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Home My WebLink About08 EXTENSION AND AMENDMENT OF EXCLUSIVE NEGOTIATING AGREEMENT WITH CD-MS (TUSTIN) LLC FOR A PORTIONDocusign Envelope ID: 894C1C3C-2C3E-4BFD-9DB8-1D23481F1D15 MEETING DATE TO FROM Agenda Item 8 Reviewed. Initial City Manager a`L� Finance Director N/A AUGUST 20, 2024 ALDO E. SCHINDLER, CITY MANAGER RYAN SWIONTEK, ACTING DEPUTY DIRECTOR OF ECONOMIC DEVELOPMENT SUBJECT: EXTENSION AND AMENDMENT OF EXCLUSIVE NEGOTIATING AGREEMENT WITH CD -MS (TUSTIN) LLC FOR A PORTION OF TUSTIN LEGACY DISPOSITION AREA 8B SUMMARY: Request for approval of an extension of the Exclusive Negotiating Agreement with CD -MS (Tustin) LLC to continue the negotiating period for the disposition and development of a portion of Disposition Area 8B at Tustin Legacy for a senior congregate care facility project for an additional 180 days and waive any applicable extension deposits. RECOMMENDATION: It is recommended that the City Council take the following actions: 1. Approve an extension of the Exclusive Negotiating Agreement for an additional period of 90 days, with an option to grant an additional 90-day extension at the discretion of the City Manager in accordance with Section 4.2.2 of the Exclusive Negotiating Agreement, as well as waive the Exclusive Negotiating Agreement extension deposit for both 90-day periods. 2. Authorize the City Manager to execute an amendment to the Exclusive Negotiating Agreement reflecting the extension request submitted by CD -MS (Tustin) LLC subject to non -substantive additions or modifications as may be deemed necessary and/or recommended by the City's special real estate counsel or the City Attorney prior to the end of the Exclusive Negotiating Agreement Negotiating Period. FISCAL IMPACT: Pursuant to the terms of the Exclusive Negotiating Agreement, all Exclusive Negotiating Agreement extensions requiring City Council approval require a $100,000 deposit that is applicable to the purchase price if close of escrow occurs. CD -MS (Tustin) LLC has requested that this extension deposit be waived due to their monetary investment towards the project to date. Docusign Envelope ID: 894C1C3C-2C3E-4BFD-9DB8-1D23481F1D15 City Council Agenda Report CD -MS Tustin ENA Extension and Amendment August 20, 2024 Page 2 CD -MS (Tustin) LLC currently has a deposit account with the City that will continue to fund the City transaction expenses incurred by staff and third -party consultants including the retention of legal counsel associated with the negotiation and drafting of the Disposition and Development Agreement and related agreements. CORRELATION TO THE STRATEGIC PLAN: The extension of the Exclusive Negotiating Agreement with CD -MS (Tustin) LLC contributes to the fulfillment of the City's Strategic Plan Goal A: Economic and Neighborhood Development. Specifically, this item implements Strategy 1 which is to develop critical phases of Tustin Legacy. BACKGROUND AND DISCUSSION: On September 19, 2023 (Effective Date), the City Council authorized the City Manager to enter into an Exclusive Negotiating Agreement (ENA) with CD -MS (Tustin) LLC (Developer) to negotiate the disposition and development of a portion of Disposition Area 813 at Tustin Legacy for a senior congregate care facility project. The ENA provided for an initial negotiating period of 270 days from the Effective Date which could be extended for one (1) additional period of 90 days at the discretion of the City Manager, which was granted. The ENA Negotiating Period, with the previously approved extension, will expire on September 16, 2024. Any additional ENA Negotiating Period extensions would require approval by the City Council and may be for 90 days with the delivery of a $100,000 deposit that is applicable to the purchase price. The City and Developer continue to negotiate the Disposition and Development Agreement (DDA), the Development Agreement (DA) and the related instruments and agreements (Transaction Documents) diligently and in good faith, and the Developer has made reasonable and sufficient progress towards fulfilling the requirements of the ENA. Due to the continuing uncertainty in capital markets, additional time is requested to complete predevelopment and negotiations of the Transaction Documents. While the City and Developer continue to negotiate the final DDA, Developer has expended over $1.3 million in advancing City and Developer Transaction Documents, entitlements and design development drawings for the project. Developer has submitted a letter to the City dated August 8, 2024 (included as Attachment 1) requesting an additional ENA extension of 90 days, as well as an option for the City Manager to grant an additional 90-day extension, for a prospective total of 180 days based on the City's determination that sufficient progress has been made towards fulfilling the terms of the ENA. If approved by the City Council, the first 90-day extension would expire on December 16, 2024. If the City Manager extends the ENA for the additional 90 days, the ENA would expire on March 17, 2025. Pursuant to the terms of the ENA, all ENA extensions requiring City Council approval may be for 90 days and require a $100,000 deposit that is applicable to the purchase price if close Docusign Envelope ID: 894C1C3C-2C3E-4BFD-9DB8-1D23481F1D15 City Council Agenda Report CD -MS Tustin ENA Extension and Amendment August 20, 2024 Page 3 of escrow occurs. Developer has requested a waiver of the extension deposit for the two proposed 90-day extensions given their investment into the project to date as part of their ENA extension letter. Any additional ENA extensions beyond March 17, 2025 would require approval by the City Council. Staff finds that sufficient progress is being made toward fulfilling the requirement of the ENA, and therefore recommends City Council approval of the ENA extension as requested. Due to the cancellation of the September 3, 2024 City Council meeting and the expiration of the current ENA Negotiating Period on September 16, 2024, staff is requesting City Council approval of the ENA extension and amendment as recommended, which will be executed by the City Manager and Developer prior to the end of the current ENA Negotiating Period (September 16, 2024). Signed by: A.Lt, �Wtbtnt - a�seaaeaeeF� Ryan Swiontek Acting Deputy Director of Economic Development Attachments: Signed by: /�PilLYI.P/1� �'L�SUCL Kenneth Piguee Senior Management Analyst 1. Letter requesting extension of ENA from Developer dated August 8, 2024 Docusign Envelope ID: 894C1C3C-2C3E-4BFD-9DB8-1D23481F1D15 rconfluent edevelopment August 8, 2024 VIA ELECTRONIC MAIL and VIA FEDERAL EXPRESS OVERNIGHT DELIVERY City Manager City of Tustin 300 Centennial Way Tustin, CA 92780 Attention: Aldo Schindler Email: aschindlerntustinca.org WITH COPIES TO: Acting Deputy Director of Economic Development City of Tustin 300 Centennial Way Tustin, CA 92780 Attention: Ryan Swiontek Email: rswiontek(ctustinca.org City Attorney Woodruff, Spradlin & Smart 555 Anton Blvd., Suite 1200 Costa Mesa, CA 92626 Attention: David Kendig, Esq. Email: dkendi woodruff.law Hepner & Myers LLP 1241 Johnson Avenue, Suite 360 San Luis Obispo, CA 93401 Attention: Amy E. Freilich. Esq. Email: afreilichkHepnerMyers.com Re: Request for Extension pursuant to that certain Exclusive Negotiating Agreement (Tustin Legacy Portion of Disposition Area 8B with an Effective Date of September 19, 2023 (the "ENA"), entered into by and among the City of Tustin ("C") and CD -MS (Tustin) LLC, a Colorado limited liability company ("Developer"). Dear Mr. Schindler: Confluent Development, LLC, a Colorado limited liability company ("Confluent") is the Manager for the Developer. Please note that unless otherwise stated, capitalized terms used below shall have the same meaning as set forth in the ENA. The Initial ENA Negotiating Period is currently set to expire on September 16, 2024. See ENA at § 4.2.1. As detailed below, notwithstanding Confluent's good faith efforts and significant progress on the MorningStar project, Confluent needs additional time to advance the project Entitlements, DDA and DA while navigating the currently unstable national economic conditions. Accordingly, Confluent hereby requests that the City amend the terms of the ENA to the following schedule and deposits. 2215 Market St (303) 573-6500 Denver, CO 80205 www.ConfluentDev.com fax (303) 573-6503 Docusign Envelope ID: 894C1C3C-2C3E-4BFD-9DB8-1D23481F1D15 ENA Request for Extensions Schedule and Deposits Request # 1 City Council to authorize an ENA Extension for 90 Days - September 16, 2024, to December 16, 2024 - with Extension Deposit waived. Request #2 City Council to authorize the City Manager to grant an ENA Extension for 90 Days (if requested by Confluent) - December 17, 2024, to March 17, 2025 - due to the holiday period surrounding the December deadline. Extension Deposit waived. Explanation for ENA Extensions with Deposits Waived Confluent is committed to the successful delivery of our Morningstar at Tustin senior living project. Since the execution of our ENA in September 2023, Confluent has completed conceptual drawings, schematic drawings, two entitlement submissions including site plan, landscape plan, civil grading and utility drawings, and detailed building floorplans and elevations, coupled with active negotiations on the DDA. Confluent is committed to completing the entitlements process as well as finalizing the negotiations prior to the expiration of the requested extension periods. We have also committed to meeting with planning and the legal team twice per month to discuss the DDA and DA in an effort to expedite that process moving forward. As referenced in Exhibit 1.0 below: Real Estate News, the economy since 2023 has significantly evolved into unprecedented territory not seen since the Great Recession. Confluent has closely monitored and navigated these challenging market conditions, all while continuing to commit valuable pursuit capital toward the design and development of the project. Our request above for the September and December extension deposits to be waived is seeking consideration of our substantial capital output during the ENA Negotiating Period, which will exceed $1,400,000 by mid -September. Additionally, Confluent expects to spend between $300,000 and $400,000 by January 2025, the majority of which is to continue the good faith negotiations of the DDA. And, through the first half of 2025, Confluent projects to spend over $2,000,000 on project design. The reasons investors and developers are reducing risk currently include the following: First, the Federal Reserve is not on track to meet its early -year estimate of seven rate cuts. Many economic advisors now assume rate cuts may not begin until 2025. The prolonged higher rates mean that capital providers are hesitant to invest until there is more certainty in the market. Second, investment dollars available this year have primarily gone toward acquisitions. Investors in real estate are finding that new assets can be purchased for 30-60% below replacement cost, making acquisitions more attractive than development deals which are inherently perceived as riskier investments. Compounding this challenge, many funds have opted to hold onto assets longer instead of returning cash to investors at a loss, resulting in substantially reduced capital allocated for new investments. As reported by the National Investment Committee for Senior Housing: 2215 Market St (303) 573-6500 Denver, CO 80205 www.ConfluentDev.com fax (303) 573-6503 Docusign Envelope ID: 894C1C3C-2C3E-4BFD-9DB8-1D23481F1D15 "Preliminary estimates for the second quarter of 2024 were only 1,300 senior housing construction starts, which, even though subject to upward revision, is likely to be the lowest quarterly figure dating back to the quarters preceding the Great Financial Crisis." Our team is in regular contact with ultra high net worth investors, institutional capital providers, private equity funds and leading investment sale brokers in the industry. The feedback we have received is that investment funds are forthcoming. Multiple large investment groups have expressed interest in investing in this project, with timelines for fund raising beginning in the fall of 2024 and deploying capital in the first or second quarter of 2025. This timeline aligns with our ENA request. Third, capital investment in development is an industry -wide challenge. As noted by industry experts, the consensus across operators, developers, investors, and architects is that deals are not getting done in 2024 due to the lack of pursuit dollars and available equity. Brian Sunday, Senior Housing Portfolio Director at AEW, one of the largest senior housing investors in the US, stated: "It's taken awhile for investors to adjust to a market that consists of higher debt costs, higher cap rates and reset valuations. This has directly caused investment activity to slow down and bring development activity to a standstill. Go -forward fundamentals in this sector are as strong as ever, which will be a catalyst to increasing volume in the near future. However, development activity will stay slow for some time." We appreciate the City of Tustin recognizes the state of the economy and our efforts to date. Our team remains committed to our successful partnership with the City and to creating a senior living community that will establish the Gold Standard in Orange County. In October 2023, the Tustin Legacy project was featured on the front cover of Senior Housing Business magazine with the title "Designers Take a Refreshing Tactic." We firmly believe that our team is the most well -positioned to facilitate a best -in -class senior living project that will set a high watermark for future developers in the region. Also worth noting, MorningStar has received over a dozen requests from local residents asking for more information on the project, including inquiries about putting down deposits to reserve a unit in the community. This level of interest is unprecedented at this stage of development and is a testament to all the hard work by the City, Confluent and MorningStar to date. 2215 Market St (303) 573-6500 Denver, CO 80205 www.ConfluentDev.com fax (303) 573-6503 Docusign Envelope ID: 894C1C3C-2C3E-4BFD-9DB8-1D23481F1D15 Exhibit 1.0 — Real Estate News When will interest rates go down? hM2s://www.cnbc.com/select/when-will-interest-rates-drop/ (CNBC, Kelsey Neubauer I Ryler Amond, July 16, 2024) Construction Starts Falling Behind Demand hM2s://www.nicmapvision.com/blog/construction- starts-falling-behind-needed-demand/ (NIC MapVision Blog, July 22, 2024) Expect slowness ahead (Senior Housing Business Magazine, Brian Sunday, Printed May 2024) Sincerely, Matthew G. Derrick Managing Director Confluent Senior Living 2215 Market St (303) 573-6500 Denver, CO 80205 www.ConfluentDev.com fax (303) 573-6503