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HomeMy WebLinkAbout06 THIRD AMENDMENT TO 15171 DEL AMO RENTAL AGREEMENT1TY MMA w.A W MEETING DATE: JULY 16. 2013 TO: JEFFREY C. PARKER, CITY MANAGER FROM: CITY MANAGER'S OFFICE Agenda Item Reviewed - City Manager 4!�� juz Fin nce Director �ti..,.�� SUBJECT: THIRD AMENDMENT TO THE RENTAL AGREEMENT BETWEEN THE CITY OF TUSTIN AND NATIONAL OFFICE LIQUIDATORS, INC. FOR A PORTION OF THE BUILDING LOCATED AT 15171 DEL AMO AVENUE SUMMARY Approval is requested to amend the Rental Agreement between the City and National Office Liquidators, Inc. (Tenant), for a City -owned property located at 15171 Del Amo Avenue. RECOMMENDATION It is recommended that the City Council authorize the City Manager to execute the attached Third Amendment to the Rental Agreement with National Office Liquidators, Inc. and support the finding that the amended Rental Agreement is at market value and no further policy directions, as outlined in Tustin City Code Section 7960(B), are required. FISCAL IMPACT The current Rental Agreement for 38,000 square feet expires August 31, 2013 and requires the Tenant pay rent at $.35 per square foot for an amount of $13,300 per month. The Third Amendment, effective August 1, 2013, will increase the space to 42,000 square feet on a Five -Year Term, with the option for either party to terminate at any time with a written six-month Notice to Terminate. In the first year, the Tenant will continue to pay $.35 per square foot and in subsequent years the rate will increase 3% annually. After the City pays $7,056, 4%, in brokerage fees for the first year, $169,344 of net rent proceeds will be available to the City General Fund. Although it is standard business practice for the brokerage fees to be paid upon agreement execution and to be based on the total rent generated during the term of an agreement, fees will be paid annually in order to reflect the option for either party to terminate at any time during the five-year Rental Agreement. Agenda Report July 16, 2013 Page 2 BACKGROUND The City owns property at 15171 Del Amo Avenue, as part of a larger acquisition associated with the new construction of an on-ramp and off -ramp providing access to and from State Route 55 to Newport Avenue and Edinger Avenue. While the building was occupied and rented when the City obtained possession of the property, it has subsequently been vacated. Rather than demolishing the building and associated parking improvements at a cost to the City, it was determined that rental of the premises in the existing condition would provide interim rental revenue until such time as the City develops a comprehensive strategy for marketing the property, market conditions warrant new development, and the City is able to obtain an adequate financial return for its original acquisition expenses. In January 2010, the City entered into a brokerage agreement with Lee & Associates to seek tenants for the building as a light industrial use, distribution use, or warehouse use (the legal non -conforming uses currently authorized on the property). On March 15, 2011, the City Council authorized a Rental Agreement with National Office Liquidators (NOL) to rent approximately one-third of the building or 28,000 square feet of the existing 85,000 square feet building. On September 4, 2012, the City Council authorized a First Amendment to the lease, extending the term through August 31, 2013. The negotiated rent rate is $.35 per square foot ($9,800 per month) and the premises are rented on a triple -net basis, meaning the Tenant will pay all real estate taxes, insurance, maintenance, repairs, utilities and other items associated with tenancy. On March 19, 2013, the City Council authorized a Second Amendment, adding an additional 10,000 square feet ($3,500 per month) on a month-to-month basis through the term of the lease, August 31, 2013. The premises would continue to be rented on a triple -net basis. Staff and Lee & Associates have been working with NOL on extending the term of the Rental Agreement. The parties have negotiated a Five -Year Rental Agreement, effective August 1, 2013, with the option for either party to terminate the Rental Agreement at any time with a written six-month Notice to Terminate. The option to terminate provides the City with the necessary flexibility to respond to potential development opportunities for the site. In addition, the Rental Agreement expands the space NOL is currently renting to 42,000 square feet and includes a rent escalator of 3% annually. As noted above, brokerage fees will be paid annually in order to take into account the Rental Agreement can be terminated at any time during the Five -Year Term. Tustin City Code (TCC) Section 7960, as enacted by Ordinance No. 1389, outlines the process City staff must follow for the approval, extension or modification of any existing City real property lease for less than market value. In the event a lease is less than Agenda Report July 16, 2013 Page 3 market value, then staff must seek policy direction from the City Council as outlined in TCC Section 7960(6). Staff, in working with Lee & Associates, has reviewed comparables to confirm current asking rates for buildings in the same market range as the Del Amo building and the proposed Third Amendment to the Rental Agreement is not for less than market value. Three (3) properties are currently advertised at a rate of 35 to 39 cents per square foot. The Del Amo building is leased on an "AS IS" basis only and is limited to a short term, month-to-month term, or includes a six-month termination clause which does not completely guarantee a Tenant of longer term occupancy (as normal rental rates are usually based on a three (3) to five (5) year initial term). In view of these facts, staff and Lee & Associates have determined and concur that the proposed rental rate is at market value. As a result, the proposed Third Amendment to the Rental Agreement does not trigger further actions as outlined in TCC Section 7960(6). Staff is available for any questions the City Council may have. Jerry Craig Economic D elo t `-ft J ousing Manager Third Amendment to the Rental Agreement THIRD AMENDMENT TO THE RENTAL AGREEMENT BETWEEN THE CITY OF TUSTIN AND NATIONAL OFFICE LIQUIDATORS, LLC This THIRD AMENDMENT TO THE RENTAL AGREEMENT (this "Third Amendment") is entered into as of August 1, 2013 (the "Third Amendment Date") by and between the CITY OF TUSTIN, a municipal corporation of the State of California ("City"), and National Office Liquidators, LLC, an Arizona limited liability company, ("Tenant"). City and Tenant are sometimes referred to herein individually as a "Party" and collectively as the "Parties". RECITALS A. The City and the Tenant entered into that certain Rental Agreement dated as of June 1, 2011, and as amended by that First Amendment to the Rental Agreement ("First Amendment") dated as of September 4, 2012, and as amended by that Second Amendment to the Rental Agreement ("Second Amendment") dated as of April 1, 2013 (collectively, the "Original Rental Agreement") pursuant to which, among other things, the City agreed to rent to the Tenant a certain portion of the real property, 28,000 square feet, located at 15171 Del Amo Avenue in the City of Tustin (the "Original Premises") as defined in the Original Rental Agreement for the purpose of a showroom for retail sales, distribution and/or warehouse use only; and B. City is the owner of the entire premises located at 15171 Del Amo Avenue in the City of Tustin, County of Orange, and State of California as more particularly described in Exhibit A of this Third Amendment, incorporated herein and hereby made a part of the Original Rental Agreement as though fully set forth herein (the "City Parcel") and C. The extension of the Original Rental Agreement with a Third Amendment is at market value and does not trigger further actions as outlined in Tustin City Code Section 7960(B); and D. The Term of the Original Rental Agreement expires August 31, 2013 with an option for the City to extend the agreement up to two (2) additional six (6) month terms, by providing the Tenant with notice, at least sixty (60) days prior to Termination Date, of City's offer to extend tenancy; and E. Tenant has a desire to increase the rental space to 42,000 square feet located on the City Parcel and adjacent to the Original Premises, as depicted in Exhibit A (the "Additional Premises") through the Term of the Original Rental Agreement. The additional 14,000 square feet is for the purpose of warehouse use only and not for the purpose of a showroom for retail sales and any use other than for dead storage space of this section of the Premises will constitute a breach of this contract and may result in eviction; and F. The Parties desire to extend the Term of the Original Rental Agreement an additional five years while providing the option for either party to terminate the Agreement at any time with a six month notice to terminate; and G. The Parties desire to amend the Original Rental Agreement by executing this Third Amendment. AlF-TA-M AGREEMENT NOW, THEREFORE, in consideration of the foregoing Recitals and of the promises and mutual covenants incorporated within the Original Rental Agreement, which are incorporated in the operative provisions of this Amendment by this reference as though set forth in their entirety, the Parties agree as follows: 1. Modification to the Original Rental Agreement. The following sections of the Original Rental Agreement are hereby amended as follows: (a) Section 4 is hereby deleted in its entirety and replaced as follows: "4.1 TERM. The term ("Term") of this Rental Agreement shall commence on June 1, 2011, ("Commencement Date") and shall be in full force and effect through July 31, 2018, ("Termination Date") unless otherwise terminated as provided herein. Tenant agrees to vacate the Premises on or before the Termination Date. At any time during the Term, the City or the Tenant may cause an earlier termination to this Rental Agreement by providing a notice to the other party six (6) months prior to the requested termination. Should this occur, the Tenant agrees to vacate the Premises on or before the noticed termination date." (b) Section 5.1 is hereby deleted in its entirety and replaced as follows: "5.1 Base Rent. In the first year of the Third Amendment, the Tenant shall pay the City the monthly sum of Fourteen Thousand Seven Hundred Dollars ($14,700) for the Premises, payable in advance. In subsequent years, the rent shall increase 3% annually. Effective August 1, 2014, the Tenant shall pay the City the monthly sum of Fifteen Thousand One Hundred and Forty -One Dollars ($15,141). Effective August 1, 2015, the Tenant shall pay the City the monthly sum of Fifteen Thousand Five Hundred and Ninety -Five Dollars and Twenty -Three Cents ($15,595.23). Effective August 1, 2016, the Tenant shall pay the City the monthly sum of Sixteen Thousand and Sixty - Three Dollars and Nine Cents ($16,063.09). Effective August 1, 2017, the Tenant shall pay the City the monthly sum of Sixteen Thousand Five Hundred and Forty -Four Dollars and Ninety -Eight Cents ($16,544.98). If the Commencement Date is other than the first day of a calendar month, the rent payable hereunder shall be prorated by the City on the basis of a thirty (30) day month. Rental installments shall be paid by giving such payments to the City, directed to the Finance Department, at 300 Centennial Way, Tustin, CA 92780. Checks should be made out to the "City of Tustin". 2. No Other Changes. This Third Amendment is supplemental to the Original Rental Agreement and is by reference made part of said Original Rental Agreement. All sections of the Original Rental Agreement not specifically amended herein shall remain in full force and effect. In the event of any conflict or inconsistency between the provisions of this Third Amendment and any provisions of the Original Rental Agreement, the provisions of this Third Amendment shall in all respect govern and control. Unless otherwise specifically defined herein, terms used in this Third Amendment shall have the same meaning as ascribed to them in the Original Rental Agreement. The execution and delivery of this Third Amendment shall not operate as a waiver of or, except as expressly set forth herein, an amendment of any right, power or remedy of either party in effect prior to the date hereof. ►01 915693.1 3. Counterparts. This Third Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the Parties hereto may execute this Third Amendment by signing any such counterpart. IN WITNESS WHEREOF, City has authorized this Third Amendment between the City of Tustin and National Office Liquidators, LLC to be executed for and on behalf of the City of Tustin, and Tenant has caused the same to be executed by its duly authorized officer on the date first above written. "CITY" City of Tustin, California Dated: Jeffrey C. Parker, City Manager Attest: Erica Rabe City Clerk Services Supervisor APPROVED AS TO FORM David E. Kendig City Attorney "TENANT" National Office Liquidators, an Arizona limited liability company By: Name: Title: By: Name: Title: 3 915693.1 EXHIBIT "A" 15171 Del Amo Avenue, Tustin Under the current Rental Agreement with National Office Liquidators (NOL), the number of parking spaces for the subject unit is not to exceed 14 and will remain at 14 under the Third Amendment. Tenant will utilize spaces in front of Subject units in a manner that does not interfere with the operations of adjoining tenants. Tenant will be limited to utilizing Loading Dock Doors 91 — 95 and Loading Docks 91 — 94.