Title
Staff Report for the Disposition and Development Agreement by and Between the City of San Leandro, in Its Capacity as the Successor Agency to the San Leandro Redevelopment Agency, and Innisfree Ventures II, LLC for the $2.25 million Sale of 1550 East 14th Street for the Development of Village Marketplace (City to receive approximately $270,000 of sales proceeds based upon its property tax allocation rate. Village Marketplace will bring on-going sales tax and property tax revenue to the City and will create approximately 113 jobs.)
Staffreport
SUMMARY AND RECOMMENDATIONS
In 2009, the San Leandro Redevelopment Agency purchased 1550 East 14th Street to provide temporary parking during the construction of the downtown parking garage and to develop the property into a project that would serve as a catalyst for downtown retail. The Redevelopment Agency has been working in partnership with Innisfree Ventures II, LLC and the community for the past three years to create the Village Marketplace, a 28,000 square foot retail project with a specialty grocery store anchor. Staff recommends that the City approve a Resolution Authorizing the City Manager to Execute a Disposition and Development Agreement by and between the City of San Leandro, in its Capacity as the Successor Agency to the San Leandro Redevelopment Agency, and Innisfree Ventures II, LLC for the $2.25 million sale of 1550 East 14th Street for the development of Village Marketplace. The sale proceeds will be turned over to the Alameda County Tax Auditor Controller for distribution to taxing entities, consistent with the requirements of AB x1 26.
BACKGROUND
In 1947, Lucky began operating a grocery store at 1550 East 14th Street (the Site). In May 2005, Red Mountain Retail Group acquired a portfolio of Lucky properties, including the Site. Red Mountain held ownership of the Site through Norcal, a limited liability corporation. In September 2005 the grocery store, which had changed to an Albertsons, closed due to underperformance.
In 2007, Norcal filed a series of lawsuits against the City contending that various planning and zoning actions related to the City's approval of the Transit Oriented Development Strategy violated its constitutional rights or were otherwise contrary to law. In 2008, the City Council placed a priority on resolving the litigation due to the prominence of the Site and the blight created by the store vacancy. On April 20, 2009, the City Council voted unanimously to approve settlement terms, which included the Redevelopment Agency's purchase of the Site for 6.175 million dollars and Norcal's demolition of the building prior to close of escrow. The settlement price was deemed reasonable based upon executed Letters of Intent for reuse of the building.
The Redevelopment Agency recognized at the time that the requirement that Norcal demolish the existing approximately 26,000 square foot building was in fact demolishing part of the asset that it was purchasing. When the Agency took ownership of the Site, its value had been significantly decreased. In exchange for this loss, the Agency gained substantial control over the nature of future development. Instead of a single-tenant building behind a field of parking, the Agency could require a development consistent with the vision of the TOD Strategy. The write down of property value in order to create a development that would be a catalyst for change is one vital role that Redevelopment Agencies used to play. Additionally, the acquisition of 1550 East 14th Street enabled the Redevelopment Agency to mitigate parking problems during the construction of the downtown parking garage.
In September 2009, the Redevelopment Agency entered into an Exclusive Negotiating Rights Agreement (ENRA) with Innisfree Ventures II for the Site and the triangle-shaped block bounded by East 14th Street, Hays Street, and Davis Street, known as "Town Hall Square." These locations were identified as two of the three key opportunity sites for development in the City's Transit Oriented Development Strategy. The opportunity is based on their ability to serve as development catalysts. Both sites are currently being used for temporary replacement parking until the Downtown garage reopens, which is scheduled to occur in September 2012.
Staff worked closely with Innisfree and the community through the TOD Strategy, a downtown retail web survey and a retail attraction letter writing campaign, to create the Village Marketplace project. It will include the following features:
· Quality retailers and a specialty grocery store
· Outdoor dining opportunities and a generous plaza for people to gather
· Retail activity along East 14th Street with parking behind the buildings
· Superior architecture, building materials, landscaping and a public art component
· Off-site improvements including pedestrian friendly streetscape and angled public parking.
The proposed tenants with signed Letters of Intent are:
· Fresh & Easy Neighborhood Market - twenty year ground lease with four, 5-year options. Innisfree will lease the land to Fresh & Easy; Fresh & Easy will build its own building on the southern portion of the site.
· Peet's Coffee & Tea - ten year lease with two 5-year options.
· Chipotle - ten year lease with four 5-year options.
· AT&T - five year lease with two 5-year options
Public meetings were held to receive input on the proposed project including a City Council work session on April 25, 2011 and a discussion with businesses at the June 24, 2011 Downtown Association meeting. Progress on the development of Village Marketplace was negatively impacted on June 28, 2011 when the State froze redevelopment agency activities thereby making it impossible for the Redevelopment Agency to sell the parcel as previously scheduled and planned.
Progress on Village Marketplace continued and public workshops were held on September 2, 2011 and September 27, 2011 and a project update was provided to the City Council at its November 7, 2011 City Council meeting.
On December 29, 2011 the State Supreme Court upheld AB x1 26, which eliminated redevelopment agencies effective February 1, 2012. City staff immediately began working with the City Attorney's office to determine the process by which to legally sell the property. The property must be sold by the City serving in its capacity as the Successor Agency to the Redevelopment Agency. Sale proceeds will be forwarded to the Alameda County Auditor Controller for distribution to taxing entities as required by AB x1 26.
The applicable entitlements for Village Marketplace were reviewed at a public hearing, approved, and recommended for City Council approval by the Planning Commission on April 19, 2012 and are being brought to the City Council for approval concurrently with the Disposition and Development Agreement.
The City and Innisfree have reached a negotiated sale price of $2.25 million and staff is recommending execution of a Disposition and Development Agreement to sell the Site to Innisfree for development of Village Marketplace consistent with the terms and conditions of all approvals, entitlements and permits.
Analysis
Sales Price
There are three primary means of appraising commercial real estate: the cost approach, sales comparison approach and the income capitalization approach. Each method has value depending on the situation and type of real estate involved.
Cost Approach - The cost approach is not commonly used. The primary assumption of this method is that the value is the same as the cost to replace the property.
Sales Comparison/Market Approach - This is the method most are familiar with as it is the accepted method for valuing residential real estate; this method is also used to value commercial real estate, although it is not the most common method. Typically this method involves selecting properties with similar characteristics in the same market area that have recently sold. Once those properties are found they are compared to the property in question and a professional appraiser will deduct value from the subject property for comparative deficiencies and increase value for comparative advantages.
Income Approach - This valuation method is a means for real estate investors to determine the value of a property based on its income in comparison to similar properties. Essentially, the investor divides the projected income to be generated by the property by the capitalization rate to come up with a sales value. The market and type of development determine the prevailing capitalization rate.
A June 2011 appraisal provided a value of $3,014,000 using the sales comparison approach. If the City sold the property to the highest bidder, it may receive this price. However, City influence on the type of project to be developed would be limited to the Zoning Code. The City's influence on the design and tenants would similarly be limited. Additionally, the developer would not be required to pay prevailing wage for project construction. Lastly, and possibly most important, this methodology does not take into consideration the value of the development as a whole. For example, the highest bidder may not develop a project which serves as a downtown retail catalyst, provides design leadership, creates jobs and sales tax revenue. Additionally, the highest bidder may choose to land bank the parcel which would only provide a slight increase in the property tax revenue to the City and other taxing entities.
The income approach is the most common method for valuing commercial real estate. Basing the sale on the value of the Site using the income approach is recommended given that the City influenced the development of the Site and placed the following requirements on Innisfree.
· Developer will pay prevailing wages on construction
· $500,000 in off-site improvements
· Quality architecture, materials and landscaping
· Generous public gathering spaces
· Full-service restaurant and desired retail tenants such as Peet's Coffee and Tea
The income approach takes into consideration the income projections. The income projections for the Site are solid because 75% of the total project has letters of intent signed with tenants. A detailed project pro forma including construction costs, financing costs, etc. was reviewed by staff and then forwarded to Keyser Marston, a financial consulting firm specializing in public-private transactions. Keyser Marston estimated the land value for the site for development of the proposed Village Marketplace to be 2.17 million dollars based on analysis of Innisfree's pro forma. Keyser Marston's report is attached for your information.
The 2.17 million dollar value is based on the following assumptions, which are reasonable in today's market:
· 10% Return on Investment (ROI)
· Net Operating Income of approximately $705,000
· Capitalization rate of 7.5%
Other economic benefits of the Village Marketplace include:
· 113 permanent jobs
· Over $100,000 annually in sales tax revenue to the City, more to others
· 8.5 million dollars added to the property tax roll; annual property tax revenue to taxing agencies of approximately $97,500.
· Aggressive construction schedule after conveyance; project completion expected within 24 months.
Terms of the DDA
The Disposition and Development Agreement (DDA) before the City Council tonight includes the following provisions.
· The City serving in its capacity as the Successor Agency to the Redevelopment Agency will sell the Site to Innisfree for $2,250,000. (section 3.2)
· Innisfree must pay the Successor Agency an additional $250,000 if a full-service restaurant is not opened on the Site within 24 months following the date of issuance of a certificate of occupancy or 48 months following the effective date of the DDA. (section 3.2.1)
· The closing date shall be no later than March 1, 2013 and is based upon the fulfillment of numerous conditions of closing such as approval of Construction Plans, and Innisfree having obtained permits, approvals, financing, and requisite insurance. (sections 3.6 and 3.8)
· Innisfree shall develop the Village Marketplace retail project consistent with the terms and conditions of all approvals, entitlements and permits. (section 4.1)
· Innisfree will include, at its expense, a public art component, new public sidewalks including street trees and bike racks. (section 4.1.1 - 4.1.3)
· City shall expeditiously process all permits, entitlements and approvals necessary for development of Village Marketplace. (section 4.3)
· Innisfree shall diligently prosecute the construction work to completion within 18 months, but in no event later than 24 months following the effective date of the DDA. (section 4.6)
· Innisfree shall submit Construction Plans within 150 days following the effective date of the DDA.(section 4.9)
· Innisfree, its contractors and agents must comply with prevailing wage laws. (section 4.15)
· Innisfree must maintain the Village Marketplace and surrounding public improvements at its own expense including the landscaping and common areas. (section 6.2)
· Innisfree will support the creation of a Property-Based Business Improvement District. (section 6.2.2)
Based upon the reasons outlined in this report, staff recommends that the City Council, serving in its capacity as the governing body of the Successor Agency to the San Leandro Redevelopment Agency, approve and authorize the City Manager to execute the Disposition and Development Agreement with Innisfree Ventures II, LLC for the $2.25 million sale of 1550 East 14th Street and the development of Village Marketplace. Approval of the DDA by the Successor Agency Oversight Board is also required and scheduled for May 23, 2012.
Previous Actions
· On April 27, 2009 the Redevelopment Agency approved a Purchase and Sale Agreement and Authorized the Expenditure of Tax Increment Funds for the Acquisition of 1550 East 14th Street.
· On November 16, 2009 the Redevelopment Agency approved an Exclusive Negotiating Rights Agreement with Innisfree Ventures II, LLC for development of the Gateway (1550 East 14th Street) and Town Hall Square sites.
Board/Commission Review and Actions
· The Planning Commission approved the entitlements for Village Marketplace on April 19, 2012.
Summary of Public Outreach Efforts
· Council work session April 25, 2011
· Downtown Association June 24, 2011
· Community Workshop September 2, 2011
· Community Workshop September 27, 2011
· Council Update November 7, 2011
Legal Analysis
This staff report and Disposition and Development Agreement have been reviewed and approved as to form by the City Attorney's office.
Fiscal Impacts
The proceeds from the Successor Agency's sale of 1550 East 14th Street will be forwarded to the County Auditor-Controller for distribution to taxing entities if such proceeds are not needed for approved development projects or to otherwise wind down the affairs of the former Redevelopment Agency, each as determined by the Oversight Board. The City's share of the proceeds is $270,000, or 12% of $2.25 million.
ATTACHMENTS
· Memorandum from Keyser Marston, subject: Village Marketplace
PREPARED BY: Cynthia Battenberg, Business Development Manager, Community Development Department