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SR-08-22-1989-6Ln -L: rAUIkUU SHORE ASSOCIATES /LENDER FINANCING REQUIREMENT: A recommendation to authorize City Manager to execute Addendum No. 5 to the Lease Agreement with Pacific Shore Associates Limited Partnership to accommodate lender financing requirement, thereby amending Contract No. 1740(CCS), was approved. CITY COUNCIL MINUTES AUGUST 22, 1989 TO: The Mayor and City Council FROM: City Staff SUBJECT: Approval of Addendum With Pacific Shore Associates Limited Partnership to Provide Certain Leasehold Mortgage Provisions to Accommodate Standard Lender Financing Requirements INTRODUCTION This staff report requests City Council authorization for City Manager execution of Addendum No. 5, to Lease Agreement with the Pacific Shore Hotel Lessee to accommodate lender financing requirement. BACKGROUND The City entered into an agreement with Royal Inns of America in 1966 to lease City -owned property for the development of a hotel. The 76,000 square foot site located along the north side of Pico Boulevard between Ocean Avenue and Main Street was improved in 1967 with an eight story, 168 room hotel in accordance with this Lease Agreement. Since execution of the original agreement and completion of construction, four addendums to the lease have been approved by the City to accommodate a variety of issues including assignment of leasehold interests, termination of expansion rights and enhancements to lease revenue compensation. The 55 year lease has 27 years remaining. - 1 - DISCUSSION Pacific Shore Associates Limited Partnership, the current lessee, requested certain mortgage protection provisions to accommodate standard lender financing requirements. The financing instrument will be a traditional leasehold mortgage held by an institutional lender, technically known as the "Holder ". The proposed Addendum No. 5 will add Section 4.08 Mortgage of Leasehold which provides adequate Holder protections for lending which are consistent with recent federal tax reform, bankruptcy code changes, and prevailing banking regulations. In particular, No. 5 Addendum provides the Holder with more information regarding the Lessee's performance including notices of any default and /or breach under the Lease Agreement. A reasonable opportunity for the Holder to cure any such default and /or breach is also provided. Finally, in the event of foreclosure, the Holder's ability to either assume or transfer the lease to a party approved in advance by the City has been clarified. BUDGET /FISCAL IMPACT The addendum does not alter the City's interest, nor the lease revenue compensation derived from the previously amended agreement. Consideration in the amount of $30,000.00 to compensate the City for its time and efforts to prepare and excute the Addendum has been agreed upon by the Lessee and will be deposited in account - 2 - 01- 904 - 077 - 000 -000. It is recommended that City Council authorize City Manager to execute Addendum No. 5 to the Lease Agreement with Pacific Shore Associates Limited Partnership. Prepared by: Peggy Curran, Director Community and Economic Development Department Linda Moxon, Deputy City Attorney City Attorney's Office Jeff Mathieu, Manager Economic Development Division Attachment: Addendum No. 5 (pacshore) - 3 - 17146/RIS/07 -17 -01 07/19/89 ADDENDUM NO. 5 THIS ADDENDUM NO. 5 shall be attached to and become a part of Contract Number 1740 (City Council Series) (the "Addendum ") is made this _ day of , 1989, by and between Pacific Shore Associates Limited Partnership, a California limited partnership (the "Developer ") and the City of Santa Monica, a municipal corporation (the "City "), based on the following facts. RECITALS A. on December 28, 1966, the City entered into that certain Lease and Agreement with Royal Inns of America, Inc., a California corporation ( "RIA "), as amended by that certain Adden- dum dated December 28, 1966, and by that certain Addendum No. 2 dated July 26, 1987, and by that certain Addendum No. 3 between the City and Royal Inns of America, Inc., a corporation, dated December 21, 1967 and by that certain Addendum No. 4 (undated) between the City and Royal Inns of Santa Monica, a California general partnership (the "Agreement ") whereby the City leased certain property to RIA for the construction operation of a 150 unit hotel. B. Developer has succeeded to all of RIA's and Royal Inns of Santa Monica's interest in the Agreement. C. Developer and the City desire to make additional revisions to the Agreement on the terms and conditions set forth herein. NOW, THEREFORE, the parties agree as follows: 1. A new section 4.08 shall be added to read as follows: 4.08. Mortgage of Leasehold. (a) Developer may, at any time and from time to time during the term of this Agreement, encumber by a "Lease- hold Mortgage" (as hereinafter defined) in favor of an "Institu- tional Lender" (as hereinafter defined) all of the Developer's interest under this Agreement and the leasehold estate created in Developer, provided that Developer obtains the prior written consent of City, which consent shall not be unreasonably withheld or delayed, and further provided that: 1. The Leasehold Mortgage and all rights acquired thereunder shall be subject to each and all,bf the covenants, conditions, and restrictions stated in this Agree- ment and to all rights and interests of City except as otherwise provided in this Agreement. 2. Developer shall give City prior written notice of any Leasehold Mortgage and shall accompany the notice with a true copy of the note and Leasehold Mortgage. -2- 3. Developer provides all requested information to City necessary or desirable in order to obtain consent. 4. No encumbrance incurred by Developer pursuant to this Section 4.08 shall, and Developer shall not have power to incur any encumbrance that will constitute in any way a lien or encumbrance on the fee of the Lease Parcel or any interest of City in the Lease Parcel. 5. City consents to the amount of the encumbrance, the terms of the assignment for security, and to the Holder. Without the prior written consent of City, which consent shall be in City's sole discretion, the amount of indebtedness secured by such Leasehold Mortgage, plus the amount of indebtedness secured by all other Leasehold Mortgages, if any, encumbering the Property, shall not exceed ninety percent (900) of the fair market value of Developer's interest in the Parcel Improvements and Developer's leasehold interest under this Agreement. For purposes of this Section 4.08(a), the "fair i market value" of Developer's interest under this Agreement shall mean the value of Developer's interest in the Parcel Improvements and under the Lease as reasonably determined by the Leasehold Mortgagee. 6. No encumbrance incurred by Developer pursuant to this Section 4.08 shall extend beyond the term of this Agreement. -3- 7. The City Manager shall be authorized to provide the consent of City required pursuant to the terms of this Section 4.08(a). 8. City shall not be required to approve any Leasehold Mortgage unless the Holder thereof is an Institutional Lender (as hereinafter defined). As used herein the term "Institutional Lender" shall mean a savings and loan association, a savings bank, a commercial bank or trust company, an insurance company, a state, municipal or private employees' welfare, pension or retirement fund or system, investment banking firm, or other financial institution, provided that such entity is subject to or submits to service of process within the State of California and has total assets of at least two hundred million dollars ($200,000,000). City hereby acknowledges the existing financing on the Lease Parcel consisting of (i) financing in favor of The Bank of New York in the total principal amount of $12,600,000 (evidenced by two notes, each in the principal sum of $6,300,000, and secured by a Deed of Trust, Security Agreement, Assignment of Rents and Fixtures Filing and (ii) financing in favor of affiliates of the General Partner of Developer in the total principal amount of $1 Million (evidenced by four notes in the amount of $500,000, $300,000, $100,000 and $100,000 respectively and secured by a second Deed of Trust). (b) As used in this Agreement, "Leasehold Mortgage" shall mean any mortgage, deed of trust or other secur- ity instrument, including, without limitation, an assignment of the rents, issues and profits from the Lease Parcel, which constitutes a lien on the leasehold estate created by this Agree- ment. (c) Any Leasehold Mortgage which contains a power of sale as defined by California law, shall contain a pro- vision that a copy of any notice of default and a copy of any notice of sale under such Leasehold Mortgage shall be mailed to City simultaneously with any such notice to Developer. In the event that a Holder sends a written notice of default to Develo- per pursuant to the Leasehold Mortgage, Developer agrees that the Leasehold Mortgage shall contain a provision requiring that Holder shall concurrently send a copy of such notice to City and that Developer shall send a copy of said notice to City, within two (2) days from Developer's receipt of any such notice from Holder. i (d) In the event Developer incurs any Lease- hold Mortgage, City shall mail to Holder a duplicate copy of any notice City may from time to time give to or serve on Developer regarding Developer's default under, or breach of, this Agree- ment. Developer shall at all times keep City informed in writing of the name and mailing address of Holder and any changes in Holder's mailing address. Any notice or other communications M70 permitted by this or any other Section of this Agreement or by law to be served on or given to Holder by City shall be deemed duly served on or given to Holder when deposited in the United States mail, first -class postage prepaid, addressed to Holder at the last mailing address for Holder furnished in writing to City by Developer or Holder. (e) Should Developer incur any Leasehold Mortgage, the Holder shall have the right at any time during the term of this Agreement and the existence of the Leasehold Mortgage toe 1. Do any act or thing required of Developer under this Agreement which may be necessary and proper to be done in observance of the covenants and conditions of this Agreement, and any such act or thing done and performed by Holder shall be as effective to prevent a forfeiture of Developer's rights under this Agreement as if done by Developer, provided that Holder complies with Section 4.08(g). 2. Realize on the security afforded by the leasehold estate by exercising foreclosure proceedings or power of sale or other remedy afforded by law or in equity or by the Leasehold Mortgage and toe a. Transfer, convey, or assign the interest of Developer in the leasehold estate created by this Agreement to any purchaser at any foreclosure sale, whether the foreclosure sale be conducted pursuant to court order or pursuant ME to a power of sale contained in the Leasehold Mortgage; provided, however, that Holder first complies with the provisions of Sections 4.08(f) and 4.08(h). b. Acquire and succeed to the interest of Developer under this Agreement by virtue of any fore- closure sale, whether the foreclosure sale be conducted pursuant to a court order or pursuant to a power of sale contained in the Leasehold Mortgage; provided, however, that Holder first complies with the provisions of Section 4.08(f). (f)(1) In the event that Developer incurs any Leasehold Mortgage, and either (i) Developer thereafter de- faults under or breaches this Agreement, or (ii) Developer there- after defaults in any term, condition or covenant of the Lease- hold Mortgage, then in either said event, and as a result of such default or breach, Holder elects to accelerate the entire out- standing balance of Developer's obligation to Holder and Holder then completes the foreclosure action described in said Leasehold Mortgage, Holder shall thereafter acquire and succeed to Deve i lo- per's interest in the Lease Parcel under this Agreement and, "this Agreement shall continue as a direct lease between City and Holder. In the event that Holder succeeds to Developer's interest as a result of any default or breach of Developer under this Agreement, Holder shall be obligated to remedy such default or breach as provided for in Section 4.08(g) of this Agreement if Holder wishes to have the Agreement continue. -7- (f)(2) In the event that Holder succeeds to Developer's interest pursuant to Section 4.08(f)(1), above, and thereafter Holder proposes to transfer, convey or assign the interest of Developer in the leasehold estate created by this Agreement to any purchaser or sublessee, then City further agrees that in the event Holder presents to Lessor a proposed successor lessee who otherwise meets all of the requirements for transfer as provided for in Section 5.09(b), City shall not unreasonably withhold its consent to the transfer of Holder's leasehold interest to the proposed successor lessee. (g) Should Developer incur a Leasehold Mort- gage, before City may terminate this Agreement because of any default under or breach of this Agreement by Developer, City must have given written notice as provided in Section 4.08(d) to Holder and afford Holder the opportunity after service of the notice to: 1. Cure the breach or default within ten (10) banking days after service of the notice given pursuant to Section 4.08(d) in the event that the default can be cured by the payment of money to City or some other person. 2. Cure the breach or default within thirty (30) days after service of the notice where the breach or default must be cured by something other than the payment of money and can be cured within that time. 3. Cure the breach or default in such reasonable time as may be required where something other than money is required to cure the breach or default and the breach or default cannot be cured within such thirty (30) day period, pro- vided that acts to cure the breach or default are commenced within such thirty (30) day period and are thereafter diligently continued in good faith and completed by Holder. (h) Holder under a Leasehold Mortgage, may forestall termination of this Agreement by City for a default under or breach of this Agreement by Developer by commencing proceedings to foreclose its encumbrance on the leasehold estate created by this Agreement. The proceedings so commenced may be for foreclosure of the encumbrance by order of court or for fore- closure of the encumbrance under a power of sale contained in the instrument creating the encumbrance. (i)(1) Provided that Holder has complied with Section 4.08(f) in any Leasehold Mortgage, the written con- sent of City which said consent shall not be unreasonably with- held or delayed, shall be required to transfer Developer's interest under this Agreement to purchaser from Holder after foreclosure where Holder was the purchaser of Developer's interest at the foreclosure sale. Holder shall give written notice of the proposed transfer to City setting forth the name and address of the proposed transferee as well as the effective date of the �L' proposed transfer, and the qualifications of the proposed trans- feree to operate a hotel in accordance with the provisions of this Agreement. (j) In the event a Holder or any third person acquires Developer's interest in the Agreement and possession of the Lease Parcel by foreclosure, by trustee's sale, or as a result of any other action or remedy provided for by any mortgage or deed of trust, or by deed or assignment in lieu of trustee's sale for foreclosure proceedings, such Holder or third person, shall take Developer's interest in the Lease Parcel and posses- sion of the Lease Parcel subject to all the terms, covenants, conditions, and provisions of this Agreement. (k) No Holder under any Leasehold Mortgage shall be liable to City as an assignee of this Agreement unless and until such time as Holder acquires all rights of Developer under this Agreement through foreclosure or other proceedings in the nature of foreclosure or as a result of some other action or remedy provided by law or the instrument creating the encum- brance. (1) If this Agreement shall terminate prior to the expiration of the term hereof for any reason beyond the control of Holder, e.g., rejection of the lease pursuant to the provisions of Bankruptcy Code § 365(d)(4), City agrees that Holder shall have the right, for a period of forty -five (45) days subsequent to the termination, to receive from City a new lease -10- of the Lease Parcel. If more than one Holder elects to make such demand, the most senior Holder shall have the first right to receive a new lease from City. The election of said new lease shall be upon the following terms and conditions: (i) The new lease shall be for a term to commence upon such early termination of this Agreement and shall have as the fixed date for the expiration thereof the same date stated in this Agreement as the fixed date for the expiration of this Agreement. (Such new lease shall be subject to all existing subleases of the Lease Parcel.) The rent for the new lease shall be at the same rate as would have been applicable during such term under the provisions of this Agreement, had this Agreement not so terminated, and all of the terms, covenants, conditions, and provisions of such new lease shall be the same as the terms, covenants, conditions, and provisions of this Agreement (except for any requirements which have been fulfilled by Developer prior to such termination of this Agreement). (ii) If any Holder shall elect to demand a new lease within the forty -five (45) day period, it shall.give written notice to City of said election and City shall thereupon, within forty -five (45) days of such election by the most senior of all Holders, execute said new lease with the most senior Holder. (iii) The Holder shall, at the time of the execution and delivery of such new lease, pay to City all sums -11- owing by Developer to City under the terms of this Agreement immediately prior to the termination of this Agreement as well as all sums which would have become payable hereunder by Developer to City to the date of execution and delivery of such new lease, had this Agreement not terminated, and which remain unpaid at the time of the execution and delivery of such new lease, including, without limitation, the percentage rental provided for in Section 3.02 of this Agreement; provided, however, Holder shall be given credit for any rents and income actually collected by City from any subtenants of the Lease Parcel. (iv) Any such new lease as herein contem- plated may, at the option of the Holder, be executed by a wholly - owned subsidiary or affiliate of such Holder without the Holder assuming the obligations of the Developer thereunder. As used herein the term "affiliate" shall mean an "entity" (as hereinafter defined) that controls, is controlled by or is under common control with such Holder. As used herein the term "entity" shall mean a partnership or corporation. (v) Subject to Holder's compliance,with the provisions of Section 5.09(b) of this Agreement, the Holder shall have the right to assign or transfer such new lease to any other person or entity. The liability of the Holder under such new lease shall cease on its assignment of such new lease to such other person or entity. -12- (vi) Until the earlier of (1) all Holders' indication in writing to City that they elect not to request a new lease or (2) the expiration of the time period specified in 4.08(1) above for requesting a new lease, City shall not cancel or agree to the termination or surrender of any existing subleases nor enter into any new subleases hereunder without the prior written consent of Holder. (vii) Notwithstanding anything to the contrary expressed or implied elsewhere in this Agreement, if requested by Holder any new lease made pursuant to this Section 4.08(1) shall be accompanied by a conveyance of title to the improvements for a term of years equal to the term of the new lease, subject to the reversion in the City upon expiration or sooner termination of the new lease. (m) Except as provided in Sections 4.08(o) and (q), this Agreement is and shall be subordinate to any encum- brance now of record or recorded by City after the date of this Agreement affecting the Lease Parcel. Such subordination is effective without any further act of Developer. Developer shall from time to time on request from City execute and deliver any documents or instruments that may be required by a lender to effectuate any subordination. If Developer fails to execute and deliver any such documents, or instruments, Developer irrevocably constitutes and appoints City as Developer's special attorney -in- fact to execute and deliver any such documents or instruments. -13- (n) This Section 4.08 may be amended to in- corporate reasonable requirements of a responsible lending insti- tution acceptable to City. Any such amendments shall not jeopar- dize or reduce City's reversionary interest in the Lease Parcel and improvements thereon or City's right to basic rental or per- centage rental hereunder. City shall use best efforts to cooperate with Developer and its lender to satisfy the loan financing requirements of Developer's lender. City shall have sole discretion in determining whether a lender's requirement is reasonable and appropriate for incorporation by amendment. Any amendment authorized hereunder shall be effective only if in writing executed by City and Developer. (o) Except as may be expressly provided otherwise in this Agreement, and notwithstanding Section 4.08(m) hereof, Developer's right to quiet possession of the Lease Parcel shall not be disturbed, even in the event of foreclosure of a lien on the fee interest in the real property leased hereunder, if Developer is not in default to City and so long as Developer shall pay the rent and observe and perform all of the provisions of this Agreement required of Developer. (p) The Holder shall not be liable to perform Developer's obligations under this Agreement unless and until the Holder acquires Developer's rights by foreclosure. After acquir- ing Developer's rights by foreclosure, Holder shall be liable to perform Developer's obligations only until Holder assigns or -14- transfers the leasehold as permitted by this Agreement. Follow- ing City's approval of Holder's transfer or assignment of the leasehold to a new lessee pursuant to Section 5.09(b), Holder shall have no further liability or obligation thereunder. (q) The Leasehold Mortgage, and any renewals and extensions thereof, shall unconditionally be and remain at all times a lien or charge on the leasehold therein described, prior and superior to any other lien or encumbrance on said leasehold. 2. During the term of a Leasehold Mortgage covering Developer's interest in the Agreement, the term "Gross Receipts" as described and defined in the Agreement shall not include the gross or net proceeds payable to or received by Developer in connection with any casualty or condemnation proceeding affecting the Property, the Lease Parcel or the Parcel Improvements. 3. Notwithstanding anything to the contrary contained in Section 3.11 of the Agreement, the City will not take any action to correct any Developer deficiency unless and until Holder shall have failed to commence to remedy such deficiency within ten (10) days after receiving the deficiency notice sent by the City; provided however, City shall have the right to take immediate remedial action to correct a deficiency which City determines constitutes an emergency or public nuisance. 4. As used in the Agreement, the terms "the City" and "Developer" shall include the respective successors and assigns of each such party. -15- 5. The City shall have the right to approve the hotel operator and to approve the terms and conditions of any manage- ment agreement with respect to the operation of the hotel, which approval shall not be unreasonably withheld or delayed. The Developer shall be required at all times to operate the hotel in a manner consistent with the standards for a first class hotel and to operate each cost center as profitably as reasonably possible in manner consistent with the standards of a first class hotel. With respect to any significant renovation, the City shall have the right to review the construction budget prior to the award of construction contracts to determine whether the cost is adequate to assure that the project will continue to be main- tained as a first class hotel. The Developer shall maintain all improvements constructed on the site throughout the term of the Agreement as a first class hotel. -16- 6. Except as expressly modified herein, all other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, this Addendum is entered into as of the date first written above. APPROVED AS TO FORM: Robert M. Myers City Attorney "Developer" PACIFIC SHORE ASSOCIATES LIMITED PARTNERSHIP, a California limited partnership By: Its: General Partner "City" THE CITY OF SANTA MONICA, a municipal corporation By: John Jalili Its: City Manager -17- 0 Reference: Contract No. 1740 (CCS) E'?1 Contract No. 3139 (CCS)