DATE: October 27, 2022
TO: Council Airport Committee
FROM: Director of Public Works
SUBJECT: Montecito Development LLC – Ground Lease for California Air National Guard Site
RECOMMENDATION
That the Council Airport Committee (CAC) reviews this report and provides comments and a recommendation to Council to move forward with a new ground lease with Montecito Development LLC (Montecito) for the California Air National Guard (CANG) site.
SUMMARY
The CANG site at the Hayward Executive Airport (Airport) has been vacant since 1980, and it was officially released to the City by the United States Government in 2012. For over ten years, the City has marketed the parcel for aeronautical use, but interest has been minimal due to current market conditions that favor non-aeronautical use.
In the past several years, staff has received several inquiries about non-aeronautical use, with Montecito Development previously expressing strong interest for a “flex” type of development that includes retail, office, and warehouse space, as well as space for a museum honoring the Tuskegee Airmen. After Council requested that the property be re-evaluated for the best and highest use possible, the plan pivoted away from a warehouse to advanced manufacturing, with the museum for the Tuskegee Airmen and the space for community service organizations retained in the new plan.
The developer has agreed, in principle, to enter into a lease agreement with the following deal points:
50-year lease term
A rent amount of approximately $66,400 per month once project is fully developed A 2,000-square-foot building, which would house the Tuskegee Airmen Museum, leased to the City for $1 per year A 4,000-square-foot building, which would provide space for community service organizations, leased to the City for $1 per year Use of the site for advanced manufacturing and life sciences Installation of Hayward History Walk Stations around the development, which will reflect the unique history of the City of Hayward, including events, people, and special places, such as Russell City Development of the parcel will commence once it is released by the FAA for non-aeronautical use and the zoning designation for the site is changed from Airport Terminal – Airport Commercial to Airport Terminal – Commercial; both requests will be submitted for review in the near future.
BACKGROUND
The Airport and all its facilities were originally transferred from the United States Government to the City in 1947 in the form of a quitclaim deed. The City entered into an agreement with the U.S. Government in 1949 for continued use of approximately 27 acres of the Airport by the U.S. Air Force and the CANG site. The CANG site was used by various military units until 1980 when approximately 24 acres was vacated and eventually returned to the City in September 2012. Three acres are still currently leased by the CANG.
The FAA prefers that owners of public-use airports use airport property for aeronautical purposes, and the City has been actively searching for aeronautical tenants for the CANG site. Requests for Proposals (RFP) were released in 2001 and 2007, several responses were received, and one response for the development of corporate aircraft hangars was determined to have merit. However, negotiations were unsuccessful.
A second RFP was released in 2016 in which none of the three respondents met the minimum specified qualifications. Later, staff contacted commercial real estate agents for assistance in identifying prospective tenants, and staff fielded several inquiries. Despite this effort, the CANG parcel could not be leased in whole or in part for aeronautical purposes.
Feedback received from some potential tenants indicated the condition of the CANG site was a factor in their decision to forego the opportunity. The buildings do not meet modern code requirements and are believed to contain some lead paint and asbestos. Potential aeronautical tenants found the estimated cost of demolition and environmental remediation to be prohibitive. As a result, efforts are now focused on non-aeronautical development.
In 2018, staff held preliminary discussions with local developer Montecito Development LLC for the development of the Hayward Airport Commerce Center, an office and warehouse complex. However, upon further review, that proposal was unsuccessful. Montecito later re-structured their proposal and turned their focus to life sciences and advanced manufacturing development.
Montecito’s experience includes projects in Richmond, Buchannan Field in Concord, and the Livermore Airport. Montecito Development has recently completed eleven advanced manufacturing projects in the life sciences field. Six agreements for advanced manufacturing have been signed with companies such as ThermoFisher and Tenaya. Eleven projects in the electronic products field have also been completed, including a 248,000 square foot facility for Siemens and a 440,000-square-foot facility for Tesla.
DISCUSSION
Montecito Development is proposing an advanced manufacturing development project. Advanced manufacturing includes the use of innovative technologies to improve products or processes. Such products or processes include life sciences, such as drugs and therapeutics, or electronic products, such as robotics and energy. Advanced manufacturing is a burgeoning industry, with over 100,000 STEM and 7,000 bio manufacturing jobs within a 30-minute drive of Hayward.
The preliminary site plan submitted by Montecito Development depicts three buildings that total approximately 332,000 square feet. The architectural design of the buildings will be high end and include flexible spaces that can be adaptable for multiple users.
Another key component of this development is a building totaling 2,000 square feet to house a museum honoring the Tuskegee Airmen, and a building of 4,000 square feet to house community service organizations including the Civil Air Patrol, Young Marines, and the U.S. Coast Guard Cadets.
Commensurate with the ground lease for Meridian Hayward and other substantial multi-million-dollar capital projects at the Airport, a lease term of 50 years is anticipated. Other key terms of the lease are as follows:
A rent amount of approximately $66,400 per month once project is fully built A 2,000-square-foot building, which would house the Tuskegee Airmen Museum, would be leased to the City for $1 per year A 4,000-square-foot building, which would provide space for community service organizations, would be leased to the City for $1 per year Use of the site for advanced manufacturing and life sciences Installation of Hayward History Walk Stations around the development, which will reflect the unique history of the City of Hayward, including events, people, and special places, such as Russell City Over the 50-year life of the project, the developer estimates the generation of $1 million in sales tax, $94 million in wages, and $177 million in direct economic impact. The annual rental revenue will assist in making the Airport financially self-sustaining in compliance with Council directives and FAA policy guidance, and it will be dedicated to Airport capital projects, equipment needs, and staffing requirements. The existing abandoned buildings on the site will be removed using private resources. Environmental remediation of the site by the federal government was concluded in 2013.
Prior to development, the FAA must review and approve the leasehold for non-aeronautical use. The release process requires a detailed explanation from the airport owner (City) to justify FAA approval, and it also requires review by several levels of the FAA, including their headquarters in Washington, D.C. The process typically takes six to nine months. City staff is in the process of drafting the written request. In addition, the zoning designation for the site must be changed from Airport Terminal – Airport Commercial (AT-AC) to Airport Terminal – Commercial (AT-C). Initial discussions have started with Development Services to effect this change.
According to the City Attorney, under the California Government Code and provisions of the City Charter, the City has the option to either entertain new business proposals from individuals or companies that may be received from time to time or solicit public interest for development opportunities through a Request for Proposals (RFP). Also, the FAA permits airport sponsors to enter long-term leases by negotiation or solicitation. The City has taken both approaches in the past. For example, Ascend Development contacted the City in 2000 and their proposal for development of aircraft hangars was subsequently approved by Council, and the City also participated in lease negotiations for development of an FBO after being contacted by Meridian Companies. In other instances, the City has issued a RFP, including one for development of the CANG site and, separately, for the lease of an existing commercial hangar.
ECONOMIC IMPACT
The proposed development would generate work for skilled and unskilled tradespeople during the construction phase, and skilled workers in the life sciences and advanced technology fields after the development is fully built. Furthermore, the City’s General Fund would benefit from additional business license fees and sales tax.
FISCAL IMPACT
The Airport is operated as a financially independent enterprise fund. It receives no financial support from the City’s General Fund and must solely rely on the revenue it generates to fund its annual operating and capital improvement budgets. FAA regulations require the airport to be as financially self-sustaining as possible, under the circumstances, and this is also an objective of Council. The development of the CANG parcel by Montecito Development will contribute approximately $800,000 in annual lease revenue for the Airport Operating Fund. The revenue can be dedicated to capital improvements, such as $18 million in paving needs. Over the life of the project, it is also estimated to generate $1 million in sales tax, $94 million in wages, and $177 million in direct economic impact.
STRATEGIC ROADMAP
This agenda item is a routine operational item and does not relate to one of the Council’s six Strategic Priorities.
SUSTAINABILITY FEATURES
The Airport is strongly committed to developing projects that are environmentally responsible. Therefore, staff will ensure than all plans proposed by the developer incorporate features that are in line with the City’s sustainability guidelines.
PUBLIC CONTACT
The agenda and staff report for this item have been posted on the City’s website and distributed to interested parties. Furthermore, this development has been previously discussed with the CAC on April 28, 2022 and with Council on June 14, 2022.
NEXT STEPS
If approved by the CAC, staff will forward this item to Council for their approval in November 2022.
Prepared by: Doug McNeeley, Airport Manager
Recommended by: Alex Ameri, Director of Public Works
Approved by:
Kelly McAdoo, City Manager