0,...0 Los Angeles W orld Airports

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1 Date 0,...0 Los Angeles W orld Airports Report to the BOARD OF AIRPORT COMMISSIONERS Meeting Date: owers, Deputy Executive Director May 21, 2013 Reviewed by: Stev CAO Review: Completed Pending. N/A City \..,_ Reviewed for 1 ttorney Capital Budget Operating Budget CEQA Approval Status By Z/Gina Mar' in ey - Executive Director Procurement 5/13/13 II Y N Cond 5/5/13 5/14113 PII YOND NA YENNA Ei Y 0 N DS AE MT SUBJECT: Purchase and Sale of Real Property Approve purchase of the commercial real property located at 6033 and 6053 West Century Blvd. and 6101 and 6151 West 98th Street adjacent to Los Angeles International Airport from Skyview Center, LLC, a Delaware limited liability company, for an amount not to exceed $113,324,063, consisting of a purchase price of $111,925,000 plus due diligence and closing costs, subject to assumption of existing leases encumbering the property and existing agreements providing property management and leasing services. RECOMMENDATION: Management RECOMMENDS that the Board of Airport Commissioners: 1. ADOPT the Staff Report. 2. DETERMINE that the purchase of 6033 and 6053 West Century Blvd. is not subject to the California Environmental Quality Act (CEQA) pursuant to State CEQA Guidelines 15061(b)(3). 3. DETERMINE that the assignment and assumption of all leases is exempt from CEQA pursuant to Article Ill, Class 1 of the Los Angeles City CEQA Guidelines and State CEQA Guidelines 15061(b)(3) and Page 1 of 9

2 4. DETERMINE that the purchase of 6101 and 6151 West 98th Street is not subject to further review under the Pubic Resources Code (PUC) Section or CEQA Guidelines because none of the conditions requiring preparation of a subsequent or supplemental Environmental Impact Report (EIR) have occurred since CEQA review was completed in both the Los Angeles International Airport (LAX) Master Plan El R and the LAX Specific Plan Amendment Study (SPAS) EIR. 5. APPROVE the purchase of the Properties known as Assessor Parcel Number (APN) , APN , APN , and APN located adjacent to LAX on an "as is with all faults" basis from Skyview Center, LLC. 6. APPROVE the assumption of the existing leases Property (collectively, Existing Leases) upon close of escrow in accordance with the Purchase and Sale Agreement and Escrow Instructions (Agreement), subject to required approval thereof by the City Council for Existing Leases with five years of term remaining, including any options. REQUEST the City Council to approve all Existing Leases that have more than five years of term remaining, including any options. 8. REQUEST the City Council to hold a public hearing to comply with PUC , to consider the acquisition of the Properties. 9. APPROVE the assumption of the existing Property Management and Leasing agreements upon close of escrow in accordance with the Agreement. 10. REQUEST the City Council to find that leases/tenants in the Properties are not (a) a "public lease or license" as defined in Section of the City of Los Angeles Administrative Code (Administrative Code), (b) "service contracts" as defined in Section of the Administrative Code, and (c) 'airport employer" as defined in the First Source Hiring Program for Airport Employees. 11. AUTHORIZE the Executive Director to execute the Agreement and all necessary documents to consummate the purchase of the Properties, in each case after approval as to form by the City Attorney. 12. AUTHORIZE the Executive Director to tender the funds contemplated by the Agreement to the Sellers of $111,925,000, including (i) $100 non-refundable contract consideration, and (ii) the deposit into escrow via wire transfer to Chicago Title Company escrow, of a fully refundable $4,500,000 deposit, plus a deposit of $500,000 for liquidated damages, which is not refundable if Los Angeles World Airports fails to close escrow and the transaction is approved by the City in accordance with the Agreement. Page 2 of 9

3 DISCUSSION: 1. Executive Summary Staff requests the Board of Airport Commissioners (Board) approve the purchase of the Properties at 6033 and 6053 West Century Blvd. (Properties) from Skyview Center, LLC (Seller) for an amount not to exceed $113,324,063, based on an $111,925,000 purchase price and 1.25% of the purchase price for due diligence and closing costs in accordance with the Agreement, subject to assumption of existing leases encumbering the Properties and existing agreements providing property management and leasing services. The Properties include two office buildings having approximately 407,000 rentable square feet (SF), a 412-space parking structure, and an adjacent surface parking lot. This action will allow LAWA to realize revenues from the acre surface parking lot just south of West 96th Street (near LAWA's Lot C), avoid rental payments for tenancy of office space currently leased by LAWA, and provide access to collocated additional office space for relocation or expansion of LAWA offices. Through a lease Los Angeles World Airports (LAWA) entered into in 2009 to occupy 104,155 SF in the 6053 West Century Blvd. office building, LAWA secured a $131,000,000 purchase option for the Properties. Since then, staff negotiated an $111,925,000 purchase price, which is 15% less than the original option. The purchase of the office buildings is a pure acquisition of an ongoing operation. At this time, LAWA plans to continue to use the office buildings in their current configuration. Should LAWA, at some time in the future, wish to change the use of the Properties, or elements of the Properties, such proposed change of use would be conditioned on future CEQA review. 2. Prior Related Actions On August 3, 2009, the Board approved Lease No. LAA-8506, which is a 10-year Lease for LAWAoccupied office space at 6053 West Century Blvd. (Board Order No. AO-5141). This Lease contained a $131,000,000 purchase option for the Properties. 3. Current Action Staff requests that the Board approve the purchase of the Properties and authorize the Executive Director to execute the Agreement together with all necessary documents to consummate the purchase of the Properties, with the Agreement and each necessary document being subject to approval as to form by the City Attorney, and to tender the funds contemplated by the Agreement to the Seller, including (i) $100 non-refundable contract consideration and (ii) the deposit into escrow, via wire transfer to Chicago Title Company escrow, of a fully refundable $4,500,000 deposit plus a deposit of $500,000 for liquidated damages. The requested not-to-exceed amount of $113,324,063 includes $1,399,063 (1.25% of the purchase price) to cover LAWA's share of closing costs, such as attorney fees, land survey, title insurance, escrow fees, and engineering studies related to structural, mechanical, earthquake and environmental matters. Page 3 of 9

4 PROPERTY DESCRIPTION The Properties are situated on a total of acres of land. The office complex is comprised of two buildings. One office building is 12 stories, with approximately 203,000 rentable SF, and the other is 11 stories, having approximately 204,000 rentable SF. The structures were built in the 1980's. The parking structure contains 412 parking spaces and sits between the two office buildings. The acre parking lot is currently used to serve tenants in the two office buildings, nearby hotels, and a park-and-fly operation. The parking lot is south of LAWA's Parking Lot C separated by West 96th Street. BUSINESS TERMS At the peak of the real estate market in 2007, the Properties were valued at $131,000,000. The then owner included the Properties in a 30-property portfolio loan with an assigned value of $131,000,000. When LAWA negotiated the option purchase price in 2009, the newest owners who had purchased the prior owner's loan portfolio had kept the $131,000,000 valuation for the Properties, which was used to determine LAWA's purchase price under the options. Staff has since negotiated a purchase price of $111,925,000. LAWA commissioned an independent appraisal which resulted in a value range of $ ,000,000. The appraised value of the Properties reflects the current uses. Page 4 of 9

5 This purchase is on an "as is with all faults" basis. Accordingly, LAWA has undertaken extensive due diligence with respect to the environmental condition of the property. The Seller has made its files available to LAWA for review. The due diligence period concludes on the date the Agreement is executed. Further contingencies to LAWA's purchase of the Property include: Free and clear title to the property vested in the City of Los Angeles, subject only to LAWA approved exceptions; Obtaining a satisfactory A.L.T.A. Title Insurance Policy; Assurances and requirements of the leaseholds through existing leases, any amendments, and estoppels certificates; Satisfaction of all required regulatory approvals. Due diligence included reports on the following: Environmental Analyses, Mechanical, Electrical Plumbing Evaluation, Roof Inspections, Property Condition, Elevators Condition, and a Seismic Assessment. The results of all these reports indicate that the Properties are in sound and safe condition. Through the reports, staff has determined that approximately $5,000,000 worth of maintenance work should be done over the next five years, including elevator modernization, window replacement, cooling tower and chiller replacement, and other interior aesthetic improvements to maintain the buildings in a Class A condition. LAWA's consultant has performed Phase 1 and Phase 2 environmental site analysis on the Properties. The results for all parameters tested were either below laboratory detection or below regulatory limits. The total expected cost of this investment is as follows: Building Purchase Price $111,925,000 Ancillary Costs $ 1,250,000 Additional Capital Investment $ 5,000,000 Total Cost $118,175,000 Upon execution of the Agreement by LAWA, LAWA will forward to Chicago Title Company a fully refundable $4,500,000 deposit, plus a $500,000 deposit for liquidated damages in the event the purchase is not consummated due to an avoidable failure by LAWA. For example, if all required approvals are obtained and there has been no material adverse change, yet LAWA refuses to close the transaction, then the Seller would retain the $500,000 deposit as liquidated damages. All accrued interest on these deposits will remain the sole property of LAWA. At the close of escrow, the entire $5,000,000 plus interest will be applied toward purchase of the Properties. EXISTING LEASES AND LICENSES The office buildings are considered Class A office space, in what is otherwise a Class B office market along the Century Corridor. Because the immediate competition for tenants is Class B, the Properties achieve a higher market rent than other buildings in the area. The office buildings are currently 82% occupied with 40 tenants, including LAWA. Page 5 of 9

6 The parking structure and separate parking lot are currently under license to Central Parking Systems, Inc. through May 2015, with a flat monthly rent and the current owner of the Properties paying the property taxes and marketing costs. The license agreement for parking operations may be terminated by a buyer upon sale of the Properties. Compensation to the owner under this license agreement is considered to be under-market and LAWA anticipates amending the existing lease or entering into a new agreement that will yield approximately $1,000,000 in additional income within the first year of ownership. PROPERTY MANAGEMENT AND LEASING AGREEMENTS The current owner manages and leases the office building portion of the Properties under agreements to one if its parent companies, which is Equity Office Partners. As a requirement of purchase at the negotiated option price that is lower than the original option price, LAWA must agree to assume these agreements for at least one year after closing. Compensation fees under both agreements are at market for similarly situated buildings. As a tenant, LAWA has been satisfied with the management of the properties in a Class A manner. Through due diligence, staff has determined that leasing has continued at an aggressive pace with solid market rentals. With this performance, the positive reputation of the Equity Office, the corresponding price reduction, and the timing of City procurement, the minimum oneyear agreements are beneficial to the City and guarantee a smooth transition in ownership while LAWA conducts an evaluation process to determine a Property Manager responsible for property management and leasing, which may be the current party. POST-CLOSING OPTIONS The purchase price does assume or cause either any direct physical change or a reasonably foreseeable indirect physical change in the environment. However, recognizing that some portion of the Properties is excess to LAWA's forecast occupancy needs, but that subdividing the Properties is not an option the current owner would entertain, staff has evaluated a variety of buy-and-hold and buy-and-sell options, including, but not limited to, selling one or both of the office buildings with a possible lease-back of office areas best aligned with LAWA's forecast future needs and financial interests. Following acquisition, staff will continue to evaluate these options with any follow-on actions being subject to future Board approval. ECONOMIC AND COST IMPLICATIONS LAWA intends to consummate the Purchase using a combination of LAX revenues and commercial paper. However, as shown in the table below, staff analyzed different long term cash flow scenarios to determine any economic impact on LAWA's financial profile. LAWA has performed extensive analysis on the net cash flow from the Properties using conservative real estate assumptions. A sample of these analyses is provided below. Page 6 of 9

7 Scenario I Purchase (All Cash) Scenario II Purchase (50% Financed) Scenario Ill Purchase (LAWA Master Lease Bldg. B, then sells both buildings Yr. 1) Initial Capital Inv. Est. Capital Improvements -$5M -$5M $0 Debt Service (4%) $o -$64M $0 Parking Income $81M $81M $81M Net Tenant Income $90M $90M $0 Residual Sale $0 $0 $50M 1 1 Net Cash Flow $54M $46M $18M LAWA IRR 3.54% 4.39% 2.23% Staff developed a "base case" plan of finance that assumes the acquisition price would be funded through a combination of LAX revenues and debt financing. This "base case" assumes that approximately 55% of the acquisition price would be funded with cash and up to 45% would be financed, although the ultimate funding mix would likely be determined when LAWA next issues bonds for LAX. In estimating the amount of the acquisition price to be funded with bond proceeds, this "base case" used a minimum debt service coverage ratio target of 1.50x over the first 10 years to minimize impacts on LAX's future debt service coverage ratio. Given that staff plans to evaluate the possible sale of some elements of the Properties following acquisition, LAWA has requested the City Council to make findings to clearly exclude any leases directly related to the Properties' future leases and tenants from certain Administrative Code sections in order to avoid any undue financial loss to LAWA in the event of a sale of certain elements of the Properties, such as one of the office buildings. Such provisions are applicable to airport related tenants or tenants providing contractual services, neither of which apply for the current or future tenants at the Properties. Regardless of this request, such provisions would still be included in any other agreements the tenants may enter into with LAWA. In addition, in order to maximize the revenue from a sale, LAWA is requesting the requirement to sell property in a public auction be set aside in order to market the building using a broker. Page 7 of 9

8 4. Alternatives Considered Not Purchasing or Deferring the Purchase of the Property The current market downturn limits the number of potential buyers, thus limiting the auction-style negotiations prevalent in recent transactions. This has enhanced LAWA's position to negotiate relative to other potential purchasers as does the attractiveness of LAWA as an all-cash buyer. This set of economic conditions may not present itself again. This property is strategically located adjacent to LAX. The current owner had engaged an architectural firm to explore the possibility of developing two parking structures consisting of up to 7,100 parking spaces. Preliminary analysis indicates that this would increase the gross value of the parking lot to a minimum of $300,000,000. Development of the Property by the current owner or an alternative purchaser would likely result in a much higher future purchase price if such developments are successfully pursued. FISCAL IMPACT STATEMENT: To facilitate purchase of the Properties, LAWA would allocate a not-to-exceed amount of $118,175,000 from the LAX Airport Revenue Fund to WBS Element Approval of the assumption of the leases will generate a minimum of approximately $3,565,000 in net annual revenue before debt service for LAWA during the first year of the ownership. STANDARD PROVISIONS: 1. The purchase of 6033 and 6053 West Century Blvd. does not involve any direct physical change or a reasonably foreseeable indirect physical change in the environment. Any future change in use of the property is conditioned on CEQA compliance. 2. The purchase of 6033 and 6053 West Century Blvd. is exempt from CEQA pursuant to State CEQA Guidelines 15061(b) (3). 3. The assignment and assumption of all leases is exempt from CEQA pursuant to State CEQA Guidelines 15061(b) (3). 4. The purchase of 6101 and 6151 West 98th Street is not subject to further CEQA review because none of the conditions requiring preparation of a subsequent or supplemental Environmental Impact Report (EIR) have occurred since CEQA review was completed in the Los Angeles International Airport (LAX) Master Plan EIR and the LAX Specific Plan Amendment Study (SPAS) EIR. 5. The Agreement of Purchase and Sale and Escrow Instructions, all exhibits thereto required to be executed by LAWA, as well as the Lease Assignment will all be approved as to form by the City Attorney. 6. Actions taken on this item by the Board of Airport Commissioners will become final pursuant to the provisions of Los Angeles City Charter Section 606 and 373 (if necessary). 7. This action is not subject to the provisions of the Service Contract Worker Retention and Living Wage Ordinances. Page 8 of 9

9 8. This action is not subject to the provisions of the SBE Program. 9. This action is not subject to the provisions of the Affirmative Action Program. 10. This action does not require a Business Tax Registration Certificate. 11. This action is not subject to the provisions of the Child Support Obligations Ordinance. 12. This action is not subject to the Insurance requirements of the City of Los Angeles. 13. This action is not subject to the provisions of Charter Section 1022 regarding the use of independent contractors. 14. This action is not subject to the provisions of the Contractor Responsibility Program. 15. This action is not subject to the provisions of the Equal Benefits Ordinance. 16. This action is not subject to the provisions of the First Source Hiring Program. 17. This action is not subject to the provisions of Bidder Contributions CEC Form 55. Page 9 of 9