City Council Meeting: November
28, 2006
Agenda Item: 1-C
To: Mayor and City Council
From:
Subject: Amendment to Lease with The Richlar
Partnership for Property Located at
Recommended
Action
Staff recommends that the City’s lease with The
Richlar Partnership for property located at
1. effective July 1, 2005, the ground rental rate will be
$809,184 per year;
2. the method for calculating future rent adjustments will be
every 30 months, based on Consumer Price
Index, with adjustments of no less than 3% per year nor more than 7% per year;
3. between July 1, 2005, and December 31, 2007, Richlar
Partnership will make partial payments; and
4. the rent deferred from July 1, 2005, through December 31,
2007, in the amount of $1,412,082, will be repaid to the City between January
1, 2008, and December 31, 2010, at 7%
interest, with the amount deferred secured by an irrevocable letter of credit.
Executive
Summary
In 1989 the City
acquired from Southern Pacific Transportation Company property that was subject
to a 50-year ground lease with The Richlar Partnership (“Richlar”) for four acres
located at
Discussion
Background
In 1989 the City acquired from Southern Pacific Transportation
Company 9.3 acres. The property was purchased using City transit funds, with the
intent that the property would be needed to accommodate future light rail transit.
Rental income is deposited into the Big Blue Bus fund.
At the time of purchase, the property was encumbered with two
leases; one to Mor-Flor Industries, parent company of American Appliance
Corporation, and the second to The Richlar Partnership. The property leased to Mor-Flor Industries is
now Bergamot Station.
The Richlar Partnership lease was a fifty year ground lease,
expiring July 1, 2030. It covers an area of 168,580 sq. ft. (about 4 acres). The site is improved with a 64,000 sq. ft.
warehouse and a 60,000 sq. ft. office building.
The lease set the rental rate during the first 25 years. The most
recent rental adjustment was set on July
1, 2002, at $207,252 per year. Beginning July 1, 2005, and every five years
thereafter, the lease states that the rental rate shall be a reasonable and
fair value of the premises at that time, as though the land constituting the
premises were unencumbered by the lease and were available for the highest and
best use allowed under zoning law then in effect. If the parties are not able to agree on the
rent, the lessor may submit the dispute to arbitration.
City staff and Richlar have been in negotiations since June 2005.
Each party obtained an independent appraisal and each appraisal was reviewed by
the other party. Based on these negotiations, staff recommends that the Council
approve a land rental increase from $207,252 per year to $809,184 per year, retroactive
to July 1, 2005.
Staff also recommends two modifications to the lease. The lease provides for rental adjustments
every five years based on highest and best use. In lieu of this method, staff
recommends that the lease be modified to provide for automatic rental
adjustments every 30 months, based on the Consumer Price Index, with
adjustments not less than 3% per year, nor more than 7% per year. Revising the lease to provide for a set
formula provides more frequent rental increases and gives the Lessee some
assurance about future rental rates which will facilitate his negotiations with
future tenants.
The second recommended modification would allow Richlar to make
partial payments, with the deferred amount repaid to the City at 7% interest. Beginning
in January 1, 2008, Richlar would begin repayment of the amount deferred, while
also paying the full rental amount. The deferred rent in the amount of
$1,412,082 would be repaid between January 1, 2008 and December 31, 2010, at 7%
interest, in monthly installments. The
deferred amount would be secured by an irrevocable letter of credit which could
be called upon in the event of default or bankruptcy. At any time that Richlar defaults on regular
rental payments, the City may terminate the lease by providing 30 days written
notice to cure the default.
Alternatives
If the proposed lease amendment is not approved, Council may refer
the matter to arbitration.
Budget/Financial Impact
Proceeds
from the rental of this property are deposited into account 41642.404090. The City will collect $610,878 between July
1, 2005 and December 31, 2007. Thereafter the City will receive the full rent
of $809,184, adjusted per the CPI formula. Repayment of deferred rent of
$1,412,082 at 7% interest between January 1, 2008 and December 31, 2010, will
result in interest income to the City of $314,849. The Budget for rental income for FY 06-07
would be increased by $1,203,864 which reflects the increased payment beginning
in January 2007 and the amount of rental income earned under the proposed lease
agreement but deferred during the period from July 2005 through June 2007.
Prepared by:
Miriam Mack,
Economic Development Manager
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Approved: |
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Forwarded to Council: |
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Martin
Kennerly, Acting
Director Resource Management Department |
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P. City Manager |