SR-06-10-2008-8A
'~ City Council and
~~=Y of Redevelopment Agency Report
Santa Monica
City Council and Redevelopment Agency Meeting: June 10, 2008
Agenda Item: ~"-
To: Mayor and City Council
Chairperson and Redevelopment Agency
From: Andy Agle, Director of Housing and Economic Development
Subject: Disposition and Development Agreement for the Civic Center Village
Recommended Action
Following a public hearing, staff recommends that the Redevelopment Agency
(Agency):
1) Adopt the attached Resolutions (Attachments A - D) making specific findings.
and approving the Disposition and Development Agreement and .Lease
Agreements between the Agency and Related/Santa Monica Village, LLC
(Related) for the Civic Center Village; and
2) Authorize the Executive Director to execute all documents, and take all
necessary actions, to complete the Disposition and Development Agreement
and Lease Agreements for the Civic Center Village.
Staff recommends that the City Council:
1) Approve an amendment to contract 8556 (CCS) with Keyser Marston
Associates, Inc. in the amount of $40,000 for real estate economics services
associated with this development.
Executive Summary
The design, public benefits and conditions for the development of the Civic Center
Village (Village) component of the Civic Center Specific Plan (CCSP) were approved by
the City Council on Mav 13. 2008. The Redevelopment Agency (Agency) owns the land
on which the Village is proposed to be developed, with exclusive development and land-
lease rights to the developer, Related/Santa Monica Village, LLC. The business terms
and conditions under which this Agency-owned property is proposed to be provided to
Related are contained in the Disposition and Development Agreement (DDA), ground
leases, affordable housing loan documents, and other attachments to the DDA
(Attachment E). The proposed business terms are. as follows:
• Land will be leased to Related for 99 years beginning July 2009 if all conditions
precedent to escrow closing are met;
• Base Land Lease payment of $19,400,000 will be capitalized arid paid to Agency
at close of escrow, and represents the fair reuse value of the leasehold;
• Additional. Land Lease payment not to exceed $4,423,000 will also be due at
escrow closing;
• Agency will provide Related with an affordable housing loan not to exceed
$23,823,000 to support development of 160 affordable residences.
• Repayment of affordable housing loan is from net available cash flow after
payment of-all other debt and operating costs;
• Affordable residences will be constructed in 'advance of, or concurrently with,
market-rate residences;
• DDA will contain a performance guarantee from the developer's parent company,
The Related Company LP, with .assets of approximately $4billion;
• Agency will receive 30 percent of gross condominium sales that exceed
projected sales proceeds, after a fifteen percent adjustment to projected sales
revenue to mitigate construction cost uncertainties.
The Village property comprises approximately 3.7 acres and will enhance the Civic
Center area with 324 residences. (including 160 that will be affordable. to low-income
households, including families and artists), public-open space, an extension of Olympic
Drive, public art, .sustainable design and construction and additional contributions
towards transportation management and the Civic Center Early Childhood Development
Center. The Mav 13, 2008 City Council staff report includes detailed information
regarding the design elements and public benefits of the Civic Center Village.
Background
In 1994, the City Council established the Earthquake Recovery Redevelopment Project
.Area (Project Area): The implementation goals and requirements of the Redevelopment
Plan include increasing the supply of affordable housing from tax increment revenue
generated in the Project Area. In April 2000, the Agency purchased 11.3 acres of
property from the RAND Corporation with tax increment revenue.
Following the Agency's acquisition of the former RAND property, the City embarked on
a comprehensive update to the original CCSP; which was adopted on June 28, 2005.
The CCSP includes the Village Special Use District which is bounded by Main Street,
Ocean Avenue, Pico Boulevard, and the future extension of Olympic Drive from Main
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Street to Ocean Avenue. See Attachment F for an illustration of the CCSP and the
approved Village design.
During 2005, a competitive developer selection process was initiated for the Village site,
culminating in the January 2006 selection of Related as the developer. Subsequently,
the Agency entered into an Exclusive Negotiation Agreement with Related regarding the
Village property and the development of the site. Several community workshops and
commission and Council meetings were held during 2006 and 2007 to consider and
refine the design for the Village, with the project parameters and entitlements approved
by the City Council on Mav 13, 2008. Concurrently, staff has been negotiating with
Related regarding the business .terms and project economics of the proposed
development and land transaction.
Discussion
The Civic Center Village represents 3.77 acres of the total 11.3 acres of former RAND
property owned by the Agency. The proposed lease of the land will implement the
Redevelopment Plan by increasing the supply of affordable housing and revitalizing the
Project Area with mixed-income housing, neighborhood-serving retail and public open
space. The CCSP program for the Village is achieved by leveraging the Agency-owned
land and using the proceeds from the land-lease to finance the affordable housing in the
Village. In addition, the Village includes numerous public benefits and the project
budget is absorbing the cost of these benefits, estimated at more than $10 million. See
Attachment G for Related's .development pro-forma and Attachment H for an
independent pro-forma analysis prepared by the Agency's advisor, Keyser Marston
Associates (KMA). KMA's independent analysis of condominium sale revenue,
development costs, affordable housing finance and residual land value are within one
percent of Related's estimates. The following summarizes the key elements of the DDA
and its attachments.
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Proiect Summary
The Village development is comprised of three legally separate but integrated sites,
referred to as Sites A, B and C. Site A is proposed to provide 66 market-rate
condominiums and approximately 10,000 square feet of retail space. Site B will contain
160 affordable apartments restricted for occupancy by very-low-income and low-income
households (28 one-bedroom, 56 two-bedroom, and 66 three-bedroom), including ten
affordable live-work units suitable for artists, a community room and a protected play
area for children. Sites A and B will contain roughly 26,000 square feet of pedestrian-
friendly public open space designed as a public plaza and walk-street through the site,
and share a common subterranean parking garage containing 377 spaces that is
accessed from First Court Alley and. Site C will contain 98 market-rate condominiums,
approximately 7,400 square feet of retail-space and a subterranean parking garage with
241 parking spaces. The Village project will embody numerous sustainable elements
including alternative energy generation, and is required to achieve a LEED `Silver'
rating. The Mav 13, 2008 City Council staff report. includes detailed information
regarding the design elements and public benefits of the- Civic Center Village.
Proiect Economics
The total cost of developing the entire Village site is projected to be approximately
$248 million, with $77 million estimated for Site A, $63 million for Site B and $108
million for Site C, excluding land costs and developer return. The per-unit development
costs of Sites A and C (condominiums) are significantly higher than for Site B
(affordable apartments) due to the different construction types (concrete/steel vs. wood-
framed over podium) and product types (ownership vs. rental), and because the costs of
the public benefits for the entire project must, as a practical matter, be borne primarily
by the market-rate component rather than the affordable component. The developer
return on cost (excluding land) of 20 percent reflects typical market standards and the
developer's original development proposal to the City. In .order to fully fund the
development gap for the affordable apartments on .Site B, the DDA requires a
capitalized (ease payment to the Agency from Related in -the amount of $8,600,000 for
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Site A and $10,800,000 for Site C, the two sites that will contain the condominium
residences. Related has also agreed to pay the Agency an additional land lease
payment not to exceed $4,423,000, equal to the difference between the $19,400,000
base land lease payment and the estimated $23,823,000 financing subsidy needed for
Site B. A development cost summary is provided as Attachment L
Residual Land Value
Residual land value is a function of the anticipated revenue generated by a
development, less the cost of creating the development. The residual land value of the
Village site is $19.4 million according to Related's analysis and $19 million according to
the Agency's analysis. Site B is not considered to have any residual land value due to
the restrictive affordable housing covenants applicable to that component of the Village.
To proceed with the development of the Village, Related has agreed to increase their
land value payment to the Agency by up to $4,423,000 to equal the financing subsidy
needed for the development of Site B ($23.8 milliori). Related has accepted this risk on
the premise that either they can reduce construction costs by that amount through
`value engineering' or if not successful in those efforts, they must accept a lower return
on investment.
The Agency purchased the former RAND property in 2000 at a cost of approximately
$113 per square foot. The land lease payment offered by Related equals approximately
$300 per square foot (for Sites A and C; Site B has no land value due to affordability
restrictions of this component of the Village). Comparable private properties are
expected to command sales prices of $500 to $600 per square foot. Sites A and C
cannot support these sales prices due to two primary factors, prevailing wages and
extensive public improvements and public benefits required as part of the development.
In the absence of prevailing wages and public improvements, the imputed land payment
price for the. Village site would exceed $550 per square foot. A Summary Report
required by redevelopment law has been prepared regarding the disposition of the
Agency-owned land and is provided as Attachment J. The Summary Report provides
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details on several aspects of the proposed DDA, including the cost to the Agency of
proceeding with the. DDA and the imputed land value of the Village site given the current
zoning and allowable uses.
Affordable Housino Loan
The 160 affordable residences proposed for Site B will be reserved for a range of low-
income households, including 58 rented to households earning less than 30 percent of
the Los Angeles County median income, 47 rented to households earning less than 50
percent of median, 53 rented to households earning -less than 60 percent of median,
and two rented to on-site managers. Construction of the affordable housing will require
a financial subsidy from the City, as is typical for developments where all residences are
restricted for affordability. Related will pursue several funding sources to construct the
affordable housing, including:
Tax Credit Equity
State- Multifamily Housing Program
Bank Loan
Deferred Developer Fee
22,302,000. From private investors
10,000,000 Competitive process
5,126,000 From project rents
1,300,000 To be paid from cash flow
The remaining financing gap is $23,823,000. Pursuant to the Council-approved
Housing Trust Fund Guidelines (Guidelines), the terms of the proposed loan are
summarized as follows:
Interest rate 0% (for financial feasibility)
Term 55 years from completion
Repayment annually from `residual receipts' (i:e., net income available
after all other expenses)
Security promissory note, deed of trust, and regulatory agreement
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The proposed loan will be funded with the proceeds of the capitalized land-lease
payment. The proposed loan equates to $148,893 per unit and is significantly less than
the $386,000 per unit limit established in the Guidelines for newly constructed units.
Schedule of Performance and Performance Guaranty
The DDA establishes a schedule of performance that requires construction of Sites A
and B to begin by August 2009 (unless the anticipated State affordable housing
financing is not obtained) and completion within thirty months. The DDA requires
Related to begin construction on Site C no later than eighteen months after construction
commencement of Sites A-and B. The DDA requires a performance guaranty from the
developer's parent company, the Related Companies LP. Should the developer fail to
perform any of its obligations under the DDA, the parent company would be required to
fulfill the DDA obligations. As one of the largest and most financially secure developers
in the nation, with assets of nearly four billion dollars, the parent company's guaranty is
an important tool to ensure that the Civic Center Village will be completed according to
community expectations.
Participation Formula
While the terms of the DDA ensure that the Agency is paid a fair reuse price for lease of
its land, the DDA also allows the Agency to receive a share of additional profits in the
event sales revenue from the condominiums exceed projections. Under the terms of
the participation payment formula, the Agency will receive 30 percent of gross sales
revenue that exceed projected. sales proceeds, after a fifteen percent adjustment to
projected sales revenue to mitigate construction cost uncertainties.
Consultant Contract Amendment
Keyser Marston Associates has completed the scope of work of its existing cohtract,
which coincides with Council consideration of the DDA. Staff recommends that the
existing contract be extended to provide additional- services following DDA execution,
including support for low income housing tax credit, tax exempt bond and State
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affordable housing funding applications, as well as final review of the method of
financing details prior to close of escrow.
Next Steos
If the DDA is approved, applications to the Architectural Review Board and California
Coastal Commission will be initiated, as will a funding application to the California
Multifamily Housing Program (MHP). The MHP application deadline is October 2008,
with funding commitments expected to be announced in January 2009. Construction is
anticipated to begin in Spring 2009, with completion targeted for 2012. Staff is also
exploring funding opportunities for the Palisades Garden Walk park from State bond
proceeds that are targeted toward infrastructure for mixed-income infill developments.
Environmental Analysis
The Environmental Impact Report (EIR) for the entire CCSP, .which includes .the
proposed Village development, was certified by the City Council in June 2005. An
addendum to this EIR, in conjunction with the City Council consideration and approval
of the land use entitlements (Development Agreement), was approved by Council on
May 13, 208.
Public Outreach
The public, commissions and Couricil have engaged in ah extensive planning and
design process for the Civic Center Village. In addition, notice of the Redevelopment
Agency hearing was published in the Santa Monica Daily Press on May 23, 2008 and
May 30, 2008.
Financial Impacts & Budget Actions
The Agency will receive a payment from Related for the value of the land-lease in the.
amount of $23,823,000 which is scheduled to occur in July 2009. The appropriations
related to this transaction will be included in the FY2009-10 budget process.
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Prepared by:
Jim Kemper, Acting Housing Administrator
Andy Agle;
Housing and Economic Development
ATTACHMENTS
Forwarded to Council:
Attachment A: Agency Resolution approving DDA
Attachment B: City Resolution approving DDA
Attachment C: Agency Resolution reviewing EIR
Attachment D: City Resolution reviewing EIR
Attachment f: Disposition and Development Agreement
Attachment F: Illustration of CCSP and Proposed Village Development
Attachment G: Related (developer) Development Cost Pro Forma
Attachment H: Keyser Marston (Agency) Development Cost Pro Forma
Attachment I: Development Cost Summary
Attachment J: Summary Report Required by California Redevelopment Law
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Reference Contract Nos.
8934 (RAS), 8935 (RAS),
8936 (RAS), 8937 (RAS),
and Amendment to
Contract No. 8556 (CCS).
Reference Resolution Nos.
507 (RAS), 508 (RAS),
10297 (CCS), and 10298
(CCS).
Additional documents
available for review in the
City Clerk's Office.