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SR 08-08-2017 3M City Council Report City Council Meeting: August 8, 2017 Agenda Item: 3.M 1 of 7 To: Mayor and City Council From: Rick Cole, City Manager, City Manager's Office, Administration Subject: Santa Monica Airport Leasing and Licensing Policy Recommended Action Staff recommends that the City Council: 1. Approve the attached Santa Monica Airport Leasing and Licensing Policy for the leasehold and license management of properties at the Santa Monica Airport (Airport or SMO). 2. Authorize the City Manager to negotiate and execute leases at the Santa Monica Airport in accordance with this Policy. Executive Summary On March 22, 2016, the City Council adopted an Airport Leasing and Licensing Policy (Attachment A). Over the past year and a half, the Policy provided staff critical guidance for pursuing the Council’s Strategic Goal of regaining local land use control over the property presently occupied by the Santa Monica Airport. Moreover, the existing Leasing Policy has been a financial success. As a direct consequence of the Council’s decision to adopt the Airport Leasing Policy, the Airport is positioned to repay the millions owed the City, repair and maintain facilities, and achieve long-term financial self-sufficiency until it closes in 2028. Specifically, the Council’s decision to terminate master tenants and charge market rates have produced a significantly increased revenue stream. Staff is recommending changes in the Leasing Policy that reflect changed circumstances due to the Consent Decree with the Federal Government: Terms:  Term for Aeronautical Service Providers. As stipulated by the Consent Decree aeronautical service providers must be offered three-year lease terms. 2 of 7  Term for Non-Aviation Tenants. Lease terms may be month-to-month or longer. However, no lease shall have a term that goes beyond December 31, 2028. Lease Approvals & Delegation of Authority  The existing Policy grants the City Manager the authority to negotiate and execute leases with terms ending no later than June 30, 2018. The proposed policy would extend the same authority to the City Manager for leases terminating on or before December 31, 2022. The Airport Commission has voted to support these changes. Background Airport lands are divided into two categories: aviation and non-aviation. The Santa Monica Airport has 187 acres designated and used for aviation activities and 40 acres designated and used for non-aviation purposes. As of July 1, 2017, there are 383 tenants at the Airport. This includes a combination of offices, hangars, storage, land leases, and tie-down tenant. There are approximately 60 vacant leasable spaces. Lease and license revenues account for approximately 70% of total annual Airport revenues. The revenue derived from Airport leasing supports the City’s goals of achieving a financially self-sufficient airport, eliminating subsidies from the General Fund, and repaying the principal and interest of past General Fund subsidies. In the past, the Airport's operation, maintenance, and capital expenditures were subsidized by the General Fund. As of June 30, 2017, the Airport has a debt obligation to the General Fund of over $10M. Since FY 2013-14, the Airport Fund has no longer required an operating subsidy from the General Fund. 3 of 7 On March 22, 2016, the City Council adopted an Airport Leasing and Licensing Policy (Attachment A). Over the last 16 months, the Policy provided staff critical guidance used to position the Airport into a much stronger financial condition. On January 28, 2017, the City of Santa Monica and the U.S. Department of Justice, on behalf of the Federal Aviation Administration, signed a settlement agreement regarding the airport. On February 1st, U.S. Judge Walters approved the settlement agreement thereby converting it into a Consent Decree (Attachment B). The Consent Decree imposes two obligations that are relevant to leasing policy. First, the Consent Decree requires the City to offer aeronautical service providers, such as Atlantic Aviation and Kim Davidson Aviation, three-year lease terms based on market rates. Aeronautical service providers offer a range of services, including flight schools, fueling, maintenance, etc. The Consent Decree also obligates the City to adhere to FAA grant assurance 22. FAA grant assurance 22 requires airport sponsor/owners to lease to aviation users based on reasonable commercial terms. Discussion The City currently has a total of 383 tenants at the Santa Monica Airport that lease hangars, tie-downs, office space, studio space, and storage. The Consent Decree represents new circumstances at the Airport and therefore the Leasing and Licensing Policy should evolve to reflect existing conditions. The proposed changes are consistent with the Consent Decree: Terms  For Aeronautical Service Providers: As stipulated by the Consent Decree aeronautical service providers must be offered three-year lease terms.  For Non-Aviation Tenants: Lease terms may be month-to-month or longer; however, no lease shall have a term that goes beyond December 31, 2028. Lease Approvals & Delegation of Authority 4 of 7  The existing Policy grants the City Manager the authority to negotiate and execute leases with terms ending no later than June 30, 2018. The proposed policy would extend the same authority to the City Manager for leases terminating on or before December 31, 2022. Leasing Policy Review: July 2015 – July 2017 The existing Leasing Policy has been a financial success. As a direct consequence of the Council’s decision to adopt the Airport Leasing Policy, the Airport is positioned to repay the estimated $10M+ it owes the City, repair and maintain facilities, and achieve long-term financial self-sufficiency until it closes in 2028. Specifically, the Council decisions to terminate master tenants and charge market rates are the reasons for the success. In FY 2015/16, prior to the Leasing Policy, the Airport generated approximately $5.9M in annual rent revenue. For FY 2017-18, staff estimates the Airport will produce $12.2M in rental revenue by eliminating master tenants Gunnell Properties, American Flyers, Krueger Aviation, partial elimination of Atlantic Aviation as a master tenant, and raising rents to reflect market rates. Continued Phasing Out of Master Tenants is Likely to Result in Increases in Leasing Revenues There are three leftover master tenants subleasing a mix of facilities at Santa Monica Airport. A master tenant is considered a landlord of subtenants, meaning that a master tenant is able to evict a subtenant, collect rent, set terms, etc. The three master tenants at Santa Monica Airport combined have approximately 147 subtenants. Below is a breakdown of the master tenants and their sub-tenants: MASTER TENANTS AND THEIR SUBTENANTS: JULY 2017 MASTER TENANTS Hangars Tie-Down Office/Studio Total Atlantic Aviation 22 0 3 25 Santa Monica Air Center 12 47 27 86 5 of 7 Santa Monica Art Studios 0 0 36 36 TOTAL 34 47 66 147 As directed by Council in March 2016, staff continues to eliminate all master tenancies in a fair and reasonable manner for an orderly transition and to ensure the City has the property management capacity required to assume the responsibilities. Of the three remaining master tenants only Atlantic Aviation is an aviation master tenant. Staff intends to phase out the remaining master tenants during FY 2017-18. An orderly transition provides the City the time needed to build the management capacity required to assume the added responsibilities. Staff believes leasing revenues at the Airport will increase, albeit at a much slower pace than over the last two years, during FY 17-18 due to several on-going lease negotiations. For instance, assuming Atlantic Aviation and the City agree to terms on a three-year lease for its facility per the Consent Decree, staff anticipates the City will realize greater revenue from the premises occupied by Atlantic Aviation for two reasons. First, Atlantic Aviation’s rent is likely to be adjusted upward to reflect market rates and second the City will be transitioning Atlantic’s sub-tenants into direct tenants of the City. In addition to lease negotiations with Atlantic Aviation, the City is or soon will be in lease negotiations with Santa Monica College and Santa Monica Air Center. Santa Monica Art Studios will also be renegotiated and the new terms may lead to an increase in future revenues. Operating and Capital Expenditures Are Projected to Increase As forecast in March 2016, staff report, having the City take over as a direct landlord has increased real estate brokerage fees, property management fees, and capital expenditures. In response to the increase in property management responsibilities and real estate brokerage duties, the City hired Aeroplex Property Management and Commercial Management Group following the competitive bidding process. In FY 2017-18, staff has budgeted $500,000 to cover property management fees and real estate brokerage fees. 6 of 7 Expenditures for capital improvements, repairs, maintenance and replacement now, and will into the foreseeable future, consume significant capital due to the poor condition of the facilities formerly managed by the above master tenants. In order to determine the magnitude of the problem, staff intends to perform a comprehensive facilities condition assessment (FCA) in FY 17-18. The runway shortening project will also require significant funding. With proper management, vigilant oversight, and prudent fiscal restraint, staff is confident the Airport will be able to maintain aviation facilities up to standard, repay its debt, and maintain a safe airport, until it closes in 2028. Alternatives Staff identifies three possible alternatives: 1. The City Council may consider not adopting the proposed Leasing Policy. If the new amended policy is not adopted, the City Manager would be prohibited from offering leases beyond June 30, 2018. 2. The City Council may consider amending the Leasing Policy as it deems appropriate. 3. The City Council may consider returning the Leasing Policy to the Airport Commission, if necessary, and as appropriate, for additional input.. Actions of the Airport Commission At its August 1, 2017 special meeting, the Airport Commission voted to recommend that City Council adopt the Airport Leasing Policy as presented to the Airport Commission. Financial Impacts and Budget There are no immediate financial impacts or budget authorization required as a result of adopting the Santa Monica Airport Leasing and Licensing Policy. However, staff will return to Council during FY 17-18 mid-year budget cycle if specific budget changes are required. 7 of 7 Prepared By: Nelson Hernandez, Senior Advisor for Airport Affairs Approved Forwarded to Council Attachments: A. Airport Leasing and Licensing Policy B. Consent Decree C. Written Comments 1 SANTA MONICA CITY COUNCIL AIRPORT LEASING AND LICENSING POLICY The purpose of this Airport Leasing and Licensing policy is to establish and declare City policy on matters related to airport leasing. This Leasing Policy shall be used by the City Manager to analyze leasing and licensing issues, to present leasing and licensing recommendations to the City Council, and to render leasing and licensing decisions under the authority granted by the City Council. By adopting the Airport Lease Policy, the City Council seeks to have an airport tenant mix that:  Is harmonious with the nearby built environment by protecting the health and safety of Airport neighbors.  Maintains a sustainable Airport Fund that is independent from the General Fund and other subsidies.  Comports with any applicable legal requirements and protects the City’s rights that relate to leases at the Airport.  Continues to provide opportunities for arts, education, and culture, including, but not limited to, the Artist Space Program administered in conjunction with Cultural Affairs Division.  Establishes practices and procedures for evaluating potential leasehold interests, and for lease management and administration.  Fosters uses and practices that are sensitive to the environment and protect the health of Airport neighbors and users and protect the City from future environmental damage exposure. General Provisions. The majority of the Airport revenue is derived from leases. To help support the Airport’s fiscal self-sufficiency, all rents, fees, and charges must reflect fair market value. To achieve the goals of the Leasing Policy, the policy shall be managed in a manner consistent with the following standards: SECTION A: USES 1. Authorized Uses: Authorized uses include: (a) low intensity uses that are compatible with surrounding uses, serve the adjacent community, and are consistent with the City's environmental goals and policies. Examples of 2 uses in category (a) include, but are not limited to: parks and open space, arts/cultural, creative space, professional theaters, museums, artist studios, art galleries, photograph studios, uses customary or incidental to the production or distribution of motion pictures, educational facilities, professional and general offices, public or private schools existing prior to September of 1984, warehouses, self-storage/public mini-warehouses, and restaurants with 500 square feet of floor area or less; and b) uses required by the Consent Decree signed by the City of Santa Monica and the U.S. Justice Department on behalf of the Federal Aviation Administration. 2. Conditionally permitted uses: Parking and automobile storage lots and structures. Restaurants with over 500 square feet of floor area. Theaters. New public or private schools or educational institutions. 3. Prohibited Uses: Prohibited uses include: any use involving the manufacture, processing, storage, or treatment of products, which by nature of the operation is likely to be obnoxious or offensive to the surrounding environment; construction of new general office buildings; any use not specifically authorized as a permitted or conditionally permitted use; and high intensity uses that are incompatible with the surrounding residential uses. SECTION B: TERMS AND CONDITIONS 1. Term for Hangars. All hangars shall be leased on a month-to-month basis. 2. Term for Tie-Downs. All tie-downs shall be leased on a month-to-month basis. 3. Term for Aeronautical Service Providers. As stipulated by the Consent Decree aeronautical service providers may be offered three year lease terms. 4. Term for Non-Aviation Tenants. Lease terms may be month-to-month or longer. However, no lease shall have a term that goes beyond December 31, 2028. 3 5. Environmental Responsibility. New requests to lease and existing leases shall be reviewed to assess potential negative effects on the environment. The City may require environmental studies or testing as appropriate and necessary, and any needed remediation shall be performed prior to establishment of new uses. All lessees shall be responsible for any environmental contamination, resulting from their prior use, as a condition to a renewed or extended lease. Environmental clean-up will be required as a condition of any renewal or extension. At the time of the application, an assessment of the proposed use will be conducted, and appropriate insurance and/or remediation requirements will be incorporated into the lease based on proposed usage. 6. Rates. All new and renewed leases will be leased at prevailing market rates and rates will be adjusted to stay current with market conditions and as new/renewed leases arise. 7. Percentage Rent Provision. In addition to a base rent, the City may elect to require that certain leases include a percentage rent provision, which can be differentiated by categories of sales. The City shall have the right to audit tenant's financial records to ascertain that the gross sales figures reported by the tenant are accurate. 8. Existing Tenants. All existing airport tenants will be given the opportunity to submit a lease application to the City. The City is under no obligation to offer lease agreements. Submitting an application to the City does not obligate the City to enter into lease negotiations, offer a lease agreement, or execute a lease agreement. The decision to execute a lease agreement will be made solely within the City’s discretion as landlord and property owner. 9. Whole Building Leases. Whole building leases may, at the City’s discretion, be subject to public Requests for Proposals intended to optimize leasehold occupancy and the self-sustainability of the airport. Tenants under a whole building lease shall be responsible for maintenance and repair of said buildings. 4 10. Transfer of Interest. Space sharing is prohibited without the written consent of the City, and granting or withholding consent will be conditioned on express standards and conditions set forth in the lease. 11. Lease and License Areas. Operation and improvements to lease and license areas are subject to the City’s standard regulatory rules, review and approval process. 12. Triple Net Leases. The City may require tenants to pay all property taxes and assessments (including Possessory Interest Tax), insurance, and utilities. 13. Commercial Operations Permit (COP). Prospective tenants proposing to use the Santa Monica Airport to engage in an activity that requires a business license from the City, are required to acquire a commercial operations permit issued by the City Manager. All COPs will be presented to the Airport Commission for their recommendation and comment prior to City Manager’s approval. 14. Master Tenants. Master tenant agreements are to be phased out in an orderly transition. 15. Sub-Leasing. New sub-leasing shall be prohibited. Existing sub-tenancies shall be subject to an orderly phase-out at the sole discretion of the City. 16. Insurance. Airport lease agreements shall minimize the City’s financial and economic risk, by incorporating reasonable indemnification and insurance provisions. 17. Daily and Transient Users. Daily and transient uses shall be permitted. SECTION C: PERFORMANCE STANDARDS 1. Compatible and Harmonious. All lessees shall use the airport and any airport property in a manner that is compatible with City policies and with the adjacent residential uses; to encourage activities that complement adjacent residential and commercial uses; and to establish practices that 5 are sensitive to the environment and protect the City from future environmental exposure. 2. Alternative Fuels. Maintenance facilities will be required to minimize their environmental impact by ensuring that all vehicles used inside the Airport Operations Area (AOA) are powered by alternative fuels. 3. All City‐owned buildings appropriate and suitable for leasing may be subject to a public procurement and solicitation process to identify prospective tenants and licensees whose financial and professional experience, and products and/or services are consistent with the Leasing Standards set forth herein. 4. All prospective tenants must submit a Lease or License Application to the City. Information contained in the Lease Application shall describe the proposed use for the available space; provide information about the respondent; provide references; describe in detail the financial capability of the respondent to perform; and set forth preliminary terms and conditions. 5. Hangars a. Hangars that have a land lease agreement with the City will be on a month to month tenancy under a City approved lease agreement which will be updated as deemed necessary by the City. 6. Recruitment for artist day studios will adhere to the criteria set forth by the Cultural Affairs Division of Community and Cultural Services Department. Candidate tenants for available Artist Day Studio space are required to file Program applications for screening purposes, and qualifying artists are selected only from the screened waiting list. SECTION D: MAINTENANCE AND TENANT IMPROVEMENTS 1. All leaseholders shall be responsible for maintaining their facilities in attractive and safe condition, in compliance with applicable building and life safety codes and all applicable environmental laws, ordinances, regulations and other city standards. 6 2. Facilities will be inspected prior to new or extended leasehold occupancy and refurbished, by the City or tenant (at the City’s election), to a decent, safe and sanitary condition appropriate for use. If tenant makes improvements to the facility as a mutually agreed upon condition of a lease, the City must first review and approve the proposed design and scope of work. All necessary building permits must be obtained and the work must be inspected for compliance with applicable code(s). Appropriate rental credits for the approved work performed may be negotiated as part of the lease. Any Tenant Improvement Credit that exceeds two months’ worth of tenant monthly rent must be approved by the Airport Director. 3. Each tenant or licensee will be responsible for interior maintenance and repair at its sole expense, and the City generally will retain responsibility for maintenance and repair of roofs, building exteriors, landscaping and common use parking for all Airport-managed leaseholds unless otherwise specified in the lease or license. Tenants who lease whole buildings from the City will be responsible for any and all maintenance, repair and improvements including roofs, building equipment and exteriors of the facilities as well as interior maintenance and repairs. 4. Tenants shall respond to the City’s written inquiries regarding any complaints or issues. Tenant will provide an action plan for improvement if so requested by the City. 5. As applicable, the above requirements may be incorporated in leases, licenses and other agreements. In addition, the City may add to any Lease or License further or different or additional operational and performance standards as the City concludes are appropriate to the particular Tenant’s operation. 6. Upon confirmation that the proposed tenancy is consistent with this Leasing Policy, a lease agreement will be prepared for review by the City Attorney and execution by the prospective tenant before being referred to the City Manager for approval. Leases for terms greater than terms specified in these guidelines require City Council approval. 7 SECTION E: LEASE APPROVALS AND & DELEGATION OF AUTHORITY 1. The City Manager has the authority to negotiate and execute month-to- month leases, leases with aeronautical service providers, and leases that expire prior to December 31, 2020, provided the City Manager finds the proposed use is consistent with this Leasing Policy and the Consent Decree. To be valid, such leases must be on the basis of written agreements prepared and approved as to form by the City Attorney. Leases for terms of occupancy beyond December 31, 2022, or otherwise outside the parameters established by this Policy, will require City Council approval. 2. The City may cooperate with commercial real estate brokers who are authorized to negotiate leases on behalf of prospective tenants. SECTION F: GENERAL PROVISIONS This Leasing Policy may be altered by the City at any time, in its sole discretion, and shall not create any right or reliance interest for any person. 1 Vernice Hankins From:Elin Katz <butrpg55@gmail.com> Sent:Monday, August 07, 2017 12:36 PM To:jetairpollution@earthlink.net; info@nojets.org; Ted Winterer; Gleam Davis; Sue Himmelrich; councilmtgitems; Councilmember Kevin McKeown; Pam OConnor; Nelson Hernandez; Terry O’Day; Tony Vazquez; Rick Cole; Susan Cline Subject:SO MANY JETS! Dear Everyone, I live 1 block from the blast-off of jets at the Santa Monica Airport, and NEVER has there been such an amount of jet traffic!! This weekend was an absolute deluge of taking off and landing or idling on the runway. I thought this would end with the weekend, but NO! Today at 7:30am, it starts all over again, and I cannot go out of my house without noticing the high pitched squeal of yet another jet waiting to take off. What has opened the floodgates to this incursion on my breathable air and quality of life?! Is the 40% reduction in air traffic after the runway is shortened based on THIS amount of jet activity? Here comes another one! Holy Moley... Elin Katz 3017 Dahlgren Avenue Lops Angeles CA 90066 310-801-4429 Item 3-M 08/08/17 1 of 3 Item 3-M 08/08/17 1 Vernice Hankins From:info@nojets.org Sent:Monday, August 07, 2017 3:36 PM To:Elin Katz Cc:jetairpollution@earthlink.net; Ted Winterer; Gleam Davis; Sue Himmelrich; councilmtgitems; Councilmember Kevin McKeown; Pam OConnor; Nelson Hernandez; Terry O’Day; Tony Vazquez; Rick Cole; Susan Cline Subject:RE: SO MANY JETS! Thanks Elin. The city of SM has helped make this travesty continue and get worse, as our lives and health continue to be impacted. The cement at the ends of the runway must come out and the noise ordinances must get enforced. The airport and city attorney have been very lenient in administering the noise penalties. This leniency needs to end, but they will likely look for ways to continue the leniency and hide behind legal fears and threats. Same old story. Alan Levenson -----Original Message----- From: "Elin Katz" <butrpg55@gmail.com> Sent: Monday, August 7, 2017 12:35pm To: jetairpollution@earthlink.net, info@nojets.org, "Ted Winterer" <Ted.Winterer@smgov.net>, Gleam.Davis@smgov.net, Sue.Himmelrich@smgov.net, councilmtgitems@smgov.net, Kevin.McKeown@smgov.net, Pam.OConnor@smgov.net, Nelson.Hernandez@smgov.net, Terry.Oday@smgov.net, Tony.Vazquez@smgov.net, Rick.Cole@smgov.net, Susan.Cline@smgov.net Subject: SO MANY JETS! Dear Everyone, I live 1 block from the blast-off of jets at the Santa Monica Airport, and NEVER has there been such an amount of jet traffic!! This weekend was an absolute deluge of taking off and landing or idling on the runway. I thought this would end with the weekend, but NO! Today at 7:30am, it starts all over again, and I cannot go out of my house without noticing the high pitched squeal of yet another jet waiting to take off. What has opened the floodgates to this incursion on my breathable air and quality of life?! Is the 40% reduction in air traffic after the runway is shortened based on THIS amount of jet activity? Here comes another one! Holy Moley... Elin Katz 3017 Dahlgren Avenue Lops Angeles CA 90066 310-801-4429 "A drop of effort can create an ocean of change" NO JETS Santa Monica Airport Item 3-M 08/08/17 2 of 3 Item 3-M 08/08/17 Item 3-M 08/08/17 3 of 3 Item 3-M 08/08/17