2. The estimated value of the interest to be conveyed or leased, determined at the highest and best use permitted under the redevelopment plan;

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1 SUMMARY REPORT PURSUANT TO SECTION OF THE CALIFORNIA COMMUNITY REDEVELOPMENT LAW ON A LEASE AGREEMENT BY AND BETWEEN THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE AND McCORMICK & SCHMICK RESTAURANT CORPORATION, A DELAWARE CORPORATION I. INTRODUCTION The California Health and Safety Code, Section 33433, requires that if a redevelopment agency wishes to sell or lease property to which it holds title and if that property was acquired in whole or in part with property tax increment funds, the agency must first secure approval of the proposed sale or lease agreement from its local legislative body after a public hearing. A copy of the proposed sale or lease agreement and a summary report that describes and contains specific financing elements of the proposed transaction shall be available for public inspection prior to the public hearing. As contained in the Code, the following information shall be included in the summary report: 1. The cost of the agreement to the redevelopment agency, including land acquisition costs, clearance costs, relocation costs, the costs of any improvements to be provided by the agency, plus the expected interest on any loans or bonds to finance the agreement; 2. The estimated value of the interest to be conveyed or leased, determined at the highest and best use permitted under the redevelopment plan; 3. The estimated value of the interest to be conveyed in accordance with the uses, covenants, and development costs required under the proposed agreement with the Agency, i.e., the reuse value of the site; 4. An explanation of why the sale or lease of the property will assist in the elimination of blight, as required by Section 33433; and 5. The purchase price or sum of the lease payments, which the lessor will be required to make during the term of the lease. If the sale price or total rental amount is less than the fair market value of the interest to be conveyed or leased, determined at the highest and \ , 10/14/2002 Page 1

2 best use consistent with the redevelopment plan, then the agency shall provide as part of the summary an explanation of the reasons for the difference. This report outlines the salient parts of the proposed Lease Agreement (Agreement) by and between the City of San Jose Redevelopment Agency (Agency) and McCormick & Schmick Restaurant Corporation, a Delaware corporation (Tenant). Under this Agreement, the Tenant will use and occupy the premises in downtown San Jose for the construction and operation of a McCormick & Schmick s restaurant. The purpose of this analysis is to determine the cost of the Agreement to the Agency. This report is based upon information in the proposed Agreement and is organized into the following six sections: 1. Summary of the Proposed Agreement - This section includes a description of the site, the proposed development and the major responsibilities of the Agency and the Tenant. 2. Cost of the Agreement to the Agency - This section outlines the cost of the Agreement to the Agency for costs associated with the Agreement between the Tenant and the Agency. 3. Estimated Value of the Interest to be Conveyed - This section summarizes the value of the interests to be conveyed to the Tenant. 4. Consideration Received and Reasons Therefore - This section describes the lease payments to be paid by the Tenant to the Agency. It also contains a comparison of the lease payments and the fair market value at the highest and best use consistent with the redevelopment plan for the interests conveyed 5. Elimination of Blight - This section includes an explanation of why the lease of the property will assist in the elimination of blight and the supporting facts and materials. 6. Conformance with Five-Year Implementation Plan - This section describes how the Agreement is in conformance with the Agency s Five-Year Implementation Plan \ , 10/14/2002 Page 2

3 II. SUMMARY OF THE PROPOSED AGREEMENT A. Description of the Premises and Project Premises The premises ( Premises ) is located at 170 South Market Street, on the ground floor of the newly constructed Fairmont Addition. The Premises is comprised of real property owned by the Agency, which will be leased to McCormick & Schmick for the construction and operation of a high-quality, first-class restaurant. The Premises for the proposed restaurant venue is approximately 7,000 sq.ft. of usable interior space and the Tenant will have the right to use approximately 1,000 sq.ft. of exterior patio area. The Premises is located in the San Antonio Plaza Redevelopment Project Area. Pursuant to a separate Disposition and Development Agreement with the owner of the Fairmont Hotel (Light Tower Associates, LP), the Agency received, as consideration as part of the public/private partnership, ownership of the ground level retail space of approximately 18,000 sq.ft. of rentable area in the Fairmont Addition. The Premises are subject to a Reciprocal Easement Agreement (REA) between the Agency and Light Tower Associates, LP. Tenant The Tenant is McCormick & Schmick Restaurant Corporation, a Delaware corporation. McCormick & Schmick is a privately owned company that operates a variety of full service restaurants specializing in seafood. Currently, there are 35 McCormick & Schmick operated restaurants in 17 major metropolitan areas across the United States. McCormick & Schmick Acquisition Corporation, a Delaware corporation (Parent Company), will provide the lease guaranty for McCormick & Schmick Restaurant Corporation. For the purpose of this analysis, the Tenant and Parent Company will both be referenced as McCormick & Schmick ( M&S ) throughout this document. Project The proposed McCormick & Schmick s ( Project ) will be a first-class restaurant and bar serving alcoholic beverages for on-premises consumption, catering, ancillary sale of retail products, and offices and related storage. The restaurant will be open for both lunch and dinner. McCormick & Schmick s will occupy approximately 7,000 sq.ft. of usable building area and will have the right to use 1,000 sq.ft. of exterior patio area in the Paseo de San Antonio. There will be no on-site parking, but the Agency will assist M&S in arranging for 35 parking spaces to be made available on a month-by-month basis at \ , 10/14/2002 Page 3

4 the Second and San Carlos Parking Garage for valet parking. The Agency will also assist M&S in obtaining City approval for a valet parking drop-off zone. B. Agency Responsibilities Subject to the specific terms and conditions stated in the Agreement, the Agency s responsibilities under the proposed Agreement are as follows: 1. Lease the Premises to M&S for a lease term of ten (10) years plus three (3) options of five (5) years each in return for lease payments as explained in Section III.B of this Report. The lease requires that the Tenant will open for business as a McCormick & Schmick restaurant. The permitted use will be the business of a first-class restaurant and bar serving alcoholic beverages for on-premises consumption, catering, ancillary sale of retail products, and office and related storage. M&S will have minimum weekday (Monday thru Friday) hours of operation for lunch and dinner from 11:30 a.m. to 10:00 p.m., and minimum weekend hours for dinners of 5:00 p.m. to 11 p.m. Saturdays, and 5:00 p.m. to 10 p.m. Sundays. M&S may operate for additional hours as it determines, subject to applicable laws. In addition, M&S may close the Premises or a portion of the Premises for private parties on a reasonable number of dates, to be mutually agreed upon. 2. Approve plans for tenant improvements submitted by M&S and mutually agree upon signage. 3. Deliver the Premises pursuant to the Agreement. The Agency will allocate approximately 7,000 sq.ft. subject to M&S utilizing the curved space thereby leaving the demised space of approximately 3,500 sq.ft. adjacent to the entry of the Fairmont Addition available for another retail use. 4. Fund Landlord s Contribution to Shell Improvements (Shell Allowance) of up to $480,000 to improve the building shell with improvements, such as the grease interceptor, fire sprinklers, and the demising wall, subject to the disbursement conditions detailed in the Agreement. 5. Fund tenant improvement allowance to finish the Premises up to a maximum amount of $749,000, subject to the disbursement conditions detailed in the Agreement \ , 10/14/2002 Page 4

5 6. The Agency will pay a real estate commission of $100,000, 50% payable with the commencement of construction and 50% with the opening for business to the public. No other real estate commission is involved in this transaction. C. McCormick & Schmick Responsibilities Subject to the specific terms and conditions stated in the Agreement, McCormick & Schmick s (M&S) responsibilities under the proposed Agreement are as follows: 1. Lease the Premises from the Agency for a lease term of ten (10) years plus three (3) options of five (5) years each in return for lease payments as stipulated in the Agreement. 2. Submit improvement and signage plans for the Agency s approval. 3. Obtain an outdoor café permit from the City of San Jose to allow outdoor café seating on the exterior patio area. 4. Take delivery of the Premises pursuant to the Agreement. 5. M&S will be responsible for construction and finish out of the Premises from the delivery of the Premises through to opening as a single activity. M&S and any contractor engaged by M&S will pay prevailing wages for construction of any improvements to the Premises. In addition to the Agency s financial obligations, it is expected that M&S will spend in excess of $1 million to open the restaurant. 6. Pay base rent and percentage rent as explained in Section III of this Report. 7. Keep the Premises in first class condition and repair, including maintaining all plumbing, HVAC, electrical and lighting facilities, and the entirety of the interior of the Premises except for internal structural items that are the responsibility of the Hotel Owner. In addition, M&S will be required to wash-down and clean up any portion of the shared (common) areas governed by the Reciprocal Easement Agreement. 8. The lease is a net lease and M&S will pay for operating expenses, property taxes (including possessory interest taxes and special assessments), insurance, and utilities, including but not limited to, water, sewer, electricity, and if applicable, natural gas. All utilities to the Premises will be separately metered. In addition, M&S will pay as \ , 10/14/2002 Page 5

6 additional rent its share of the public area maintenance (CAM) expenses. M&S s share will be $10,500 per year. 9. M&S will make a good faith effort to participate in the Agency s voluntary San Jose First Source Employment Program, a program that assists San Jose residents in gaining early access to employment opportunities in San Jose and in helping businesses that are experiencing difficulty finding qualified workers \ , 10/14/2002 Page 6

7 III. COST OF THE AGREEMENT TO THE AGENCY This section presents the total cost of the DDA to the Agency, as well as the "net cost" of the project after consideration of the project revenues. The net cost can be either an actual cost, when expenditures exceed receipts, or a net gain, when revenues created by implementation of the Agreement exceed expenditures. A. Estimated Cost to the Agency The Agency will incur costs associated with funding construction of the shell and tenant improvements and a brokerage commission as explained in Section II of this report under Agency s obligations. For this Agreement, the estimated costs for the Agency are: (Estimated) Agency Contribution for Shell Improvements $ 480,000 Agency Contribution for Tenant Improvements 749,000 Brokerage Commission 100,000 Total Costs $ 1,329,000 (Rounded) $ 1,330,000 As shown above, the estimated cost to the Agency is $1,330,000. The Agency s funding is provided for in the Agency s Proposed FY Capital Budget. Financing the $1,330,000 over 30 years at the average interest cost of 5.7% results in approximately $1.48 million of additional costs. On a present value basis, these costs are nominal. B. Revenues to the Agency Per the terms of the Agreement, the Agency will lease the Premises to M&S in return for monthly lease payments over the life of the lease term. The lease payments to the Agency will be in the form of base rent and percentage rent paid by M&S. The lease payments and resulting revenues to the Agency are as follows: \ , 10/14/2002 Page 7

8 Annual Rent The Agency will receive annual rent in the form of base rent (as defined below). Once McCormick & Schick s annual gross sales reach $4,500,000 ( Threshold ), the annual percentage rent will be paid. Base Rent The Agency will receive for the first five years (years 1-5) of the lease term a monthly base rent of $14,000 per month ($2.00/sq.ft./month) or $168,000 per year ($24/sq.ft./year). In years 6-10, M&S will pay a monthly base rent of $15,400 ($2.20/sq.ft./month) or $184,800 per year ($26.40/sq.ft./year). Base rent payments are summarized below: Year Monthly Base Rent Annual Base Rent Years 1-5 $14,000 $2.00 PSF $168,000 $24.00 PSF Years 6-10 $15,400 $2.20 PSF $184,800 $26.40 PSF Over the ten-year lease term, the base rent is: Year Monthly Base Rent PSF Annual Base Rent PSF Annual Base Rent 1 $2.00 $24.00 $168,000 2 $2.00 $24.00 $168,000 3 $2.00 $24.00 $168,000 4 $2.00 $24.00 $168,000 5 $2.00 $24.00 $168,000 6 $2.20 $26.40 $184,800 7 $2.20 $26.40 $184,800 8 $2.20 $26.40 $184,800 9 $2.20 $26.40 $184, $2.20 $26.40 $184,800 Base Rent Payments to Agency (Non-discounted) $1,764,000 Present Value of Base Rent Years 1-10 $1,230,000 The base rent is a net rent. M&S will be responsible for, and directly pay, all costs incurred for taxes, assessments, insurance, possessory interest taxes, repairs, replacement, and maintenance related to the interior of the Premises, plus public area maintenance (cleaning of the exterior patio area) \ , 10/14/2002 Page 8

9 As shown above, over the 10-year term, base rent payments to the Agency are projected to be $1,764,000. In present value terms (determined using the Agency s cost of money), the base rent payment to the Agency over the 10-year term is estimated at $1.23 million. This is the minimum amount of revenue that the Agency can expect to receive over the life of the lease term (first 10 years) and does not include percentage rent. In the option periods, if the option periods are exercised, McCormick & Schmick will pay base rent as follows: Year Monthly Base Rent Annual Base Rent Years $16,940 $2.42 PSF $203,280 $29.04 PSF Years $18,632 $2.66 PSF $223,584 $31.94 PSF Years $20,498 $2.93 PSF $245,976 $35.14 PSF Over the 25-year term (including option periods), base rent payments to the Agency are projected to be $5,128,200. In present value terms (determined using the Agency s cost of money), the base rent payment to the Agency over the 25-year term is estimated at $2.25 million. Percentage Rent Once the Threshold of $4.5 million in annual gross sales is reached, McCormick & Schmick will pay the Agency additional rent above the base rent in the amount of 5% of gross sales in excess of $4.5 million. The percentage rent will be calculated on an annual basis. The history of M&S is that the annual gross sales of their restaurants are at or above $4.5 million. However, for the purpose of this report, percentage rent is not calculated given the speculative nature of this projection. Therefore, the rent projection is believed to be conservative, as we would expect percentage rents to be paid beyond the fifth year of operation. C. Net Costs to the Agency The present value of the initial 10 years of base rent is estimated at $1,230,000. The present value of the base rent of the 25-year term (first 10 years plus three 5-year option periods) is $2,250,000. The present value of the Agency s costs is estimated at $1,330,000. As a result, the Agreement is anticipated to generate a net cost to the Agency of $100,000 over the 10-year lease term, but will generate a $920,000 gain to the Agency over 25 years if the option periods are exercised \ , 10/14/2002 Page 9

10 Initial 10-year Lease Term 25-year Lease Term (incl. Option Periods) Agency Revenue Base Rent Only (Present Value) $ 1,230,000 $ 2,250,000 (Less) Present Value of Agency Costs (1,330,000) (1,330,000) Net Gain (Cost) to Agency ($100,000) $ 920,000 It should be noted that the Agency owns the retail space. Agency funded improvements that are being incurred as part of this agreement, such as the grease trap, sprinklers, and demising walls, will be of value to the Agency when releasing the Premises in the future \ , 10/14/2002 Page 10

11 IV. VALUE OF THE INTEREST TO BE CONVEYED The fair lease for the Premises is directly a function of a very specific permitted use. As part of the Fairmont Addition public/private partnership, the Agency received ownership of the ground level retail space in the Fairmont Addition. For this space, the Agency s objectives include leasing the space to a high quality, first-class restaurant serving both lunch and dinner. McCormick & Schmick has an established track record as a high quality, first-class seafood restaurant and is expected to be a destination for the downtown area. The Agreement includes a list of comparable restaurants that are deemed by the parties to be first class. KMA has also estimated the value of the interest being conveyed to the Developer if leased by the Agency at its highest and best use allowed under the Redevelopment Plan. The required land use is retail, which could include a single tenant or a combination of tenants. The space at the base of the Fairmont Addition is suited for a restaurant and is also best suited for a business that is a destination business. It is difficult to lease the Premises to a retailer due to its independent location relative to other retailers and its relationship to free retail parking. Therefore, in our judgment, the highest and best use is a restaurant tenant. It is possible that another restaurant might pay a comparable rent of $24 per sq.ft. per year and not require a significant tenant improvement allowance; but the type of restaurant would be of a lesser quality and would not meet the objectives of the Agency. In our judgment, the rent proposal and tenant improvement allowance is necessary to attract a restaurant of the quality of McCormick & Schmick, one that will be a high quality, destination restaurant, invest approximately $1 million of its own funds in the opening of the restaurant, and will operate both lunch and dinner weekdays and dinner on the weekends. V. CONSIDERATION RECEIVED AND REASONS THEREFORE The consideration being paid to the Agency is not less than the fair lease value for the Premises, given the Agency s requirement for a high quality, destination restaurant serving both lunch and dinner weekdays and open seven days a week. The Agency has determined that this specific Project as provided in the Agreement offers the best complementary uses for other land uses in the San Antonio Plaza and adjacent Century Center Redevelopment, Guadalupe-Auzerais and Park Center Plaza Project Areas. The Project will be a destination business in the downtown. Therefore, the Project will further the overall goals of the Agency s Downtown Strategy Plan 2010, adopted by the San Jose City Council and the Agency, to develop hotel and retail space and revitalize the downtown core \ , 10/14/2002 Page 11

12 VI. ELIMINATION OF BLIGHT The Project will reinforce the Agency s objective of linking public uses and the downtown retail district. The inclusion of the exterior patio dining area in the Project will serve to spur the street activation of the Paseo de San Antonio. The neighborhood of the Premises consists of the heart of the downtown area, including the Fairmont Hotel and Fairmont Plaza office building (50 West San Fernando Street) to the north, the Abovenet complex and the Twohy Building (currently undergoing renovation and conversion to live-work lofts) to the east, the Montgomery Hotel (boutique hotel to open in 2004) to the south, and the Plaza de Cesar Chavez city park to the west. To reinforce and enhance the vitality of the downtown as a destination within San Jose for residential, businesses and tourism, the Agency made a substantial investment in the revitalization effort to create a downtown core that serves as both a daytime and nighttime activity center. The revitalization effort includes the development of cultural, art, entertainment, commercial, and residential components. The Agency was willing to make this investment in McCormick & Schmick s because M&S is seen as a dynamic business that will be a catalyst for bringing visitors to the downtown. The Agency is entering into the Lease Agreement in order to achieve its objective to attract destination businesses to the downtown. Furthermore, the Project will increase employment, both during the construction phase and thereafter. The Project will offer downtown residents and hotel guests an additional retail/entertainment attraction. The Project also will increase the real property tax base for the City. VII. CONFORMANCE WITH FIVE-YEAR IMPLEMENTATION PLAN The primary Five-Year Implementation Plan program objective for the San Antonio Plaza Redevelopment Project Area is to eliminate conditions that negatively impact economic development of the community. To that end, the Agency is leasing the Premises for development of a high-quality firstclass McCormick & Schmick s restaurant. Furthermore, the Implementation Plan also establishes a priority objective of increasing the community s economic base by encouraging investment in the redevelopment project area. The Project will further encourage the San Antonio Plaza Redevelopment Project Area and adjacent Century Center, Guadalupe-Auzerais, and Park Center Plaza Redevelopment Project Areas as mixed-use 24 hour activity centers consistent with the goals of the Agency s Downtown Strategy Plan to attract retail/entertainment uses to downtown San Jose. The Project will be developed in the near-term and it will maximize the Premises ability to draw additional uses to the downtown. As such, the Project will increase the real property tax base and provide new sales tax, business license tax and utility user tax within the San Antonio Plaza Redevelopment Project Area. The Project conforms to the Implementation Plan and will achieve the goals specifically defined in the implementation plan \ , 10/14/2002 Page 12

SEE BELOW SEPTEMBER 20, 2007

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 33433 REPORT FOR THE