7 4
7 7
City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Administrative Services
Meeting Date: June 17, 2025
Report #:2506-4764
TITLE
Approval of and Authorization for the City Manager or Designee to Negotiate and Execute a Purchase and Sale Agreement with C H LLC to Acquire the Industrial Property Located at 2575 East Bayshore Road (Assessor’s Parcel Number 008-03-015) for $8.5 million, with Leaseback to Insulation Sources, Inc. (dba Ico Rally) for $12,600/Month; CEQA Status – Exempt Under CEQA Guidelines Section 15301
RECOMMENDATION
Staff recommends that the Council approve the Purchase and Sale Agreement in Attachment A and authorize the City Manager or their designee to take all actions necessary, including negotiating and executing the final Purchase and Sale Agreement, including necessary exhibits, in Attachment A, to acquire the industrial property at 2575 East Bayshore Road (Assessor’s Parcel Number 008-03-015) in an amount not to exceed $8.5 million plus typical closing costs and lease back the property to the existing tenant for $12,600 per month for up to six months.
EXECUTIVE SUMMARY
Utilities staff have had an ongoing need for storage space and contractor office workspace for capital improvement projects (CIPs). The property at 2575 East Bayshore Road is listed for sale and ideally situated between the Municipal Service Center (MSC) and the Regional Water Quality Control Plant for Utilities’ needs. Staff recommend to acquire the property in an amount not to exceed $8.5 million plus typical closing costs and lease the property back to the existing tenant for up to six months. The terms of the Purchase and Sale Agreement have been finalized in Attachment A, while the Lease Agreement is pending minor revisions.
BACKGROUND
The Utilities Department has many CIPs, such as recurring gas main replacement, sewer main replacement, and water main replacement projects, that require a contractor to independently acquire access to space to store and stage construction materials, equipment, and vehicles.
7 4
7 7
Given the limited availability and high cost of leasing commercial space in or near Palo Alto, the cost is generally passed through to the City by the contractor at $100,000 - $200,000 per CIP.
Over the past few years, Utilities has been seeking to purchase storage space at a fair price between Redwood City and Mountain View to support grid modernization and recurring CIPs.
However, there are not many suitable properties available for purchase, and the prices range between $8 million and $15 million. Many properties that staff assessed have had unfavorable conditions, such as renovation costs of $1 million or more to bring office space up to code, zoning restrictions preventing warehouse use, safety and security vulnerabilities on the lot, or operating costs due to travel time and traffic congestion.
Previously, Utilities used a portion of the City-owned property at 2000 Geng Road as storage for various CIPs, paying rent to the City’s General Fund. The Geng Road site was an undeveloped lot which did not have office space or power or water utility services. Contractors would have to bring in their own mobile trailer office and generator to provide power. There was also limited parking space for contractor vehicles and equipment at Geng Road. As of September 2024, the Geng Road site has been re-purposed for Safe Parking.
For the Advanced Metering Infrastructure (AMI) project, Utilities had to lease a vacant lot at 975 Terra Bella Avenue, in Mountain View, to store the AMI meters, lids, and radios securely and provide a staging area for the contractors and their 10 vehicles. The monthly lease was approximately $35,600, totaling $213,600 for a six-month lease. As noted in staff’s report to Council on August 19, 2024, the Utilities Department attempted to negotiate a purchase agreement for the property at an estimated cost of $8 million.1 The parties were unable to reach an agreement and staff continued to explore other options.
ANALYSIS
The property at 2575 East Bayshore Road was listed on October 24, 2024, by Brian McCarthy of Renault & Handley with an asking price of $10.1 million. Below are some details of the property. The property market value is estimated at $7.8 million, as of March 31, 2025, based on an appraisal completed for the City.
•Zoning: ROLM (E)(D)(AD) [Research, Office and Limited Manufacturing Subdistrict – Embarcadero (Site and Design Review) (Automobile Dealership)] •Comp Plan: RO (Research/Office Park)
•Flood Zone: AE; flood insurance required.
•Building Area: +/- 14,640 square feet plus 2,000 – 3,000 square feet of mezzanine storage
•Age: 65 years (built 1960)
1 City Council, August 19, 2024; Agenda Item #10;
https://cityofpaloalto.primegov.com/Portal/viewer?id=0&type=7&uid=fdbb3b9b-bb6f-4362-9d5c-1a55454ecd2a 7 4
7 7
•Buildout: 20% office, balance manufacturing/warehouse space •Land area: +/- 1 acre; A southeastern portion of the parking lot encroaches on the adjacent City parcel, as shown on the aerial image below. •Parking: +/- 46 parking spaces as currently striped
•Features: 4 – 14’ roll up doors (one door currently covered), sprinklered, 3 space heaters in manufacturing/warehouse area, +/-23’8” clear height
Staff toured the property at 2575 East Bayshore Road in March 2025. The property is attractive to Utilities because of its proximity to the MSC, Warehouse, Operations, and Elwell Engineering offices (less than one mile); the size of the lot; indoor warehouse capacity; and office space.
Utilities will be able to utilize this space for multiple CIPs concurrently. In the next seven to 10 years, Utilities will be purchasing $20M - $40M of equipment which can be stored indoors for the modernization of the electric grid. Because the lead time for some of the materials required ranges from eight to 24 months, Utilities needs to place the orders in advance to secure reasonable delivery dates and prices. The new warehouse will enable Utilities to pre-order and secure materials required for grid modernization and prevent future project delays due to potential supply chain issues.
The property has eight offices and a conference room which can serve as a satellite office for staff and contractors during projects. Given the property’s proximity to MSC and Elwell, it can also serve as another location for Engineering and Operations staff to convene and collaborate if conference rooms are not available in either facility. With these offices, Utilities could also reduce the cost of leasing mobile offices for contractors during multi-year construction projects, which is generally a pass-through cost to the City. Given the location, size, existing improvements, general condition, and price of 2575 East Bayshore Road, as well as storage requirements for planned critical long-term CIPs, staff believe this is a cost-effective investment.
7 4
7 7
After several conversations with the sellers, parties reached agreement on $8.5 million. Staff engaged an outside attorney to draft the purchase and sale agreement and lease agreement in Attachment A. Below is a summary of the key provisions. •Purchase Price: $8,500,000
•Refundable Deposit: $255,000 (3% of Purchase Price)
•Contingencies: City has 35 days from the execution of the purchase and sale agreement to conduct due diligence and remove contingencies
•Close of Escrow: Within 10 days from the buyer’s removal of contingencies •Lease: Month to month, up to six months, at $12,600.33 per month, industrial gross
FISCAL/RESOURCE IMPACT
Funds are available in the FY 2025 Electric Grid Modernization for Electrification CIP budget (EL- 24000). Due to lengthy lead time for materials and delay of construction contracts, there is $23 million remaining in the FY 2025 Grid Mod CIP budget. Instead of returning $23 million back to Electric CIP reserves, Staff will reassign $8.5 million to the warehouse purchase. Staff will return the remaining $14.5 million to CIP reserves at fiscal year-end. The FY 2025 and proposed FY 2026 electric rates will not be impacted by the warehouse purchase.
7 4
7 7
Staff recommend use of the Grid Modernization CIP budget for the initial purchase, with reimbursement of the CIP to replenish it to be completed through the initial debt financing of the Grid Modernization capital project estimated to cost $300 million over the life of the project. This strategy would have no initial rate impact on customers and allow for the smoothing of the costs to the rate payers. With the new warehouse, Utilities will avoid paying contractors $100,000 - $200,000 per CIP project for leasing a staging area and warehouse for materials and equipment. Should equipment or projects from utilities other than the electric utility need warehouse space, staff would appropriately allocate a rental cost to ensure compliance with the restricted nature of enterprise funds.
STAKEHOLDER ENGAGEMENT
The terms of the Purchase and Sale Agreement have been finalized in Attachment A, while the Lease Agreement is pending minor revisions. Per the terms of the purchase and sale agreement, the City will have 35 days from the execution of the purchase and sale agreement to conduct due diligence and remove contingencies. Staff is coordinating internally and with outside parties to complete the various due diligence items including obtaining an environmental site assessment and a property inspection. The close of escrow is estimated to occur in late July or early August 2025.
ENVIRONMENTAL REVIEW
The acquisition and continued use of the industrial property at 2575 East Bayshore Road for storage and office purposes is exempt from review under the California Environmental Quality Act (CEQA) pursuant to CEQA Guidelines section 15301 because it involves the operation and maintenance of an existing facility with negligible or no expansion.
ATTACHMENTS
Attachment A: Purchase and Sale Agreement and Lease Agreement APPROVED BY:
Lauren Lai, Administrative Services Director