TO: HONORABLE MAYOR FROM: John Aitken
AND CITY COUNCIL Jim Shannon
SUBJECT: HEWLETT PACKARD DATE: April 11, 2022
GROUND LEASE TERMINATION
Approved Date
4/13/2022
RECOMMENDATION
(a) Adopt a resolution authorizing the City Manager or designee to negotiate and execute a Third Amendment to the Ground Lease of Parcel W-9
Agreement (Agreement) with Hewlett
Packard Incorporated (HPI) to terminate the agreement early, effective upon execution by the City with a payment to HPI of $1,500,000.
(b) Adopt the following 2021-2022 Appropriation Ordinance and Funding Sources Resolution amendments in the Airport Renewal and Replacement Fund:
(1) Increase the estimate for Transfers and Reimbursements by $1,500,000; and (2) Establish the Hewlett Packard Incorporated Lease Buyout appropriation to the Airport Department in the amount of $1,500,000.
(c) Adopt the following 2021-2022 Appropriation Ordinance amendments in the Airport Revenue Fund:
(1) Increase the Transfer to the Airport Surplus Revenue Fund by $1,500,000; and (2) Decrease the Airline Agreement Reserve by $1,500,000. (d) Adopt the following 2021-2022 Appropriation Ordinance and Funding Sources Resolution amendments in the Airport Surplus Revenue Fund:
(1) Increase the estimate for Transfers and Reimbursements by $1,500,000; and (2) Increase the Transfer to the Airport Renewal and Replacement Fund by $1,500,000.
OUTCOME
If approved by the City Council, the City Manager or designee will finalize an amendment to terminate the Agreement and the City will pay HPI $1,500,000 for both the leasehold improvements and the buy-out of the remaining seven years of the lease. This action allows the City to issue a Request for Proposals for new corporate aviation tenants with a more advantageous rent structure than the existing Agreement provides. The City will negotiate a contract with HPI for the term of the ground lease, which expires in October 2023.
COUNCIL AGENDA: 4/26/2022
FILE: 22-552
ITEM: 2.7
HONORABLE MAYOR AND CITY COUNCIL
April 11, 2022
Subject: Hewlett Packard Ground Lease Termination
BACKGROUND
HPI has operated a corporate aviation operation at the airport since 1973. On May 29, 1986, the City and HPI entered into a ground lease agreement for 7.08 acres on the airport to build and operate a corporate aviation operation on the west side of the airport. HPI occupies a facility that is comprised of 56,804 square feet of hangar and office space, 112 parking spaces and associated ramp for aircraft operations, which HPI built in 1986. The use of the facility is limited to corporate aviation operation. HPI spent over $9.6 million in capital improvements on the site since 1986 and the current lease has just over 7 years left before it terminates. Based on the terms of the Agreement, the leasehold improvements revert to the Airport at the end of the lease term, which is November 2028.
In December 2020, Hewlett Packard Enterprise Company (HPE) announced plans to relocate their corporate headquarters from San José, California to Houston, Texas. HPE then contacted the City to discuss the possibility of the City buying out HPE from the remainder of the lease or marketing the lease to another party. HPE is in the process of transferring their interest in the Ground Lease to HPI. City staff recommends buying out the remainder of the lease now, as current corporate aviation lease market trends indicate a favorable return on investment during the remaining term of the lease. The Airport would conduct a Request for Proposals (RFP) to find a new Specialized Aviation Service Operation to lease the site with a rent structure that includes the ground as well as the cost of the improvements.
ANALYSIS
Under the current lease, HPE is allowed to assign or sell their ground lease to another party and the new entity would continue on with payments to the City in accordance with the lease terms.
HPE would leave and the City would not have any input on the selection of the new tenant. The relocation of corporate headquarters prompted HPE to inform City staff that they intended to market the lease opportunity, but they also provided an opportunity for the City to negotiate a buy-out of the remaining leasehold including improvements. HPE is finalizing the transfer of their interest in the ground lease to HPI who has agreed to allow the City to purchase the improvements and terminate the ground lease.
The negotiated purchase price of improvements, $1.5 million, is approximately one-half of what HPE reported to City staff as the unamortized capital expenses. Staff believes the buyout of the leasehold improvements would be beneficial to the City as the Airport could market the ground lease and improvements for greater revenue than the current ground rent. The current ground rent to the City is approximately $900,000 and staff estimates the overall rent could increase to approximately $1.4 million with the ground rent and improvements.
HPE has requested that the City allow their current subtenant, HPI to stay for the term of the current sublease, which expires in October 2023 and generates revenue of $546,949 annually.
Staff will enter into a new lease with HPI for the time it takes to award a new master lease with a new master tenant who then will manage the HPI’s agreement under the new master lease. The
HONORABLE MAYOR AND CITY COUNCIL
April 11, 2022
Subject: Hewlett Packard Ground Lease Termination
Airport will provide some maintenance of the facility until the new master tenant lease is executed.
CONCLUSION
By the City buying out the remaining leasehold interest including improvements, alterations, betterments, structures, construction additions and fixtures and allowing HPE to terminate the Agreement, it permits the Airport to provide future opportunities for new aviation operations, with the potential to generate added revenue for the Airport.
EVALUATION AND FOLLOW-UP
The Director of Aviation shall be responsible for coordination of the Third Amendment to the Agreement and shall render overall supervision for development of an RFP for a new aviation tenant. The Director will keep City Council apprised of progress, performance and return with a recommendation for award.
CLIMATE SMART SAN JOSE
The recommendation in this memorandum has no effect on Climate Smart San José energy, water, or mobility goals.
POLICY ALTERNATIVES
Alternative #1: The City Council may choose to not approve the Third Amendment to the Agreement to terminate the HPE lease and buy-out of the leasehold interest for $1.5 million.
Pros: The tenant, or an assigned tenant, will continue to be financially responsible for the maintenance, upkeep and lease of premises until the end of the term resulting in approximately $900,000 in revenue per year.
Cons: The Airport would forgo potential additional annual revenue of $500,000 over the next seven years and would not be able to determine the new entity who obtains the ground lease.
Reason for not recommending: By having the Airport manage the property, the Airport can leverage additional revenue from the developed site and ensure the property use complies with FAA guidelines as well as current goals for general aviation at the Airport. The City would also be in a position to choose the new tenant using a competitive process.
HONORABLE MAYOR AND CITY COUNCIL
April 11, 2022
Subject: Hewlett Packard Ground Lease Termination
PUBLIC OUTREACH
This memorandum will be posted on the City Council’s Agenda website for the April 26, 2022 Council meeting.
COORDINATION
This memorandum was coordinated with the City Attorney’s Office.
COMMISSION RECOMMENDATION
This item does not have explicit input from the Airport Commission, although Commission members are provided with regular updates of airline services and proposed program changes.
FISCAL/POLICY ALIGNMENT
This action aligns with the City’s Economic Development Strategy #9 “Keep Developing a Competitive, World Class Airport, and Attract New Air Service.”
COST SUMMARY/IMPLICATIONS
The City’s cost to terminate the Agreement with HPI is $1.5 million for both the leasehold improvements and the buy-out of the remaining seven years of the lease. The HPI Lease Buyout appropriation will be established in the Airport Renewal and Replacement Fund for the $1.5 million payment and will be offset by a reduction to the Airline Agreement Reserve in the Airport Revenue Fund. Buying out the remaining term of the lease initially reduces Airport annual revenue by approximately $900,000 but is partially offset by HPI’s continued use of the site under a new agreement directly with the City which provides annual revenue of approximately $547,000 until the City awards a new lease to a new master tenant. Buying out the HPI lease enables the City to conduct an RFP and select other tenants at rates the City identifies, which is expected to increase revenue to approximately $1.4 million or an increase of approximately $500,000 over the existing agreement terms.
BUDGET REFERENCE
The table below identifies the fund and appropriations to fund the payment recommended as part of this memorandum.
HONORABLE MAYOR AND CITY COUNCIL
April 11, 2022
Subject: Hewlett Packard Ground Lease Termination
CEQA
Not a Project, File No. PP17-003, Agreements/Contracts (New or Amended) resulting in no physical changes to the environment.
/s/
JOHN AITKEN, A.A.E. JIM SHANNON
Director of Aviation Budget Director
Fund
#
Appn
# Appn. Name
Total
Appn
Rec. Budget
Action
2021-
2022
Adopted
Budget
Page
Last
Budget
Action
(Date,
Ord. No.)
521 8697 Airline
Agreement
Reserve
$124,918,435 ($1,500,000) 929 02/08/2022
Ord. No.
30717
521 A016 Transfer to the
Airport Surplus
Revenue Fund
$17,772,000 $1,500,000 929 06/22/2021
Ord. No.
30621
524 R003 Transfers and
Reimbursements
$17,773,928 $1,500,000 930 10/19/2021
Res. No.
80261
524 A014 Transfer to the
Airport Renewal
and Replacement
Fund
$15,772,000 $1,500,000 930 06/22/2021
Ord. No.
30621
527 R003 Transfers and
Reimbursements
$15,772,000 $1,500,000 752 6/22/2021,
Res. No.
80109
527 NEW Hewlett Packard
Incorporated
Lease Buyout
N/A $1,500,000 N/A N/A
HONORABLE MAYOR AND CITY COUNCIL
April 11, 2022
Subject: Hewlett Packard Ground Lease Termination
I hereby certify that there will be available for appropriation in the designated funds and in the amounts as listed in the Fiscal Year 2021-2022 monies in excess of those heretofore appropriated therefrom:
Airport Renewal and Replacement Fund $1,500,000
Airport Surplus Revenue Fund $1,500,000
JIM SHANNON
Budget Director
For questions, please contact John Aitken, Director of Aviation at (408) 392-3611.