Loading...
SR 10-25-2016 3H Ci ty Council Report City Council M eeting : October 25, 2016 Agenda Item: 3.H 1 of 8 To: Mayor and City Council From: Andy Agle, Director , Housing and Economic Development, Economic Development Division Subject: Lease Modifications for off -site City office space Recommended Action Staff recommends that the City Council authorize the Cit y Manager to: 1) Negotiate and execute a lease modification with Folke Investment, LLC at 1437 4 th Street, Suite s 300 and 310 , to extend the lease terms of each for three years beginning May 1, 2017 and August 1, 2017, respectively, with an additional one - ye ar option . The first -year annual lease expense w ould be $488,313 (Suite 300) and $69,741 (Suite 310) for a combined total lease expense of $2,369,756 for the proposed four -year occupancy period; 2) Negotiate and execute a lease modification including any ne cessary related business terms with AMDA, LLC at 1901 Main Street to extend the lease term for two years beginning May 1, 2018, with an additional one -year option , for a first - year annual lease expense of $962,458 and a total expense of appro ximately $3,03 3,445 during the proposed three -year occupancy period ; and 3) Negotiate and execute a lease modification with Wilshire & 5 th LLC at 1212 5 th Street, Suite 300 to extend the lease term for three years beginning February 1, 2017, with t wo additional one -year o ptions , for a first -year annual lease expense of $205,692 and a total expense of approximately $872,966.64 during the proposed five -year occupancy period. Executive Summary Several City workgroups currently lease space in private ly owned offices. Once th e City Services Building is completed in 2020, and the relevant phase of the City Yards Modernization in 2021, the workgroups will be consolidated in City -owned facilities. In the meantime, four leases will be expiring in the next year or two, and staff r ecommends that the leases be extended to coincide with the planned opening of the new City facilities. Extending the existing leases would allow the relevant City workgroups to be housed during the interim period at prevailing market rates while avoiding the additional expense of relocation to new facilities following by relocation to the new City facilities. Additionally, staff evaluated options related to occupying or leasing a City -owned office building located 1632 5 th St reet, as the current tenant in tends to move out by November 30, 2016. Given the costs associated with retrofitting the building for City 2 of 8 use, as well as the building’s limited ability to provide for public interface, s taff recommends that the City continue to lease the building . Bac kground Since City Hall was constructed in 1938 , the City’s services and staffing levels have evolved and increased to serve the needs of an active community and a vibrant commercial center. Because City Hall is at capacity , some City workgroups have been located in privately owned office space in off -site locations. On April 28, 2015 , Council authorized a contract with Hathaway Dinwiddie Construction Company for design services (Attachment A) for the City Services Building. The design services are curre ntly in process with completion of construction anticipated for the third or fourth quarter of 2020. As contemplated in the City Services Feasibility Study (Attachment B), the City would develop a “one stop” City Hall complex, consolidating services that would include a permit counter , housing counter , and space for other city departments. As part of th e effort, all but one of the City workgroup s that currently lease privately owned office space would eventually move into the new City Services Building an d City Hall for the purposes of centralizing services and eliminating leasing costs in the future. The other City workgroup, t he Water Resources Division in Public Works , would mov e to the City Yards as part of the Modernization Plan in 2021. The four off -site City leases are briefly summarized below: Leased Office Space Department / Division Served Council Authorization Lease Expiration Leased Square Footage 1433 Fourth Street, Suite 300 Public Works / Engineering and Architecture Services Divisions Sept . 26, 2006 (Attachment C) April 30, 2017 7,751 sq. ft. 1433 Fourth Street, Suite 310 Community and Cultural Services / Cultural Affairs Division Feb . 13, 2007 (Attachment D) July 31, 2017 1,107 sq. ft. 3 of 8 1901 Main Street Housing and Economic Development, part of Information Systems Jan . 8, 2008 (Attachment E) April 30, 2018 13,386 sq. ft. 1212 Fifth Street, Suite 300 Public Works / Water Resources Division July 12, 2011 (Attachment F) Jan . 31, 2017 4,140 sq. ft. The City also leases space at 1717 Fou rth Street, which serves the Finance Department and Office of Sustainability and the Environment. Because the lease for th e site expires in 2020, a lease extension is not necessary at this time. In addition to being a lessee, the City owns and leases pr operties . In 2006 , the City acquired a small office building at 1632 5 th Street as a part of the land assemblage within the block bounded by Fourth Street, Fifth Street, Colorado Avenue, and Olympic Boulevard for future public purpose s includ ing light rail transit, parking, affordable housing , or other public uses. At the time of acquisition, the building was occupied by a single tenant and the City assumed the tenant’s lease. Th e long -term tenant has provided notice that they will move out by November 30, 2016. At this time , there are no immediate plans for redevelopment of the site. Discussion Given the off -site City workgroups ’ needs for office space until the City Services Building and City Yards space is completed, staff studied the costs and benefits of occupying the City -owned building at 1632 5 th Street for City purposes , as well as extending and modifying the existing leases. Staff ’s analysis has de monstrated that the estimated costs of the City’s off -site workgroups relocating and temporarily occ upying the City -owned building exceeds the benefits the City would gain in occupying the building. The following summary describes the recommendations associated with each property. 1632 5 th St. Th e City -owned property at 1632 5 th St. (5 th St. Building) is a four -story office building 4 of 8 with two levels (one below grade) of parking providing 39 spaces and approximately 13,125 sq uare feet of net usable Class B office space . The building was designed to accommodate a residence on the top floor, though that spa ce has been modified for office use. The office t enant at the 5 th St. Building has given notice and will vac ate the property by November 30, 2016. The City receives annual rental revenues of approximately $675,000 from th e property. Staff studied the feas ibility of relocating off -site workgroups to th e 5 th St. B uilding ; however, it is too small to serve the Housing and Economic Development (HED) Department , and its configuration would not accommodate the direct customer service functions of HED. Staff eva luated the costs of relocation and tenant improvements to occupy the building for any of the other three off -site City workgroups . T he City’s Engineering and Architecture Services (AES) Division s estimated that, at minimum, relocation costs would be appro ximately $125,000 for each workgroup and an initial capital investment of at least $400,000 would be necessary to make basic tenant improvements such as painting and City network connections to the b uilding. AES also indicated that depending on the tenant improvements required for occupancy, the 5 th St. Building may need to meet current building and safety standards , including American s with Disabilities Act (ADA) improvements and seismic upgrades that are estimated at a minimum of $4.0 million. Potential savings in occupancy costs would not warrant the short -term investment to comply with current ADA and seismic standards, particularly if private tenants could occupy the space without significant investment. Staff also evaluated the amount of lease reve nue that could be produced from the continu ed leas e of the 5 th St. Building in the current market . Based on recent prevailing market lease rates of $4 to $5 per square foot for Class B office space , the building could generate approximately $800 ,000 to $1 ,000,000 in annual lease revenues for the City. The lease terms could be structured with provisions that the tenant accept the property in an “as -is” condition, with no warranty and full responsibility for all building maintenance and expenses. Discussion s with brokers who are active in the area ha ve indicated that there are a variety of tenants who are willing to lease space without making significant improvements. The net result of leasing the space is that the City 5 of 8 would not need to fund tenant improve ments, maintenance , or operational expenses nor incur relocation costs and would receiv e a lease revenue stream to help off -set leasing costs elsewhere. 1437 Fourth Street The lease for 1437 Fourth Street , Suite 300 expires on April 30, 2017 and has no a dditional options to extend. The property owner has agreed to e xtend the lease term for three years with an additional one -year option , allowing the City to extend the lease as far as April 30, 2021. The annual lease payment and associated parking expense would be $488,313 for the first year of the extended term. All other terms and conditions in the lease w ould remain in effect. The lease for 1437 Fourth St reet, Suite 310 expires on July 31, 2017 and has no additional options to extend. The property owne r has agreed to extend the lease for three years with an additional one -year option , allowing the City to extend the lease as far as July 31, 2021. The annual lease payment and parking expense would be $69,741 for the first year of the extended term. All other terms and conditions in the lease w ould remain in effect. 1212 Fifth Street The 1212 Fifth Street lease expires on January 31, 2017 and has no additional options to extend. The property owner has agreed to extend the lease term for three years wi th two, one -year options, allowing the City to extend the lease as far as January 31, 2022. The annual lease payment and parking expense for the first year of the lease extension would be $205,692. All other terms and conditions in the lease would remain i n effect. 1901 Main Street The lease for 1901 Main St reet expires on May 1, 2018 and provides a five -year option to extend until May 1, 2023. Under the current lease term, the City would need to exercise its option to extend in 2018 , but that would comm it the City to an additional five 6 of 8 years, extending the lease three years beyond the relocation date into the City Services Building. Therefore, staff has been in discussions with the property owner to modify the lease term and option period to align with t he relocation into the City Service Building. The property owner has agreed to extend the base term by two years with a one -year option , allowing the City to extend the lease as far as April 30, 2021. The annual lease payment and associated parking expense would be $962,458 beginning May 1, 2018. All other terms and conditions in the lease w ould remain in effect. By negotiating extensions to the current leases, the City is able to extend and align the expiration of the lease terms with the move -in period f or the City Services Building and City Yards . The estimated costs related to the off -site workgroups ’ temporarily relocating and occupying the 5 th Street Building exceeds the benefits the City would gain leasing the property in “as -is” condition for appro ximately $800,000 to $1,000,000 annually. Based on the known and the unknown costs for the City to occupy 1632 Fifth St reet , staff recommend s seek ing private tenants to lease the building. The projected lease revenue would off -set a portion of the expens e for the City offices that are in leased space. To implement the leasing , staff w ould seek real estate brokerage services to help market and lease the building and return to Council for approval to enter into a professional services agreement . Alterna tive Actions As an alternative to the recommended actions above, Council could consider the following options: 1. The City could pursue alternative office locations to lease rather than extend the leases in the current occupied office spaces. However, the Ci ty would incur the costs of relocation twice in moving from the current office space to an interim office space before the final relocation into the City Services Building. In addition, the lease rates proposed in the extensions are comparable within the m arket. Savings may not be realized as current fair market lease rates are expected to remain competitive. Additionally, the City could incur additional expenses to build out new tenant improvements in an interim office space. As a result, the costs to lea se new office spaces may exceed the costs to extend the current leases. 7 of 8 2. The City -owned 5 th St. Building could be retained for City use and not leased out. However, staff ’s evaluat ion d emonstrates that there is no significant economic benefit to invest in relocating and improving the 5 th St. Building for any of the four off -site City workgroups. In addition, there are currently no other City office needs that would require using the building for City use now or in the near future. Staff proposes to lease the 5 th St. Building for a term of three years and offer two, one -year options at the City’s sole discretion which would provide the City with the rights and flexibility to occupy the building in the mid -term if needed. Financial Impacts and Budget A ctions There is no immediate financial impact or budget action as a result of the recommended action. If Council authorizes staff to negotiate and execute lease modifications, staff would seek appropriate budget adjustments during the 2017 -19 Biennial Bud get adoption. Prepared By: Jason Harris, Economic Development Manager Approved Forwarded to Council Attachments: A. April 28, 2015 Staff Report B. January 27, 2015 Staff Report C. September 26, 2006 Staff Report D. February 13, 2007 Staff Report E. September 8, 2008 Staff Report 8 of 8 F. July 12, 2011 Staff Report Reference:    Agreement  No. 10374   (CCS)  &  Agreement  No. 10375   (CCS)