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REDUCTION OF LEASED PREMISES AND DISCOUNTED PREPAYMENT OF REMAINING LEASE OBLIGATION FOR 400 EAST MAIN STREET
recommended action
RECOMMENDATION
It is recommended that the City Council adopt a resolution:
1) Approving a Lease Amendment with William J. Hoffman, as duly appointed Receiver (Landlord), to reduce the premises currently being leased by City and receive a prepayment discount for 400 East Main Street; and
2) Amending the FY 2018-19 Annual Budget to appropriate $3,897,934 for the prepayment in the General Fund and associated revenues of $175,563; and
3) Authorizing the City Manager, or his designee, to take all the necessary and appropriate actions to carry out the purpose and intent of this resolution.
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Summary
The City acquired the Waterfront Office Towers earlier this year to serve as permanent City Hall and no longer needs the first-floor space totaling 19,491 s.f. of its current lease at 400 East Main Street. The Landlord has approached the City offering to amend its lease to reduce the space the City currently leases and provide a prepayment discount for the balance of the space the City will retain under the existing lease. With the reduction in the leased space and the prepayment discount offered, the City will realize an estimated savings of $990,215 in FY 2022-23, should the Council approve the Lease Amendment.
DISCUSSION
Background
On February 25, 2015, the City entered into an agreement with William J. Hoffman, duly appointed Receiver (Landlord), to lease office space at 400 East Main Street for an eight-year term, with the option to extend the lease up to an additional four years (Attachment A - Current Lease).
Under the current terms, the City is leasing a total of 80,320 s.f., as shown below:
|
|
Size |
Current Use |
|
First Floor |
19,491 s.f. |
Vacant |
|
Third Floor |
25,755 s.f. |
Administrative Services & Human Resources |
|
Fourth Floor |
25,730 s.f. |
IT, Economic Development & Fire Administration |
|
Seventh Floor |
9,344 s.f. |
Stockton Kings & Meeting/Training Space |
Present Situation
The leased space on the first floor of 400 East Main Street remains vacant, and the City does not anticipate using the space given its recent purchase of the Waterfront Office Towers at 501 and 509 West Weber Avenue to serve as the City’s permanent City Hall. Further, the Landlord has received interest from other parties to lease the vacant space. As such, the City and Landlord wish to amend the current lease to reduce the premises being leased by the City and to provide a prepayment discount for the balance of the space the City will retain.
Following are the proposed terms of the Lease Amendment, which is included as Exhibit 1 to the resolution:
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Give Back Premises: |
The first-floor space totaling 19,491 s.f. The City will retain the leased space on the third, fourth and seventh floors totaling 60,829 s.f. |
|
Rent Obligation Balance: |
As of November 1, 2018, the rent balance for the first-floor space is $1,314,996.76. |
|
Discounted Buyout Payment: |
City shall make a one-time payment of $657,498.38, equal to 50% of the Rent Obligation Balance within 10 days of the execution of the Lease Amendment. |
|
Retained Premises Prepayment: |
City shall make a one-time payment upon execution of the Lease Amendment equal to the balance of rent obligation through the lease expiration date of March 31, 2023, for the retained premises at a discounted rate of 3.5%. As of November 1, 2018, the retained premises prepayment would equal $3,791,751.09, including the 3.5% discount. |
|
Parking: |
City will give back 25 parking spaces out of the 130 spaces allotted in the current lease agreement. |
The Landlord will also reduce the amount of the existing security deposit of $209,314.78 paid by the City in the amount proportionate to the percentage of the retained premises. Further, the Rent Obligation Balance, Discounted Buyout Payment, and Retained Premises Prepayment amounts will be based on the date of execution of the Lease Amendment and are subject to change.
FINANCIAL SUMMARY
Approval of the Lease Amendment would decrease the City’s lease obligation through the lease expiration date of March 31, 2023, from $5,439,464 (as of November 1, 2018) to $4,449,249, resulting in a savings of $990,215. This savings will be used to offset the costs of the Waterfront Office Towers tenant improvements and other City Hall move-related costs.
Prepayment of the lease will not negatively impact the Long-Range Financial Plan as the annual lease payments have been budgeted through the full lease term. The General Fund currently contributes 76.6% of the total annual lease payments; the remainder contributed through other City funds. The General Fund will receive revenues from other City funds based on existing space allocations to offset the prepayment. Appropriation is needed from the General Fund available fund balance to pay the prepayment estimated at $4,449,249.47. Budgeted rental payments for the remainder of the year of $551,316 will go toward the prepayment leaving a shortage of $3,897,933. In FY 2018-19, the prepayment cost will also be offset by rent payments from other City funds of $175,563.
Recommended FY 2018-19 Budget revenue and expense appropriations are as follows:
|
Description |
Account |
Amount |
|
Expenditure - General Fund Non-Department Rent |
010-0131-510 |
3,897,934 |
|
Revenue - General Fund Rent |
010-0000-362 |
175,563 |
Attachment A - Current Lease