CITY COUNCIL STAFF REPORT
Meeting: October 17, 2023
Subject
Options for construction of a City Hall facility.
Recommended Action
Direct staff to pursue conceptual development of a mixed used Public Private Partnership for City Hall and the Sports Center properties.
Reasons for Recommendation
On November 15, 2022, following the completion of work by a Council Subcommittee on City Hall, the Council provided direction to include a retrofit project in the Capital Improvement Program. On February 21, the Council re-directed staff to suspend all work on the City Hall renovation plan and to explore options for constructing a new City Hall facility with flexible events programming space and to incorporate other potential city properties in the analysis.
Previous project review has shown that a renovation project would cost approximately $27.5M, while a new facility would approach a cost of $80M. The revised direction from Council seeks to identify ways to deliver a new facility as opposed to renovating the existing facility.
Self-Funding Option
Staff first explored options for self-funding a project. This option has been limited by the significant budget challenges that face the City, as discussed at the October 10 Council Meeting. In summary, in order to issue debt (loans, bonds, etc.) to fund a project, the City would need to have an identified source of funds to pay back that debt. The City currently faces a ten-year structural deficit, meaning ongoing expenses exceed ongoing revenue and thereby not providing for an ongoing source of funds within the City’s current revenue and expenditure structure. The Council may want to explore a future revenue enhancing measure (such as a sales tax increase, property tax assessment, transit occupancy tax increase, etc.). These options will be discussed with Council at a later date this fiscal year. The discussion could include a review of both operating and capital needs that would benefit from increased revenue.
Public-Private Partnership (P3) Option
Public-private partnerships provide alternatives to typical project delivery solutions, bringing the combined resources of a government entity together with a private project delivery partner. P3 projects are inherently complex and difficult to deliver. In this case, the concept project would involve incorporating private use development (residential) and municipal use on one or multiple properties.
Staff enlisted the assistance of the Cumming Group and the Concord Group in a Go/ No Go assessment, leveraging other City properties in an attempt to find a financially feasible option for constructing a new facility through a P3 methodology. This type of assessment is designed to take a preliminary look at the market, potential development opportunities and costs, the potential for a public-private partnership, and to determine if a project is feasible.
In pursuing this direction, the assessment considered city properties where a private use could be combined with a municipal use, thereby creating the partnership that could make for a financially feasible project. Two properties are of a size to make an evaluation worthwhile: City Hall (including Community Hall) and the Sports Center. In both cases a project would involve removing the existing facilities and constructing a mixed use facility that meets a private development need as well as replacing the municipal need.
The evaluation began by looking at the highest and best use for the properties in terms of maximizing the return from a conceptual development perspective. In both cases, the use that would create the greatest return is multi-family residential. This use is not surprising given the private development activity seen in the area.
In this case a P3 project would utilize the profit-making ability of a residential development to carry the additional cost of the municipal use. With this in mind, the analysis focuses heavily on the market elements specific to project costs and revenue opportunities associated with residential development. The City’s contribution to the project would come by way of the land contribution and potentially access to capital funding at a lower rate than is available to private investors. Other resources, including partnering with an experienced below market rate housing developer and exploring grant opportunities may contribute to bottom line calculations.
In support of a potential project, the report findings indicate a strong demand for rental housing in Cupertino, driven by high home ownership costs. This is balanced by high costs of construction and other factors, including inclusionary housing requirements and local appetite for the density of development necessary for a pro-forma calculation to pencil out. In addition, rent levels in Cupertino are just low enough where they cast doubt on the viability of a potential project. All of this is evidenced in the private development market where interest is strong, but actual development has difficulty taking place, and this without the added complexity of a municipal use detracting from the bottom line.
Additional City Properties
Two additional properties warrant some discussion. The Byrne Avenue Single Family residence is in the surplus property process as directed by the Council. As a result of required noticing, a number of entities expressed interest. The Council will have the opportunity to hear the potential uses from the interested parties and to provide direction on negotiation, which could include a market rate sale or a below market sale to support an alternative use for the property. To the extent there are funds that result from this sale, those funds could help offset a City Hall project cost. The market rate value of this property is approximately $2.73M.
The City purchased the property at 10455 Torre Avenue to provide a customer serving facility during a City Hall renovation or reconstruction project. A future renovation project to bring the Torre Avenue space to a basic level or condition for providing public services is pending completion of design. Should the City invest in that renovation, the renovation costs would likely exceed the ultimate value of the property. The current value of the property is at or slightly more than the $4.45M paid to acquire it.
Next Steps
Although a successful project opportunity is not readily apparent, staff remains committed to exploring all opportunities. Staff recommends that Council provide direction for staff to engage with one or more below market housing developers to explore a conceptual project. In providing the recommendation, Council may wish to provide guidance on the two identified properties (City Hall and the Sports Center) and the viability of each for mixed use solutions.
Sustainability Impact
There is no sustainability impact resulting from the recommended action in this report.
Fiscal Impact
There is no fiscal impact from the recommended actions in this report.
California Environmental Quality Act (CEQA)
The actions in this report are ministerial in nature and not a project. _____________________________________
Prepared by: Matt Morley, Assistant City Manager
Approved for Submission by: Pamela Wu, City Manager
Attachment:
A – Draft Strategic Marketing and Programming Analysis Report