Agenda Report
Fullerton City Council
MEETING DATE: june 18, 2024
TO: CITY COUNCIL / SUCCESSOR AGENCY
SUBMITTED BY: eric j. levitt, city manager
PREPARED BY: DAISY PEREZ, DEPUTY CITY MANAGER
ellis chang, director of administrative services
SUBJECT: cALIFORNIA sTATE uNIVERSITY fULLERTON / fullerton ground lease and fullerton / sky harbor fullerton, llc sublease amendmentS
SUMMARY
City Council consideration of Amendment to Ground Lease between The Board of Trustees of the California State University (CSUF) and The City of Fullerton, California and the Amended and Restated Sublease between The City of Fullerton, California and Sky Harbor Fullerton, LLC for the Marriott hotel.
PROPOSED MOTION
Approve in substantially the form attached and authorize City Manager, or designee, to finalize, execute and administer Amendment to the Ground Lease by and between The Board of Trustees of the California State University and The City of Fullerton, California, in a form approved by the City Attorney.
Approve in substantially the form attached and authorize City Manager, or designee, to finalize, execute and administer Amended and Restated Sublease by and between The City of Fullerton, California and Sky Harbor Fullerton LLC, in a form approved by the City Attorney.
ALTERNATIVE OPTIONS
Approve the Proposed Motion
Do not approve the Proposed Motion
Other options brought by City Council.
STAFF RECOMMENDATION
Approve the Proposed Motion.
CITY MANAGER REMARKS
This proposed amendment to the ground lease will extend the lease term which will provide the City TOT for the property and the sublease revenue for additional years out to 2088. The City will also receive additional sublease revenue with the amendment.
The City Manager recommends approval.
PRIORITY POLICY STATEMENT
This item matches the following Priority Policy Statements:
Fiscal and Organizational Stability
Infrastructure and City Assets.
FISCAL IMPACT
The Amendment to the Ground Lease amends the loan term to 7% simple interest on the original $7,309,173 principal loan by the former Redevelopment Agency to CSUF for parking deck and sports complex construction. CSUF agrees to pay off the outstanding principal and amended interest balance on the Redevelopment Agency loan (approximately $745,000) as part of the Amendment to the Ground Lease.
Subtenant, Sky Harbor Fullerton, LLC, agrees to pay the City 5.5% of Annual Gross Room Sales annual lease payments of minimum $200,000 per year in rental payments per the Amended and Restated Sublease. The City would retain 1.6% of the 5.5% of Annual Gross Room Sales which represents a 29.0909% share of annual rental payments received from Sky Harbor Fullerton, LLC.
The City agrees to remit 3.9% of the 5.5% Annual Gross Room Sales collected to CSUF per the Amendment to Ground Lease. CSUF would receive 70.9091% of rental payments the City receives from Sky Harbor Fullerton, LLC.
The City would receive $58,182 per year and CSUF would receive $141,818 per year at the minimum $200,000 annual rent. The City has received about $320,000 on average in rental revenue from the sublease based on 4% of Annual Gross Room Sales over the past ten years. The City would receive about $93,100 and CSUF would receive about $226,900 per year based on $320,000 annual rental revenue.
BACKGROUND AND DISCUSSION
The former Redevelopment Agency of the City of Fullerton (Agency) executed a lease with the Trustees of the California State University and a sublease with Marriott Corporation for construction, maintenance and operation of a 224-room, six-story Marriott hotel on California State University Fullerton (CSUF) property in 1986. The City and CSUF entered into the Lease Agreement for CSUF Sports Complex and Parking Deck construction. All funds have been expended for the Sports Complex and Parking Deck.
The Redevelopment Agency entered a sublease with the Marriott Corporation for hotel construction. The sub-lessee seeks to refinance the Marriott and make necessary upgrades as a franchisee and requested a lease term extension.
CSUF needs to agree to the new proposed terms to finalize an agreement with the Tenant. The existing sublease agreement provides minimal benefit for CSUF to agree to an extension due to the need for future student housing land and the lack of revenue received through the current agreement structure.
The proposed modification to the agreement discussed with CSUF has the following benefits:
Provide CSUF a financial incentive
Allow refinancing to go through and provide the ability to keep the Marriott brand Continue to provide revenue to the City.
However, the proposed agreement reduces the revenue the City receives from the land lease.
The following outlines current loan terms:
Lease:
Original Lease March 1983
Initial Term expired December 2015
First Extension expires December 2025 with four additional 10-year extensions Annual Rent totals $1.00
If all extensions exercised, the lease remains valid through December of 2059.
Sub-Lease:
Commencement Date June 1988
Opening Date October 1989
Partial Fiscal Year (Opening Date to First Fiscal Year) December 1989 30 Year Lease through December 2019
Extension Options: first option exercised to December 2029 with three additional 10-year options If all extensions exercised, the sublease remains valid through December 2059 Base Rent to City currently 4% of annual gross room sales Sub-lease amended as follows:
Marriott requested for consent to REIT conversion June 1998 Transfer of leasehold mortgage loan June 2008
Hotel Management Agreement between Rim Corp. and Sky Harbor Fullerton, LLC August 2013 Relicensing Franchise Agreement between MIF, LLC and Sky Harbor Fullerton, LLC September 2013 The former Redevelopment Agency began loaning CSUF money in Fiscal Year 1982-83 for a total $7,309,173 at 7% interest rate to support parking deck and sports complex construction on the university campus.
The original master lease and sublease agreements were drafted with the understanding that 4% of Marriott’s Annual Gross Room Sales would provide sufficient funding to pay back the principal and interest. The City would retain 30% of rent and remit 70% of rent to CSUF once the principal and interest on the loan was paid back. The original agreements did not contemplate fluctuations in occupancy and room rates or economic downturns and resulted in insufficient rental payments to pay back the principal and compounded interest.
The City and CSUF will continue to share in 4% of Annual Gross Room Sales with the City retaining 40% and remitting 60% to CSUF. The amendments also provide for CSUF receiving a separate 1.5% of Annual Gross Room Sales. The results of these amendments are that City and CSUF will share in 5.5% of Annual Gross Room Sales or minimum of $200,000 per year in rental payments as outlined in the fiscal impact section. The City and CSUF will share the 5.5% Annual Gross Room Sales at 1.6% and 3.9% of the 5.5% respectively which results in the City receiving a 29.0909% share of total annual rental receipts and CUSF receiving 70.9091% of total annual rental receipts.
The proposed amendment to the Ground Lease and the Amended and Restated Sublease enables the City of Fullerton to continue the current lease of property from CSUF and sublease of this property to Sky Harbor Fullerton, LLC for the Marriott hotel in the City of Fullerton. The amendments extend the lease term to December 31, 2088 and support Sky Harbor Fullerton LLC in efforts to refinance the property. This arrangement supports payback of outstanding loan balance and the City receives ongoing rental revenue and supports CSUF sharing of revenue from rent generated on its property.
Attachments:
Attachment 1 - Presentation
Attachment 2 - Amendment to Ground Lease
Attachment 3 - Amended and Restated Sublease
cc: City Manager Eric J. Levitt
CSUF / Fullerton Lease and Fullerton / Sky Harbor Sublease Amendment June 18, 2024 - Page 2