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Introduction of Ordinance Amending Ordinance 3850 Approving and Authorizing the City Manager to Execute Documents Necessary to Implement the Terms of an Amended and Restated Lease with Bay Ship and Yacht Corporation to Clarify the Parties Obligations, Modify the Leased Premises and Adjust Rent Payments for the Tideland Property Located at 2900 Main #2100 and Surrounding Area. (Community Development 216)
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To: Honorable Mayor and Members of the City Council
From: Jill Keimach, City Manager
Re: Introduction of Ordinance Amending Ordinance 3850 Approving and Authorizing the City Manager to Execute Documents Necessary to Implement the Terms of an Amended and Restated Lease with Bay Ship and Yacht Corporation to Clarify the Parties Obligations, Modify the Leased Premises and Adjust Rent Payments for the Tideland Property Located at 2900 Main #2100 and Surrounding Area
BACKGROUND
The City is the owner, in trust, of a parcel situated at 2900-3000 Main Street (“Tidelands Parcel”). Much of the Tidelands Parcel was at one time a portion of the former Todd Shipyard property on the Alameda side of the Alameda-Oakland Estuary. In 1984, the City of Alameda and Alameda Gateway, Ltd (AGL) entered into a Tidelands lease as AGL owned property immediately adjacent to the Tidelands parcel. In November 1993, AGL entered into multiple lease agreements with Bay Ship and Yacht, Co. (BSY) on its property and subleased portions of the City’s Tidelands parcel to BSY. The Tidelands sublease had a 25-year term with an additional 25 years, if certain conditions were met.
In February 2000, the City and BSY entered into a Nondisturbance and Attornment Agreement under which the City agreed if the Tidelands lease with AGL was terminated, the City would not disturb BSY’s tenancy and would assume the role of BSY’s lessor under the same terms and conditions as the Tidelands lease. In 2009, the Lease between the City and AGL expired and the City declined to renew the lease on the grounds of AGL’s non-performance of certain obligations. The City’s right to terminate the lease was upheld in subsequent litigation. In April 2009, the City began a direct landlord-tenant relationship with BSY under the Attornment Agreement.
In 2012, the City approved a 66-year Tidelands lease with BSY which included land and portions of the Sawtooth Building (Exhibit 1). The leased premises were complicated. Because the property line dividing the Tidelands premises from AGL’s fee property runs through the Sawtooth Building, only a portion of the building is on the Tidelands Parcel, and Rosenblum Cellars/Diageo (Rosenblum) occupied part of the Tidelands portion of the building. In 2014, Rosenblum vacated its premises and BSY entered into a license agreement with the City for those premises. Also in 2014, BSY, through an affiliate company, Alameda Commercial Properties (ACP), acquired the AGL property, effectively giving BSY, direct control over that property. This greatly simplified the relationship between the City and BSY, eliminating a number of issues regarding AGL previously addressed in the Tidelands lease, and simplifying future modifications to the existing lease between these parties.
DISCUSSION
The proposed lease amendment (Exhibit 2) accomplishes three main things:
• Acknowledges BSY’s affiliate ownership of the former AGL premises and removes reference to agreements/arrangements relating to AGL;
• Adds to the existing lease, the premises that were previously leased by another tenant, and most recently licensed to BSY and adjusts the rent accordingly; and
• Revises the leasehold mortgage provisions of the lease to facilitate additional financing based on BSY’s control of the entire premises and allows for administrative approval of re-financing of property owned by BSY’s affiliate under certain conditions.
The leasehold mortgage provisions have been modified to include two types of approvals. For leasehold mortgages that do not require City consent, which are outlined in the existing lease, the use of proceeds to pay off debt secured by the premises would be expanded to include debt secured by the ACP property. Staff recommends this modification because the two properties have a common utility system and share the Sawtooth structure and, as a result, any improvements on the ACP property will most likely benefit the City’s Tidelands property.
For leasehold mortgages that require City approval, the amendment allows such financing to be approved administratively by the City Manager if certain criteria are met, including:
1. Proceeds from any new financing must be spent on the Tidelands Parcel, the ACP property, or adjoining property owned by BSY or its affiliate;
2. Proceeds must be used for industrial, commercial or maritime purposes; and
3. The Loan to Value (LTV) ratios must be 85% or less (the current lease does not specify permitted uses of proceeds and deems denial reasonable if LTV ratio is below 75%).
The amendment includes an appraisal process in connection with calculating the LTV ratio, to ensure that the property is not over-extended. Also, failure to meet the debt service coverage ratio requirement included in the original lease can be grounds for denying the mortgage request. BSY is requesting the administrative approval process for certain leasehold mortgage financing as described above as it allows flexibility when working with banks to ensure the most competitive terms and conditions while at the same time providing sufficient protections for the City so that the property is not over-extended and proceeds are being reinvested in the area for maritime and commercial purposes. The proposed administrative approval process does not preclude the City Manager from taking these requests to the City Council should there be a concern about a specific transaction.
The lease is also being revised to secure permanent rights to utilities and access for the Tidelands properties regardless of ownership of the adjacent fee title property (current driveway is on the ACP property). This will be accomplished by recording a reciprocal easement when the lease becomes effective.
The amendment also shifts full responsibility for maintaining and repairing the Sawtooth Building to BSY. Under the 2012 lease, the City retained maintenance obligations for its portion of the Sawtooth Building, including the corner portion of the roof, interior walls and foundation. The proposed lease amendment converts the entire lease to triple net lease (tenant pays the cost of taxes, insurance and maintenance) with a $50,000/year reduction in the proposed rent in exchange for the City’s release of its maintenance obligations. The current combined rent under the license and lease is $43,953 per month. Under the proposed amendment the new rent is $39,786 per month. At years 20 and 40 there is a market rate adjustment that occurs which is capped at a 15% increase above the prior base year rent, with a floor of 90% of the prior base year rent. At no time will the rent go below the rent paid in year 1 of the lease which is $38,486.
Under the lease, as long as ACP owns the property and BSY is the tenant, each owner maintains the utilities on each of their properties (and BSY is responsible for the City’s maintenance). If ACP intends to sell the adjacent property or if a notice of termination of the BSY lease is issued, the City and ACP must seek to negotiate a utility maintenance agreement that will spell out each owner’s obligations with respect to maintenance costs, and will transfer those obligations with the ownership of the premises.
The lease amendment helps clear up many of challenges of this Tidelands lease parcel by simplifying the lease relationship between the City and BSY/its affiliate ACP. The amendment permanently resolves access to the premises and utilities. Finally, the amendment relieves the City of remaining maintenance obligations by converting the lease to triple net. In exchange, BSY has more flexibility for financing its leasehold interests and leveraging more funds for improvements along the Alameda waterfront in the Tidelands, ACP and future waterfront development areas via administrative or Council approval.
FINANCIAL IMPACT
There is no impact to the General Fund from approving the lease amendments described above. The monies from the amended lease will be deposited into the Tidelands Fund (Fund 216) and are restricted to the uses permitted under the Trust by California State Lands.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
The proposed lease amendment is consistent with Tidelands Trust property requirements.
ENVIRONMENTAL REVIEW
There is no requirement for environmental review for amending a lease with BSY under the California Environmental Quality Act (CEQA). CEQA applies to discretionary approvals that have the potential for resulting in a direct or reasonably foreseeable indirect physical change in the environment. Public Resources Code § 21065. Since the lease amendment maintains the status quo uses on the premises for the length of the term and does not authorize or enable any development, the amendment would not result in any direct or reasonably foreseeable indirect physical change in the environment. As such, approval of the lease amendment does not constitute a project for purposes of CEQA.
Even if the amendment were determined somehow to constitute a project, the request is exempt from CEQA pursuant to the Class 1 (Existing Facilities) exemption (CEQA Guidelines § 15301) as well as the common sense exemption since it can be seen with certainty that there is no possibility that the activity in question may have a significant effect on the environment . . ” (CEQA Guidelines § 15061(b)(3)).
RECOMMENDATION
Introduce an Amendment to Ordinance 3850 Approving and Authorizing the City Manager to Execute Documents Necessary to Implement the Terms of the Lease Amendment with Bay Ship and Yacht Corporation for the Tideland Property Located at 2900 Main #2100 and Surrounding Area.
Respectfully submitted,
Debbie Potter, Community Development Director
By:
Nanette Mocanu, Assistant Community Development Director
Exhibits:
1. 2012 Lease
2. Amended and Restated Lease