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Santa Momicu
City Council Meeting: March 22, 2011
Agenda Item: ~ E
To: Mayor and City Council
From: Andy Agle, Director of Housing and Economic Development
Subject: Modification of Leases at 1437 Fourth Street
Recommended Action
Staff recommends that the City Council authorize the City Manager to negotiate and
execute modifications to Leases at 1437 Fourth Street; Suite 300 (Engineering and
Architecture Services Divisions, CCS 8638) and Suite 310 (Cultural Affairs Division,
CCS 8680) to:
1. Exercise the lease options for one five-year term for Suites 300 and 310; and
2: Effective at the beginning of the option periods, reduce the rental rate to $3.25
per square foot and reduce the annual rent escalator to conform to the Consumer
Price Index, but no less than three percent nor more than five percent.
Executive Summary
Folke Investment, LLC, owner of 1437 Fourth Street, has agreed to modify its leases
with the City for Suite 300, occupied by the Engineering and Architecture Services
Divisions, and Suite 310, occupied by the Cultural Affairs Division, to reduce the rent
and annual escalation rate, effective upon the commencement of the option periods.
Background
The City leases office space at 1437 Fourth Street for administrative offices. The
Engineering and Architecture Services Divisions occupy 9,456 sq. ft. in Suite 300 under
a lease authorized by the City Council on September 26, 2006. The lease provides for
one five-year option which is set to begin April 25, 2012.
The Cultural Affairs Division leases 1,351 sq. ft. in Suite 310 under a lease authorized
by Council on February 13, 2007. This lease also provides for one five-year option,
effective July 9, 2012.
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Prior to City offices moving into the leased spaces, the Landlord made substantial
tenant improvements. The total cost to renovate Suite 300 was $464,404, with the
landlord contributing $294,538 and .the City contributing $169,866. The total cost to
renovate Suite 310 was $89,935, with the landlord contributing $42,066 and the City
contributing $47,869.
In both leases, the base rent has increased five percent per year with the rent in the
option period to be set at the prevailing market rent, but not less than the base rent
payable for the immediately preceding year. If the City exercises its options under both
existing leases, the rent commencing in the option periods is expected fo be $4.01 per
sq. ft. The City is required to provide notice of its desire to exercise the five-year
options at least nine months prior to expiration of the term, which would be July 25,
2011 for Suite 300 and October 9, 2011 for Suite 310.
Discussion
Both City divisions would like to continue their tenancies; however, staff recognizes that
the rental rate in the option periods will likely exceed that of other office space currently
on the market. In advance of the due date to notify the landlord of the City's desire to
exercise its options, staff researched competitive spaces on the market. According to
the Santa Monica Office Market 4th Quarter 2010 News, prepared by First Property, the
average asking rate in the Downtown Santa Monica District is $3.54 per sq. ft. Most of
the. properties with asking rents lower than the expected option lease rate were sub-
leases that would require negotiation for delayed rent commencement and landlord
allowance for tenant improvements.
In recognition of the soft real estate market, the value of having the City as a tenant,
and the benefit of retaining a tenant rather than enduring a vacancy and having to
contribute towards new tenant improvements, the landlord has agreed to a rent
reduction in the option period from $4.01 per sq. ft. per month to $3.25 per sq. ft. per
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month, and a reduction in the annual escalation clause from five percent annually, to the
Consumer Price Index, but not less than three percent nor more than five percent.
Financial Impacts & Budget Actions
Beginning April 25, 2012, the rental expenses for Engineering and Architecture Services.
will be reduced to $30,732 per month, a savings of $86,352 per year. Beginning July 9,
2012, the rental expenses for Cultural Affairs will be reduced to $4,390.75, a savings of
$12,336 per year. Budget authority for subsequent years will be requested in each
budget cycle for Council approval.
Prepared by: Miriam Mack, Economic Development Manager
Andy Agle, Directo i
Housing and Econo
Forwarded to Council:
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Rod Gould
City Manager
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Reference Amended
Lease Nos. 8683 (CCS)
and 8680 (CCS).