SR 10-25-2016 3H
Ci ty Council
Report
City Council M eeting : October 25, 2016
Agenda Item: 3.H
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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
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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.
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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
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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
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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
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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.
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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
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F. July 12, 2011 Staff Report
Reference:
Agreement No. 10374
(CCS)
&
Agreement No. 10375
(CCS)