Supermarine of Santa Monica to Incorporate Lender Requirements INTRODUCTION On May 1, 1986, the City entered into a Lease Agreement with Supermarine of Santa Monica ("Lessee") pertaining to development of certain property located at the Santa Monica Airport ("Premises") for purposes of construction, operation and maintenance of a full service aviation fixed base operation ("FBO"). Lessee has secured a construction loan commitment from Wells Fargo Bank which is contingent upon certain Lender required revisions and clarifications to the Lease Agreement. Such revisions and clarifications will necessitate a written modification to the Lease Agreement. Section 8.13 of the Lease Agreement expressly allows for amendments to incorporate reasonable requirements of a responsible lending institution acceptable to Lessor for construction loan financing of the Leasehold Improvements. - 1 - ~- L AUG y 1988 Such section also requires the City, as Lessor to use its best efforts to cooperate with Lessee and its lender to satisfy the loan financing requirements of Lessee's lender. Wells Fargo Bank, as Lessee's lender ("Lender") has presented its desired Lease Agreement revisions to City Staff for review, and such revisions have been determined to constitute reasonable requirements which may be effected by a Lease Modification. PROPOSED REVISIONS TO LEASE AGREEMENT The revisions required by Lender primarily involve protections of Lender's interests as a mortgagee. It is standard practice for lending institutions to require such provisions in order to secure their financial investments. The significant proposed revisions are summarized as follows: 1. Lender requires sufficient notice and time to allow it to cure any monetary breach or default by Lessee. 2. Lender seeks to protect its rights in the event either Lender or a City-approved assignee of Lender succeeds to Lessee's interest in the Lease, so that the Lease will continue in full force and effect provided that Lessee's obligations are fully satisfied by Lender or the approved assignee. 3. Addition of a standard quiet possession/non-disturbance provision to protect Lessee's rights so long as Lessee is not in default under the Lease Agreement. 4. Addition of a provision clarifying that Lender's liability for Lessee's obligations is limited unless and until Lender acquires Lessee's rights by foreclosure, and that upon - 2 - City's approval of an assignment or transfer by Lender of such acquired rights, Lender shall have no further liability for the Lease obligations. 5. Addition of a provision clarifying the priority of Lender's mortgage interest as a lien on the Leasehold Estate, superior to all other liens or encumbrances except those which may be imposed by the United States government. 6. A revision increasing the cost threshold from $5,000.00 to $10,000.00 for leasehold improvements for which the City may, at its discretion, require performance and payment bands. 7. Addition of a provision allowing non-structural decorating improvements without prior City approval if such improvements are consistent with the permitted uses and activities under the Lease or do not exceed a cost threshold of $10,000.00. 8. Revisions extending application of Article 18 provisions pertaining to assignment, transfer and subleasing to a lender succeeding to Lessee's position. A lender would be required to provide the same evidence as Lessee on qualifications of any proposed transferee, provided that a proposed transferee would be deemed to satisfy the required qualifications under the Lease Agreement if such transferee has a financial worth not less than Lessee's as of the Completion Date of the Improvements and has qualifications and experience in the operation of a fixed base operation at least equal to that of Lessee. 9. A revision to the provision requiring a sublessee to make sublease or other payments directly to Lessor (on Lessor's written notice of default), to entitle the Lender to receive such - 3 - sublease payments so long as the Lender proceeds diligently to cure any breach or default which may have resulted in Lender's succession to Lessee's interest. 10. Deletion of the provision which allows the City to terminate the Lease in the event of damage or destruction of 50~ or more of the Airport Common Areas. Lender emphasized that Lessee's Improvements and business operations would not necessarily be impacted by such damage or destruction to the Common Areas. 11. Addition of a provision requiring 30 days notice of any proposed amendment be provided to Lender. FISCAL/BUDGET IMPACT There are no direct fiscal/budget impacts resulting from the actions required by this report. RECOMMENDATION Accordingly, City Staff recommends that the City Council take the following action: 1. Authorize the City Manager or his designee to execute a Modification to the Lease Agreement incorporating the Lender required revisions discussed above. PREPARED BY: Hank Dittmar, Airport Director Robert M. Myers, City Attorney Linda A. Moxon, Deputy City Attorney 4 Reference Contract No. 4671 (CCS).