HomeMy WebLinkAboutStaff Report 226-09CITY OF PALO ALTO
Memorandum
TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER DEPARTMENT: PUBLIC WORKS
DATE: JUNE 1,2009 CMR:226:09
REPORT TYPE: REPORTS OF OFFICIAL
SUBJECT: Discussion on Termination of Option Agreements Between the City and Essex
Park Boulevard, LLC and Brown-Fairchild Park Investment Company, L.P. for
the Purchase of the Properties Located at 2785 Park Boulevard and 2747 Park
Boulevard, Respectively and Direction to Pursue Alternative Land Banking
Options for Public Safety Building
The above-referenced City Manager's Report (CMR:226:09) was continued from the Council
meeting of May 18, 2009.
Copies of this report and attachments can be viewed
http;llwww.cityofpaloalto.orglknowzone/agendas/council.asp or by contacting
Engineering Division, Elizabeth Ames, Senior Engineer at 650-329-2502.
iil~ -
GLENN S. ROBERTS
Director of Public Works
on-line at
Public Works
TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER
DATE: MAY 18,2009
REPORT TYPE: REPORTS OF OFFICIAL
DEP ARTMENT: PUBLIC WORKS
ADMINISTRATIVE SERVICES
CMR:226:09
SUBJECT: Discussion on Termination of Option Agreements Between the City and
Essex Park Boulevard, LLC and Brown-Fairchild Park Investment
Company, L.P. for the Purchase of the Properties Located at 2785 Park
Boulevard and 2747 Park Boulevard, Respectively and Direction to Pursue
Alternative Land Banking Options for Public Safety Building
EXECUTIVE SUMMARY
This report provides information leading to a staff recommendation to terminate the land
purchase option agreements with Essex Park Boulevard, LLC and Brown-Fairchild Investment
Company, L.P. for properties located at 2785 and 2747 Park Boulevard respectively. These
properties were to be used for the City's Public Safety Building project but since the downturn in
the economy the values of the two properties have dropped dramatically and the City does not
have a sound financing plan to fund the project. Instead, staff recommends pursuing an
alternative land banking proposal which will allow the City to acquire property in a record low
market, but defer larger capital costs until the economy improves. Design on the project has
been suspended at the 35% stage.
RECOMMENDATION
Staff recommends that Council authorize:
1. The City Manager to execute the attached Notices of Termination of the Option
Agreements (Attachment A) between the City and Essex Park Boulevard, LLC, for the purchase
of the property located at 2785 Park Boulevard; and between the City and Brown Fairchild-Park
Investment Company, L.P., for the purchase of the property located at 2747 Park Boulevard,
Palo Alto and
2. Staff to pursue landbanking options which will generally accommodate the
facility needs set forth in the Blue Ribbon Task Force Report approved by the Council in June
2006.
BACKGROUND
In December 2005, Council directed the Mayor to appoint a community-based Blue Ribbon Task
Force (BRTF) to evaluate the need, size, cost and site for a public safety building. In June 2006,
the Council accepted and approved the Public Safety Building Blue Ribbon Task Force
recommendations to consider a new Public Safety Building totaling 49,600 square feet at the
two-parcel, 1.51 acre site located at 2785 Park Boulevard.
CMR:226:09 Page 1
On November 17, 2007 (CMR:420:07) Council authorized the City Manager to enter into an
Option Agreement to purchase the property from the owner, Essex Park Boulevard, LLC (Essex)
for the purchase price of $10,900,000. Structuring the transaction as an option agreement, rather
than an outright purchase, allowed the City to secure the property and lock in a price. Terms of
the option agreement include a 30-month term which began in November 2007 and terminates in
April 2010. The first option payment, in the amount of $436,000 was paid upon execution of the
'Agreement. The second through nineteenth option payments, $36,333 each, are due each month.
To date the City has paid a total of $617,665 in option payments on the Essex Property. The
option payments are nonrefundable and were to be credited against the total purchase price. The
Agreement provides that the City may terminate the option at any time during the option term by
providing Essex with a written notice.
In February 2008, upon Counsel's direction, staff assembled a peer review team with
architectural, construction and development expertise to evaluate the PSB project. The group
expressed concern over the single L shaped option's long, inefficient rectangular parking
configuration and suggested that acquisition of the adjacent .3 acre parcel located at 2747 Park
Boulevard would allow for additional design flexibility and construction cost efficiencies.
On May 1, 2008, staff received an offer from the owners of 2747 Park Boulevard, the Brown
Fairchild-Park Investment Company, L.P. (Brown), to enter into a sale or option to purchase
agreement with the City for the property. On May 12th, the City Council directed staff to
proceed with the negotiations for purchase of the property and on May 19, 2008, staff received a
letter of intent from Brown to enter into an option to purchase the .3 acre property for the price of
$2,732,000. The terms of the option agreement include a 23-month term which began July 2008
and terminates on May 29, 2010. The first payment in the amount of $109,280, made in July
2008, secured the option for one year. The beginning of twelve monthly option payments in the
amount of $9,106 is due to begin this July 1,2009. The option payments are nonrefundable, and
were to be credited against the total purchase price. The Agreement provides that the City may
terminate the option at any time during the option term by providing Brown with a written
notice.
On July 14, 2008, Council approved a design contract with RossDrulisCusenbery Architecture,
Inc. (RDC) to complete the design of the PSB through construction documents. The proposed
design is based on the findings of the Blue Ribbon Task Force (BRTF) and Outside Peer Review
that recommended a 50,000 sq. ft. new building be built on a 2-parcel site located at 2747
(Brown) and 2785 Park Boulevard (Essex Properties). The design and construction documents
were to be completed by summer 2009.
In November 2008, the City commissioned an appraisal of the Essex property which concluded
that the property had significantly decreased in value. While the City did not re-appraise the
smaller Brown property, a comparable decline would be expected. It is difficult to predict
whether the commercial market has bottomed as there is still uncertainty created by the high
level of vacancies and possibly far more layoffs in the valley. Accordingly, the negotiated option
prices are now considerably above market with little likelihood of catching up by the time the
City must exercise the options.
CMR:226:09 Page 2 of4
DISCUSSION
As reported in the First Quarter Fiscal Year 2009 Financial Results Discussion Report to Council
on December 16, 2008 (CMR:462:08), the Country continues to deal with its worst financial
crisis since the Great Depression. And, as reported, the national and local economy is faced with
a tight credit market, growing unemployment, weak banks, and a severe housing downturn. The
effect on local real estate prices is being felt up and down the peninsula and Palo Alto's market is
not immune. As reported by various local real estate agents, appraisers and studies, prices for
commercial and residential properties have declined and commercial vacancy rates continue to
rIse.
As the current option agreements with Essex and Brown are no longer reflective of market
conditions and there is little likelihood that the market price will catch up to the option price,
staff recommends cancelling both options.
Land Banking Alternative
In lieu of pursuing a full scale buildout of the Public Safety Building in this economic downturn,
an alternative approach is a land banking option. Under this approach, the Council may decide
to purchase a property now and if the City's financial position improves, the property could be
developed at a later time. Alternatively, if the City's financial position does not improve, the
City could elect to sell the property. One advantage to a land banking option, is it could allow
the City to recognize interim income from rental of the property.
City staff has had preliminary discussions with the owners of the EssexIBrown properties and it
appears that they would be willing to consider a substantial price reduction if the City were to
acquire the properties now. In addition, staff has identified another site at 3045 Park Boulevard
that is currently on the market and which meets the general site parameters identified by the Blue
Ribbon Task Force. This site contains an approximate 17,956 square foot building and thus has
significant rental income potential. Both EssexIBrown and 3045 Park have indicated a
willingness to finance a large part of the purchase price. If Council is interested in pursuing a
"land banking" option, staff recommends that Council direct staff to continue to negotiate with
the owners of the respective properties and return to Council for consideration of a Purchase
Agreement. At that time, Staff would review other long term options for a Public Safety
building, such as build out of the Mezzanine floor of the current Public Safety Building and a
split facility.
Current Project Status
Because of the severe economic downturn and its impact on City revenues, it is evident that the
fmancing options for the Public Safety Building (PSB) need to be re-evaluated. There is
considerable uncertainty surrounding the level of City revenues which is expected to continue at
least through year 2010. The City's revised Long Range Financial Forecast shows a deficit of
$7.8 million this fiscal yea( and a $10.0 million deficit next fiscal year. Under these conditions,
funding the estimated $5.2 million in annual debt service for the PSB land acquisition and
construction costs needs to be reassessed. Resources cited in a February 11, 2008 report to the
Council (CMR:144:08 with attached CMRs:140:08 and 114:08) to pay debt service will need to
be analyzed anew as economic and budget conditions remain volatile. Staff has suspended the
PSB project at the 35% design stage in light of the current financial climate.
CMR:226:09 Page 3 of4
Police Wing Mezzanine and other alternatives
In view of the economic conditions, staff is exploring other options in addition to land banking.
There has been some interest in exploring building out the mezzanine level of the existing police
wing in the Civic Center. In 2002 staff and the design consultant evaluated the feasibility of this
option and concluded it would require major structural work at significant additional cost and
would also require temporary facilities for the Police Department during construction. Staff is
reviewing this earlier report as well as other downsized options and will report back to Council
in the next couple of months.
RESOURCE IMPACT
The City has expended the following sums on these two properties, 1) DesignlEIR Costs
(September 2008 to February 2009) $1,202,667, 2) Option payments to Essex and Brown
totaling $726,945 for a grand total of$1,929,612.
POLICY IMPLICATIONS
This recommendation does not represent a change to existing City policies.
ENVIRONMENTAL REVIEW
The actions requested in this report do not constitute a project for the purposes of the California
Environmental Quality Act.
ATTACHMENTS
Attachment A: Notices of Termination of Option Agreements
PREPARED BY:
MARTHA MILLER
DEPARTMENT HEADS:
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GLENN S. ROBERTS
LA
Director, Administrative Services
CITY MANAGER: "5/.('
Page
Attachment A ~j~ .. QfJ~~2_~!9
Office of the City Manager
May 18,2009
VIA PERSONAL DELIVERY
Brown Fairchild-Park Investment Company, L.P.
clo Vance Brown Inc.
3197 Park Blvd.
Palo Alto, CA 94306
Attn: Loren K. Brown
RE: Notice of Termination of Option: 2747 Park Boulevard, Palo Alto
Dear Mr. Brown:
Pursuant to Section 12.1 of the Option Agreement dated July 22, 2008 between the
City of Palo Alto and Brown Fairchild-Park Investment Company, L.P., the City
of Palo Alto hereby terminates the Option to purchase the property commonly
known as 2747 Park Boulevard, Palo Alto.
Very truly yours,
James Keene
City Manager
cc: North American Title Company
090413 jb 0130459
P.O. Box 10250
Palo Alto, CA 94303
650.329.2563
650.325.5025 fax
VIA PERSONAL DELIVERY
Essex Park Boulevard, LLC
c/o Essex Property Trust, Inc.
925 East Meadow Drive
Palo Alto, CA 94303
Attn: Bruce Knoblock and Jordan E. Ritter
~~~QfJ?~qM~Q
Office of the City Manager
May 18,2009
RE: Notice of Termination of Option: 2785 Park Boulevard, Palo Alto
Dear Messrs. Knoblock and Ritter:
Pursuant to Section 12.1 of the Option Agreement dated November 20, 2007
between the City of Palo Alto and Essex Park Boulevard, LLC, the City ofPalo
Alto hereby terminates the Option to purchase the property commonly known as
2785 Park Boulevard, Palo Alto.
Very truly yours,
James Keene
City Manager
cc: North American Title Company
090413 jb 0130458
p.o. Box 10250
Palo Alto, CA 94303
650.329.2563
650.325.5025 fax