City Council
Report
City Council Meeting: February 8, 2022
Agenda Item: 3.C
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To: Mayor and City Council
From: David Martin, Director, Administration
Subject: Approval of Third Lease Modification with JP Morgan Chase for 1333 Fourth Street Lease
Recommended Action
Staff recommends that the City Council authorize the City Manager to negotiate and execute a lease modification with JP Morgan Chase to extend term from May 1, 2022 through April 30, 2026, providing a total of $4,022,120 in rental revenues during the four-year term.
Summary
JP Morgan Chase’s lease for the city-owned property at 1333 Fourth Street expires on April 30, 2022. This property is part of the 4th and Arizona project site. The City has no immediate plans to redevelop the site and any efforts to re-envision, plan and initiate an alternative project is anticipated to take four or more years to accomplish. There is an opportunity to extend the current lease extension through April 2026 which would align with the other bank lease at the site. The short-term extension will generate $4,022,120 in rental revenue while preserving future redevelopment opportunities.
Discussion
The City-owned property at 1333 Fourth Street (Property) is part of the 4th and Arizona project site and was originally acquired by the City’s Redevelopment Agency in 2010 as part of a land assemblage to form a redevelopment site consisting of nine contiguous parcels (Site) totaling 112,000 square feet (approximately 2.57 acres) bounded by 4th Street, 5th Street, and Arizona Avenue. The acquisition included two existing bank buildings (JP Morgan Chase and Bank of America) with active leases which the City 2 of 4
inherited. The Site was previously approved by Council for a hotel/retail/office/open space development known as the “The Plaza” development, after a competitive RFP process; however, Council terminated the negotiations for The Plaza development in December 2020.
The proposed lease extension would align the JP Morgan Chase lease with the adjacent Bank of America lease on this larger project site. Staff believes that any effort to re-envision, plan and initiate an alternative project for this larger 4th and Arizona project site would take at least the next four years to do and therefore this lease extension does not hinder the City’s future options while preserving an important revenue stream.
This is a standard triple net lease. Under a triple net lease, the Tenant pays rent plus all three additional expenses of possessory interest taxes, insurance and maintenance costs. While triple net leases normally apply to long-term leases (e.g. 10 years or more), the Tenant acknowledges and agrees to the interim nature of its lease with the City. The extended term is limited to four-years, structured to align with the termination of the City’s lease agreement with neighboring tenant, Bank of America, at 1301 Fourth Street. Except for the new extended term and rental rates, the Original Lease and subsequent amendments (Exhibits 1-3) shall continue in full force and effect.
The Tenant will pay the City $4,022,120 in rental revenues, $1,005,530 annually, for the four-year term. The proposed rental rate is the same rental rate that the tenant currently pays. Currently, Downtown Santa Monica retail/ground floor office space has a 26% vacancy rate with average market rent of $6.35 per square foot per month. The lease extension would result in a monthly lease of $7.03 per square foot per month including subprime mezzanine space of 3,854 square feet for a building that may otherwise be challenging to lease due to bespoke fit-out of the bank space and the short-term lease requirements (under 5 years) due to pending redevelopment. Retaining the existing tenant represents a win-win for both parties as it guarantees $4 million in rental income that the City may otherwise not have and allows the Tenant to remain in its current location.
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The Property is subject to the California Surplus Land Act (SLA) pursuant to Government Code 54220 et seq. The SLA governs the sale of surplus lands and requires local agencies to prioritize opportunities for certain uses including affordable housing development for any land the entity may sell or lease. Under the Surplus Land Act, the City must follow a specific statutory noticing and negotiation period with certain designated entities, including eligible housing sponsors defined by the California Department of Housing and Community Development (HCD).
At its meeting on March 23, 2021, the City Council adopted a resolution declaring 1333 Fourth Street as surplus land and authorized the City Manager to submit the report of declared surplus land and exempt surplus land as part of the Annual Report to HCD by April 1, 2021. However, since that declaration, HCD has clarified in their final regulations that short term leases of less than five years do not qualify as “disposition of surplus land” within the meaning of the SLA. Therefore, the City does not need to comply with the noticing procedures of the SLA prior to entering into negotiations or executing the proposed short-term lease with Chase Bank.
Past Council Actions
Meeting Date Description
5/11/2010 (Attachment A) Acquisition of Property at 1301 – 1333 Fourth Street 3/22/2011 (Attachment B) JP Morgan Chase (1333 Fourth Street) Lease Modification
3/23/2021 (Attachment C) Adoption of a Resolution of Inventory of City-Owned Properties Subject to the Surplus Lands Act
Financial Impacts and Budget Actions
The FY 2021-22 budget includes lease revenues from JP Morgan Chase of $837,942, for 10 months. Under the proposed lease extension, the twelve-month revenue will be $1,005,530. The additional $167,588 in FY 2021-22 revenues will be deposited in the General Fund, account 01700014.414000. The FY 2022-23 revenue adjustment will be included in the FY 2022-23 Exception-Based budget.
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Prepared By: Nia Tang, Senior Development Analyst
Approved Forwarded to Council
Attachments:
A. Attachment A: Acquisition of Property at 1301–1333 Fourth Street (Web Link) B. Attachment B: JP Morgan Chase (1333 Fourth Street) Lease Modification (Web Link)
C. Attachment C: Adoption of a Resolution of Inventory of City-Owned Properties Subject to the Surplus Lands Act (Web Link)
D. Exhibit 1 - 1333 4th St. Lease
E. Exhibit 1.a - 1333 4th St Lease - Addendum 2006
F. Exhibit 1.b - 1333 4th St Lease - Assignment 2008
G. Exhibit 2 - 1333 4th St. Lease - 1st Amendment
H. Exhibit 3 - 1333 4th St. Lease - 2nd Amendment
I. Written Comment