Loading...
SR-05-10-2016-8A City Council Report City Council Meeting: May 10, 2016 Agenda Item: 8.A To: Mayor and City Council From: Elaine Polachek, Asst. City Manager, City Manager's Office, Administration Subject: Office Space Lease at 2772 and 2800 Donald Douglass Loop North, and Second Modification to Professional Services Agreement No.10248 (CCS) for Commercial Real Estate Leasing Services for the Santa Monica Airport Recommended Action Staff recommends that the Council 1. Authorize the City Manager to negotiate and execute a Lease with Snapchat, Inc. (Snapchat) for office space located at 2772 and 2800 Donald Douglas Loop North, and 8 hangars, reflecting the general terms and conditions below. 2. Authorize the City Manager to negotiate and execute a second modification to professional services agreement No.10248 (CCS) in the amount of $744,844 with Co, a California-based corporation, to provide additional commercial real estate leasing services for the Santa Monica Airport. This will result in a (3) three-year amended agreement expiring on June 30, 2018 for a total amount not to exceed $1,104,834 with future year funding contingent on Council budget approval. 3. Authorize budget changes as outlined in the Financial Impacts & Budget Actions section of this report. Executive Summary In accordance with the recently adopted Santa Monica Airport (SMO) Leasing Policy, the City is moving forward with leasing city-owned properties, including those that were formerly the subject of subleases. The City owns the two office buildings located at 2772 and 2800 Donald Douglas Loop North and eight hangars. The combined square footage is as follows: 2772 Donald Douglas has 47,343 and 2800 Donald Douglas has 23,130, for a total of 70,473. The eight hangars are small and total 8,900 square feet. Snapchat is an innovator in the creative space realm, with a specialty in image messaging. The proposed lease agreement with Snapchat is for a period of five years, with an option for an additional five year period. The base rent at full occupancy begins at $3.07 per square foot and includes an annual escalator of 3%. A real estate commission fee of $804,834 based on 5% of the value of the total 5-year lease term, would be due to Corporate Realty Group (CRG) for the proposed lease agreement should the lease be executed on July 1, 2016 The commission would 1 of 6 No. 10248(CCS) with the City. Staff anticipates the use of CRG to negotiate additional lease agreements at the Airport during FY2016-17 and FY2017-18. The anticipated commissions through June 30, 2018 would be in an amount not-to-exceed $1,104,834. Background On June 9, 2015 (Attachment A), Council authorized the City Manager to negotiate and execute a month-to-month lease with Milstein Adelman LLP for 23,130 square feet on the second and third floors at 2800 Donald Douglas Loop North and a three year lease agreement with Volkswagen Group of America (Volkswagen) for 43,471 square feet of office space and 8,900 square feet of hangar space at 2772 Donald Douglas Loop North. Milstein Adelman LLP vacated the premises in December 2015. Volkswagen gave notice that it will be vacating the premises at 2772 Donald Douglas Loop North on December 31, 2016. On February 9, 2016 (Attachment B), the City approved a first modification to increase Agreement No.10248 (CCS) with CRG by $180,000 expiring on June 30, 2016 with two annual renewals of $50,000, for a total agreement amount not to exceed $359,990 to provide assistance to City staff innegotiating leases for properties located at Santa Monica Airport, including brokerage services for vacancies that might arise within the contract period. Discussion In April, 2016 CRG notified staff that it had an offer from Snapchat to lease the subject property. Snapchat is an innovator in the creative space realm, with a specialty in image messaging. Snapchat is currently headquartered in Venice, California. Due to significant growth, Snapchat seeks additional office space in Santa Monica. Snapchat proposes to lease both buildings, with a combined square footage of 70,473 for five years, plus eight small abutting hangars for a period of five years plus one option of five years. It should be noted that the subject buildings were and/or are currently occupied by office users, (attorneys and auto designers) hence there is no change in use. Although Snapchat will modify the building with minor interior tenant improvements, Snapchat does not propose to expand the buildings. Accordingly, the proposed project is exempt from CEQA pursuant to CEQA Guidelines Section 15301. Additionally, the proposed project is exempt pursuant to CEQA Guidelines Section 15061(b)(3) in that it can been seen with certainty that the proposed project does not have the potential to significantly impact the environment, since the new and existing uses are largely the same. Snapchat will employ approximately 300 workers on site. Therefore, it should be noted that Snapchat will be subject to the transportation demand management (TDM) 2 of 6 requirements of the City in order to address, any transportation and/or parking management issues. Moreover, Snapchat would be required to comply with all city building code regulations, planning standards, and any applicable FAA regulation, as a condition of the lease. Finally, the lease is consistent with the terms of the voter- approved Measure LC passed in 2014 to regulate future use of SMO property. At full occupancy, the rent shall be $3.07 per square foot, and includes a 3% annual escalation provision. Annual rent paid by Snapchat to the City will be approximately between $2.9M and $3.2M, depending on the year. The proposed rent reflects a - sufficiency and allow it to repay its $13M debt obligation to the City. Additionally, Snapchat has agreed to spend at least $1.4M in tenant improvements in the two buildings. Any improvements undertaken by Snapchat will revert to the City at the conclusion of the lease term. If Snapchat installs the required tenant improvements, the City will provide a rent credit equal to five months of rent. Commencement Upon execution of Lease Document Date: Term Ends: January 31, 2022 or 67 months from the date of lease execution. Options One five-year option at Fair Market Value Base Rental Rate Rent and absorption of the premises shall be in accordance with the following schedule (includes a three percent annual increase). Execution Date December 2016: $69,390.00 / month or $3.00/SF Modified Gross 23,130 SF January 2017 December 2017: $243,866.90 / month or $3.07SF Modified Gross. January 2018 December 2018: $251,182.91 / month or 3 of 6 $3.16/SF Modified Gross January 2019 December 2019: $258,718.39/ month or $3.26 SF Modified Gross January 2020 December 2020: $266,479.95/ month or $3.36/SF Modified Gross January 2021 December 2021: $274,474.34/ month or $3.46/SF Modified Gross January 2022 $282,708.57/ month or $3.56/SF Modified Gross Escalations 3% per year starting January 2018. Parking is not subject to escalators. Tenant Tenant shall receive a rent credit that is equivalent to Five (5) Improvement Allowance for a total of ($1,402,784.99) Parking at full 133 parking spaces at $150 per month equals to $19,950 per occupancy month. Modification to CRG Contract Should the proposed lease be approved and executed, the real estate commission fee 10248(CCS months term. The commission for this proposed lease is estimated to be $804,834. 4 of 6 Staff anticipates CRG will negotiate additional leases in FY 2016-17 and FY 2017-18. Staff anticipates $150,000 in commissions to be paid in each of the fiscal years. Therefore, staff recommends a second modification to increase the professional services agreement with CRG by $744,844 for a total agreement amount not to exceed $1,104,834 expiring on June 30, 2018 for additional commercial lease brokerage and negotiation services for the Santa Monica Airport. It should be noted should Snapchat exercise its option to renew for an additional five- year lease at fair market value, the City would have a future commission obligation to CRG. This obligation would be based on 3% of the value of the total lease term for years six through ten. Financial Impacts & Budget Actions The recommended lease with Snapchat Inc. will generate an estimated $1,782,225 in Airport revenues for FY2016-17, at account 33431.402120. Revenue increases associated with the new lease agreements will be included in the FY 2016-17 Proposed Budget and FY 2017-19 Proposed Biennial Budget. The agreement modification to be awarded to CRG is $744,844 for an amended agreement total not to exceed $1,104,834. In addition to the current budget of $259,990, award of the agreement modification requires an appropriation of $844,844 from the Airport Fund to account 33431.555060 in FY 2015-16. Prepared by: Nelson Hernandez, Senior Advisor to the City Manager Prepared By: Nelson Hernandez, Senior Advisor for Airport Affairs Approved Forwarded to Council 5 of 6 Attachments: A. Staff Report June 9, 2015 B. Staff Report February 9, 2016 C. Written comments D. Powerpoint 6 of 6 Reference: Lease No. 10302(CCS) AmendedAgreement No. 10248(CCS)