SAN JOSE CAPITAL OF SILICON VALLEY

Transcription

1 CITY OF SAN JOSE CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR AND CITY COUNCIL COUNCIL AGENDA: 10/06/15 ITEM: 4,2 Memorandum FROM: Kim Walesh SUBJECT: FIRST AMENDMENT TO LEASE FOR THE POLICE VEHICLE DATE: AND EVIDENCE WAREHOUSE Approved *?/Z Tj/S COUNCIL DISTRICT: 7 RECOMMENDATION Adopt a resolution authorizing the City Manager, or his designee, to execute a First Amendment to extend the current lease between Sun Garden Tenants in Common, as Landlord, and the City of San Jose, as Tenant, for an additional three-year period (expiring on May 31, 2019), allowing for the continued use and operation of the Police Vehicle and Evidence Warehouse, consisting of approximately 99,819 square feet of warehouse space located at 1598 Monterey Road in San Jose. The lease amount is $712,419 for the first year, $733,792 for the second year, $755,805 for the third year. The total rental cost is $2,202,016 for the three-year term of this lease extension. OUTCOME Approval of this First Amendment to the Lease Agreement by the City Counci l allows for the continued use and ongoing operation of the Police Vehicle and Evidence Warehouse, thereby avoiding the costs and logistical efforts required to relocate the operation after the expiration of the existing First Renewal Option term, which expires on May 31, BACKGROUND State, county and municipal laws, require law enforcement agencies to safeguard and maintain the integrity of all property seized, found, or recovered. Proper storage is essential to protect the work of the criminal justice system. Investigators, crime labs, and all others involved in a case must be assured that crime scene evidence, and any property seized, found, or recovered, be handled with the utmost care and that the 'chain of evidence' is never broken. Courts, parties charged with crimes, as well as victims of crimes must be assured that the evidence delivered or seized by law enforcement agency personnel during the investigation be recorded, safeguarded and stored in a secure facility. The consequences of mismanagement of property and evidence

2 Page 2 can be severe, including dismissal of charges in cases. Therefore, adequate secured storage space must be made available to the Police Department. On May 12, 2003, a ten year lease was executed with Sun Garden Tenants in Common, which included two (2) three (3) year options to extend the lease. Due to improvements required to the building before it could be occupied, the lease term commenced on June 1, 2003, thereby setting the expiration date at May 31, On May 3, 2013, the First Renewal Option to extend the lease for an additional three years was executed. Based upon the execution of the First Renewal Option the revised expiration date of the lease was set at May 31, Per the terms of the option language, the starting rent and annual rental increases were adjusted upward to reflect the then market rate. All other terms of the original lease remained in full force and effect, with the exception of a clarification regarding an insurance requirement. During both the original and the first renewal option term, the Landlord redeveloped the property surrounding the Police Evidence Warehouse into what is now known as The Sun Gardens Shopping Center. The Landlord's planned future development for the property includes the demolition and replacement of the Police Evidence Warehouse with a co-anchor retail tenant. Although the lease provides for a second option to renew the lease for an additional three year term, the option would require that the rent to be adjusted to the current market rate, which has substantially increased since the last option period. Given the pending expiration of the first renewal option term, the potential of a significant increase in rent, and the unique requirements of a police evidence warehouse, staff and the Landlord proactively commenced a search for a suitable replacement building that would meet the needs of the police department. Staff identified more than twelve possible locations for relocation and conducted an analysis in order to determine the rental costs, building and parking arrangements, and the amount of tenant improvements that would be required. The Police Department staff toured more than half of the available sites that best fit their requirements. There were only a very limited number of alternative locations that were feasible for possible relocation. Some of the challenges involved in the relocation effort included private sector competition for similar buildings, significantly increased rental rates, and that the City often includes a right of termination if funding is not appropriated for the next fiscal year. The funding termination requirement is undesirable to most landlords and places the City in a very non-competitive position when compared to private sector tenants that are competing for similar space. Due to the limited options that were available and the amount of time needed to relocate, staff began working with the current Landlord to extend the lease with more favorable terms, in advance of the deadline indicated within the lease to exercise the second option to renew.

3 Page 3 ANALYSIS The existing lease option is based on a gross lease rate of approximately $0.54 square foot (SF) per month (Mo) on a gross basis (Gross). A gross lease typically means that the total cost paid by the tenant is based solely upon the cost per square foot stated in the lease. Staff conducted a rental study, which included an analysis of current market rents and determined that the average warehouse lease rate is now based upon a triple net (NNN) lease structure. The typical base rent range is approximately $0.70-$0.75/SF/Mo/NNN. A triple net lease requires the tenant to pay an amount, in addition to the base rent, to cover the landlord's expenses related to the building taxes, insurance, and maintenance. The approximate current market rate for triple net expenses of warehouse property is in the range of $.08-$0.12/SF/Mo. For comparison purposes, the conversion from a gross lease to a triple net lease would be a market rental rate of approximately $0.78-$0.87/SF/Mo. Another equally important consideration of relocation versus extending the current lease is the potential cost of tenant improvements necessary to bring a new building up to the required standards for the Police Evidence Warehouse. Although $500,000 has been set aside in an earmarked reserve for relocation expenses, no additional money was allocated for the cost of tenant improvements. The intent was for the Landlord to bear the expense of any tenant improvements, and then amortize the tenant improvement amount over the term of the lease, in a similar fashion as the original lease agreement for the current Police Evidence Warehouse. However, staff anticipates that the costs for tenant improvements to a different building would be far greater at this time due to the increased costs of construction, and new requirement including technology changes that have occurred since the last relocation of approximately 12 years ago. With that in mind, the cost of tenant improvements are estimated to be close to 1 million dollars; which if amortized into the rent, would significantly increase the base rent amount well beyond the market rental rate indicated above. Therefore, based upon the potential savings anticipated with a lease extension rather than a relocating to another facility including the cost to build the tenant improvements, staff began negotiations with the Landlord, and has reached a tentative agreement based upon the following terms: Building Address: Landlord: Address of Landlord: Tenant: 1598 Monterey Road, San Jose, CA Sun Garden Tenants in Common SDS NexGen Partners, LP 1122 Willow Street, Suite 201 San Jose, CA CITY OF SAN JOSE, a Municipal Corporation of the State of California

4 Page 4 Rentable Area of Premises: Term: Commencement Date: Expiration Date: Options to Extend: 99,819 square feet Thirty (36) months June 1, 2016 May 31, 2019, unless extended through mutual consent One option to extend for an additional 3 years Rent: Monthly Base Rent Inc. Annual Annual Rent Year Escalations Escalation Inc. Escalations 1 $59, % $712, $61, % $733, $62, % $755, The lease extension monthly base rent will continue to be a gross lease rate that includes property taxes, operating expenses and building maintenance. Year 1 monthly base rent is set at approximately $0.59 square foot a month, with annual increases of 3% per year. The difference in rent from the current rate ( ) to the first year of the lease extension ( ) is approximately eleven (11%) percent. Although this amount is considerably greater than previous increases, it is significantly less than the market rate increase that would be associated with the second option renewal or a new lease at a different facility, which could equate to a rate increase of approximately 40-50%. Right to Relocate: Right to Terminate: Landlord's right to relocate Tenant is hereby deleted. Both the Landlord's and the Tenant's right to terminate the lease are hereby deleted. This includes the Tenant's (City) right to terminate for funding appropriation. Although most City lease agreements typically contain language that allows the City to terminate if funding is not appropriated for the lease in any given year, the recommended amendment removes this termination right. While unusual, this approach results in: Significant cost savings associated with the lease extension rate versus the market rate (Estimated rent savings range from $18,965 to $27,949 a month or $227,587 to $335,392 a year based on a comparably sized market rate building rent); No tenant improvement expense;

5 Page 5 No relocation expense; (The $500,000 earmarked reserve would not be needed until a later date); and No interruption in the proper storage of evidence that is essential to protect the work of the criminal justice system. EVALUATION AND FOLLOW-UP After the First Amendment to Lease is signed, no follow-up action by the City Council is anticipated until the extended lease term expires, at which time either the second three-year option to extend will be exercised, or staff will locate and negotiate a lease on a suitable alternative space for Council's consideration. PUBLIC OUTREACH This memorandum will be posted on the City's website for the October 6, 2015 City Council agenda. POLICY ALTERNATIVES Alternative #1: Exercise the second option to extend the lease. Pros: Allows for the continuation of the City's right to terminate for funding appropriation. Cons: The rental rate under the second option will be set at market rate, which is significantly higher than the negotiated rate under the First Amendment to Lease. When compared to the negotiated rate, the increased cost to the City under this alternative over a three-year period ranges from approximately $700,000 to $1,000,000. The Landlord would also retain the right to relocate and terminate the lease to accommodate his re-development of the site. Reason for Not Recommending: As the Police Department is satisfied with the current location and there is no anticipated need to move within the next three years, the First Amendment to Lease is the most efficient and cost effective method to facilitate, without interruption, the proper storage of evidence that is essential to protect the work of the criminal justice system. FISCAL/POLICY ALIGNMENT This action aligns with both the Economic Strategy #5 "Increase San Jose's Influence in Regional, State, and National Forums in Order to Advance City Goals and Secure Resources,"

6 Page 6 and the operating budget theme for fiscal year "Improving Safety through Investments in Police and Fire Operations" (investments that ensure our public safety services are safe, effective, and efficient). COST SUMMARY/IMPLICATION As indicated above, the rental rate structure of the lease extension is $712, for the first year, $733, for the second year, $755, for the third year. The total rental cost is $2,202, for the three-year term of this lease extension. The funding for the lease payment in is included in the Property Leases City-Wide appropriation. It is important to note that the Amendment obligates the City to fully fund the lease cost each year for the next three years. The Office of Economic Development will work closely with the City Manager's Budget Office to ensure that the increased lease costs ($65,592 in to $108,978 in ) are included in the Property Leases City-Wide appropriation as part of each year's Base Budget. Though the $500,000 Police Property Facility Relocation Reserve would not be immediately needed with the Amendment's execution, relocation costs may be necessary in the future and staff will evaluate the need to keep or liquidate the reserve as part of the Proposed Budget process. COORDINATION This memorandum has been coordinated with the Police Department, the City Manager's Budget Office, and the City Attorney's Office. The City Attorney's Office has also reviewed the First Amendment to Lease agreement and approved it as to form. CEOA Not a Project, File No. PP10-066(f), Lease of equipment of existing space for the same use. /s/ KIM WALESH Deputy City Manager Director of Economic Development For questions please contact Nanci Klein, Assistant Director at (408)