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sr-052510-7b~, Y of ity i Santa Monica City Council Meeting: May 25, 2010 Agenda Item: ~'~~ To: Mayor and City Council From: Andy Agle, Director of Housing and Economic Development Subject: Ordinance Regarding Acquisition of Property at 1301 - 1333 Fourth Street Recommended Action Staff recommends that the City Council adopt the attached ordinance. Executive Summary On May 11, 2010, the City Council and Redevelopment Agency took actions necessary to authorize the City Manager and Executive Director to negotiate the purchase of property at 1301 - 1333 Fourth Street. As part of its actions, the City Council introduced for first reading an Ordinance authorizing the execution of and approving the act of entering into a lease and reimbursement agreement with the Agency for the subject property. The ordinance is now presented to the City Council for adoption. ®iscussion During the past three years, the City has acquired 67,500 square feet of property on Fifth Street, south of Arizona Avenue. While specific uses for 1301 - 1333 Fourth Street have not been identified, acquisition of the subject property would broaden the City's ability to achieve its goals as identified in the Bayside District Specific Plan, as the subject property is directly across Fourth Court from the City-owned properties on Fifth Street. The property provides opportunities to expand the vitality of the Third Street Promenade onto Fourth and Fifth Streets, to create additional activity and uses in a very central location within Downtown Santa Monica and to strategically address parking needs identified in the Downtown Parking Strategy and the Walker Parking Study in a manner that reduces congestion on the bus-heavy Fourth Street corridor. As a financed sale, the proposed transaction differs from the lump-sum acquisitions the City has generally completed. Under the proposed transaction, the Redevelopment 1 Agency would immediately gain fee title to the property subject to a deed of trust in favor of the Sellers and promissory notes to each of the Sellers. The Agency would make annual payments of $1.6 million prorated in 2010, $1.648 million in 2011„ $1.697 million in 2012 and $3.3 million per year from 2013 through 2029. Between 2030 and 2042, the annual installments would increase incrementally until reaching $3.6 million per year between 2040 and 2042. The sellers have represented that structuring the acquisition as a financed sale is acceptable because it supports the various owners' financial objectives, while alump- sum sale does not. The financed sale also represents advantages for the City, as the Redevelopment Agency does not have sufficient funds on hand to pay for alump-sum purchase. The financed sale also creates a long-term Redevelopment Agency obligation, which can be .paid from Agency tax increment following the Agency's indebtedness deadline of 2014. Future changes in redevelopment law are not expected to impact the Agency's ability to make payments under the proposed purchase and sale agreement because changes in law cannot impair existing contracts. The proposed transaction is a purchase not to exceed $42.5 million (depending on the date of closing) financed by the sellers at 6.75 percent interest, with the initial annual repayment starting at $1.6 million and growing to $3.6 million in 2042. The proposed purchase price was negotiated pursuant to an economic analysis prepared by Allan D. Kotin and Associates. The economic analysis used income capitalization and residual land valuation methodologies to evaluate the two different types of interests on the property. The portions of the property containing the banks were valued based on capitalizing the income received from the two bank leases (approximately $1.6 million annually) at a 6.7 percent capitalization rate, resulting in an estimated value of $23.4 million. For the 37,500-square foot parking lot between the banks, the analysis evaluated the residual land value assuming mixed-use development scenarios that are similar to what has been built or approved recently in the vicinity. The estimated value is $19.1 million, reflecting a $508 per square foot land value that is within the range of .recent, similar downtown Santa Monica land sales. The sellers' financing over 32 years 2 was determined based upon a coupon interest rate of 6.75 percent for a taxable mortgage of this type. Environmental Analysis On May 11, 2010, the City Council approved a resolution adopting a negative declaration for the purchase of the subject property. Financial Impacts & Budget Actions The terms of the financed purchase and sale agreement will commit the Redevelopment Agency to make annual payments of $1.6 million prorated for 2010, $1.648 million in 2011, $1.697 million in 2012, $3.3 million per year from 2013 through 2029, $3.4 million per year from 2030 through 2034, $3.5 million per year from 2035 through 2039 and $3.6 per year from 2040 through 2042. Sufficient funds for at least the first four years of financing repayments are available in capital improvement account 0172075.589000. Funds for subsequent years' payments will be allocated in future Redevelopment Agency budgets. Prepared by: Miriam Mack; Economic Development Manager Approved: Andy Agle, Directo Housing and Economic Development Forwarded to Council: -®... Rod Gould City Manager Attached: Proposed Ordinance 3 Reference Ordinance No. 2313 (CCS).