Item No.
1 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: OFFICE OF THE CITY MANAGER
BY: AUSTIN RAMIREZ, DIRECTOR OF ECONOMIC DEVELOPMENT
DATE: NOVEMBER 12, 2024
SUBJECT: APPROVAL OF THE SEVENTH AMENDMENT TO THE GROUND
LEASE WITH INDUSTRIAL REALTY GROUP, LLC
EXECUTIVE SUMMARY
The City Council will consider approving a Seventh Amendment to the Ground Lease with Industrial Realty Group, LLC (IRG). The Ground Lease was executed in December 2003 and subsequently amended several times to facilitate redevelopment of the approximately 160-acre former National Aeronautics and Space Administration (NASA) industrial site.
IRG is requesting a Seventh Amendment that will allow it to pursue residential development on the last remaining undeveloped 8.31 acres of City-owned property in the area referred to as the “Back 20”.
RECOMMENDATION
That the City Council:
Authorize the City Manager, or his designee, to execute the Seventh Amendment to the Ground Lease with Industrial Realty Group, LLC.
BACKGROUND
Between 1999 and 2003, the City acquired the approximately 160-acre former NASA industrial site in the area bounded by Lakewood Boulevard and Bellflower Boulevard from west to east, and Stewart and Gray Road and Imperial Highway from north to south. In 2002, the City adopted the Downey Landing Specific Plan (DLSP) with the goal of facilitating a true mix of uses on the former NASA property, including commercial, retail, entertainment, office, medical, and hotel.
In December 2003, the City and IRG entered into a Ground Lease to conduct environmental remediation and development activity aimed at fulfilling the vision of the DLSP. Six amendments to the ground lease were executed between 2012 and 2022 to reflect changes in property ownership, redevelopment goals, and market conditions. From 2003 to now, significant development progress of the former NASA site has been achieved and the area is now one of the City’s premier destinations, featuring the Landing and Promenade retail centers, Kaiser Permanente Medical Center, and the Columbia Memorial Space Center. Approximately 20 acres remain undeveloped (known as the
APPROVAL OF THE SEVENTH AMENDMENT TO GROUND LEASE WITH INDUSTRIAL REALTY
GROUP, LLC
NOVEMBER 12, 2024
PAGE 2
Back 20) and are comprised of multiple owners (the City, IRG, Kaiser Permanente, and the Downey Federal Credit Union).
IRG is requesting a Seventh Amendment to the Ground Lease to pursue residential development on the last remaining undeveloped 8.31 acres of City-owned property in the Back 20.
ANALYSIS
Sensitive use restrictions placed on the property by NASA do not allow childcare, lodging, and residential in the Back 20 due to the site’s long history of industrial use and contamination. The site’s Covenants, Conditions, and Restrictions (CCR) establish a lengthy process for lifting the sensitive use restrictions to allow residential development:
1. Site contamination must be assessed and characterized in a technical document called a Human Health Risk Assessment (HHRA).
2. The HHRA and environmental remediation/mitigation strategies must be submitted to the Los Angeles Regional Water Board (LARW B) for review to request lifting the sensitive use restrictions.
3. If the request is approved by the LARWB, the Major Voting Parties (City, IRG, Kaiser Permanente, Walmart, and Northwood Retail) identified in the CCR must also approve lifting the sensitive use restrictions.
Additionally, further deed restrictions from Walmart do not allow for residential development and limit the types of allowable commercial development. Approval from Walmart would need to be obtained to allow residential development.
In consideration of market conditions, the community’s need for additional housing, and the proximity to high quality amenities, City and IRG staff agree that residential development is highest and best use of the City-owned properties in the Back 20. It is estimated that the full process (lift the sensitive use restrictions, lift the Walmart deed restrictions, and complete pre-development process) to start construction of residential development will take approximately five years to complete. The current Ground Lease includes an early termination clause, which requires that IRG begin construction by April 30, 2028 or the lease terminates. IRG is requesting a two-year extension to the early termination date to April 30, 2030 to allow enough time to pursue residential development without violating the early termination clause.
IRG’s request provides the City an opportunity to introduce tangible milestones to ensure development of the City-owned properties progresses satisfactorily and in alignment with the City’s goals. The Seventh Amendment extends the early termination date one year to April 30, 2029, conditional on the following terms:
1. IRG will pay the City a $50,000 extension fee.
APPROVAL OF THE SEVENTH AMENDMENT TO GROUND LEASE WITH INDUSTRIAL REALTY
GROUP, LLC
NOVEMBER 12, 2024
PAGE 3
2. IRG will deliver the following milestones within the time frame specified. Failure to deliver milestones within the time frames will result in IRG paying a $75,000 missed milestone fee, per each missed milestone.
a. Complete seasonal environmental sampling within three months and share results with the City.
b. Within one month of completing 2.a, IRG will submit sampling results to the LARWB for review. Within six months of completing 2.a, IRG will meet with the LARWB to discuss sampling results and receive further direction on lifting the sensitive use restrictions. Completion of 2.b requires that IRG provides the City with a summary of the meeting with the LARWB, as well as address any questions the City may have regarding the meeting. c. Within eight months of completing 2.b, IRG will complete and submit a Human Health Risk Assessment to the LARW B and share a copy with the City.
d. .
The City will only consider extending the early termination date the additional one-year to April 30, 2030, if all milestones are delivered and the LARW B is receptive to lifting the sensitive use restrictions. Extending the additional one-year to 2030 will be contingent on IRG paying another $50,000 extension fee, and the City approving new milestones.
CITY COUNCIL PRIORITIES
Economic Vibrancy
Quality of Life, Safety and Infrastructure
FISCAL IMPACT
Approval of the recommended actions will not result in any fiscal impacts.
ATTACHMENTS
Attachment A – Seventh Amendment to Ground with IRG
1 SEVENTH AMENDMENT TO AGREEMENTS IN GROUND LEASE
This Seventh Amendment to Agreements in Ground Lease (this “Seventh Amendment”) is made as of this ____ day of ___________, 2024 (the “Effective Date”), by and between THE CITY OF DOWNEY, a charter city and municipal corporation of the State of California (“Landlord”), and HOLDINGS DOWNEY, LLC, a Delaware limited liability company (“Holdings Downey”), and IRG DOWNEY, LLC, a California limited liability company (“IRG Downey”) (collectively “Tenant”). NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant hereby agree to amend, modify and/or supplement the Ground Lease as of the Effective Date as follows:
1. Background. Landlord and one of Tenant’s predecessors-in-interest, Industrial Realty Group, LLC, a Nevada limited liability company (“Original Tenant”) entered into a Ground Lease, dated on or about December 4, 2003, pursuant to which Landlord leased to Original Tenant certain real property described therein (the “Ground Lease Property”) that was formerly a part of the NASA Industrial Plant in Downey, California. Original Tenant assigned its interest in the Original Ground Lease to PCCP IRG Downey, LLC, a Delaware limited liability company (“PCCP Downey”), and IRG Downey (together with PCCP Downey, “Prior Tenant”) pursuant to that certain Assignment and Assumption of Ground Lease, dated March 16, 2004. The Ground Lease was subsequently amended by a First Amendment dated March 15, 2012 (“First Amendment”) between Landlord and PCCP IRG Downey, and IRG Downey. The parties entered into a Second Amendment dated September 13, 2017 (“Second Amendment”), and subsequently PCCP Downey assigned its interest in the Original Ground Lease to Holdings Downey pursuant to that certain Assignment and Assumption of Ground Lease, dated April 10, 2019. The parties then entered into a Third Amendment dated May 27, 2020 (“Third Amendment”), Fourth Amendment dated November 25, 2020 (“Fourth Amendment”), Fifth Amendment dated February 23, 2022 (“Fifth Amendment”), and Sixth Amendment dated June 15, 2022 (“Sixth Amendment”) (together, all such amendments and the Assignments, the “Prior Agreements”).
The Original Ground Lease, as amended by the other Prior Agreements, is herein after referred to as the “Lease.” All capitalized terms used herein but not herein defined shall have the meanings ascribed to such terms in the Prior Agreements, as applicable. To the extent any discrepancy exists between any terms and conditions of this Seventh Amendment and any term or condition in any of the Prior Agreements, the terms herein shall control.
2. Purpose and History of Amendments to Date. Concurrent with the Third Amendment, Landlord, as seller and Tenant, as buyer, entered into a Sale Agreement and Escrow Instructions, as amended (“South Parcel Sale Agreement”), which South Parcel Sale Agreement provided for the sale of an 8.76-acre portion of the Ground Lease Property (“South Parcel”) from Landlord to Tenant (the “South Parcel Sale”). Concurrent with the Fourth Amendment, Landlord, as seller, and Tenant, as buyer, entered into a Sale Agreement and Escrow Instructions (“DFCU Sale Agreement”), which DFCU Sale Agreement provided for the sale of an approximate 2.64- acre portion of the Ground Lease Property located on the North Parcel (“DFCU Parcel”) from Landlord to Tenant (the “DFCU Parcel Sale”). To facilitate the South Parcel Sale and DFCU Parcel Sale, Landlord and Tenant, through the Third Amendment and the Fourth Amendment, respectively, agreed to terminate the Lease as to the South Parcel and DFCU Parcel, while continuing the Lease as to the remaining 8.29 acres that comprise the Ground Lease Property (“Remaining Ground Lease Property”). Landlord and Tenant, through the Fifth Amendment,
ATTACHMENT A
2 agreed to modify certain rent terms, acknowledge the possibility of future entitlement changes on the Remaining Ground Lease Property, and discuss the potential sale of the Remaining Ground Lease Property to Tenant. By way of the Sixth Amendment, the Parties extended the Early Termination Date to April 30, 2028 and clarified rent obligations. At this time, in this Seventh Amendment, Landlord and Tenant wish to provide for further extension of the Early Termination Date on certain conditions and subject to mutually agreed upon milestones designed to advance development.
3. Effective Date: An Amended Memorandum of Lease dated the Effective Date shall be recorded in the Office of the County Recorder of Los Angeles County pursuant to Section 16.13 of the Original Ground Lease.
4. Early Termination: The Early Termination Date as defined in the Lease shall be conditionally extended by one (1) year from April 30, 2028 to April 30, 2029 (“Conditional Early Termination Date”), subject to: (i) Tenant’s payment of a one-time upfront extension fee in the amount of Fifty Thousand Dollars ($50,000.00) (“Extension Fee”) to Landlord within fifteen (15) days of the Effective Date; and (ii) Tenant’s completion of the development milestones below within the specified time (the “Milestones” and each a “Milestone”). Landlord may, in its sole discretion, rescind the Conditional Early Termination Date and the previous Early Termination Date of April 30, 2028 will apply if Tenant fails to timely meet any of the Milestones in subsections (a) – (c) below and otherwise fails to comply with subsection (d) below in any respect. Further Landlord may, in its sole discretion, rescind the Conditional Early Termination Date and the previous Early Termination Date of April 30, 2028 will apply if Tenant is in default under any other provision of the Lease beyond any notice and cure period after the Effective Date. a) Tenant has completed the seasonal sampling of the Remaining Ground Lease Property and will share the results thereof upon receipt with Landlord’s legal counsel identified by Landlord no later than three (3) months following the Effective Date (the “Results Receipt Date”) (the “Environmental Milestone”).
b) Tenant shall request a meeting (“Water Board Meeting”) with the Los Angeles (Region 4) Water Resources Control Board (“Water Board”) within one (1) month of the Results Receipt Date, with the request to have such a meeting scheduled within four (4) months and such meeting actually taking place within six (6) months of the Results Receipt Date (“Water Board Meeting Milestone”). Tenant to provide Landlord with a copy of such request to the Water Board, the date of scheduled Water Board Meeting, and a copy of any materials submitted to the Water Board to achieve Water Board direction. If Tenant deems it appropriate, Tenant shall invite the Landlord’s Director of Economic Development (or his designee) to the Water Board Meeting; provided, however, if Tenant does not deem it appropriate to invite Landlord’s Director of Economic Development (or his designee) to the Water Board Meeting, then Tenant shall provide Landlord with a copy of Tenant’s consultants notes of the Water Board Meeting and if requested, provide explanations to Landlord for any if its questions regarding such meeting. The Water Board Meeting may be a face to face engagement, virtual, or phone
3 interaction, but must include sufficient review of Property status, information and requested action by Tenant for Water Board to provide direction, either prior to the Water Board Meeting, in the Water Board Meeting, or in follow-up after review of Tenant’s submissions. For avoidance of doubt, the Water Board Meeting must be substantive in review of the Project requirements and not merely logistical, even though it is most likely that the Water Board will provide its written direction only after the Water Board Meeting has concluded and its review of all Tenant submissions.
c) Within eight (8) months after the Water Board Meeting, Tenant shall complete a Human Health Risk Assessment (“HHRA”) and submit all results of the HHRA to the Water Board (“Assessment Milestone”). Notwithstanding anything contained in this Seventh Amendment to the contrary, in the event the Water Board requests alternative or additional activities to the HHRA, Tenant shall complete such activity to satisfy the Assessment Milestone. Tenant to provide Landlord with a copy of the HHRA (or other alternative requested by the Water Board) and any other materials submitted to the Water Board to satisfy the Assessment Milestone.
d) If Tenant fails to timely meet any of the Milestones in Sections 4(a) – (c) within the time frames specified above, Tenant shall pay Landlord an additional Seventy Five Thousand Dollars ($75,000.00) (“Missed Milestone Fee”) for each failed Milestone to hold open the Conditional Early Termination Date.
The Missed Milestone Fee must be paid within ten (10) business days after the last day to complete the missed Milestone. In any event and notwithstanding the payment of a Missed Milestone Fee, any missed Milestone must thereafter be completed within fifty (50) days of Tenant’s Missed Milestone Fee payment or Landlord may, in its sole discretion, rescind the Conditional Early Termination Date.
5. Further Extension of Early Termination Date.
If Tenant timely satisfies or otherwise meets all requirements of Section 4 above as determined by Landlord and is not in default under any other provision of the Lease at the time of application, Tenant may apply to Landlord for further extension of the Conditional Early Termination Date by one (1) additional year from April 30, 2029 to April 30, 2030 by providing written notice of its request to Landlord within 3 months of completing the Milestones in Sections 4(a)-(c) (“Request for Further Extension”). Landlord and Tenant shall thereafter negotiate in good faith to develop new and appropriate milestones as conditions to the further extension. If Landlord approves Tenant’s Request for Further Extension, Tenant shall, within fifteen (15) business days of approval, pay Landlord an additional Extension Fee of Fifty Thousand Dollars ($50,000). If Tenant has missed Milestones as of the Conditional Early Termination Date, Landlord is under no obligation to consider any additional extensions.
4 6. Counterparts. This Seventh Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which, taken together, shall constitute one and the same instrument.
7. Further Assurances. Each of the Parties shall execute and deliver all additional papers, documents and other assurances, and shall do all acts and things reasonably necessary in connection with the performance of their obligations under this Seventh Amendment to carry out the intent of this Seventh Amendment.
8. Governing Law. This Seventh Amendment is made under and shall be construed pursuant to the laws of the State of California.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
5 IN WITNESS WHEREOF, Landlord and Tenant hereto have executed this Seventh Amendment the date and year first above written.
“LANDLORD”
CITY OF DOWNEY,
a municipal corporation of the State of
California
By: __________________________
Mario Trujillo, Mayor
APPROVED AS TO FORM:
By: ___________________________
John Funk, City Attorney
ATTEST:
By: ___________________________
Maria Alicia Duarte, CMC
City Clerk
“TENANT”
HOLDINGS DOWNEY, LLC, a Delaware
limited liability company
By: Holdings SPE Manager, LLC, a Delaware
limited liability company
Its: Manager
By: ______________________________
Richard H. Klein
Its: Chief Financial Officer
IRG DOWNEY, LLC, a California limited
liability company
By: IRG III, LLC, a California limited
liability company
Its: Managing Member
By: S.L. P roperties, Inc., a Delaware
corporation
Its: Manager
By: ______________________________
Richard H. Klein
Its: Chief Financial Officer