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).