Title
Recommendation to Provide Direction to Staff on Responses Received to the Request for Proposals for Leasing Building 19 Located at 2175 Monarch Street; and, if Recommendation is Approved: and
Introduction of Ordinance Authorizing the Interim City Manager, or Designee, to Execute a Third Amendment to the Lease, Substantially in the Form of the Attached Agreement, with Saildrone, Inc., a Delaware Corporation, for Building 12, Located 1050 West Tower Avenue, Alameda, CA, to Add Building 19, Located at 2175 Monarch Street, Alameda, CA, to the Premises with a Five Year Lease Term with Five Year Option to Extend. (Community Development 29061822)
Body
EXECUTIVE SUMMARY
The City of Alameda (City) received four competitive proposals for Building 19 from Astra Space Operations, Inc. (Astra), Pyka, Inc. (Pyka), Rain Industries Inc. (Rain), and Saildrone, Inc. (Saildrone). On July 12, 2022, staff brought a recommendation to City Council to lease Building 19 to Saildrone, and intended to return to City Council with a proposed amendment to Saildrone’s existing lease if this recommendation was approved. However, City Council did not approve staff’s recommendation and directed staff to return to City Council with additional information.
In response to City Council’s direction, each Building 19 applicant was asked to provide staff with greater detail regarding its intended use and tenancy of Building 19, and its ability to pay rent and honor other financial lease obligations. The City employed Keyser Marston Associates (Keyser Marston), a real estate economics advisory firm, to evaluate the financial strength of each company. On July 13, 2022, Astra advised the City that it was revoking its offer to lease Building 19. Pyka has also advised the City that it is no longer interested in leasing Building 19, so long as it is able to lease Building 11.
Staff is seeking City Council direction on the remaining proposals for leasing Building 19 received from Rain and Saildrone and recognizes that the selection of a Building 19 tenant and/or the providing other direction is fully within the discretion of City Council. However in the interest of facilitating the advancement of a Building 19 lease, staff is making a recommendation and offering a proposed tenant agreement.
Staff is recommending that the City lease Building 19 to Saildrone because: (i) it has been a reliable, longer term Alameda Point tenant, (ii) its financial condition appears adequately stable and it has demonstrated to the City for multiple years its ability to meet its lease obligations, including the payment of rent, (iii) its use is consistent with City Council priorities, as described below, and (iv) it has pressing need for additional space to expand.
If City Council approves the staff recommendation to lease Building 19 to Saildrone, then staff requests that City Council approve execution of a third amendment to the lease with Saildrone for Building 12, located at 1050 West Tower Avenue, in order to add to the premises Building 19, located at 2175 Monarch Street, consisting of approximately 16,888 square foot office building and a 3,993 square foot shed, totaling approximately 20,881 square feet of rentable square feet at Alameda Point (collectively, Building 19 [Exhibit 1]).
If City Council does not approve the staff recommendation, staff will return at a later date as directed by City Council.
BACKGROUND
Building 19, a former air traffic control tower, is located at 2175 Monarch Street (see Exhibit 2). In addition to the historic control tower, which offers approximately 16,888 square feet of interior office space, Building 19 includes an approximately 3,993 square foot shed and enclosed, paved yard area. Bordering the California Least Tern Conservation Area, owned by the United States Department of Veterans Affairs (VA), Building 19 is subject to certain activity and construction restrictions. Building 19 was previously occupied by Google, Inc. and Makani Technologies, LLC, who made a few infrastructure improvements to the office space. As one of the most unique structures and requiring the least capital investment, Building 19 is one of the most desirable properties available at Alameda Point.
The Surplus Land Act (SLA), as amended by AB1486 (2019), requires local agencies such as the City, to offer properties it intends to sell or lease on a long-term basis for certain public uses, such as open space or affordable housing, before it is disposed of to private parties. At the May 18, 2021 City Council meeting, the City Council approved issuing Notices of Availability to Sell or Lease (Notices), as prescribed by the SLA, for five sites at Alameda Point, including Building 19. The City received no responses to these Notices.
Following conclusion of the SLA process, staff issued a request for proposal (RFP) seeking a tenant interested in leasing and developing Building 19 (Exhibit 3). The RFP was listed on CoStar and Loopnet, which are the commercial leasing versions of the residential MLS. The RFP included the material terms of a lease for Building 19, and asked respondents to match or enhance those terms. RFP proposals were evaluated using the same criteria used for all commercial tenants at Alameda Point, including consistency with City Council priorities, such as job generation, sales tax generation, and clean energy technology, consistency with current tenant mix, and ability to attract other similar tenants.
Currently, there is no policy guiding decisions on leasing and/or selling property at Alameda Point. In making prior recommendations to City Council regarding selling or leasing an Alameda Point real estate asset, factors considered have included building maintenance requirements; personnel/staffing costs; infrastructure needs; a building or parcel’s condition, desirability and location; the proposed use of a property; and terms of occupancy. An analysis is currently being prepared to inform the development of a policy for disposition of Alameda Point real estate assets, and staff will return to City Council with this analysis in the future. In the interim, staff is recommending that Alameda Point real estate assets be leased instead of permanently disposed of through a sale.
The City received four competitive proposals for Building 19 from Astra, Pyka, Rain, and Saildrone. On July 12, 2022, staff brought a recommendation to City Council to lease Building 19 to Saildrone, and intended to return to City Council with a proposed amendment to Saildrone’s existing lease if this recommendation was approved. However, City Council did not approve staff’s recommendation and directed staff to return to City Council with additional information.
In response to City Council’s direction, each applicant was asked to provide staff with greater detail regarding its intended use and tenancy of Building 19 and its ability to pay rent and honor other financial lease obligations. The City employed Keyser Marston, a real estate economics advisory firm, to evaluate the financial strength of each company. A summary of each applicant’s intended use, job growth projections and Keyser Marston’s financial findings is attached (Summary of RFP Proposals, Exhibit 4). On July 13, 2022, Astra advised the City that it was revoking its offer to lease Building 19. Pyka has advised the City that it is no longer interested in leasing Building 19, so long as it is able to lease Building 11. The remaining proposals for Building 19 are from Rain and Saildrone.
Rain
Rain designs and manufactures autonomous aircrafts. These aircraft assist with extinguishing wildfires in their early stages, an innovative and important product to our state and the environment. Rain would use Building 19 for the following functions: research and development, light manufacturing and as a headquarters for its business operations. Rain is also interested in licensing the Northwest Territories for testing of its prototypes’ autonomous flight, fire retardant deployment (though it will only deploy water at Alameda Point), and coordinated containment capabilities. Rain currently has twelve (12) employees and anticipates that number will increase to thirty-two (32) employees by the end of 2022 and to eighty-five (85) by 2025. Rain employs a diverse workforce to research and develop its drones, including employees handling business administration, light manufacturing, computer-aided design (CAD) and software engineering. As a climate technology firm with a culture of sustainability, nearly half of Rain’s employees commute on foot or bicycle. If Rain’s proposal for Building 19 is selected, the company plans to expand in Alameda as it grows.
Saildrone
Saildrone has been an Alameda Point tenant since April 2016. Currently operating out of Building 12, Saildrone designs and manufactures wind and solar powered autonomous vehicles, called Saildrones. These vehicles are used for cost-effective ocean data collection and utilized by governments and private companies around the globe to provide new insights about weather forecasting, carbon cycling, global fishing, and the impacts climate change has on humanity. Saildrone has gone from eight (8) employees in 2016, to thirty (30) employees in 2017, to one hundred ten (110) employees in 2021, and to one hundred forty-five (145) employees in 2022. By the end of 2022, Saildrone estimates their workforce will increases to two hundred fifty-two (252) employees. Saildrone employs a range of positions from entry level manufacturing jobs to high end software engineers. Saildrone maintains large multi-year contracts with customers such as the National Oceanic and Atmospheric Administration (NOAA), NASA and the U.S. Navy. Staff recommends leasing Building 19 to Saildrone to support their continued success and expansion at Alameda Point.
Saildrone currently leases Building 12, located at 1050 West Tower Avenue at Alameda Point, which includes 110,000 square feet of rentable space. Saildrone’s lease (Exhibit 5), dated as of April 2017, as amended by the first amendment (Exhibit 6) dated March 3, 2021, and the second amendment (Exhibit 7) dated July 27, 2022, has a five-year term with two (2) five-year extension options and a first right of negotiation for purchase if the City elects to sell the Building 12. The first extension option was exercised through the second lease amendment, and the extension term commenced September 1, 2022 and expires August 31, 2027. The second extension option, if exercised, will expire August 31, 2032. Building 12 has not been fully conveyed to the City, so sale is not possible at this time.
DISCUSSION
Rain and Saildrone’s proposed uses for Building 19 are consistent with City Council prioritization of new, emerging and/or clean technologies. The areas that differentiate the two companies and that impacted staff’s recommendation were the City Council prioritization of job creation, tax revenue generation, financial strength and stability.
Employment Growth
• Rain forecasts an approximately one hundred sixty-seven (167) percent employment growth between now and the end of 2022, increasing from twelve (12) to thirty-two (32) employees at Alameda Point.
• Saildrone’s anticipates an approximately seventy-four (74) percent employment growth increasing from one hundred forty-five (145) employees to two hundred fifty-two (252) employees over the same period.
• Net job generation by December of 2022 is twenty (20) employees for Rain and one hundred seven (107) employees for Saildrone.
Tax Revenue Generation
• Rain, which was founded in 2019, is in the piloting and fundraising stage of its product development.
• Saildrone, which was founded in 2012, is in the production and research stage of its product development.
• This difference in product maturity means that Saildrone is currently able to generate some tax revenues, while Rain’s trajectory for tax revenue generation will require additional time.
Financial Strength/Stability
• Rain was founded in 2019 and operates at a loss while it focuses on development and initial pilot demonstrations of its autonomous aircraft networks for containing wildfires. The company will require additional capital investment in the near term to maintain viability and support work toward initial service deployment of its product, which is expected to occur in 2025. To that end, Rain is planning a $25 million “Series A” venture capital fundraising round this fall, which is estimated to be adequate to support the company’s operations for a period of years. The company provided a support letter from its venture capital investor, DBL Partners, expressing an intent to support the company through this planned fundraising and to make a substantial additional investment in Rain. In addition to the planned Series A fundraising, the company will require subsequent rounds of venture capital investment and/or revenue generation to maintain operations over the full term of the proposed 10-year lease. The company has offered to deposit an initial year of rent in an escrow account as a showing of good faith and security for rent payments in the initial lease year.
• Saildrone is an early-stage technology company founded in 2012. Saildrone operates at a loss while making significant investment in research and development (R&D) and production of its autonomous wind and solar-powered ocean drone product line. Saildrone has financed its operations and R&D activities through infusions of investment capital. The company has limited debt on its books relative to its balance sheet. The company secured $100 million in new venture capital funding in 2021 and, as of December 2021, has available cash and short-term investments adequate to sustain the company's operations at their 2021 levels for a period of years, although an expansion in operations is expected. A continuation of investment capital infusions, improvement in net revenues or reduced spending would be necessary to sustain the company's business for the full duration of the proposed 5-year lease term, as well as the proposed 5 year option if exercised.
Staff seeks City Council direction on whether to lease Building 19 to Rain or Saildrone, or select neither of these companies and instead market the property to other prospective tenants. Staff’s analysis and recommendation are presented to assist with City Council’s decision. With that in mind, staff is recommending that the City lease Building 19 to Saildrone’s because: (i) it has been a reliable, longer term Alameda Point tenant, (ii) its financial condition appears adequately stable and it has demonstrated to the City for multiple years its ability to meet its lease obligations, including the payment of rent, (iii) its use is consistent with City Council priorities, and (iv) it has pressing need for additional space to expand.
If City Council approves the staff recommendation to lease Building 19 to Saildrone, then staff proposes execution of the attached third amendment to the lease with Saildrone to add Building 19 (Exhibit 8) to the premises described in the lease. The third amendment will accomplish the following: (i) amend the premises under the lease to include Building 19, (ii) establish the base monthly rent for Building 19 at $1.05 per square foot with three-percent (3%) annual increases, (iii) cause the insurance requirements in the lease to apply to Building 19, (iv) increase the security deposit to account for Building 19, (v) clarify that the purchase option in the lease applicable to Building 12 will not be expanded to include Building 19, as that purchase option term was not reflected in the RFP, and (vi) reflect a termination date of August 31, 2027, with one (1) remaining five-year extension option.
The proposed rent for Building 19 is as described below:
|
Months |
Building 19 Monthly Base Rent |
Total Monthly Rent (Buildings 12 and 19) |
|
1-12 |
$31,312.50 |
$132,521.50 |
|
13-24 |
$32,261.15 |
$136,497.15 |
|
25-36 |
$33,228.98 |
$140,592.06 |
|
37-48 |
$34,225.85 |
$144,809.82 |
|
49-60 |
$35,252.62 |
$149,154.11 |
Monthly base rent during the five-year extension period will start equal to the greater of either (1) fair market value at commencement of the renewal term or, (2) base rent at the end of the initial sixty (60) month term. Monthly base rent will then increase by three percent (3%) every twelve (12) months.
If City Council does not approve the staff recommendation to lease Building 19 to Saildrone, staff will return at a later date as directed by City Council.
ALTERNATIVES
• Approve the third amendment to the lease with Saildrone, as described above, to expand the premises to include Building 19.
• Direct staff to renegotiate all or some of the terms of the third amendment to the lease with Saildrone based on City Council direction.
• Direct staff to lease Building 19 to Rain.
• Direct staff to market the property to other prospective tenants.
FINANCIAL IMPACT
Lease revenue would be deposited in the Alameda Point/Base Reuse Fund (290) and is restricted by use as described in the Economic Development Conveyance Agreement. Leasing these properties will increase the projected revenue for this fund.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This action is consistent with the Alameda Municipal Code.
ENVIRONMENTAL REVIEW
In accordance with the California Environmental Quality Act (CEQA), this action is Categorically Exempt pursuant to CEQA Guidelines Section 15301(c) - Existing Facilities.
CLIMATE IMPACTS
There are no identifiable climate impacts or climate action opportunities associated with the subject of this report.
RECOMMENDATION
Provide direction to staff on responses received to the Request for Proposals for leasing Building 19 located at 2175 Monarch Street; and
Introduce an ordinance, if City Council approves staff’s recommendation in this staff report, authorizing the Interim City Manager or designee to execute a third amendment to the lease, substantially in the form of the attached agreement, with Saildrone, Inc., a Delaware corporation, for Building 12, located 1050 West Tower Avenue, Alameda, CA, to add Building 19, located at 2175 Monarch Street, Alameda, CA, to the premises, if City Council approves staff’s recommendation in this staff report
Respectfully submitted,
Lisa Nelson Maxwell, Community Development Director
By,
Lorie Curtis, Management Analyst
Exhibits:
1. Premises/Building 19
2. Map with Building 19 Location
3. Building 19 RFP
4. Summary of Building 19 RFP Proposals
5. Lease for Building 12
6. First Amendment to Lease for Building 12
7. Second Amendment to Lease for Building 12
8. Third Amendment to Lease for Building 12 and adding Building 19, substantially in the form
cc: Nancy Bronstein, Interim City Manager