Successor Agency to the
Redevelopment Agency of the
City of Riverside
TO: HONORABLE MAYOR AND CITY COUNCIL DATE: DECEMBER 19, 2023 FROM: Community & Economic Development WARD: 1
Department
SUBJECT: REAFFIRM APPROVAL TO EXTEND THE LEASEBACK AGREEMENT WITH THE STATE OF CALIFORNIA - DEPARTMENT OF GENERAL SERVICES TO LEASE THE CALIFORNIA TOWER BUILDING GROUND FLOOR RETAIL SPACE, LOCATED AT 3737 MAIN STREET, FOR AN ADDITIONAL TEN YEARS, FROM OCTOBER 1, 2024, TO SEPTEMBER 30, 2034, SHOULD THE STATE EXERCISE ITS OPTION TO PURCHASE THE PROPERTY ISSUE:
Adopt a resolution to reaffirm approval to extend the Leaseback Agreement with the State of California - Department of General Services (DGS) to lease the California Tower building ground floor retail space (Ground Floor) located at 3737 Main Street (California Tower Property) for an additional ten years, from October 1, 2024 through September 30, 2034, should DGS exercise its option to purchase the property as approved in the Successor Agency’s Long-Range Property Management Plan (LRPMP).
RECOMMENDATIONS:
That the Successor Agency:
Adopt a resolution (Attachment 1) reaffirming the approval for the Successor Agency to exercise its option to extend the Leaseback Agreement with the DGS to lease the Ground Floor retail space of the California Tower, for an additional ten years, from October 1, 2024 through on September 30, 2034, should the DGS exercise its option to purchase the property, as approved in the LRPMP by the Department of Finance (DOF) in its determination letter issued on March 6, 2014; Recommend the Countywide Oversight Board adopt a board resolution reaffirming the approval for the Successor Agency to take the same action, to be presented to the Countywide Oversight Board for final consideration and approval; and Authorize the Executive Director, or designee, to take all actions, on behalf of the Successor Agency, and execute the Leaseback Agreement extension for an additional ten years should the DGS exercise its option to purchase the property.
LEGISLATIVE HISTORY:
Dissolution Act
In 2011, the State of California passed Assembly Bill X1 26 (Dissolution Act), which eliminated redevelopment agencies throughout the State and required a successor in interest to manage the dissolution of each redevelopment agency.
In 2012, pursuant to the Dissolution Act, the City Council adopted a resolution for the City of Riverside (City) to become the Successor Agency to the former Redevelopment Agency of the City of Riverside (RDA). As the Successor Agency, the City is responsible for carrying out and paying for the RDA’s enforceable obligations, and winding down its affairs, including overseeing the disposition and use of its real properties and other assets.
To maximize community benefit and implement planning objectives for which the properties were originally acquired by the RDA, each property was assigned under one of the following four different categories:
The retention of the property for future development;
The use of the property to fulfill an enforceable obligation (EO); The sale of the property; or
The retention of the property for a governmental purpose.
With the approval of the original Oversight Board (OOB) in 2012, all 33 City properties and assets of the RDA were assigned under these categories for approval by the DOF and implementation by the Successor Agency.
Approved LRPMP Governs the RDA’s Enforceable Obligations In 2013, the State of California passed Assembly Bill 1484 (AB 1484), which directed all successor agencies to prepare a long-range property management plan to address the disposition and use of the RDA’s real properties and other assets. In accordance with AB 1484, the Successor Agency submitted a plan to the DOF for review on August 19, 2013. DOF requested modifications be made to the initial plan.
On February 14, 2014, the Successor Agency submitted a revised plan to the DOF. After its second review, the DOF issued a determination letter, approving the Successor Agency’s amended LRPMP with a total of 33 properties and other assets, which authorized them as enforceable obligations, in accordance with the Health and Safety Code Section 34191.3, on March 6, 2014 (Approved LRPMP – Attachment 2).
Prior to the approved LRPMP, the Successor Agency provided information to the DOF supporting the property as an EO. Additionally, the Successor Agency met and conferred with the DOF, and the expenditures associated with the Leaseback Agreement were subsequently approved by the DOF for processing of payments.
The California Tower is identified as Site 4, in the Approved LRPMP (Site 4 – Attachment 3). Site 4 was approved to be used to fulfill an EO.
Pursuant to Section 34191.3 of the Health and Safety Code, the Approved LRPMP governs over all other provisions of the Dissolution Act in association with the disposition and use of the real properties and other assets of the RDA. As such, the Successor Agency is required to follow the Approved LRPMP in the implementation of the RDA’s enforceable obligations, which are subject to the approval of the Countywide Oversight Board (COB).
BACKGROUND
Lease Agreement and Leaseback Agreement with DGS
In early 1994, to stimulate economic development in Downtown, the City Council and the RDA authorized the purchase of the formerly vacant Security Pacific Bank Tower, commonly known as the California Tower. Shortly after acquisition of the California Tower, the RDA began renovation and leasing the property to retail and office users to re-energize the Main Street Pedestrian Mall.
On April 26, 1994, the RDA entered into a lease agreement with DGS. The RDA leases the entire 1.2-acre parcel to DGS which includes the 160,000-square-foot office tower and approximately 22,400 square feet of Ground Floor retail/office space for a term of 30 years (Lease Agreement). Concurrently, both parties entered into a leaseback agreement in which the RDA leases back from DGS the Ground Floor for the same term of 30 years (Leaseback Agreement).
The key provisions of the Lease Agreement and Leaseback Agreement are as follows:
DGS may assume ownership of the property at the conclusion of the Lease Agreement, on October 1, 2024, for $1 (Option to Purchase) as shown in Attachment 3.
DGS may purchase the California Tower prior to October 1, 2024, but the State would be required to repay the bonds that were issued in 1994 to fund the purchase and improvement of the property.
RDA has an option to extend the Leaseback Agreement for an additional ten years, which would extend the term until September 30, 2034 (Option to Extend) as shown in Attachment 3.
RDA is responsible for the operation, maintenance and repairs, and leasing and funding of tenant improvements associated with the Ground Floor.
Leaseback Agreement – Option to Extend by the Successor Agency First, pursuant to Section 2 (ii) of the Leaseback Agreement, the RDA is obligated to facilitate occupancy of the Ground Floor retail/office space and use the area in a manner consistent with the terms of the agreement with DGS. Second, pursuant to Section 4 of the Leaseback Agreement, the RDA is also obligated to pay for all maintenance and repairs, tenant improvements, leasing of vacant spaces, and maintaining the overall attractiveness of the Ground Floor and outdoor food court area. Moreover, pursuant to Section 17 of the Leaseback Agreement, upon the expiration of the initial term on September 30, 2024, the Successor Agency has the Option to Extend the Leaseback Agreement for an additional ten years until September 30, 2034.
During the development of the Approved LRPMP, the Successor Agency included its intention to exercise the Option to Extend as shown in Attachment 3. The Option to Extend was approved by all the approval bodies at that time, including the Successor Agency, OOB, and DOF.
The Successor Agency’s Option to Extend is conditioned upon the DGS exercising its Option to Purchase the property. If the DGS exercises its Option to Purchase by September 1, 2024, then the Successor Agency would exercise its Option to Extend as anticipated in the Approved LRPMP.
DISCUSSION:
The COB Action on January 17, 2019
On November 27, 2018, to ensure the continued vitality of Downtown for the benefit of the city and its residents while retaining the viability of small local businesses in the area, the City Council adopted a resolution authorizing the Successor Agency to exercise its Option to Extend the Leaseback Agreement with the DGS until September 30, 2034. On January 17, 2019, the COB approved the same (COB 2019 Approval – Attachment 4).
On March 4, 2019, the DOF issued a letter objecting to the COB 2019 Approval, citing the following reasons (Attachment 5):
The DGS has not expressed its interest in exercising the option to purchase the property; Continuing the Leaseback Agreement does not reduce the Successor Agency liabilities to maintaining the property; and The Successor Agency is required to expeditiously wind down the affairs of the RDA.
Pursuant to the Health and Safety Code Section 34179 (h), the DOF returned the COB 2019 Approval to the Board for reconsideration.
Request for Reaffirmation of the COB 2019 Approval
The Successor Agency’s lease agreements with the various retail and office tenants are expected to expire on September 30, 2024. Without new leases in place on or before this date, the existing business owners will become holdover tenants, starting on October 1, 2024. Therefore, the Successor Agency needs confirmation from the COB on the implementation of the option to extend the leaseback agreement should DGS exercise its option to purchase the property, which is no later than September 1, 2024, as required in the current Lease Agreement.
Planning for the execution of new leases will prevent the Successor Agency from having holdover tenancy issues and potentially losing rent revenue, which would significantly impact the Recognized Obligation Payment Schedule (ROPS).
Successor Agency staff anticipates the following two possible outcomes for the LRPMP Site 4 after October 1, 2024:
Outcome 1: If the COB acknowledges the property as an EO and reaffirms its previous action, which authorized the Successor Agency to extend the Leaseback Agreement, then:
The Successor Agency sells the property to DGS for $1 (if the DGS exercises its option on or before September 1, 2024) in accordance with the Approved LRPMP. Upon the close of escrow, the State owns the property in fee, and the DGS leases the Ground Floor to the Successor Agency; and The Successor Agency leases the Ground Floor from the DGS in accordance with the Approved LRPMP for an additional ten years. The Successor Agency negotiates with the existing business owners prior to the expiration of their leases and prepares new agreements for execution upon obtaining approval from the COB.
Since the DOF approved the property as an EO in the Approved LRPMP, this action, if taken by the COB for implementation, shall not require review by the DOF.
Outcome 2: If the COB denies the property as an EO, which would invalidate the approval bodies’ previous action of the Option to Purchase by the DGS and the Option to Extend by the Successor Agency, then:
The Successor Agency declares the property as surplus and disposes of the California Tower to another party in accordance with the Dissolution Act. The California Tower will be transferred to a new property owner who will take over the entire property and enter into new leases.
The DGS may not assume ownership of the property for $1. However, the State has the option to purchase the Property from the Successor Agency at fair market value.
Since the DOF approved the property as an EO in the Approved LRPMP, this action, if taken by the COB for implementation, shall not require review by the DOF.
Currently, there are two existing line items on the ROPS associated with the Property:
$100,000 annually for professional services (ROPS Line Item 119) $250,000 annually for property maintenance (ROPS Line Item 120) If the COB approves implementation of Outcome 1, these existing ROPS line items will remain as-is. There is no new financial impact to the taxing entities with executing the Successor Agency’s Option to Extend.
While the estimated fair market value rent to the State is approximately $52,192 per month or $626,304 per year ($2.33 per square foot, multiply by 22,400 square feet of Ground Floor, multiply by 12), the Successor Agency is entitled to the “Agency’s Residual Value” of the Property at the time of the sale to the State pursuant to Section 25 of the Lease Agreement with the DGS.
Keyser Marston Associates, Inc. (KMA) was retained to determine this stated value. Based on KMA’s preliminary analysis of Section 25, an estimated agency’s residual value is a credit to the Successor Agency of approximately $141,292 per month or $1,695,504 per year for the next decade. As such, the Successor Agency is not required to pay the State rent for leasing the Ground Floor during the extension period. At the time of the sale, an updated analysis will be completed.
Support for Reaffirmation of the COB 2019 Approval
Staff recommends the Successor Agency recommend the COB adopt a Board resolution reaffirming its previous approval to extend the Leaseback Agreement until September 30, 2034 with the following findings:
Pursuant to the Health and Safety Code Section 34167 (d)(5), an EO may be defined as “any legally binding and enforceable agreement or contract that is not otherwise void as violating the debt limit or public policy.” Additionally, pursuant to the Health and Safety Code Section 34191.5(c)(2), a successor agency may retain or dispose of certain property to fulfill an EO. These sections of the Dissolution Act are applicable to both the Lease and Leaseback Agreements between the RDA and DGS.
On February 1, 2012, pursuant to Section 34173 of the Health and Safety Code, the Successor Agency was formed and charged with paying the RDA’s existing enforceable obligations, disposing of its real properties and other assets, and unwinding the affairs of the RDA. The Successor Agency is required to pay expenses in connection with the leasing and maintenance of the Ground Floor pursuant to its contractual obligation to the State.
On March 30, 2012, the OOB approved the Successor Agency’s Enforceable Obligation Payment Schedule (EOPS). The EOPS was mandatory at the time for the Successor Agency to pay the RDA’s enforceable obligations. The California Tower was added to the EOPS because the Property was obligated pursuant to third-party agreements. The DOF did not object to the Successor Agency retaining the Property to fulfill an EO with the DGS, allowing tax increment to pay for debt service on the 1994 bonds and expenses relating to the Ground Floor.
On February 14, 2014, both the Successor Agency and OOB approved the LRPMP, which again confirmed the existing EO with the State.
On March 6, 2014, as the final approval body, the DOF approved the LRPMP. Pursuant to Section 34191.3 of the Health and Safety Code, once the LRPMP is approved by the DOF, this document governs and supersedes all other provisions of the Dissolution Act related to the disposition and use of the real properties and other assets of the RDA. Because the LRPMP was approved by the OOB and DOF, Site 4 (the California Tower), in its entirety, is considered as an EO pursuant to Section 34191.3 of the Health and Safety Code. Therefore, if the California Tower property is an EO, both the Option to Purchase and Option to Extend pursuant to the Dissolution Act are enforceable obligations.
The DOF approved the LRPMP with the California Tower property after multiple assessments. Accordingly, the Lease and Leaseback Agreements constitute an enforceable obligation under the Health and Safety Code Section 34171(d)(1)(E). Under this section, the Successor Agency is required by the Dissolution Act to execute the RDA’s existing contractual obligations in accordance with the Approved LRPMP.
In addition to the authority granted under the Approved LRPMP, Section 34177(c) of the Health and Safety Code authorizes the Successor Agency to perform obligations required pursuant to any preexisting EO. As such, under the Approved LRPMP and instructed by the Dissolution Act:
The Successor Agency is authorized to transfer the Property to DGS for $1 in accordance with the Lease Agreement, and The Successor Agency is authorized to exercise its Option to Extend for no more than ten years in accordance with the Leaseback Agreement.
Furthermore, Section 34191.6 of the Health and Safety Code allows the Successor Agency until the last ROPS to completely wind down the affairs of the RDA. The last ROPS of this Successor Agency is expected to be in 2037, which is approximately three years after the expiration of the Leaseback Agreement extension. Therefore, allowing the Leaseback Agreement to extend until September 30, 2034 will not impact the imminent conclusion of the RDA affairs.
Lastly, pursuant to Section 34191.5 of the Health and Safety Code, specified actions taken by the COB, in accordance with the Approved LRPMP, to implement the disposition and use of the RDA’s real properties and other assets shall not require review by the DOF. As demonstrated above, the DOF had multiple opportunities to review this item and, ultimately, approved the Property for inclusion in the Approved LRPMP.
If the COB approves Outcome 1, the Successor Agency will return to the Board to present updated information for consideration and obtain final approval before moving forward with transferring the property to the State and entering into a Leaseback Agreement extension with the DGS.
STRATEGIC PLAN ALIGNMENT:
This item contributes to Strategic Priority 3 – Economic Opportunity and Goal 3.3 – Cultivate a business climate that welcomes innovation, entrepreneurship, and investment.
This item aligns with each of the five Cross-Cutting Threads as follows:
Community Trust – The Option to Extend the Leaseback Agreement with DGS is in accordance with the Approved LRPMP as an existing EO of the RDA.
Equity – Moving forward with the extension to the Leaseback Agreement will ensure that the California Tower is fully occupied, which would continue to generate revenue to fund expenditures for the Ground Floor while ensuring the existing local small businesses have certainty in their leases with the Successor Agency and providing equitable economic benefits to small local businesses.
Fiscal Responsibility – The Leaseback Agreement extension with DGS will produce auxiliary revenue for the City, Successor Agency, and Taxing Entities.
Innovation – Developing and maintaining supportive relationships with local small businesses demonstrates that Riverside is inventive and timely in meeting their needs and the needs of all Riverside residents.
Sustainability & Resiliency – Developing solutions for business continuity demonstrates that Riverside is committed to sustainability and resilience.
FISCAL IMPACT:
Extending the Leaseback Agreement will have no new financial impact on the taxing entities. The existing ROPS Line Items 119 in the amount of $100,000 and 120 in the amount of $250,000 will remain as-is.
Prepared by: Kaitlyn Nguyen, Senior Project Manager Approved by: Jennifer A. Lilley, Community & Economic Development Director Certified as to the
availability of funds: Kristie Thomas, Finance Director/Assistant Chief Finance Officer Approved by: Rafael Guzman, Assistant City Manager
Approved as to form: Phaedra A. Norton, City Attorney
Attachments:
Resolution
DOF Determination Letter
Approved LRPMP – Site 4
COB 2019 Approval
DOF Objection Letter
California Tower – Leaseback Agreement – Execution of Option to Extend ● Page 2