City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Public Works
Meeting Date: May 19, 2025
Report #:2501-4063
TITLE
Approval of a Lease Agreement with Embarcadero Way Property Owner, LP, c/o BioScience Properties, Inc. for Laboratory and Office Space at 2470 Embarcadero Way for a Period of 20 Years, at an Initial Annual Lease Amount of $1.11 Million Per Year plus Common Area Expenses, and $4.5 million in Tenant Improvements; CEQA Status – Exempt Under CEQA Guidelines Section 15301
RECOMMENDATION
Staff recommends that Council approve and authorize the City Manager or their designee to execute the Lease Agreement with Embarcadero Way Property Owner, LP, c/o BioScience Properties for Laboratory and Office Space at 2470 Embarcadero Way for a period of 20 years, with an option to extend for an additional 10 years, at an initial annual lease amount of $1.11 million per year plus common area expenses, and $4.5 million in tenant improvements.
EXECUTIVE SUMMARY
The City’s Regional Water Quality Control Plant (RWQCP) is undergoing a series of significant Capital Improvement Program (CIP) projects to implement the RWQCP’s Long-Range Facilities Plan (LRFP), which was accepted by the City Council in 2012.1 Among these projects is a new Laboratory and Environmental Services Building. Identifying larger and safer spaces for the RWQCP’s Laboratory and Engineering groups is an effort that has been underway for over a decade.
The Laboratory Group consists of nine staff members. The existing laboratory is 55-years old.
The building’s infrastructure is failing and it has inadequate space to conduct the increased analytic testing required under current regulations. The Engineering Group consists of five staff members who currently work out of a temporary trailer at the RWQCP. 1City Council, July 2, 2012; SR# 2914
https://portal.laserfiche.com/Portal/DocView.aspx?id=108061&repo=r-704298fc&searchid=84a4a944-2f7e-4872- ae4d-5d0581502389
A 13,946 square-foot building at 2470 Embarcadero Way, located across the street from the RWQCP, has been available for lease for over two years. The building’s owner recently completed a full renovation to a research and development space to attract tenants in the life sciences industry. The building’s location and layout offer an ideal solution for addressing the need for a new laboratory and office space. Staff proposes that the City lease this building for a term of 20 years, with an option for an additional 10 years, at an estimated annual lease amount of $1.5 million per year, plus common area maintenance costs. The Total Lease Amount over the 20-year term is estimated to be $38.7 million. The lease will commence after substantial completion of the required tenant improvements, which are expected to cost approximately $4.5 million. These tenant improvements (TIs) will ensure the space meets the new state testing requirements for drinking and wastewater laboratories. The annual lease amount and required tenant improvements will be budgeted in the Wastewater Treatment Fund, and the cost will be shared among the RWQCP’s six partners.
BACKGROUND
The RWQCP treats wastewater from Palo Alto and five other neighboring communities, including Mountain View, Los Altos, Los Altos Hills, East Palo Alto, and Stanford University.
Significant portions of the RWQCP were built 55 years ago. In 2012, the Public Works – Environmental Services division prepared the LRFP to address the plant’s aging infrastructure and evolving regulations. One of the projects included in the 2012 LRFP was a new staff building. Initially, the City explored constructing a new building on the RWQCP grounds. Staff recommended, and the Council decided, against this approach for several reasons. First, the RWQCP site is severely space limited. Second, the preliminary design estimate for the building was $60 million, and determined to be cost-prohibitive. Third, the time required to design and build a new building would delay the necessary improvements and compete with other high priority treatment process projects. Rather than committing to a single, consolidated building, staff is exploring a dynamic, campus-wide strategy that offers greater flexibility and adaptability for future needs. This approach enables leasing and potentially purchasing smaller adjacent properties as part of the ongoing planning for workspace needs.
Council previously approved a consultant agreement for the design of a new, consolidated staff and laboratory building at the RWQCP.2 Given the estimated cost in 2021 for a new building (approximately $60 million), Council authorized staff to explore the purchase of one or more properties adjacent to the RWQCP as an alternative, in addition to relocating some workgroups 2 City Council, June 14, 2023; Agenda Item #44; SR# 2305-1396 https://portal.laserfiche.com/Portal/DocView.aspx?id=66157&repo=r-704298fc&searchid=11881fbf-e38e-4e8d- 9e44-a2abfe9a184e
to an adjacent parcel via a lease.3 Exploring long-term lease options was authorized as an alternative option.4
Staff is currently in the process of updating the LRFP, which includes an advanced workspace planning analysis to evaluate opportunities for future space needs at the RWQCP. This effort is exploring several possibilities including rehabilitating and repurposing current Operations and Administration buildings, procurement possibilities for supplemental real estate, lease options and a new on-site building to house several different combinations of workgroups, and providing a new laboratory.5 The LRFP Update is expected to be completed in 2026. Identifying where Laboratory and Engineering Groups will be located for the next 20 years will inform space planning needs in the LRFP update; narrowing these options through this lease will allow a more focused evaluation of space planning needs at the RWQCP.
Over the next 15 years, the number of treatment process facilities that will be rebuilt and the RWQCP’s relatively small parcel size pose a significant challenge in terms of sequencing projects, staging, and finding space for contractors to work and park. Relocating staff to nearby buildings frees up parking and staging areas on-site for future construction projects. Listed below are the current capital projects at the RWQCP:
Table #1: Current Capital Projects at the Regional Water Quality Control Plant Project Status Planned Total
Expense (million) Primary Financing
Primary Sedimentation Tanks Rehabilitation
and Equipment Room Electrical Upgrade
Project
Substantially Complete $16.5 Debt (State Revolving
Fund)
12kV Loop Upgrades, Phase 1 Substantially Complete $6.7 Pay-as-you-go (minor capital)
Secondary Treatment Upgrades In Construction
(approx.30% Complete) $193.0 Debt (State Revolving
Fund)
Joint Interceptor Sewer Rehabilitation, Phase
1 In Construction
(approx. 30%
Complete)
$8.9 Pay-as-you-go
(minor capital)
12kV Loop Upgrades, Phase 2
In Construction
(Awarded in 10/2024,
<10% complete)
$6.8 Pay-as-you-go
(minor capital)
3 City Council, June 22, 2021; Agenda Item #2; SR #11543 https://portal.laserfiche.com/Portal/DocView.aspx?id=55806&repo=r-704298fc&searchid=f77aeef9-1375-48dc- 98cd-73252d2d8786
4 City Council, August 21, 2023; Agenda Item #7;SR #2304-1389 https://portal.laserfiche.com/Portal/DocView.aspx?id=67189&repo=r-704298fc&searchid=4d59af23-ecd7-44cc- a758-51f7679b117e
5City Council, June 10, 2024; Agenda Item #6; SR# 2405-2993 https://portal.laserfiche.com/Portal/DocView.aspx?id=72805&repo=r-704298fc&searchid=8188b562-870a-42de- 9d7a-1d0e531fbb6a
Table #1: Current Capital Projects at the Regional Water Quality Control Plant Project Status Planned Total
Expense (million) Primary Financing
Advanced Water Purification System Bidding for
Construction $59.9*
Debt (State Revolving
Fund) + Various Grant
Programs
New and Rehabilitated Outfall Pipelines
In Design
(Paused at 90%
Complete)
$17.8** Debt (Bond)
Headworks Facility In Advanced Planning
$55.3***
(Partner forecast
assumes $100M)
Debt (assumed Bond +
State Revolving Fund)
Long Range Facilities Plan Update In Planning $2.5 Pay-as-you-go (minor capital)
* Bids received. Awaiting approval by Mountain View and Palo Alto City Councils ** Estimated amount based on latest pricing from 2018 (likely closer to $20M) *** Anticipating a significantly higher construction estimate cost this spring (2-3x) To support capital projects, the RWQCP’s Engineering Group, which is responsible for implementing the CIP projects, has grown over the years from a one-person to a five-person team. Since 2015, the Engineering Group has been housed in a temporary trailer, which was intended to be a short-term solution. As the scope of the RWQCP’s capital projects has expanded, the current trailer no longer provides enough space for the growing team. In addition, with two additional large capital projects starting in the next five years, the area where the trailer is located would be better utilized for construction management and contractor laydown needs.
The Laboratory plays a crucial role in the health and safety of Palo Alto and neighboring communities by conducting essential tests on drinking water and performing analyses to ensure compliance with wastewater regulations. The existing 55-year-old facility does not provide adequate space for current testing requirements or to house the laboratory staff. The Laboratory building systems continue to deteriorate and fall short in following established best practices in safety, electrical standards, air quality, and analytical methodology. Annually, the Laboratory is audited by the Environmental Laboratory Accreditation Program to ensure that all the equipment meets state required standards.
ANALYSIS
Leasing the building at 2470 Embarcadero Way provides an immediate and efficient solution for the Laboratory and Engineering Groups. The alternative, which is purchasing land/property, coupled with the necessary renovations or new construction required for a new Laboratory, would delay this important improvement for at least five years. The building at 2470 Embarcadero Way is located directly across the street from the RWQCP and is designed for laboratory and office space, making it ideal for both the Laboratory and Engineering Groups.
Establishing a 20-year lease effectively meets the primary need outlined in the LRFP’s capital project, New Laboratory And Environmental Services Building Project (WQ-14002).
Campus-Wide Approach for Workspace Planning
In addition to leasing 2470 Embarcadero Way, staff will continue to explore purchasing or leasing additional properties in the vicinity as part of a broader, campus-wide approach to meet the evolving space needs of the RWQCP’s workgroups. In 2021, City Council authorized a lease at 1900 Embarcadero Way and the Watershed Protection Team, RWQCP Plant Manager, and RWQCP administrative staff were moved to this space.7
Staff is strategically exploring commercial property options due to the ongoing market changes resulting from the COVID-19 pandemic and the shift to remote and hybrid work models. A combination of new laboratory space completions and commercial property tenants vacating their existing space results in higher available supply, presenting an opportunity to secure additional properties. Staff is currently in discussions with nearby property owners to explore lease and purchase options. Identifying a location for the Laboratory and Engineering Groups allows for a more focused evaluation of space planning needs at and around the RWQCP.
According to the 2025 Silicon Valley Index published by Joint Venture Silicon Valley, new laboratory space development completion reached over 4.0 million square feet in 2024, representing 58% of new commercial space completed and the highest amount in more than two decades. Statistical inventory includes laboratory buildings above 30,000 square feet in Santa Clara County (plus Fremont and Newark) and 20,000 square feet in San Mateo County. In 2024, 2.9 million square feet of laboratory space was leased, representing an increase of 619% since 2010. The average vacancy rate for Silicon Valley laboratory space was 26% in 2024, which is nearly seven times higher than just two years ago, due to a combination of new laboratory completions and tenants vacating their existing space. While inflation-adjusted rates for laboratory space have nearly doubled in the past decade to $6.44, the 5% year-over-year decline in 2024 could represent an opportunity to secure laboratory space at a more favorable rate before the trend reverses.
Lease Agreement
Table #2: Key Terms of the Lease Agreement
Commencement Date Upon Substantial Completion of the TIs Expiration Date 20 Years After the Commencement Date, with option for 10 additional years.
Premises to be Leased 2470 Embarcadero Way (entire building) Rentable Area of Premises 13,946 square feet
Basic Rent $6.65 Per Square Foot, Per Month, Triple Net, Subject to Annual 3% Increases
7 City Council, June 22, 2021; SR #11543
https://portal.laserfiche.com/Portal/DocView.aspx?id=55806&repo=r-704298fc&searchid=6400d8cb-f4c1-43af- b074-4a623802489e
2025 Common Area Maintenance Charge $1.94 Per Square Foot, Per Month (2025 estimate) Commencement of Rent Upon Substantial Completion of the TIs Basic Rent Reduction 50% Reduction Months 2 Thru 15
Parking Spaces 42
Warranty of Building Systems For 12 Months After the Commencement Date Tenant Improvement Allowance from Landlord $100,000
The proposed lease is a triple net lease, in which the City will pay a base rent, as well as a pro rata share of the common area operating expenses, insurance, and property taxes. Triple net leases are typical for laboratory/R&D spaces. Basic Rent for the first year of payments is estimated to be $1,112,891 prior to the rent reduction of 50% for months 2 through 15.
Payment of rent does not commence until substantial completion of the construction of tenant improvements. The Basic Rent will escalate at 3% per year. The total estimated cost of the Basic Rent over the 20-year lease term is estimated to be $30 million.
In addition to Basic Rent, the City is responsible for its prorata share of the project’s Common Area Maintenance charge, which is estimated at $1.94 per square foot per month for 2025. This charge will be paid monthly based on an annual Estimated Statement, provided by the landlord, and reconciled annually based on actual expenses. Certain controllable expenses are limited to a maximum annual increase of 7%. The City will also be responsible for the building’s operating costs, which includes costs related to maintenance and repair (excluding structural and foundation), janitorial service, and utilities.
Finally, the landlord will be responsible for construction of tenant improvements designed by an architect to meet the City’s specific operational needs, including preferred floorplan layout and the location of key functions such as laboratory processing areas, sample receiving, and storage. The current estimated cost of the tenant improvements is $4.5 million. Approximately $1 million of the $4.5 million in tenant improvement costs will be used to replace aging laboratory equipment, much of which is already due for replacement due to its condition and age.
FISCAL/RESOURCE IMPACT
The total estimated cost of the Basic Rent is $30 million over the 20-year lease term, with the initial lease amount of $1.11 million increasing by 3% annually. In accordance with the Lease Agreement, the rent for months two through 15 will be 50% of the total annual rent for that year.
The RWQCP will not be required to start the annual rent payments until substantial completion of the construction of the tenant improvements. The total cost for the tenant improvements is estimated to be $4.5 million, with completion anticipated in FY 2027. The TIs will utilize part of the budget allocated for the Wastewater Treatment Fund Capital Improvement New Laboratory and Environmental Services Building Project (WQ-14002). This capital project budget is a component of the Wastewater Treatment Fund and is proportionally funded by partner revenue, as included in the forecast provided for FY 2026.
In addition to Basic Rent and the TIs costs, it will be necessary to allocate additional funding for Common Area Maintenance charges and all other building operating costs, including insurance, maintenance, and repairs. Common Area Maintenance charges and building operating costs will be funded through the Wastewater Treatment Fund's operating budget. For 2025, the Common Area Maintenance charge is estimated at $1.94 per square foot per month, or approximately $8.7 million over the 20-year lease term, assuming a 3% escalator.
The projected cost of the new lease, including Basic Rent, and Common Area Maintenance is approximately $38.7 million, with additional costs for the TIs estimated at $4.5 million.
Table #3: Fiscal Impact Summary
Estimated Total Cost Estimated Palo Alto Share* Basic Rent (20-year term) Approximately $30 million Approximately $11.1 million Common Area Maintenance
(20-year term) Approximately $8.7 million Approximately $3.2 million Tenant Improvements (TIs) Approximately $4.5 million Approximately $1.7 million Total: $43 million $16 million
*estimate since it is based on flow share
Because the laboratory and office space is part of the wastewater treatment operation, the costs of the lease will be shared among the City, Mountain View, Los Altos, East Palo Alto, and Stanford University. Palo Alto’s share of the rent is approximately 37%, and the other five agencies’ share is approximately 63%. The total cost of the new lease is estimated at about $1.34 per month for Palo Alto residential ratepayers, which is approximately equivalent to a 2% wastewater rate increase. The wastewater collection rate includes the lease expenses within the proposed rates. This additional budget allocation will be subject to Council approval as part of the annual budget appropriation process.
STAKEHOLDER ENGAGEMENT
Leasing this space will not impact neighbors or Baylands visitors, as no activities producing noise or emissions will be transferred to the new location. Further, the external appearance of the adjacent building will not change. Therefore, a formal outreach program was not conducted. However, the immediate neighbors were notified. The proposed lease expenses, which are approximately 5% of the RWQCP’s estimated annual operating expenses, were shared with the RWQCP partners at a Partners Meeting that included review of FY 2026 expense forecasts. The Partner agency representatives did not express concern with or opposition to the proposed lease.
ENVIRONMENTAL REVIEW
Approval of the Lease Agreement is exempt from review under the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guideline Section 15301, Existing Facilities, involving negligible expansion of existing or former use because the proposed lease would move laboratory and engineering operations from the RWQCP to an already-existing building on an adjacent parcel.
ATTACHMENTS
Attachment A: Lease Agreement for 2470 Embarcadero Way
APPROVED BY:
Brad Eggleston, Director Public Works/City Engineer