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sr-092810-8bt,Y~, City Council Report City Council Meeting: September 28, 2010 Agenda Item: _8-B To: Mayor and City Council From: Andy Agle, Director of Housing and Economic Development Subject: Third Modification of Ground Lease for 1800 Stewart Street -REVISED Recommended Action Staff recommends that the City Council authorize the City Manager to negotiate and execute a Third Lease Modification to assign the City's ground lease with CF Santa Monica Office VI, LP for property located at 1800 Stewart Street, to Agensys, Inc. and amend the Lease to provide for the following: Subject to Agensys' development of the site for its research and development facility, an + + n f ++._ ,. ,,..+ ~ ~ .± ~ ..ption to extend the term of the Lease for 10 years, from January 1, 2033, through December 31, 2042 will be granted. The base rent during the extension term will be adjusted to fair market rent at highest and best use based on the value of the land without considering any building improvements at the then current zoning. Increases in the rent during the extension term would occur every 30 months, in accordance with the Consumer Price Index, but not less than 3 percent or more than 7 percent. A requirement that Agensys,- Inc., will, at the direction of the City, close, relocate and/or repair two ground water monitoring wells that are on the property and will be impacted by the construction and will pay for these direct costs, not to exceed $50,000. ~J ~;tYOf City Council Report Santa bionica~ City Council Meeting: September 28, 2010 Agenda Item: To: Mayor and City Council From: Andy Agle, Director of Housing and Economic Development Subject: Third Modification of Ground Lease for 1800 Stewart Street Recommended Action Staff recommends that the City Council authorize the City Manager to negotiate and execute a Third Lease Modification to assign the City's ground lease with CF Santa Monica Office VI, LP for property located at 1800 Stewart Street, to Agensys, Inc. and amend the Lease to provide for the following: Subject to Agensys' development of the site for its research and development facility, an assignment to Agensys of the current .lease and an option to extend the term of the Lease for 10 years, from January 1, 2033, through December 31, 2042 will be granted. The base rent during the extension term will be adjusted to fair market rent at highest and best use of the land based upon its value under the then current zoning, but without considering any building improvements. Increases in the rent during .the extension term would occur every 30 months, in accordance with the Consumer Price Index, but not less than 3 percent or more than 7 percent. Agensys, Inc., will be required to pay for the closure, relocation and/or repair of two ground water monitoring wells that are on the property and will be impacted by the construction, not to exceed $50,000. Executive Summary Agensys, Inc. ("Agensys") a Santa Monica-based cancer-treatment research firm, proposes to construct a new biotechnology research and development facility on City- owned property located at 1800 Stewart Street. Currently, the property is leased to CF Santa Monica Office VI, LP. The proposed project is subject to the City assigning its lease to Agensys and providing one ten-year option to extend the term of the lease from January 1, 2033, through December 31, 2042. Rent for the extension term would be set by January 1, 2029 at fair market rent at highest and best use of the land based upon its value under the then current zoning, but without considering any building improvements. Adjustments in the rental rate would continue every 30 months in accordance with the Consumer Price Index of not less than 3 percent or more than 7 percent. Agensys would be allowed to exercise the option provided it has improved the property consistent with the project described in the Development Agreement, separately approved upon first reading by the City on September 14, 2010, and that Agensys is in full compliance with the Development Agreement. Agensys would also be required to 1 pay for the closure, relocation and/or repair of two ground water monitoring wells, not to exceed $50,000, in a manner and to a location determined by the City. Background The City acquired the nine-acre parcel located at 2525 Michigan/2715 Exposition Boulevard/1800 Stewart Street from Southern Pacific Transportation Company in 1989 with transit funds. A portion of the property (four acres), which covers 1800 Stewart Street, was subject to a 50-year ground lease with The. Richlar Partnership ("Richlar") expiring July 1,.2030. The lease was amended in November 2006, to establish a new rental rate and update the method and time for establishing rental adjustments for the remaining 25-year term. In August 2007, the City approved the assignment of the lease from the Richlar Partnership to CF Santa Monica Office VI, LP ("Lessee"). After the assignment, the Lessee received administrative approval for renovations to the site's existing buildings which consist of a 64,000 sq. ft. warehouse and a 60,000 sq. ft. two-story office building. Work began in early 2008, but was placed on hold in November 2008, when the Lessee began negotiations to sublease the entire site to Agensys. Agensys is a bio-tech firm that has been in Santa Monica since 1997. The company currently. employs 170 people and occupies 58,000 square feet in four sites in Santa Monica and seeks to consolidate its operations into one centralized location in the City and expand its workforce to 300 employees by 2015. On December 8, 2009, the City approved a 30-month extension of the lease term (from July 1, 2030 to January 1, 2033) in order for the Lessee and Agensys to pursue their on-going sublease negotiations and entitlements. During this time the City negotiated a separate Development Agreement for Agensys's project, the first reading of the Ordinance for which was approved by Council on September 14, 2010. 2 Discussion Agensys proposes to develop the site as a new campus for its state-of-the-art clean manufacturing and research facility. Agensys has requested that the City approve the assignment of the Lease from CF Santa Monica Office VI LP, and add an option to extend the term of the Lease by 10 years. With the extended term, the Lease would expire on December 31, 2042. A condition of the assignment is that Agensys be required to improve the property as described in its Development Agreement and to pay the agreed upon rent. To provide enough time to negotiate a new lease rate before the extension term, Agensys will be required to give notice to the City five years prior to the expiration of the term. In addition, Agensys will need to be in full compliance with the Development Agreement in order to obtain the extension term. If the parties cannot agree, the new rental rate will be determined by "baseball" arbitration, which obligates the parties to submit their respective reasonable fair market rent proposals to an arbitrator who then selects the one which best reflects the market conditions based upon the highest and best use of the land based upon its value under the then current zoning for the land without regard to Agensys's building improvements. The new rental rate for the extension term must be set by January 1,2029, and will not be lower than the last most recent rental rate. The agreed upon rent for the extension term, established by January 1, 2029 and increased by the CPI, will begin on January 1, 2033, and will increase thereafter in accordance with the terms set forth in the Lease, which provides for rental rate adjustments every 30 months in accordance with the Consumer Price Index, but not less than 3 percent or more than 7 percent. The site currently contains two groundwater monitoring wells. At least one of these wells will be impacted by the new development. Under direction of the City, Agensys will be responsible to pay for the relocation, closure and/or repair the well(s) in a manner and at a location to be determined by the City, at a cost not to exceed $50,000. 3 Environmental Analysis Council approved a Mitigated Negative Declaration for the proposed project in accordance with the California Environmental Quality Act (CEQA) on September 14, 2010. Financial Impacts & Budget Actions The assignment of the Lease will have no budget impact as the current rental rate of $894,411 per year will continue. R 41642.404090 in the Big Blue Bus fund. January 1, 2013. ental income is recorded in Account No. The next rent adjustment will be effective Prepared by: Jennifer Taylor, Senior Development Analyst roved: Andy Agle, ~ ector Housing and Economic Development Forwarded to Council: -~~7 Rod Gould City Manager 4 Reference Amended Contract No. 8654 (ccs).