SR-05-13-2014-3DCity Council Report
City of
Santa Monica'
City Council Meeting: May 13, 2014
Agenda Item: 3-1D
To: Mayor and City Council
From: Andy Agle, Director of Housing and Economic Development
Subject: Parking Structure No. 6 Ground -Floor Lease Agreements
Recommended Action
Staff recommends that the City Council authorize the City Manager to negotiate and
execute lease agreements for the ground -floor retail space at Parking Structure 6 (PS 6)
located at 1431 Second Street.
Executive Summary
Following a due diligence process, staff recommends entering into lease agreements
with three proposed tenants to occupy the ground -floor retail space in PS 6. Proposed
tenants are Orange Theory Fitness, a fitness studio that would lease approximately
3,400 sf., Espresso Cielo, a specialty cafe that would lease approximately 1,600 sf., and
KC Chocolate, a chocolatier that would lease approximately 1,100 sf.
Traditionally, a property owner /landlord leases its properties with basic building
improvements; however, in the case of the PS 6 retail space, the City is providing the
space without such improvements with the expectation that each tenant would finance
and complete construction of base building improvements on behalf of the City in
exchange for Tenant Improvement (TI) rent credits during the initial 5 -year term.
Staff recommends providing rent credits of up to the estimated TI design and
construction cost of $155 per sf based on tenants' demonstrated costs. Once the base
building improvements are constructed, the City would not be obligated to provide this
level of TI credit to future tenants.
Background
Reconstructed PS 6 opened to the public for parking in December 2013. The inclusion
of ground -floor retail in the 744 -space parking structure was intended to ensure a
pedestrian orientation along its ground -floor Second Street frontage. Leasing of
City -owned properties within Downtown, including PS 6 retail space, is contemplated
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under the Downtown Leasing and Licensing Guidelines ( "Guidelines ") approved by
Council on March 19, 2013. The Guidelines set forth preferred uses, as well as
preferences and guidelines for lease terms, options, and renewals. The City issued a
Request for Proposals (RFP) in June 2012 which described the `preferred uses' for the
space as neighborhood - serving, retail- oriented uses that would animate the pedestrian
experience. Restaurants were excluded as a preferred use due to venting and grease
trap limitations related to the overall design of PS 6.
The RFP explicitly stated the condition of the space and that the City did not have
available TI funds to offer. In addition, the RFP stated rent credits would be considered
to enable the proposed tenants to provide certain improvements on behalf of the City.
The City received 14 proposals. A panel comprised of City and Downtown Santa
Monica, Inc. (DTSM) staff evaluated the responses, interviewed finalists and narrowed
the field to four prospective tenants that met the criteria specified in the RFP, including
demonstrated financial and operational capacity to provide the preferred uses and
build -out the significant tenant improvements without upfront financial assistance from
the City. DTSM Board recommended approval of the proposed tenants. One of the four
tenants withdrew from the process. Staff has adjusted the space allocation to
accommodate the three remaining proposed tenancies.
Discussion
The recommended tenants are OTF SM, LLC (d.b.a. Orange Theory Fitness), a fitness
studio (approx. 3,400 so, Espresso Cielo, a specialty cafe shop (approx. 1,600 so, and
KC Chocolate, a chocolatier (approx. 1,100 so. In the event a proposed tenant is
unable to execute a lease, staff would identify a suitable replacement and have the
authorization to execute a lease under the same terms described below.
The Leasing Guidelines and RFP identified the City's intention to lease the space in a
"cold- shell" condition, meaning the space has no improvements or finishes other than a
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cement floor, roof, storefront window and front doors. Typically a landlord would provide
a space in a "warm shell" condition, which would include improvements such as
restrooms, HVAC, fire sprinklers, demising walls, leveled floors, and utility stub outs
The City did not allocate funds for such basic Tls as part of the construction of PS 6, as
the City intended to issue a rent credit equivalent to the costs required to bring the
space to a warm shell level and allow tenants to construct improvements to suit their
particular space - planning needs. Cost for the design and construction of these base
improvements is estimated to cost up to $155 per square foot. To ensure cost
effectiveness, the leases will require each tenant to solicit no less than three bids on
any construction contract for installation of the base improvements.
Recommended business terms to be reflected in each of the three prospective leases
include
• rent credit of up to $155 per square foot for the demonstrated costs associated
with the design and construction of base building improvements; rent credit
would be applied to each tenant's monthly rental obligation; the total maximum
rent credit for each tenant is estimated as follows:
• Orange Theory Fitness - $527,000
• Espresso Cielo - $248,000
• KC Chocolate - $170,500
• term of lease up to 15 years (five -year initial term with two five -year options) and;
• initial rental rate of $3.25 per square foot, triple net and subject to annual
adjustments of no less than three percent.
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Financial Impacts & Budget Actions
There is no immediate financial impact or budget action necessary as a result of the
recommended action. No revenue was projected for the lease of the Parking Structure
No. 6 ground -floor retail in the FY 2013 -14 budget. In view of the amount of tenant
credits, lease revenue is not projected to begin until late FY 2018 -19 (assuming the
leases commence before the end of FY 2013 -14), and will be included in subsequent
year revenue budgets when lease revenue is realized.
Prepared by: Elana Buegoff, Senior Development Analyst
Approved:
Andy Agle, Director
Housing and Economic De�elopment
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Forwarded to Council:
Rod Gould
City Manager
Reference:
Agreement No. 9899 (CCS)
E'?1
Agreement No. 9900 (CCS)
Agreement No. 9901 (CCS)