Title
Recommendation to Authorize the City Manager to Offer Commercial Tenants in City-Owned Properties a Loan Conversion and Forgiveness Assistance Program in Response to the COVID-19 Pandemic. (Community Development 858)
Body
To: Honorable Mayor and Members of the City Council
EXECUTIVE SUMMARY
The COVID-19 pandemic continues to impact communities around the world, including the City of Alameda (City). On March 17, 2020, the City Council adopted an urgency ordinance declaring a local emergency. The March 17 ordinance authorized certain actions until April 7, and was subsequently extended until the State’s declaration of emergency is rescinded, or sooner should it be appropriate to lift the local emergency declaration prior to State action. On April 21, 2020, the Council discussed a rent deferral and abatement policy for commercial tenants in City-owned properties. City Council requested that staff come back with more information and recommendations for a rent relief program.
Staff’s research into what other commercial landlords were doing revealed that rent abatement is not typically being offered. As an alternative to abating past due rent, staff recommends that the City Council provide a loan conversion assistance program to commercial tenants in City-owned properties who have been impacted by the COVID-19 pandemic. With the loan conversion approach, the City may agree to convert the past due rent into a loan payable over time or to convert some, or all, of the loan to a grant if certain conditions are met. Staff is recommending the loan conversion approach because it offers the City a great deal of flexibility and provides individualized assistance to tenants based on their situation. Staff asks that City Council provide direction regarding criteria for the rental assistance program.
BACKGROUND
On March 17, 2020, the City Council approved an ordinance which in part allows the City Manager to "evaluate and amend leases, licenses and other occupancy agreements applicable to City-owned residential and commercial properties in order to provide financial concessions to the tenants under such agreements for the months of April, May, and June." The current shelter-in-place order will remain in effect through May 31, 2020.
On March 25, 2020, the City sent letters to all commercial tenants offering a deferment of two months’ rent with a twelve-month repayment period beginning in October 2020, with full payment by October 2021. The letter indicated that during the sixty (60)-day period, staff would be evaluating the emergency situation and potentially offering other programs/options. At its April 21, 2020 meeting, the City Council considered a two- pronged approach to support commercial tenants in City-owned properties:
Deferral: Allowing some portion of time to pass where the tenants do not pay rent with an established repayment period; and
Abatement: Offering certain tenants financial relief by abating rent payments for an negotiated period of time.
DISCUSSION
At its April 21 meeting, the City Council considered staff’s and a City Council subcommittee’s recommendations on a rent deferment and rent abatement program for tenants in City-owned buildings. As part of that discussion, City Council concurred with staff’s recommendation that the 60-day deferment program be extended for an additional 30 days through June 30, 2020.
In addition, the City Council provided feedback on a rent abatement program, or other type of assistance, and requested that staff research and return with more concepts/ideas.
Some of the issues the City Council asked staff to consider as it developed a rental assistance program included:
• Whether tenants paying a market rate rent versus those with under-market rents should have priority for assistance;
• In exchange for rent assistance provided, should the City receive from the tenant profit sharing, percentage rent or sliding scale rent when the tenant is operational again;
• Require all abatement recipients to document the impact of the COVID-19 pandemic on their businesses by provide their books for the previous year;
• Base abatement assistance decision on the business’ status during the shelter-in-place order - e.g., closed, partial staff, fully operational, etc.;
o Consider abatement for businesses that are completely closed
§ Question about whether abatement should last beyond Shelter in Place (SIP)
• Consider how the business has supported or protected employees;
• Create a cap on support based on time or a monetary limit;
o Be careful with double dippers (business participating in the small business grant + rent abatement program) - The criteria for the loan program should be different than the business assistance grant program developed by the Economic Development team.
o Is this a franchise-tenant for whom franchisor assistance may be available?
• Some sort of consideration for civic responsibility during the C-19 crisis;
• Consider business resiliency (speed of resiliency and likelihood of success);
• Consider catalyst businesses (theatre);
• Consider longer payback period;
• Look at some of the criteria from the business assistance grants;
• Analysis of financial implications to the City/Base Reuse; and
o If we offer abatement, what projects and programs will be impacted- what can’t we do? Will jobs be lost?
• Hybrid approach of rent deferral and reduced rent discussed by the City's brokers.
In addition to the issues identified above, staff researched what other commercial landlords are doing around the Bay Area and the State. Staff read articles and documents from real estate professionals and surveyed several local property management companies about what their owners/landlords were doing to address the COVID-19 crisis. The most intriguing result to note was that none of the landlords were offering rent abatement. Instead they were offering alternatives around rent deferment.
Some of the alternatives included:
§ Application of Deposit: Tenant agrees to allow its security deposit be used for current rent obligation. Tenant will agree to replenish security deposit within a negotiated period of time.
§ Subletting: Bringing in a new tenant (for part of or all of the rented space) could reduce or eliminate the rent obligations while replacing revenue for the landlord.
§ Loan Conversion: Rather than abating past due rent, a landlord may agree to convert the past due rent into a loan payable over time. The loan is then evidenced by a promissory note that is cross-defaulted with the lease.
Staff is recommending the loan conversion approach because it offers the City a great deal of flexibility and provides individualized assistance to tenants based on their situation. For example, the loan could be administered like the federal loans that can be converted to a grant if the recipient complies with certain requirements. The loans could be forgiven if the tenant complies with agreed upon measures or otherwise satisfies specified metrics like job retention; tenant's financial impact; is the tenant a catalyst/anchor presence, or other metrics the City Council might suggest.
In addition, the loan conversion option provides information on fiscal impacts on a case-by-case basis. With each negotiated promissory note, there will be more precise information on how the transaction will impact City funds and budgets.
While it is not outright abatement, the City Council could offer loan forgiveness as an additional component of the loan conversation program, which is essentially abatement of a rent obligation. The research advises that the recipients should provide a great deal of information to the City in order to qualify for the loan conversion program and potential loan forgiveness. In addition to historical financial documents, applicants would need to provide the following information:
• Current cash on-hand
• Payroll information
• List of creditors, with amounts owed and payment schedules
• Narrative history and explanation of current financial difficulties, and a plan for recovery
• Current business license and BIA assessment
• No code compliance violations
The program works as follows:
• Tenant requests term for rent deferral, for example 18 months.
• City agrees to term and develops a promissory note with specific terms.
- Total deferred rent is due in 18 months
- If tenant restores employment levels, is fully functioning and restored to pre-COVID-19 levels, or meets other criteria/metrics established by the City Council, 50% of the loan is converted to a grant.
• If a business is a catalyst/anchor tenant, the entire loan could be forgiven upon the satisfaction of certain performance measures.
Staff should be able to evaluate individual requests based upon:
• Tenant's consistency with the long- term land use/development plan (Alameda Point tenants only);
• Tenant must have more than 30 employees or generate significant sales tax or be considered an economic development catalyst; and
• Demonstrate significant loss of income, 35% or more, since March 17, 2020.
The City should consider each request for relief on a case-by-case basis, rather than based on deals negotiated with other tenants.
ALTERNATIVES
• Staff recommends that the City Council authorize the City Manager to establish a loan conversion and forgiveness assistance program to commercial tenants in City-owned properties who have been impacted by the COVID-19 pandemic.
• The City Council could consider a rent reduction program with a deferral payment over a predetermined term, for one year or spread across the remaining term of the lease. This is the program described by the City's brokers which allows for cash flow for the tenant and the landlord. The commercial real estate documents suggest this practice should be done for leases with three years or less remaining on the term.
• The City Council could allow tenants to sublet all or a portion of their premises to assist in rent payments. Subtenants must be consistent with zoning, receive all governmental permits and approvals and insurance, and execute City-approved subtenant agreements.
• The City Council could allow tenants to apply their deposit under to the lease to rent.
• The City Council could only provide its three month rent deferral program and not offer a loan conversion/rent abatement program.
FINANCIAL IMPACT
Any actions proposed will impact the Base Reuse Fund 858. The projected revenue for the fund for Fiscal Year 2019-20 is $14 million and as of April 2020, revenue received was $12 million. Mid-cycle adjustments to cut expenditures to allow for some sort of tenant support program will be needed.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
Setting up a Loan Conversion Assistance Program is consistent with the urgency ordinance declaring a local emergency. The Alameda Municipal Code (AMC) Chapter 2-24.2 defines a local emergency as “the actual or threatened existence of conditions of disaster or of extreme peril to the safety of persons and property within this jurisdiction requiring the combined forces of other political subdivisions to combat.”
ENVIRONMENTAL REVIEW
Approval of a Loan Conversion Assistance Program is exempt from review under the California Environmental Quality Act Section 153 (not a project); and Section 15061(b)(3) (no significant environmental impact).
CLIMATE IMPACTS
There are no identifiable climate impacts or climate action opportunities associated with the subject of this report.
RECOMMENDATION
Authorize the City Manager to offer commercial tenants in City-owned properties a Loan Conversion Assistance Program in response to the COVID-19 pandemic.
CITY MANAGER RECOMMENDATION
Through evaluating the options the City can consider, one element is obvious and that is that we are in an unprecedented time impacting the entire community including businesses leasing from the City. Staff has put together options that attempt to balance the needs of businesses leasing from the City with City’s long-term financial needs to serve the community. We have provided several options for Council consideration.
I recommend approval of the staff recommendation, with the ability to come back to Council with further considerations as the urgency of the COVID-19 evolves into the Fall of 2020.
Respectfully submitted,
Debbie Potter, Community Development Director
By,
Nanette Mocanu, Asst. Community Development Director
Financial Impact section reviewed,
Nancy Bronstein, Acting Finance Director
cc: Eric Levitt, City Manager