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SR-08-13-2013-3ECity Council Meeting: August 13, 2013 Agenda Item: -f- To: Mayor and City Council From: Andy Agle, Director of Housing and Economic Development Subject: Bergamot Station Arts Center Lease Modification Recommended Action Staff recommends that the City Council authorize the City Manage to: 1) Negotiate and execute a lease modification with Bergamot Station, Ltd., a Santa Monica -based company, to provide a two -year lease term option extending the lease to December 31, 2017 with an accompanied rent reduction of $3,664.43 per month for a new monthly rent of $44,000; and 2) Authorize the budget changes as outlined in the Financial Impacts and Budget Actions section of this report. Executive Summary Bergamot Station Arts Center is located on 5.5 acres of City -owned land and is comprised of over 30 art galleries, creative businesses, and a non - profit theater company. The art center is managed by Bergamot Station, Ltd., with a lease term that expires December 31, 2015. To facilitate the center's ongoing role as a cultural hub and anchor for the larger Bergamot Transit Village and Mixed -Use Creative districts, staff recommends that the City modify the lease agreement with Bergamot Station, Ltd. to allow for a two -year lease term option that would extend the lease until December 31, 2017 and revise the rent payment retroactively from $47,664.43 per month to $44,000 per month, effective from the Exposition Light Rail land taking on the site of December 7, 2012. This action would generate an additional two years of revenue totaling approximately $1 million. Background Bergamot Station Arts Center ( "Bergamot ") is located on approximately 5.5 acres of City -owned land. The site was acquired in 1989 with City transit funds to accommodate future light rail operations. The arts center is managed by Bergamot Station, Ltd. and rental income from the site is deposited in the Big Blue Bus fund. In 1994, the City 1 entered into a lease agreement with Bergamot Station, Ltd. on a month -to -month basis. On July 13, 2004, the City Council authorized a five -year lease with five one -year options. The lease option period expires on December 31, 2015. Discussion Bergamot is Southern California's largest art gallery complex and is a center of Santa Monica's creative arts community. A key component of the City's Land Use and Circulation Element calls for preserving and enhancing Bergamot as an economically sustainable arts center and transit hub. The site is immediately adjacent to a planned station of the Exposition Light Rail and is included in the draft Bergamot Area Plan, which outlines goals to preserve the arts, provide quality access to transit options, expand open space and community access, and create commercial amenities such as a hotel and neighborhood - serving retail to produce lease revenue for the Big Blue Bus. To facilitate the long -term viability of Bergamot Station as an arts center and transit site, on January 29, 2013, the City issued a Request for Proposals (RFP) to three selected development teams to develop Bergamot consistent with the Area Plan, while preserving the character and tenants that have defined Bergamot as a world- renowned fine arts center. Bergamot Station, Ltd. is one of the three development teams invited to submit a proposal, along with teams from Lionstone /Industry and ReThink/Kor. The City received proposals from all three teams on May 1, 2013. It is anticipated that a development team will be selected by the end of 2013. In accordance with the RFP, development at Bergamot will include a hotel and additional infill creative workspace, along with infrastructure enhancements. It is anticipated that development activity would not commence until early 2018 due to timing required for lease negotiations, community outreach, environmental review, planning, design, entitlements, and financing. To facilitate the center's ongoing role as a cultural hub and arts destination during this transition period, staff recommends extending the lease with Bergamot Station, Ltd. for two years, through December 31, 2017. The extension would allow 2 Bergamot Station, Ltd. to offer its tenants standard sub - leases of up to nearly five years within the framework of the master lease. The existing arts center operations have also been impacted by Exposition Light Rail construction activity. On December 7, 2012, there was a site reduction of approximately 19,389 square feet due to the Metropolitan Transit Authority's taking for the Exposition Light Rail station development. This resulted in the demolition of a 13,294- square foot building that housed Track 16 gallery, book store and event space. The remaining City portion of the complex currently has several warehouses that total approximately 62,000 square feet of gallery and creative space, housing over 30 fine art galleries, creative businesses, and a cafe. Staff recommends reducing the lease payment in recognition of the loss of leasable building, parking and event space. Bergamot Station, Ltd. currently pays a rent of $47,664.43 per month with annual consumer price index (CPI) increases not to exceed five percent. In recognition of the Metro taking, including the loss of the Track 16 gallery building, associated event space, and ancillary surface parking, staff recommends a revised monthly rent amount of $44,000, subject to the existing CPI increases and existing lease conditions. The lease does not state how rent is calculated nor how to adjust the rent amount in the event of a property taking or partial taking of the site. Staff analyzed the rent reduction through a variety of approaches (including income, square footage, usage and improvements) to establish the recommended rent amount agreed to by the parties. The revised rent amount would take effect upon execution of the lease modification and would be applied retroactively to the date of the Metro taking on December 7, 2012. The recommended actions would result in continued revenue for the Big Blue Bus for two additional years, at which point implementation of the Bergamot Area Plan and on -site development are expected to commence. The lease extension would also help ensure the retention of the art uses and cultural activities at Bergamot Station during the transition period and would help retain local businesses that currently generate over $10.5 million in taxable sales each year. 3 Financial Impacts and Budget Actions The lease modification will result in a reduction in current lease revenues for Big Blue Bus of approximately $44,000 for FY 2013 -14 and FY 2014 -15, as well as a retroactive rent reduction of approximately $23,811 for FY 2012 -13. To reflect the loss of revenue, the revenue budgets at account 41642.404090 will be reduced by $44,000 for FY 2013 -14 and FY 2014 -15. These revenue reductions to the Big Blue Bus would be more than covered by sales proceeds from the Metro taking, which the Big Blue Bus received in FY 2012 -13. Approving a lease extension would generate two additional years of lease revenue for the Big Blue Bus in the amount of approximately $528,000 annually in FY 2015 -16 and FY 2016 -17. These amounts would be included in future year revenue budgets. Prepared by: Jennifer Taylor, Economic Development Administrator Andy Agle, DirectT" 1 Housing and Economic Development Forwarded to Council: Rod Gould City Manager Reference: Lease No.8371 (CCS)