SUMMARY REPORT PURSUANT TO CALIFORNIA GOVERNMENT CODE SECTIONS AND FOR AN AGREEMENT TO LEASE AT 5410 LA PALMA AVENUE, LA PALMA, CA 90623

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1 SUMMARY REPORT PURSUANT TO CALIFORNIA GOVERNMENT CODE SECTIONS AND FOR AN AGREEMENT TO LEASE AT 5410 LA PALMA AVENUE, LA PALMA, CA The following Summary Report has been prepared pursuant to California Government Code Sections and The report sets forth certain details of the proposed Agreement to Lease for a City-owned commercial building located at 5410 La Palma Avenue, La Palma, CA (APN ) (the Lease Agreement ). The Lease Agreement is proposed between the following parties: 1. The City of La Palma ( City ); 2. Elite Tae Kwon Do Center, Inc. ( Tenant ) INTRODUCTION The building at 5410 La Palma Ave was transferred from the Successor Agency to the La Palma Community Development Commission ( Successor Agency ) to the City on February 27, 2014, pursuant to the Successor Agency s long range property management plan ( LRPMP ). La Palma s LRPMP was approved by the California Department of Finance ( DOF ) on December 13, It provided that the goal of the transfer was to place an active commercial lease in the building that would foster an ongoing taxable possessory interest to the benefit of the City and other taxing entities. To comply with the LRPMP, the City must facilitate leasing the space to private commercial interests. The City of La Palma is now considering a commercial lease agreement with Elite Tae Kwon Do Center, Inc. (hereinafter the "Tenant") whose President is Victor H. Chung, for the use and operation of this commercial retail space as a martial arts center. The property to be leased consists of approximately 3,000 square feet of existing front loaded in-line retail space on a 10,000 square foot lot. The following Summary Report is based on information contained within the Lease Agreement and is organized into the following seven sections: I. Identity of the Contracting Party: This section provides the name and address of the Tenant. II. Salient Deal Points of the Agreement: This Section summarizes the major responsibilities imposed on the Tenant and the City by the Lease Agreement. SB 470 Summary Report Page 1 of 9

2 III. IV. Estimated Value of the Interest to be Conveyed or Leased, Determined at the Highest and Best Use of the Property: This section estimates the value of the leasehold interest, determined at the highest and best use of the property,. Estimated Value of the Interest to be Conveyed or Leased, Determined at the Use and with the Conditions, Covenants, and Development Costs Required by the Lease Agreement: This section estimates the value of the leasehold interest, factoring in the use of the property, and conditions, covenants, and development costs required by the Lease Agreement. V. Economic Incentive\Development Subsidy Provided, and Cost of the Agreement: This section details the economic incentive/development subsidy to be provided by the City and the costs to be incurred by the City to implement the Lease Agreement. VI. VII. VIII. Consideration Received and Comparison with the Economic Incentive/Development Subsidy Provided: This section describes the financial compensation to be received by the City pursuant to the Lease Agreement. Creation of Economic Opportunity and Public Purpose: This section explains how the Lease Agreement will assist in creating economic opportunity in the City. Job Creation: This section describes the number of full-time, part-time, and temporary jobs created by effectuating the Lease Agreement. This Summary Report and the Lease Agreement are to be made available for public inspection prior to approval of the Lease Agreement. I. IDENTITY OF THE TENANT Elite Tae Kwon Do Center, Inc. C/O Victor H. Chung, President Galaxy Place Gardena, CA II. SALIENT DEAL POINTS OF THE LEASE AGREEMENT a. Project Description This Lease offer, from the operator of Elite Tae Kwon Do Center, proposes to use the City s property as a first class martial arts center. Elite Tae Kwon Do Center s offer is for both suites 5410 and 5414 La Palma Avenue or all 3,000 square feet SB 470 Summary Report Page 2 of 9

3 (sf) of building space. They propose to consolidate the two suites into a single unit for their center. Elite Tae Kwon Do Center has requested the City deliver the space as a vanilla shell that is move-in ready. Vanilla shell generally refers to a commercial building with a minimally finished interior improvements consisting of heating and cooling (HVAC) system, ADA compliant restrooms and associated plumbing, minor interior walls (painted or unpainted), miscellaneous electrical outlets and data ports, drop ceilings and interior lighting compliant with green energy codes and concrete floor. The vanilla shell request also includes removal of the interior demising wall to consolidate the existing two suites into one space. The demising wall has been determined to be a load bearing wall and its removal will require support columns and beam. The terms of the Lease Agreement provide for a rent amount of $1.70 per square foot (PSF) triple net (NNN) with an annual increase of 3.0% each year thereafter. The initial term of the lease is for 10 years with three (3) five-year renewal options. b. City Responsibilities The Lease Agreement requires the City to: i.) obtain all necessary permits and approvals (collectively, the City Approvals ) for, and install and/or construct (as applicable), the following improvements to and within the Premises (collectively, the City Improvements ) for a cost not to exceed Ninety Thousand Dollars ($90,000): (1.) Demolition of the previous tenant partitions, flooring material, plumbing and electrical fixtures. (2.) Creation of clear span opening of load bearing demising wall with the fewest support posts as commercially reasonably possible. (3.) Cleaning and sealing of exposed concrete floor. (4.) Installation of one new front double entry door. (5.) Construction of one new ADA compliant restroom, including one urinal. (6.) Construction of two new nine foot (9 ) by nine foot (9 ) offices, with window facing main room. (7.) Construction of a new storage room with mop sink and relocated electrical panel. SB 470 Summary Report Page 3 of 9

4 c. Tenant Responsibilities (8.) Construction of required seismic retrofit of T-bar ceiling and all new acoustical ceiling tiles, code compliant energy efficient lighting, mechanical diffusers and miscellaneous ductwork to be coordinated to the new floor plan. ii.) Process a Conditional Use Permit (CUP) for martial arts use. The deposit fee for a CUP is $1,000, the amount of which will be waived; and, iii.) Provide a 50% rent discount for months 2 through 5. The discount is equivalent to $10,200 based on a rental fee of $1.70psf; and, iv.) Provide rent credit on annual basis to tenant in the amount of the cost differential between commercial liability insurance with a $3,000,000 limit versus the costs for same policy with a $1,000,000 limit. Annual rent credit for insurance premium is estimated at $1,000; and, v.) Pay the tenant s brokerage commission fee equal to 6.0% on the first five years of the initial 10 year term, and three percent (3%) of the last five years of the initial 10 year term. Said commission is calculated to be $30,795 and half is payable on the date the Tenant obtains possession of the premises (hereinafter the Lease Commencement Date ) and half is payable on the Rent Commencement Date, which is the earlier of (i) 90 days after the Lease Commencement Date, and (ii) the date Tenant opens the premises for business; and, vi.) Be responsible during the Lease Term, and any extension or renewal thereof, at its sole cost and expense, for: (1) maintaining the structural integrity of the roof of the building, roof skin, HVAC system, utility lines, gutters, downspouts, floor slab, and exterior walls, and (2) maintaining the HVAC system in good operating condition. The Lease Agreement requires the Tenant to: i.) Pay monthly rent on the first day of each month beginning on the Rent Commencement Date in an amount equal to $1.70psf triple net (NNN); and ii.) Pay Common Area Maintenance (CAM) charges from lease execution; and iii.) Pay annual rent increase of 3.0%; and iv.) Obtain General Liability insurance in the amount of $3 million dollars per occurrence and indemnify the City for any negligence committed by Tenant; SB 470 Summary Report Page 4 of 9

5 and v.) Pay a security deposit equal to the rent payment for the final month of the initial term which is six thousand eight hundred fifty four dollars ($6,854); and, vi.) Pay for all costs of the City Improvements that are in excess of Ninety Thousand Dollars ($90,000). At Tenant s election, Tenant may pay such amount in cash, on the Rent Commencement Date, or Tenant may pay a portion of such amount with each payment of Rent during the initial Lease Term; and, vii.) Furnish and install all desired business signage at Tenant s sole cost and expense including expenses for requisite permits; and, viii.) Keep and maintain in good condition and in substantial repair, all to the satisfaction of the City in its sole and reasonable discretion, the Premises and all appurtenances, at Tenants sole cost and expense, at all times during the Lease Term, and any extension or renewal thereof. III. ESTIMATED VALUE OF THE INTEREST TO BE CONVEYED OR LEASED, DETERMINED AT THE HIGHEST AND BEST USE OF THE PROPERTY The subject property is zoned Neighborhood Commercial (NC). The NC Zoning District provides localized commercial retail and service activities for surrounding neighborhoods. Typical uses include food market, drug store, apparel, dry cleaners, food services, tutoring schools, shoe repair, health and beauty services and other personal professional service uses such as accounting and optometry. The martial arts use is a permitted use in the NC zone subject to a conditional use permit. There are no other martial arts centers in the subject shopping center. The subject property s neighborhood and surrounding area are characterized as a densely developed, residential community with related convenient commercial services on the main arterials. This is a mature, virtually built-out and stabilized neighborhood, with some reinvestment occurring during the last few years. There are high barriers to entry due to the lack of undeveloped land. Most development activity consists of redevelopment of depreciated commercial properties. Over the long term, the area should continue to support the subject property and be a desirable place to live and do business for the foreseeable future. Recently, market conditions have been improving and vacant commercial sites are trading again. However, financing and a significant shift by consumers and retailers to e- commerce present challenging hurdles for commercial properties. The limited supply of vacant land due to the fully developed nature of the area has provided support for commercial property values. The property was purchased by the former Community Development Commission of the City of La Palma in November The purchase and SB 470 Summary Report Page 5 of 9

6 sale agreement indicates a total purchase price of $610,000, or approximately $203 per square foot. The subject property is an older, small retail building in a secondary location. Its location within the existing shopping center is off to the side and it does not benefit from proximity or visibility to the majority of the shops and anchor tenant. The property is considered a secondary commercial space with appeal on the lower half of the spectrum. The City commissioned an appraisal of the property in June 2013 from Kiley Company, in accordance with the guidelines set forth by the Uniform Standards of Professional Appraisal Practice. The appraised value of the property at that time was $530,000 or $176 per square foot. Based on the appraised value of the property, the estimated value of the leasehold interest at its highest and best use was approximately $1.44 per square foot. The City has negotiated the slightly higher rental rate of $1.70 per square foot which is indicative of the economy s modest turnaround since June IV. ESTIMATED VALUE OF THE INTEREST TO BE CONVEYED OR LEASED, DETERMINED AT THE USE AND WITH THE CONDITIONS, COVENANTS, AND DEVELOPMENT COSTS REQUIRED BY THE LEASE AGREEMENT. The building was constructed in 1972 and has not had any significant improvements since As such, the property is in need of reinvestment to bring the building into current code compliance and suitable market conditions. The Lease Agreement provides that the City furnish the lease space as Vanilla Shell, move-in ready condition. It has been estimated that the expense to ready the property for move-in condition is approximately $90,000. The Lease Agreement provides for a 50% rent discount in months 2 through 5, an annual rent offset for insurance premium estimated at $1,000, and for the City to pay a brokerage commission fee. The rent discount for months 2 through 5 is equal to $10,200 and the Brokerage fee is $30,795 bringing the total economic development subsidy by the City to lease the property over the initial ten year term at $140,995. The estimated value of the leasehold interest, determined by appraisal conducted in anticipation of preparation of the LRPMP was approximately $1.44 per square foot. Pursuant to the Lease Agreement, Tenant will pay $1.70 per square foot, which is slightly higher than the previously appraised value, but is in close parity with current market rates for similar product. The Lease Agreement provides for payment of a base rent with an annual fixed increase that compensates the City for the $90,000 in Tenant Improvement expenses to ready the space for move-in condition as well as, the 50% rent discount for months 2 through 5. The real estate transaction expenses and improvement work necessary to prepare the space and a ready to rent Vanilla Shell are typical commercial property expenses in the private sector. AB 562 considers expenses in excess of $100,000 by a municipality an economic development subsidy. The rental income to be paid to the City under the Lease Agreement exceeds the development costs required by the City under the Lease Agreement. SB 470 Summary Report Page 6 of 9

7 V. ECONOMIC DEVELOPMENT SUBSIDY PROVIDED, AND COST OF THE AGREEMENT The City is providing the following economic development subsidies to facilitate the leasing of this commercial retail building as a martial arts center: A. Construct and/or install tenant improvements in an amount up to $90,000. B. Provide a 50% rent discount for months 2, 3, 4, and 5; and, C. Provide an annual rent credit for insurance premium estimated at $1,000 per year; and, D. Payment to Tenant s broker of a brokerage commission in the amount of $30,795. The total economic development subsidy to be provided under the Lease Agreement is estimated at or around $140,995 for the initial 10 year term. The City s appraiser has indicated that in the commercial lease context it is customary for a lessor/landlord to provide a tenant improvement allowance and often other payments and fees are negotiated. The appraiser has indicated that the total cost of the City s economic development subsidies are not inconsistent with current market trends. VI. CONSIDERATION RECEIVED AND COMPARISON WITH ECONOMIC DEVELOPMENT SUBSIDY PROVIDED The City expects to receive two new sources of revenues from the project. The Lease Agreement will generate a rental income for the City as a new funding source. The City also anticipates a portion of the property tax revenues generated by the Lease Agreement. Below is a table that estimates the revenue to be generated. It assumes an annual 3% increase in annual rental income and an annual property tax increase of 2%. No sales taxes are expected from the martial arts center use. Year Elite TKD Center 10 Year Net Revenue Monthly Rent Annual Rent Est. Sales Tax Est. Prop. Tax 1 $5,100 $61,200 $ $5,253 $63,036 $ $5,411 $64,927 $ $5,573 $66,875 $ $5,740 $68,881 $ $5,912 $70,948 $ $6,090 $73,076 $ $6,272 $75,268 $0 76 SB 470 Summary Report Page 7 of 9

8 9 $6,461 $77,526 $ $6,654 $79,852 $0 79 Total Rent $701,589 $0 723 Less TI Expense $90,000 Less Rent Discount $10,200 Less Rent Credit $10,000 Less Broker Fee $30,795 Net Rent $560,594 Total Sales Tax $0 Total Property Tax $723 Net Revenue $561,317 The total revenues anticipated to be received over the initial term exceed the economic development subsidy to be provided by the City under the Lease Agreement, by $561,317. VII. CREATION OF ECONOMIC OPPORTUNITY AND PUBLIC PURPOSE The property has been sitting idle for the last 6 years due to the protracted recession and the dissolution of Redevelopment. The important goals and objectives that are satisfied by the Project are: 1. Diversification of the City s revenue sources so that it may fund the services the community expects. 2. Increased employment through additional jobs created as a result of private sector investment. 3. Enhance and improve the quality of life and promote positive growth in La Palma by facilitating local access to a martial arts and fitness center. 4. Elite Tae Kwon Do Center is expected to bring their student enrollment to La Palma on a reoccurring weekly basis. These will be new trips into La Palma and the shopping center that will provide potential synergistic effect for the other nearby merchants. In addition to these benefits, the other taxing entities that rely on the La Palma tax base to support their services and programs will receive new property tax revenues. Those taxing entities include, but are not limited to, Local School Districts, Orange County Library, Orange County Fire Authority, Orange County Harbors, Beaches and Parks, and Orange County Sanitary District. SB 470 Summary Report Page 8 of 9

9 VIII. JOB CREATION The project is expected to create temporary and permanent jobs. The temporary jobs will be created during construction to prepare the space to move-in ready status. It is estimated that 8-10 construction-related jobs will be created during the tenant improvement construction activity. Once the project is complete, it is estimated that 2-3 permanent full-time related jobs will exist. SB 470 Summary Report Page 9 of 9