SEE BELOW SEPTEMBER 20, 2007

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1 JOINT AGENDA: 10/2/07 ITEM: 8.3 HONORABLE MAYOR, CITY COUNCIL, AND REDEVELOPMENT AGENCY HARRY S. MAVROGENES DEBRA FIGONE SEE BELOW SEPTEMBER 20, 2007 SUBJECT: ACCEPTANCE OF A SUMMARY REPORT FOR THE DEVELOPMENT OF BLOCK 8 AND APPROVAL OF THE FIRST AMENDMENT TO THE DISPOSITION AND DEVELOPMENT AGREEMENT WITH CITY FRONT SQUARE, LLC AND CASA DEL PUEBLO PRESERVATION PARTNERS, LLC FOR THE DEVELOPMENT OF CITY FRONT SQUARE A MIXED USE RESIDENTIAL PROJECT RECOMMENDATION It is recommended that: (a) (b) (c) The Redevelopment Agency Board adopt a resolution approving the First Amendment to the Disposition and Development Agreement (Amendment) with City Front Square, LLC and Casa Del Pueblo, LP. (Collectively Developer ) and authorizing the Executive Director to execute ancillary documents as contemplated by the Amendment. The City Council adopt a resolution accepting the attached summary of costs and findings of the Summary Report pursuant to the California Health and Safety Code Section for the sale and development of Block 8, located at 281 South First Street under the terms and conditions of the attached First Amendment to the Disposition and Development Agreement. The City Council rescind the Public Art Agreement between the Developer and the City of San Jose and allow the payment of Public Art fees directly to the Office of Cultural Affairs by the Developer per the terms of the Amendment.

2 Honorable Mayor, City Council, Agency Board Page 2 OUTCOME Approval of the proposed amendment will enable the Developer to move forward with the design and development of the Project in accordance with the revised and restated Schedule of Performance under this amendment. BACKGROUND The Agency and Developer entered into a Disposition and Development Agreement (DDA) on June 27, 2006, with the Developer agreeing to design, develop and construct a high-rise mixed use residential project on two parcels, one of which is owned by the Agency. The parcels are located in the San Antonio Plaza Redevelopment Project Area between Market and First Street on the north side of W. San Carlos Street and described in the DDA as the Site. The project will be developed in two phases. The first phase will be built on the Agency parcel and will include the first market rate residential tower and the replacement of the below market rental housing for the Casa del Pueblo senior residents. The second phase will be the demolition of the Casa del Pueblo building and the construction of the second market rate tower on that site. In 2006, the City of San Jose, in cooperation with the Redevelopment Agency, initiated an Airport Obstruction Study (Obstruction Study) to review and analyze the heights of potential high-rise developments near the San Jose/Mineta Airport in relationship to One Engine Inoperative departure procedures. The Obstruction Study indicated that greater airspace restrictions for downtown San Jose would increase air safety. The Developer received a No Hazard Determination from the FAA in October 2006 on the first phase of the Project, which includes Tower 1 and the new Casa Del Pueblo residential building. On October 20, 2006, Airport staff informed the Agency and Developer that, regardless of the FAA determination, the Obstruction Study identified the height of the proposed Project as a concern under the proposed One Engine Inoperative departure procedures. City Council consideration of staff s recommendations related to the Obstruction Study is currently pending an outside review of the findings. To expedite the entitlement and design process for the Project, Agency staff and the Developer, working with City staff, agreed to revise the Project to lower the height of the proposed Project to a level below the height identified as a concern in the Obstruction Study.

3 Honorable Mayor, City Council, Agency Board Page 3 In addition, as part of Developer s on-going due diligence, Developer became aware that the Pestana building foundation was left in the ground as part of the 1999 demolition of the building. The Pestana building was a mid-rise office building that was demolished by the Agency under a contract with Biggs and Cardosa Associates, Inc., to convert the site for public parking until redevelopment of the site occurred. Given the lack of any specific development plans for the site, the foundation was not demolished in order to reduce demolition costs. Developer stated that this unforeseen condition would materially increase its excavation costs and thereby affect the agreed upon purchase price to the Agency. Agency staff s position was that such a condition would not have a material impact to the overall cost of the Project and no adjustment in purchase price was warranted. The removal of the Pestana foundation is required as part of the planned construction of the three story below-grade parking garage. ANALYSIS To address the height issue, Agency staff and the Developer have agreed that the two market-rate Towers shall be reduced in height by one floor each, in addition to a reduction of approximately 10 feet that will be achieved through design changes in both Towers. Based on these agreed upon changes in design, both Towers would be constructed below the height identified as causing a concern in the Obstruction Study while preserving the Project s symmetry, an important goal of the Developer. As currently designed, the loss of one floor in each Tower results in the elimination of seven units in each Tower. The lost units will directly impact the profitability of the project for the Developer. As compensation for the loss in units and its related loss in sales revenue, Agency staff and Developer have agreed to reduce the purchase price for the Agency property by $700,000 and reduce the Developer s Public Art obligation by $729,800 to a revised total under the amendment of $1,094,700, based on the Developer s obligation of $1,824,500 for both phases of the Project under the executed Public Art Agreement. To address the unexpected project costs associated with the presence of the Pestana building foundation, the Agency and Developer agreed to obtain three Developer-solicited bids for the additional cost to the Project to remove the Pestana building foundation. Based on the Agency s review of the bids, the Agency and Developer have agreed to reduce the purchase price for the Agency property by $200,000 as compensation for this unexpected additional cost to the Project.

4 Honorable Mayor, City Council, Agency Board Page 4 The purchase price shall remain payable in two installments. The first installment of $13,960,000 is payable upon start of construction and corresponding transfer of the Agency property to the Developer and the second installment of $13,760,000 is to be paid upon the first construction draw under the construction loan for Phase Two of the Project. The Developer and the Office of Cultural Affairs (OCA) executed a Public Art Agreement in November 2006 that reflects planned payments by the Developer of $1,824,500 for both phases of the Project. The new Public Art obligation will be fixed at $1,094,700, payable to the City in two payments of $547,350, payable at the same time as the two purchase price payments. Agency staff and the Developer have further agreed that the public art funds, less OCA s overhead and administrative costs, would be used on public art project(s) located in (i) Plaza de Cesar Chavez, or (ii) any parcel adjacent to Plaza de Cesar Chavez or (iii) in other downtown core locations selected by OCA after consultation with the Agency. SCHEDULE OF PERFORMANCE: As part of the proposed amendment, Agency staff and the Developer have agreed to revise the Schedule of Performance with a new targeted first payment date for the Agency property of June 30, 2008, with Phase I construction to start within 60 days of the close of escrow on the Agency Property. The Schedule of Performance will be adjusted to take into account any delays caused by the Agency or City in meeting their obligations under the Schedule of Performance provided that the Developer was not the cause of such delay. AVIGATION EASEMENT: The proposed Amendment also requires the Developer to execute and record against the Site an Avigation Easement. The Avigation Easement secures the use of air space above the Project for air traffic and limits any part of the development from intruding into such air space ANALYSIS: Pursuant to Section of the California Redevelopment Law, a Summary Report, a copy of which is attached, was prepared by Keyser Marston Associates, the Agency s financial consultant. This report, along with a copy of the proposed First Amendment to the DDA was made available for inspection as required by

5 Honorable Mayor, City Council, Agency Board Page 5 California Redevelopment Law. The Summary Report summarizes the key terms of the proposed DDA, the cost of the Agreement to the Agency, the fair reuse value, and conformance with the Agency s Five-Year Implementation Plan. EVALUATION AND FOLLOW-UP Performance of Agency DDAs are monitored and reported each year as part of the Agency s annual budget process under the Performance Measures section in the Capital Budget. PUBLIC OUTREACH/INTEREST The proposed action does not meet any of the criteria noted below for added outreach efforts. The Amendment and Summary Report will be posted on the Agency s website and made available for public review in the Agency s public lobby area. Criterion 1: Requires Council action on the use of public funds equal to $1 million or greater. Criterion 2: Adoption of a new or revised policy that may have implications for public health, safety, quality of life, or financial/economic vitality of the City. Criterion 3: Consideration of proposed changes to service delivery, programs, or staffing that may have impacts to community services and have been identified by staff, the Board or Council, or a community group that requires special outreach. COORDINATION This action has been coordinated with the Office of Cultural Affairs, City Attorney s Office, staff of the San Jose International Airport, and the Agency s General Counsel. FISCAL IMPACT Pursuant to the First Amendment to the DDA the Agency will receive $900,000 less from the Developer for its property and the City will receive $729,800 less for public art.

6 Honorable Mayor, City Council, Agency Board Page 6 CEQA San Jose Downtown Strategy 2000 EIR, Resolution DEBRA FIGONE City Manager HARRY S. MAVROGENES Executive Director