Title
Introduction of Ordinance Authorizing the City Manager to Execute a Fifteen-Year Lease with One Five-Year Option to Extend, Substantially in the Form of the Attached Lease, with Nautilus Data Technologies, Inc. for Building 530, an 82,251-Square Foot Building Located at 120 West Oriskany Avenue, Building 529, a 3,200-Square Foot Building, and Building 600, a 343-Square Foot Building, at Alameda Point. [Requires Four Affirmative Votes] (Base Reuse 819099)
Body
To: Honorable Mayor and Members of the City Council
EXECUTIVE SUMMARY
Nautilus Data Technologies (Nautilus), a Delaware corporation, uses innovative water cooling technology to operate data centers that reduce the cost of computing, cut power usage, eliminate water consumption, decrease air pollution, and lower greenhouse gas emissions. This action will authorize the City Manager to execute a fifteen-year lease with one five-year option with Nautilus for the development of a water-cooled data storage facility in Building 530, Building 529, and Building 600 at Alameda Point. The project includes $6 million in building improvements and an investment in infrastructure that will result in millions of dollars in electrical system improvements, water intake/discharge and recirculation systems, and high-performance internet fiber and connections. This item was continued from the May 7, 2019 City Council meeting, and public comment will be heard as City Council provided direction about changes in the lease terms as described below.
BACKGROUND
Nautilus has been interested in developing a data storage facility at Alameda Point for approximately two years. Initially, Nautilus was interested in locating its water-cooled data storage system on a barge at the piers, a technology it is currently piloting at the Port of Stockton. However, after touring Alameda Point and seeing Building 530 with its proximity to the water, its lack of windows, and privacy, the company thought the building would be ideal for a land-based, water-cooled data storage facility. Exhibit 1 is a map of the premises.
Over the years, the City of Alameda (City) has been approached by numerous data storage companies interested in locating at Alameda Point. Typically, this has not been an industry that meets the Alameda Point redevelopment goals for job and sales tax generation. However, Nautilus’ sustainable data center design won the 2016 European Breakthrough Innovation Award and the 2015 U.S. Startup of the Year Award. Innovative technologies, especially green energy, are a key sector of the Alameda economy and are supported in the City’s Economic Development Strategic Plan.
At its build out, Nautilus will become one of the largest consumers of energy from Alameda Municipal Power (AMP), which is important for the infrastructure development at Alameda Point and the community. At Alameda Point, the growth of Nautilus will hasten the upgrades for the Cartwright Substation that provides power to Alameda Point, in turn attracting other large energy consumers to the Enterprise District. The community may benefit because a large consumer of power has the potential to result in significant electric rate revenues for AMP, which helps all customers in the City by putting downward pressure on future rate increases.
A proposed lease with Nautilus was presented to the City Council at its April 2, 2019 and May 7, 2019 meetings. City Council continued its initial consideration of the lease approval to its May 7, 2019 meeting with the intention that it be heard after an April 22, 2019 special meeting to tour the Enterprise District, where Nautilus has proposed to lease Building 530, and re-affirm its goals and objectives regarding redevelopment of the Enterprise District.
At the May 7 meeting, the City Council focused much of its discussion on the potential environmental issues that could arise due to Nautilus’ proposed technology, which is untested to date. As a result, City Council requested, and Nautilus agreed to, additional language in the lease that would require third-party environmental monitoring, regular reporting to the City, and an ability to terminate the lease should materially adverse environmental impacts be identified. In addition, City Council requested that one five-year extension be eliminated. The revised lease is attached as Exhibit 2.
Given the changes in the lease that address City Council’s concerns, staff recommends that the City Council introduce an ordinance authorizing the City Manager to execute a lease with Nautilus as discussed below.
DISCUSSION
Project Overview
Nautilus is interested in creating the first water-cooled data center at Alameda Point. The project is estimated to include $6 million in improvements to the building, which include a new roof, façade improvements, environmental/asbestos/mold remediation, landscaping, security, and parking upgrades.
Nautilus estimates that its investment in the City’s infrastructure will result in several million dollars in electrical system improvements, water intake/discharge and recirculation systems (mostly beneficial to the water cooling aspect of its project), and $5 million in high performance internet fiber and connections. Nautilus has agreed to pay 32.5% of the Development Impact Fees (DIF) for Alameda Point infrastructure improvements, $976,857 of which must be paid over the initial term of the lease (within the first 15 years). The tenant cannot exercise its five-year renewal option without completing the payment as described above. The remaining 293,057 will be paid during the optional renewal period, for a total of 32.5% of the DIF and a total payment of approximately $1,269,914. If, in the future, the City agrees to sell Nautilus the buildings, Nautilus will receive credit for funds already paid into the DIF. Payment of 32.5% of the DIF is based on the “usable life” of the building during the potential 20-year lease term; whereas, full payment of the DIF is required when a building is sold. In addition, Nautilus has committed to providing the City data storage space in its facility.
Nautilus must secure the appropriate environmental permits and certifications from regional and state regulatory agencies to build its water-cooling technology. These include:
• California Environmental Quality Act (CEQA)
• San Francisco Bay Conservation and Development Commission (BCDC)
• California State Lands Commission
• California Department of Fish and Wildlife
• National Marine Fisheries Service
• U.S. Fish and Wildlife Service
• U.S. Army Corp of Engineers
• Clean Water Act Section 401 Water Quality Certification & Construction Storm Water National Pollutant Discharge Elimination System
• State of California San Francisco Bay Regional Water Quality Control Board
• Alameda County Flood Control and Conservation Board
• City of Alameda planning and building permits, including Marsh Crust and Use Permits
The Nautilus site is not in the buffer zone for the California least tern and this development will have no impact on the tern. In addition, staff consulted the marine biologist who worked with the community on the harbor seal haul-out and he determined that the project will have no impact on the seals. As part of the lease terms, Nautilus will have an early termination provision, which allows the tenant to terminate after fifteen months in the event it is unable to obtain its required permits. If this occurs, the tenant is required to pay the City an early termination fee of $47,705.58, and it forfeits the security deposit of $68,312.27.
AMP is supportive of the Nautilus proposal because at full build-out there will be a significant revenue contribution (estimated at $20-25 million per year), which will put downward pressure on future rate increases for all customers. Upon lease approval, AMP will execute one or more special agreements with Nautilus to address issues such as power infrastructure needs. AMP is not anticipating many capital cost impacts associated with providing service to Nautilus. However for power procurement, AMP has already begun evaluating different short- and long-term options, and will likely require Nautilus to provide a deposit to reduce risk during the term of the power purchase agreement.
The current Cartwright substation has space capacity to accommodate much of the projected demand from Nautilus, but AMP will require Nautilus to make a contribution to the expansion and future replacement of the facility if Nautilus exceeds a certain amount of capacity. AMP will also work to ensure there is sufficient capacity for other customers at Alameda Point and for future development.
At the May 7, 2019 meeting, a concern was expressed about AMP’s ability to service such a large new power user. AMP has confirmed that current staffing levels are adequate to accommodate the project through construction, initial ramp-up (2-3 years), and full operation.
Nautilus has provided the following information regarding job generation, with additional details in the attached Letter of Interest (Exhibit 3):
• Phase I (Years 1 and 2), 100 union trade jobs (electrical, plumbers, pipefitters, etc.)
• Phase 2 (Years 3 - 5), 50 union trade jobs
• At build-out, 30 full-time data center employees: technical, facilities, security ($60,000 - $125,000/annually)
The Building and Construction Trades Council of Alameda County, AFL-CIO, has offered its support for this project and the platform it provides for economic growth and job creation in the attached letter (Exhibit 4).
Nautilus also cites numerous examples of new businesses drawn to locations near data centers/technology infrastructure, as well as increased exposure of the Enterprise District due to the 20-plus customer representatives who will rotate on-site throughout the lease term.
The rent schedule for the lease is:
|
Months |
Monthly Base Rent |
|
1 - 12 |
$ -0- |
|
13 - 24 |
$ 46,060.56* |
|
25 - 36 |
$ 47,705.58* |
|
37 - 48 |
$ 47,705.58 |
|
49 - 60 |
$ 50,831.12 |
|
61 - 72 |
$ 52,356.05 |
|
73 - 84 |
$ 53,926.73 |
|
85 - 96 |
$ 55,544.53 |
|
97 - 108 |
$ 57,210.87 |
|
109 - 120 |
$ 58,927.19 |
|
121 - 132 |
$ 60,695.01 |
|
133 - 144 |
$ 62,515.86 |
|
145 - 156 |
$ 64,391.33 |
|
157 - 168 |
$ 66,323.07 |
|
169 - 180 |
$ 68,312.77 |
* Months 1-12 are fully abated and month 13-36 are partially abated pursuant to Section 4.1(b) of the attached lease stating that Nautilus Data Technologies, Inc. will spend approximately $100,000 on capital improvements to the Buildings during the first twelve (12) months of the Term and an additional approximately $6,000,000 on capital improvements and tenant improvements before the expiration of the thirty-sixth (36th) month of the Term (Tenant Work).
Proposed Revisions to Lease Terms
City Council has spent a significant amount of time considering approval of a lease with Nautilus. The primary concern has focused on the possibility that Nautilus’ proposed technology leads to warming the Bay water and the impacts that could have on the environment and wildlife. While this issue will be analyzed during the CEQA and regulatory agency review process, the City Council sought additional assurances that the City would have the ability to independently evaluate potential environmental impacts during project operations, receive regular reporting on these issues, and terminate the lease should significant and unavoidable impacts be identified. Nautilus has assured the City Council that its goal with its new technology is to be a greener way to provide data storage services. Consistent with that notion, Nautilus has agreed to the following new lease terms as requested by the City Council:
• Environmental Testing: During project construction and operations, the City will have the right to engage an environmental consultant and/or biologist of its choice who shall, during the lease term (including the extension period), regularly undertake environmental testing on the premises and all surrounding area and waterways to evaluate the impact of the permitted use on Alameda Point and its adjacent waterways (City Testing), to the extent any such testing is not already being undertaken as required for compliance with regulations or agency permitting governing the project. The scope, breath and type of the testing (which will be based on objective scientific standards) will be recommended by the consultant and agreed upon by the City. All costs related to the testing, including engaging the environmental consultant(s), the cost of testing and other related costs and expenses, will be paid by Nautilus.
• Reporting to City: The findings and results of the City Testing will be provided to the City for the duration of the lease term (including the extension period) in a written monthly report (could be as often as weekly if requested by the City). Until all necessary permits are secured, the report will include a detailed description of the status of obtaining all third party environmental (and other) agency permits and approvals.
• Environmental Termination Right: If the City determines, based on the City Testing and in consultation with its environmental consultant, that the permitted use is significantly adversely impacting the environmental condition of Alameda Point and/or its waterways, such Significant Adverse Impact shall be a material default of the lease and the City will have the right, in its sole and absolute discretion, to immediately terminate the lease. As defined in the lease, “Significant Adverse Impact” shall mean a significant environmental impact to Alameda Point, its waterways, air, subsurface, subsurface strata, ground, flora, fauna, species, occupants or visitors that, in the reasonable opinion of the City and its consultant, significantly degrades the quality of life at or about Alameda Point (including its waterways), significantly impacts any species, flora or fauna at or about Alameda Point (including its waterways), or poses a significant present or potential hazard to human health and safety, and cannot be mitigated to a level that is less than significant. Construction and ongoing operations undertaken in compliance with the performance standards set by regulations and agency permits governing the project shall be deemed to be less than significant.
In addition to the lease provision described above, the City Council requested, and Nautilus agreed to, a reduction in the lease term through the elimination of the second five-year option. Therefore, the lease has been modified to include one fifteen-year initial term and one five-year option.
ALTERNATIVES
• Alternative 1 --- The City Council has worked diligently to provide direction on revising the lease terms to fully reflect its concerns about any potential adverse impacts on the environment, including requesting a provision that would allow termination of the lease immediately upon determining that such an impact has occurred. Nautilus has agreed to include the City Council’s requested language.
• Alternative 2 --- An alternative location to discharge the water could be considered in order to address environmental concerns, which would include discussions on additional capital costs which may impact the project.
However, given the length of time and the substantive changes that have been made as part of the process, if the City Council does not want to approve the lease as revised, staff recommends that the City Council not introduce the ordinance approving the lease.
FINANCIAL IMPACT
The monies from the lease will be deposited into the Base Reuse Fund (Fund 858) Lease Revenue account and are limited to uses permitted under the Economic Development Conveyance Memorandum of Agreement with the United States Navy.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This action is consistent with the Alameda Municipal Code.
ENVIRONMENTAL REVIEW
In accordance with CEQA, this lease is Categorically Exempt pursuant to CEQA Guidelines section 15301 - Existing Facilities.
The attached Water Intake and Discharge Pathways provides a design overview and locations of the water intake/discharge structures for Nautilus’s water-cooled system (Exhibit 5).
Environmental impacts of Nautilus’s water-cooled design received evaluation during the permitting and regulatory approval process for Nautilus’s Stockton data center, which is currently under development. A detailed summary of the required approvals for the Stockton facility and the regulatory bodies that authorize them are provided in Exhibit 6.
Anticipated approvals to meet permit and compliance requirements for construction of an Alameda Point data center are found in Exhibit 7.
CLIMATE IMPACTS
Nautilus states that its company’s driving principle is to create a technology that is cleaner and greener than any current technology used to store large amounts of data. However, its technology remains untested and the proposed server farm at Alameda Point would be a first of its kind. Therefore, there is an extensive environmental permitting process that Nautilus must complete to secure its approvals to operate. In addition, the lease, as proposed, would allow the City to retain its own environmental consultant to monitor impacts on the environment and to terminate the lease immediately if materially adverse impacts are identified. With these safeguards, if the technology is proved up, it could have a positive environmental impact through the significant reduction in energy used to power the data server. If Nautilus in unable to secure the necessary permits to operate, the project will not move forward.
RECOMMENDATION
Introduce an ordinance authorizing the City Manager to execute a fifteen-year lease with one five-year option to extend, substantially in the form of the attached lease, with Nautilus Data Technologies, Inc. for Building 530, an 82,251-square foot building located at 120 West Oriskany Avenue, Building 529, a 3,200-square foot building, and Building 600, a 343-square foot building, at Alameda Point.
CITY MANAGER RECOMMENDATION
If the City Council votes to move forward on the lease, I recommend that the lease have strong language ensuring that initial and continuous environmental evaluation of the technology occurs.
Respectfully submitted,
Debbie Potter, Community Development Director
By,
Nanette Mocanu, Assistant Community Development Director
Financial Impact section reviewed,
Elena Adair, Finance Director
Exhibits:
1. Premises
2. Form of Lease
3. Letter of Interest
4. Trade Council Letter of Support
5. Water Intake and Discharge Paths
6. Stockton Environmental Approvals
7. Permit Agencies and Requirements
cc: Eric J. Levitt