HomeMy WebLinkAbout11-05-2013 c10 modification of existing lease for 837 marsh
FROM: Daryl R. Grigsby, Director of Public Works
Prepared By: Robert Horch, Parking Services Manager
Ryan Betz, Public Works Analyst
SUBJECT: MODIFICATION OF EXISTING LEASE FOR 837 MARSH STREET
RECOMMENDATION
1. Approve the modification of the existing retail lease space for 837 Marsh Street.
2. Authorize the City Manager to execute the modified agreement for 837 Marsh Street.
DISCUSSION
Background
On May 15, 1989 the City and the Charles Ford Company, doing business as Riley’s Department
Store, executed a building and lease agreement. The City agreed to build the Marsh Street parking
structure and a 15,000 square foot retail space to be used for Riley’s. In exchange the City obtained
property to build a parking structure with a long term tenant to ensure parking demand in the
parking structure and revenue for the Parking Enterprise Fund.
Copelands acquired the lease from Riley’s and is currently required to pay the City $11,000 a month
or 5% of the annual gross sales (whichever is greater) until the current agreement term expires on
January 31, 2018. The percentage of gross annual sales provision has never resulted in a rent
amount higher than the base rent provided. The current rent is fixed pursuant to the first of two
options that runs through 2018; there is a second option period under the current lease that would
run through 2028, with rent being “at market rate as mutually agreed by the parties.” Thus, the
second option rental rate is uncertain under the current lease and would need to be negotiated prior
to the current option expiration in 2018.
The retail space at 837 Marsh has been vacant since 2012. Copelands Properties LLC recently
approached the City about modifying the current retail lease agreement between the City and
Copelands to facilitate a long term lease with a potential retail tenant. Copelands is seeking to
modify the lease to reflect a 10 year guaranteed term (as opposed to the current term of slightly
more than four years guaranteed) with an additional 5 year option at an agreed upon market rate to
be negotiated by the parties upon expiration of the guaranteed term. The proposed change would
add one year to the back end of the lease, extending it to 2029 and provide more certainty on the
lease rate for the next ten years, allowing Copelands to secure a long term tenant for the space.
In exchange for this amendment to the lease terms, Copelands has offered to increase the rental rate
by 3% beginning February 2014, with an annual increase of 3% for each year of the 10 year term.
The current lease would provide no increases at least until 2019, at which time any increases would
Meeting Date
Item Number 11/05/2013
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be subject to negotiation and agreement as to market rate. In addition Copelands is willing to
upgrade the air conditioning and invest in tenant improvements for a prospective tenant. All totaled
it is anticipated that there will be in excess of $300,000 in improvements to city-owned property
made as a result of this lease amendment. Overall, with all options exercised, the current lease
would run through 2028, while the proposed modification with the option would run through 2029.
In consideration of this lease extension, the City asked Copelands for the following external repairs:
1. Fund $9,000 in repairs to the elevator entrance thresholds
2. Update and repair the corner planter and window display area
3. Repair the floor tiled entrance foyer to the lease space
4. Repair the rear delivery alcove area tiles and door on Chorro Street
5. Repair and clean brick work on the exterior area surrounding the lease space
6. Repair or replace etched glass windows for the lease space
7. Repair and repaint the lower exterior panels near the sidewalks on Chorro and Marsh Streets
8. Update the exterior lighting under the lease space awnings on both Chorro and Marsh
Streets
Copelands is willing to include these updates and repairs, as well as pay the increased rent.
Benefits
The City and the parking fund benefit by receiving the long term value of significant improvements,
guaranteed rent increases and having the tenant space occupied for the next 10 years. These benefits
include:
A. Additional sales tax
B. Additional parking demand in the Marsh Street facility
C. Increased rent for the next five years
D. Additional five years rent at a known rental rate with guaranteed increases, irrespective of
market conditions
E. Continued property management for the 10-year period
F. Improved consistency in the occupancy for the 10-year period
G. Reduces/Eliminates the risk to the City regarding tenant acquisition and improvement costs
for the 10-year period
H. Increased vibrancy in the downtown by having this lease space occupied and active
Recently staff clarified when the increased rent would begin (February 1, 2014) and that there was a
request to a one year extension of the lease term (2029). This information is slightly different than
staff’s previous understanding. None of these clarifications significantly changes the overall benefit
of moving forward with this lease amendment.
FISCAL IMPACT
There is no direct cost for the lease agreement modification to the Parking Fund. Copelands is
currently paying the City $11,000 a month. The proposed amendment would increase the monthly
payment by 3% and each subsequent year until 2024. In addition, Copelands has agreed to invest
more than $300,000 in tenant improvements and infrastructure upgrades (air conditioning) for a
prospective tenant. While these improvements are not for the benefit of the City, but rather for the
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private tenant, the improvements will remain when the property returns to City control, likely
resulting in long term benefit to the City.
ALTERNATIVES
1. Do not extend the lease. If the lease is not extended it is possible that it could be leased
at a more favorable rate than the current rate at the expiration of the current option in
2018, assuming a more favorable market rate at that time. However, benefits to the City
from a higher lease rate would be reduced by additional costs associated with improving
the space for a prospective retail tenant at that time. Without an extension to Copelands,
it will continue to prove difficult to find a tenant interested in a short term lease resulting
in continued vacancy for the remainder of the lease. Allowing the extension will make it
more likely this retail space will be filled and contribute to vibrant downtown and earn
revenue for the City.
2. Provide Staff with alternative terms. City Council may provide different terms in
which to negotiate the lease extension.
ATTACHMENTS
1. Modification to the Agreement for 837 Marsh Street
2. Riley-Copeland Lease Agreement for 837 Marsh Street
T:\Council Agenda Reports\2013\2013-11-05\Lease extension for 837 Marsh St
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