Authorize finalization and execution of leases at Creekside Marketplace

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1 AGENDA REPORT Meeting of the San Marcos City Council MEETING DATE: June 24, 2014 SUBJECT: Authorize finalization and execution of leases at Creekside Marketplace Recommendation Adopt the attached resolution authorizing the City Manager to finalize and execute all leases and related documents for WinCo Foods, LLC and Hobby Lobby Stores, Inc at Creekside Marketplace. Board or Commission Action Not Applicable Relevant Council Strategic Theme Quality of Life Economic Development Relevant Department Goal Maximize revenues received from use of city-owned real estate Professionally manage City's real estate portfolio Introduction At the September 10,2013 City Council meeting, the City rejected a transfer of the Lowe's Home Improvement Warehouse, Inc lease to Walmart, which resulted in the termination of the Lowe's ground lease on October 31, With the termination, the City gained possession of the building and began marketing the building to prospective tenants. Early on, WinCo Foods, LLC and Hobby Lobby Stores, Inc expressed interest in the property and began negotiating with City staff. All parties have agreed to lease terms and final negotiations are taking place regarding the construction and tenant improvements. Discussion The City developed Creekside Marketplace as part of the fulfillment of Section 203 of the San Marcos Charter, which emphasizes enterprise activities designed to produce non-tax revenue sources. Since its opening, Creekside Marketplace has provided the City with substantial lease revenues, totaling over $3 # 11.1

2 million per year, in addition to sales tax revenues associated with commercial activities. With the termination of the Lowe's lease, the City purchased Building A (Lowe's) at book value, which was substantially less than market value. WinCo Foods and Hobby Lobby have been negotiating with staff over the past several months with final details on construction still being finalized. To expedite the process, we are asking to have the City Manager authorized to sign the leases as soon as the construction details and non-financial lease items are agreed to. The financial and key deal points, as agreed upon by all parties through signed letters of intent, are provided below. WinCo Foods: Leasehold Size: Lease Term: Options: Base Rent: Common Area Expenses: Rent Commencement: Tenant Improvements: Taxes and Assessments: Use: Hours of Operation: Opening & Operating: approximately 91,554 square feet of the existing building at 555 Grand Ave Twenty years from Rent Commencement Date Six additional five-year terms Annual base rent: $875,000 years 1-10; $962,500 years Proportionate share of triple net expenses, paid monthly. Earlier of a) 30-days after certificate of occupancy issued; b) 270-days after building permit issued; or c) date WinCo opens for business WinCo will cover cost of demising the building into two spaces Possessory interest taxes paid by tenant to County directly 24-hour grocery store or any other permitted retail use with exception of center specified noxious uses or exclusivity clauses 24-hours per day, 365 days per year (366 days in leap years) Fully fixtured and stocked store within 270 days of Landlord's delivery of premises to tenant. With exception of permitted remodeling periods, if tenant closes store and stops operating, City has right to recapture premises Hobby Lobby: Leasehold Size: Lease Term: Options: Base Rent: Common Area Expenses: approximately 58,000 square feet of the existing building at 555 Grand Ave Ten years from Rent Commencement Date Two additional five-year terms Annual base rent: $768,500 years 1-5; $826,500 years 6-10 Proportionate share of common area expenses. Beginning in year 2, controllable Common Area Expenses increases capped at 4% over previous year. # 11.2

3 Rent Commencement: Taxes and Assessments: Use: Tenant Improvements: Opening & Operating: Earlier of a) 120-days after delivery date or b) date Hobby Lobby grand opens for business, which shall not be more than 7 days after soft opening Possessory interest taxes paid by tenant to County directly Retail hobby and craft store initially or any other first class retail use thereafter with exception of exclusivity clauses $12.00 per square foot for tenant improvement allowance to be paid by Landlord Fully fixtured and stocked store within 270 days of Landlord's delivery of premises to tenant Fiscal Impact During Fiscal Year (the last full year of Lowe's lease), the City received less than $645,700 in base rent from Lowe's Home Improvement. The proposed leases will allow the City to collect more than $1.64 million annually in base rent, or 155% of the Lowes lease beginning in Fiscal Year In addition to the base rent collected, the City will also receive common area reimbursements and sales tax revenues. Council will be presented with financing plans relating to the purchase of and structural changes to the former Lowe's building at a future meeting. Attachment(s) Resolution Prepared by: Submitted by: Geoffrey Foster, Senior Management Analyst Ellen Hegarty, Director of Real Property Services Approved by: Jack Griffin, City Manager # 11.3

4 RESOLUTION NO A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN MARCOS AUTHORIZING THE CITY MANAGER TO FINALIZE AND EXECUTE ALL LEASES, DOCUMENTS AND CONTRACTS RELATING TO FLOOR LEASES WITH WINCO FOODS, LLC AND HOBBY LOBBY STORES, INC AT CREEKSIDE MARKETPLACE. WHEREAS, the City of San Marcos is a chartered municipal corporation empowered, pursuant to Section 203 of its Charter, to engage in any enterprise deemed necessary to produce revenues for the general fund or any other fund established by the City Council to promote a public purpose ; and WHEREAS, in keeping with the spirit of this provision, the City has aggressively developed nontax revenue streams; and WHEREAS, ground and building lease revenues constitute an important percentage of general fund revenues; and WHEREAS, the City is the owner of 25.6 net acres comprising of Creekside Marketplace; and WHEREAS, the City is the owner of 555 Grand Avenue, commonly referred to as Building A; and WHEREAS, the City desires to fill the vacancy of Building A with high-class, stable tenants complimentary to the composition of Creekside Marketplace; and WHEREAS, the City has determined that the proposed lease terms for WinCo Foods, LLC and Hobby Lobby Stores, Inc is predicated on market terms and promotes a public purpose pursuant to Section 203 of the Municipal Charter. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of San Marcos has determined that: 1. The City Manager is hereby authorized and directed to finalize and execute all necessary leases, contracts and other documentation necessary for the leasing of 555 Grand Avenue to WinCo Foods, LLC and Hobby Lobby Stores, Inc pursuant to the financial deal points presented and agreed to through signed letters of intent by all parties. PASSED, APPROVED, AND ADOPTED by the City Council of the City of San Marcos, at a regularly scheduled Council Meeting this 24th day of June, 2014 by the following roll call vote: AYES: NOES: ABSENT: # 11.4

5 ATTEST: Jim Desmond, Mayor City of San Marcos Phillip Scollick, City Clerk City of San Marcos # 11.5