City Council
Report
City Council Meeting: June 13, 2017
Agenda Item: 8.A
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To: Mayor and City Council
From: Andy Agle, Director, Housing and Economic Development, Economic Development Division
Subject: Bergamot Station Arts Center
Recommended Action
Staff recommends that the City Council:
1. Provide conceptual direction regarding a preliminary plan for revitalization of the City-owned Bergamot Station Arts Center (Arts Center);
2. Authorize the City Manager to negotiate an extension of the exclusive negotiating agreement with the Worthe Group for a period of three years, with two, one-year options;
3. Authorize the City Manager to negotiate and execute an interim, master ground lease with the Worthe Group, for a period of three years, with two, one-year options, pursuant to: (a) the terms included in the staff report, including that existing tenants would face lease rate increases no greater than the consumer price index during the interim period, in order to ensure stability while future plans are developed, and (b) development of an arts center management plan in collaboration with the Arts Commission, as further discussed in the staff report.
Executive Summary
The future of Bergamot Station, one of Santa Monica’s most prominent arts assets, has been the subject of lengthy discussion, particularly in the context of the long-anticipated arrival of a regional light-rail station last year. With the expiration of the current master lease on December 31, 2017 and the completion of the work of the Bergamot Advisory Committee, staff seeks Council direction regarding a preliminary plan for the Arts Center advanced by the Worthe Real Estate Group development team (Worthe Group), pursuant to Council’s guidelines and input from the Advisory Committee. Staff recommends extending the exclusive negotiating agreement with the Worthe Group for three years with two, one-year options to accommodate an entitlement process for development consistent with the preliminary plan for the site. During that time, an arts center management plan (as recommended by the Arts Commission) would be developed to ensure the area fully realizes its potential as a community cultural asset.
Additionally, staff seeks authorization to enter into an interim, master ground lease with the Worthe Group for a period of three years with two, one-year options to commence on January 1, 2018, pursuant to parameters identified in the staff report, including that existing tenants would be offered leases with annual increases of no more than the increase in the consumer price index for up to three years. 2 of 27
Background
Bergamot Station Arts Center at 2525 Michigan Avenue consists of City-owned land and private land. The City-owned land (Site) was purchased in 1989 with transit funds with the goal of serving future transit needs in Santa Monica, including providing a source of revenue for the Big Blue Bus (BBB). It was anticipated that the Site would be reserved for future transportation-related development adjacent to a future light-rail transit stop, but the timing for development of the light-rail line and station adjacent to the Site was speculative at the time the Site was acquired and for many years thereafter.
The Site consists of approximately five acres with five buildings totaling approximately 62,000 square feet of total building space that is subleased to approximately 27 small, creative tenants, including art galleries, designers, a nonprofit theatre company, and a café. The space was master-leased to Wayne Blank, who spearheaded its creation (along with the adjacent private land he owned) into a unique constellation of private art galleries and related arts uses, including a theater and formerly an arts museum. The City currently receives $552,553 annually in ground rent. The master lease has had relatively short terms since its initiation as the Los Angeles County Metropolitan Transportation Authority (Metro) developed and implemented plans for light-rail service to Santa Monica along the adjacent rail right-of-way. Construction of Metro’s Exposition light-rail line (Expo) ultimately required a portion of the Site to be sold to Metro.
The remainder of the Site remained subject to the master lease, which expires on December 31, 2017.
The Bergamot Station Arts Center complex also includes approximately 1.3 acres of privately owned adjacent land with approximately 30,000 square feet of building space that houses approximately ten galleries and other creative businesses. The private portion was owned and managed by Wayne Blank, who holds the master lease to the City-owned portion of the Arts Center. Mr. Blank sold the property in December 2016.
The Site and building layout, as well as adjacent properties, are shown in Illustration 1 below.
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Illustration 1 – Aerial Site Plan
The Bergamot Area Plan governs the privately owned and publically owned portions of the Arts Center. In 2011, in anticipation of the opening of the Expo line and a light-rail station located immediately adjacent to the Arts Center, the City began planning for the Art Center’s future as part of the Bergamot Area Plan process. Council adopted the Bergamot Area Plan in 2013. It designates the Site as a Conservation Arts Center Zone with a total floor-to-area-ratio (FAR) of 1.0, or one times the parcel size as the total permitted amount of development, reflecting the lowest allowed commercial density in Santa Monica.
The Site is both highly strategic and highly sensitive for the future of both transportation and local culture – as well as the fiscal sustainability of Big Blue Bus in a time of dynamic change in transit economics. While some advocate for no changes to the current status quo, the opening of Expo, the sale of the adjacent, privately owned portion of Bergamot Station Arts Center, ongoing changes in the fine-art business, and the closing of the Santa Monica Museum of Art all point to the need to plan for the future vitality of Bergamot Station. Pursuant to Council direction, the City issued a request for qualifications for revitalization of the Site in July 2012, followed by a request for proposals (RFP) in February 2013. The RFP included eight goals for the Site, which 4 of 27
were adopted as policy goals in the Bergamot Area Plan and further endorsed by Council on March 20, 2012 (Attachment A) for guiding Bergamot’s future development.
The eight policy goals for the revitalization of the Site were as follows:
1. Include at least 75,000 square feet of arts-related space (equivalent to the artsrelated square footage currently on-site at that time) that is affordable to nonprofit cultural arts organizations and for-profit art galleries, with emphasis on retaining existing Bergamot Station Arts Center tenants.
2. Include open space, infrastructure, and other amenities to support public access to the light-rail station as well as improving the environment and functionality of the Site.
3. Maximize the preservation of existing buildings, where feasible. Retaining the character of the Arts Center is very important to the community and City.
4. Incorporate additional uses, which support the Site as a cultural destination, including evening and weekend activation, and uses that help generate revenue for the development. These uses should include a hotel, restaurant/bar, shared community meeting room/performance space and could include creative office and cultural uses that will maximize market opportunities and create a vibrant development.
5. Consider the LUCE (Land Use Circulation Element) parking approaches and shared parking opportunities.
6. Produce ground lease payments for the City. It is the expectation that the lease rates will be based upon fair market values taking into consideration the other development objectives.
7. Exemplify exceptional architecture and sustainable design and construction as well as have a focused, transit-oriented development approach to design, site layout, and view corridors.
8. Exemplify the concepts identified in the Bergamot Area Plan process.
Three proposals were submitted in response to the RFP. On September 9, 2014, Council selected the Worthe Group as the City’s development partner and authorized staff to enter into exclusive negotiations as well as directed staff to form a community advisory committee to help refine the conceptual plan for the Site (Attachment B).
Council did not adopt the Worthe Group’s original development proposal. The City entered into an exclusive negotiation agreement (ENA) with the Worthe Group on April 30, 2015, that is set to expire on August 30, 2017. A full record of the RFQ/RFP process and associated documents are available at the project website:
www.smgov.net/Bergamot.
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Bergamot Station Advisory Committee and Guidelines
To advise on future planning for the Site, on February 10, 2015, Council approved the creation of an eleven-member Bergamot Advisory Committee (Attachment C), which was composed of representatives of the Bergamot Station Gallery and Cultural Association, Santa Monica Neighborhood Council, Arts Commission, Chamber of Commerce, and Santa Monica Travel and Tourism (Attachment D). Also at the February 10, 2015 meeting, Council adopted a set of six guidelines for the revitalization of the City-owned Bergamot Station Arts Center property and defined the role of the Bergamot Advisory Committee (Advisory Committee). The guidelines were consistent with the project goals included in the RFP and vision of the Site as outlined in the Bergamot Area Plan. The six guidelines adopted by Council to direct the work of the Advisory Committee were as follows:
1. The project shall seek to minimize displacement and disruption to the fine art galleries and other creative businesses on the Site.
2. The project shall incorporate space for additional nonprofit cultural uses.
3. The project shall support the Expo Station and bus integration through amenities and services, including consideration of facilities such as public restrooms.
4. The project shall incorporate a permanent home for a museum or other significant cultural institution that can demonstrate the ability to finance tenant improvements and ongoing operations while providing a cultural experience that benefits the Santa Monica community.
5. The Site has customarily generated $622,000 of annual ground rent. The project shall maintain and increase that ground rent amount over time in order to provide a consistent revenue source for the Big Blue Bus (BBB).
6. The project shall generate additional municipal revenues that could be used to supplement BBB funds.
Bergamot Station Advisory Committee Process and Recommendations The Advisory Committee held its inaugural meeting on April 15, 2015, and met monthly for a year to provide recommendations regarding the preliminary plan for the revitalization of the Arts Center, working within the Council guidelines for the Site.
The meetings were open to the public and conducted under Brown Act open-meeting requirements. The Housing and Economic Development Department provided staff support to the Advisory Committee and the Worthe Group attended all meetings and 6 of 27
participated throughout the process. Meeting agendas, minutes, audio recordings, and presentations were made available on the project website: www.smgov.net/Bergamot.
The Advisory Committee received presentations and diligently reviewed relevant background information on various topics such as the Bergamot Area Plan, current uses at the Arts Center, current and proposed BBB and Expo services to the Site, amenities for transit users, and the City Yards Master Plan and proposed shared-parking structure. The Advisory Committee also sought input from Wayne Blank, founder of Bergamot Station Arts Center, and invited input from individual Bergamot tenants to understand the elements that help make Bergamot special, as well as the on-going facility and operational requirements to continue to support a vibrant arts center.
Based on the review of background information, the Advisory Committee asked the Worthe Group to review and explain the mix of uses of the original proposal.
The original proposal that the Worthe Group submitted in response to the City’s RFP served as a baseline for the Advisory Committee’s initial review, in order to understand the rationale for the mix of uses and proposed square footage attributed to each use, as well as the economics of the proposal. The Advisory Committee also reviewed and commented on key deliverables for the implementation and management of the Arts Center in order to address issues such as construction phasing, parking management, urban design, site management, infrastructure, overall Site improvements, and an artscenter management plan.
The Advisory Committee discussed and adopted formal recommendations regarding each type of use and the associated amount of building square footage, building height, and general locations on the Site. In response to the Advisory Committee’s feedback and recommendations, the Worthe Group revised and updated the preliminary plan, acknowledging that revitalization of the Arts Center would need to be built in phases to minimize disruption to and displacement of the existing tenants. The Advisory Committee also determined that off-site parking would need to be constructed before significant revitalization could occur. The opportunity to develop a shared parking structure at the City Yards was identified as critical to the Art Center revitalization.
The Advisory Committee agreed with the need for offsite parking to replace the existing 7 of 27
surface parking at the Site in order to create attractive, flexible open space at the Site to support art events, public art, outdoor dining, and public gathering space. The Public Works Department has incorporated the Art Center’s parking need and shared parking structure concept into the City Yards master planning process.
The Advisory Committee was unable to reach consensus on the inclusion of a hotel within the mix of uses at the Arts Center and a majority of Advisory Committee members (six of eleven total) ultimately voted against inclusion of a hotel in the project.
In addition to its review of uses and locations, the committee evaluated the financial projections of the original proposal and revised plan. To facilitate the Advisory Committee’s efforts, staff produced a matrix of the Arts Center key deliverables and the Advisory Committee comments and motions made at each meeting (Attachment E).
Discussion
Following the completion of the Advisory Committee’s work, staff requested that the Worthe Team update the preliminary plan and financial projections based on the recommendations of the Advisory Committee. The Worthe Group’s revised preliminary plan addresses most of the Advisory Committee’s recommendations regarding uses and square footage, while preserving four of the five buildings (Buildings A, B, E, and F). However, the Worthe Group’s revised preliminary plan includes a hotel, which is described further in the report. The preliminary plan proposes six new buildings (Buildings C, D, G, H, I, and M) providing additional space for galleries and nonprofit cultural uses, a museum, a community center, restaurant/café space, and creative office space, as well as a hotel that would include additional space for galleries and restaurant/café uses. Removal of the on-site surface parking would create over three acres of flexible open space for cultural events, community programming, and use by the public and tenants.
Table 1 below outlines the types of uses, associated square footage of each plan, and compares the Worthe Group’s original proposal responding to the City’s RFP, the Advisory Committee’s recommendations, and the Worthe Group’s revised plan based on the Advisory Committee process.
Table 1 – Uses and Square Feet Summary
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Use Worthe Original
Proposal (SF)
Advisory Committee
Recommendations
(SF)
Revised Preliminary
Plan, including hotel
(SF)
Museum 21,100 21,100
9,000 above grade
12,100 below grade
21,100
9,000 above grade
12,100 below grade
Gallery, Nonprofit,
and Cultural Uses
61,600 65,700 65,700
Creative Office 44,000 30,000 30,000
Restaurant and Cafe 7,000 7,000 7,000
Community Space 2,000 4,000 4,000
Arts-Related Uses n/a 9,000 9,000
Bike Center 4,600 600 600
Hotel Total SF
- stories
- rooms
- gallery
- food and beverage
80,000
- 7-story
- 120 rooms
- 3,000 SF
- 2,000 SF
None 82,600
- 7-story
- 120 rooms
- 3,000 SF
- 2,000 SF
Buildings Preserved 4 5 4
T Building
Use Not Identified
NA 11,214 NA
Total SF
(above grade)
220,300 136,514 207,900
Total Floor-to Area
Ratio (FAR)
.98 .61 .93
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The revised preliminary plan for the Site is shown in Illustration 2 below, which denotes the location of uses and number of floors for each building in the massing site plan.
Following the massing site plan illustration is a discussion of each type of use included in the revised preliminary plan for the Site, as well as a description of the Advisory Committee’s review and recommendations.
Illustration 2 – Revised Preliminary Plan
Museum Space – Building M
The Worthe Group originally proposed the museum space to be located immediately adjacent to the Expo Station in a newly constructed 21,100-square-foot, twostory building. Based on the Advisory Committee’s review and recommendation, the museum concept was revised to be composed of two buildings above ground totaling 9,000 square feet with an additional 12,100 square feet of below-grade space to 10 of 27
connect the two buildings above ground. The Advisory Committee felt that a single, two-story building as originally proposed might create a visual and physical barrier between the Expo Station and the Site. During the review process, the committee recommended that the building include a minimum 1,000 square feet (up to 2,000 square feet) of food- service space for coffee and carry-out food options to serve museum patrons, Expo riders, area workers, and local residents. Pursuant to zoning ordinance standards, below-grade museum space would not count towards the project’s floor-to-area ratio.
Gallery and Nonprofit Cultural Uses – Buildings A, B, C, D, E and F The Advisory Committee evaluated the amount of existing building space at the Arts Center utilized by gallery and cultural uses, as well as what the Worthe Group originally proposed. The committee initially recommended that a minimum of 61,600 square feet be dedicated to galleries and nonprofit cultural uses, excluding the museum. Later in the process, the committee recommended increasing the amount to 65,700 square feet and that two separate, 3,000-square-foot spaces for nonprofit performing arts uses be a part of the Arts Center. The committee further recommended that City Garage, the nonprofit theatre group that is currently located at the Arts Center, be prioritized for one of the two performing arts spaces. The committee also recommended that priority of leasing opportunities be offered to existing tenants of the Site first, followed by tenants of the privately owned portion of Bergamot Station when space is available. As the conceptual site plan was revised, the gallery and nonprofit cultural uses were designated to be located in the existing buildings on the Site (Buildings A, B, E and F) as well as in the ground floor of two of the new buildings proposed on the Site (Buildings C and D).
Creative Office – Building C
The proposed creative office space provides a revenue stream to help subsidize the museum, gallery, and nonprofit cultural spaces at the Arts Center and helps support the ground-lease payment to the BBB. The Worthe Group’s original proposal included 44,000 square feet of creative office space in two new buildings of two stories in height located at the southeast corner of the Site adjacent to City Yards and Agensys.
The Advisory Committee recommended that the amount of office space be reduced by 11 of 27
14,000 square feet to a total of 30,000 square feet and be located in only one new building (Building C). To maximize the open space and prioritize the art uses throughout the Site, the Advisory Committee recommended that the office use be located in the two upper floors of Building C with the 15,000 square feet on the ground floor committed to gallery and nonprofit cultural uses.
Restaurant and Café Spaces – Buildings G and M
The Advisory Committee recommended that the proposed enclosed restaurant and café space of 5,000 square feet be located in the center of the Site in a new structure (Building G) with the benefit of outdoor dining space in order to help activate the Arts Center. The committee further recommended that up to 2,000 square feet of “grab-n-go” café and coffee bar space be located in the museum building (Illustration 2), with the understanding that outdoor dining space would not count toward the project’s floor-toarea ratio.
Community Center with Adjacent Open Space – Building I
The Advisory Committee advocated for increasing the amount of building space dedicated for community space from the originally proposed 2,000 square feet to 4,000 square feet in a new structure (Building I). The revised preliminary plan includes a centrally located community center with connecting open space of up to 10,000 square feet to allow for a fluid connection of indoor/outdoor activities, including community art exhibits, workshops, film and music events, and other events for the community. The community center is proposed for the center of the Site, adjacent to the restaurant, in order to serve as an overflow food venue for larger-scale events when needed.
Arts-Related Uses – Building D
The Advisory Committee recommended that the originally proposed creative office building be redesigned into two new structures (Buildings C and D) and that Building D be focused on arts-related uses instead of creative office. The Advisory Committee endorsed Building D for market-rate arts-related uses on the second floor, totaling 9,000 square feet, with the ground floor’s 9,000 square feet dedicated to gallery and nonprofit cultural uses of which 4,100 square feet be at market rate with the remainder of the gallery and nonprofit cultural space be provided at below market rate. 12 of 27
Bike Center
The Worthe Group’s original proposal included a 4,600-square-foot bike center to be located in the center of the Site. The Advisory Committee expressed concerns regarding the proposed location, size, potential demand and prospective users.
The Advisory Committee ultimately recommended a bike center of 600 square feet to be located in the shared parking structure or toward the south side of the Site near Michigan Avenue.
Hotel – Building H
The Bergamot Area Plan identifies preferred use concepts for the Arts Center, which includes a hotel with a restaurant or café that could serve as an amenity for the Arts Center and larger Bergamot Area and help activate the Arts Center beyond standard gallery operating hours. The hotel would also provide an economic benefit to the City/BBB, even though the expected ground lease revenue would be constrained due to the limited allowed FAR and the large amount of subsidized uses planned for the Site.
The preferred concept suggests a location at the western edge of the Site adjacent to 26th Street. The RFQ/RFP issued for the Arts Center referenced the preferred use concepts, including the hotel, which was part of all three proposals submitted for revitalization of the Site. The Worthe Group’s original proposal included a seven-story, 120-room, art-centric boutique hotel in the range of 80,000 to 83,000 square feet that included a roof-top bar, restaurant, conference room, and ground-floor art uses with subterranean parking spaces to serve the hotel guests and employees. The hotel’s height was originally proposed at 86 feet, the maximum permitted height under the Bergamot Area Plan.
The Advisory Committee spent several meetings reviewing the original proposed hotel use and related financial projections and asked the Worthe Group to evaluate the financial feasibility of a reduced-scale hotel of 80 rooms and 4 to 5 stories. In response, the Worthe Group analyzed a smaller hotel concept and determined that a hotel under 100 rooms would not be economically viable to operate or finance within the overall project, the limited market of hotel brands that service less than 100-room hotels and 13 of 27
the inefficiencies of operating a hotel of that size. Advisory Committee member Richard Peterson who was with the Santa Monica Travel and Tourism organization at the time acknowledged to the committee that this was his understanding of hotel operations as well. However, the Worthe Group presented a reduced hotel concept of six stories, 100 rooms with 70,800 square feet of building area at a height between 65 feet to 75 feet.
The Advisory Committee approved the 100-room, six-story hotel use as presented with the understanding that it would be classified as a Tier 2 project within the zoning policies of the Bergamot Area Plan. The proposed location of the hotel was located on the west side of the Site adjacent to 26th Street in the location of the existing T Building.
At the following Advisory Committee meeting, the committee rescinded their previous approval upon confirming with staff that the 100-room, six-story hotel concept of 65-75 feet would be classified as a Tier 3 development under the Bergamot Area Plan because it would exceed the 60-foot height limit for Tier 2 projects. The Worthe Group and Advisory Committee evaluated a five-story hotel with a 100 rooms, but both parties agreed that expanding the footprint of the hotel to achieve a 5-story concept with 100 rooms was too impactful to the Site’s open space and view corridor. A majority of the Advisory Committee members ultimately voted against a 65- to 75-foot hotel at the Site.
A majority of the Advisory Committee had concerns regarding the hotel based primarily on the following three elements:
that hotel construction would have severe impacts on the Arts Center businesses and operations,
that the hotel would not be synergistic with the Arts Center, and that the proposed height of six to seven stories would overshadow and be out of scale with the Site.
A minority of Advisory Committee members (five of the eleven members) supported the hotel, noting the additional services and economic benefits the hotel would bring to the project, including unionized jobs for local residents, transient occupancy tax revenue to support City and BBB operations, additional dining and nightlife amenities for nearby residents and workers, synergies with Art Center uses including additional gallery and event space, and proximity to the Expo station to serve transit users. 14 of 27
Both hotel concepts (a six-story, 100-room project or seven-story, 120-room project) evaluated included 2,000 square feet of restaurant space and 3,000 square feet of gallery or event space, resulting in a modest increase in both uses on the Site.
If the hotel or an alternative use/building for the proposed location is not included in the Art Center’s preliminary plan, the T Building and its approximately 11,214 square feet of the building space would be retained. The Advisory Committee did not evaluate or recommend a use for the T Building space, though staff assumes that the space would continue to be made available for gallery and nonprofit cultural uses.
Building Preservation
The Advisory Committee’s recommendations preserves five buildings (approximately 52,900 square feet of existing building space) on the Site, recognizing that the existing A Building would be partially demolished by approximately half to accommodate the new C Building. The Worthe Group’s revised preliminary plan would require demolition of the T Building to accommodate the proposed hotel, in which case four buildings (approximately 41,700 square feet of existing building space) would be retained.
Open Space and Parking
The Site has abundant open space which serves the Art Center as a surface parking lot currently. The Advisory Committee recommended that the surface parking be retained until replacement parking is built off site, with the exception of implementing modest landscaping, open space, or other site modifications. Additionally, the committee recommended that the Worthe Group reserve as much peripheral surface parking onsite as needed for the existing galleries and nonprofit cultural uses to conduct business.
The Worthe Group proposes to provide the code-required amount of parking for the Arts Center in the proposed shared City Yards Parking Garage, while maintaining a limited amount of on-site surface parking for disabled parking and loading requirements. The Worthe Group would be obligated to finance or lease the Arts Center parking in the proposed shared City Yards Parking Garage. Once the off-site, replacement parking is constructed, the reclaimed open space that totals over three acres, is envisioned to be 15 of 27
integrated into the overall Site as a public gathering space that can used for a wide range of art, cultural, and community events.
Advisory Committee’s Report
The Advisory Committee concluded its efforts by adopting a Bergamot Advisory Committee Recommendation Report that summarizes the committee’s review, financial projections, and recommendations, as well as positions of the minority vote.
The Bergamot Advisory Committee’s report was provided to Council on May 17, 2016 (Attachment F) and posted on the project website (www.smgov.net/Bergamot).
The Advisory Committee also made recommendations addressing key project deliverables such as parking management, construction phasing, infrastructure and site improvements, and the Arts Center management plan.
If Council authorizes continuing forward with a preliminary plan, the Worthe Group would be required to prepare architectural plans, finalize financial pro-forma analysis, and prepare related key project deliverables, which would be incorporated into the development agreement and ground-lease contracts.
Economic and Fiscal Impacts
Recognizing the overall duration of the project to date, starting with the initial qualification submissions in 2012 through the Advisory Committee review process in 2015/2016, staff requested that the Worthe Group update its financial pro-forma for the revised preliminary plan based on current costs and rental rates. The City’s financial consultant, Keyser Marston Associates, Inc. (KMA), reviewed the updated financial proformas, analyzed whether the preliminary uses could support the proposed groundlease payments and construction costs, and estimated the amount of public revenues that the City would receive annually from revitalization of the Site.
Project Pro-forma
When the Advisory Committee conducted their review of the Worthe Group’s concept plans, the financial estimates were based on the original proposal’s cost estimates from 2013. Construction and financing costs have been updated by the Worthe Group and are incorporated in an updated financial pro-forma (Attachment G). The estimated 16 of 27
construction costs for the revised preliminary plan without the hotel have increased by approximately 11 percent (from $22.2 million in total hard and soft costs to $24.6 million) and the updated pro-formas now include the combined possessory interest and property tax expenses that the plan is expected to incur. The rental revenue cash flows were also updated to reflect the below-market rents the Art Center tenants currently pay adjusted for consumer price index, and the phasing of the plan.
The revitalization of the Arts Center requires significant financial investment in order to upgrade the Site’s infrastructure and existing buildings, and to construct the new improvements and a shared parking structure. The total estimated costs of the revised preliminary plans are $39.6 million for the plan that does not include a hotel and $95.1 million for the plan that includes a 120-room hotel. Using Worthe’s assumptions, staff asked KMA to model the cost to construct a 100-room hotel, which KMA estimated at $85.7 million.
Net cash flow from the plan without a hotel before consideration of debt service and return on capital is estimated to be approximately $2.2 million in the first year of full build-out and approximately $6.4 million in the first year of full build-out for the plan with a 120-room hotel. Net cash flow is expected to grow over time as revenues grow.
When debt service and return on capital are considered, the plan without a hotel is not expected to repay the capital investors until 2058. The plan with a hotel is not expected to repay the capital investors until 2045. Assuming a 55-year ground lease, the net present value of the net cash flow after debt service and repayment of capital, assuming a 10 percent discount rate, is $4.5 million for the plan without a hotel and $25.8 million for the plan with a hotel. The net present value provides a means to estimate the Worthe Group’s estimated profit over the life of the ground lease.
It should be noted that the financial pro-formas are preliminary, order-of-magnitude estimates used to test the feasibility of the land-use scenarios. If the plan moves forward, KMA would complete a detailed financial evaluation of the plan as it is further defined. During the preliminary phase, staff asked KMA to provide initial feedback on the Worthe Group’s pro-forma. KMA comments include:
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The loan-to-capital ratio of 65 percent is low compared to most commercial developments, which typically leverage a greater amount of debt. The Worthe Group has responded that they are able to attract a greater amount of capital to their plans.
The net developer profit is low compared to the overall size of the development. The Worthe Group has responded that they are able to accept lower overall returns because of their long-term investment horizon.
The time period for repayment of the initial capital investment is extremely long, particularly in the scenario without a hotel. The Worthe Group has responded that their investors are accustomed to longer windows of return on investment, though they acknowledge that the extended time period for the plan without a hotel would face greater challenges in attracting capital.
Based on the Worthe Group’s Operating Pro-forma and Cash Flow Projections, KMA confirmed that the Worthe Group has the capacity and access to capital to finance the different preliminary plan uses being considered.
While the City could take the position that financing is purely a developer’s risk, if the Worthe Group is unable to attract debt and capital financing, revitalization of the Arts Center might be delayed.
In addition, the Worthe Group’s pro-forma assumes that the developer would construct and operate a shared parking structure at the City Yards. Staff believes the concept requires significant further discussion and negotiation between the City and the Worthe Group if the plan moves forward.
Estimated Public Revenues
Attachment H identifies estimated annual City revenues of the revised preliminary plan.
As noted in Attachment H and highlighted in Table 2 below, the annual City revenues from a preliminary plan without a hotel would generate approximate $1.3 million in annual City revenue. Annual City revenues from a preliminary plan that includes a 120- room hotel use is approximately $2.9 million. KMA estimated the annual City revenues from a hypothetical 100-room hotel at approximately $2.6 million. The most notable difference among the scenarios are the estimated property tax and transient occupancy tax revenues related to a hotel.
Table 2 - Annual Estimated Revenue to the City
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Revenue Source No Hotel 100-Room Hotel 120-Room Hotel
Ground Lease Payment $700,000 $700,000 $700,000
Transit Occupancy Tax $0 $1,226,000 $1,472,000
City Share of Property Taxes $55,000 $119,000 $132,000
Total Estimated Tax Revenue
to City’s General Fund
$640,000 $1,933,000 $2,195,000
Total Overall Estimated
Public Revenues
$1,340,000 $2,633,000 $2,895,000
Lastly, the Worthe Group has committed to a minimum ground rent of $700,000 under each scenario; however, annual ground rent payments are typically equal to a percentage of the supportable land value. If the plan moves forward, KMA would develop a detailed evaluation of the refined plan and its financial pro-forma, in order to support negotiation of a ground-lease structure and profit-sharing opportunities associated with the market-rate uses.
Market-Rate Uses and Below-Market-Rate Use
An early policy direction that was included in the RFQ/RFP was the intent of preserving gallery and nonprofit cultural uses at the Arts Center. The City envisioned that the rental rates for cultural uses would be provided at below-market rates, with the recognition that nonprofit arts and cultural space would be discounted at a higher rate than for-profit gallery space. Likewise, it was envisioned that the Site would accommodate market-rate uses such as creative office, restaurants, and a hotel to help offset the below-market rents of the art spaces. The Worthe Group has maintained these lease rate expectations in their financial pro-forma analysis that they have produced throughout the process. The Advisory Committee recommendation limits the market-rate uses on the Site to 31 percent of the total building square footage, with the remaining 69 percent of the building space at below-market rates. The revised plan by the Worthe Group that includes a 120-room hotel adjusts the balance of building space to 43 percent 19 of 27
subsidized space and 57 percent market-rate use. KMA notes that a balance, at a minimum closer to a 50/50 split of below-market and market-rate uses would be more sustainable for the plan by providing more reliable and diverse long-term income to support the below-market uses. A hotel could also support the Art Center tenants by providing a regular stream of visitors to the Site, including supporting restaurants that could incorporate evening service beyond typical gallery hours.
Council Guidelines
The Advisory Committee was thoughtful in considering the Council’s guidelines in their recommendations regarding the preliminary plan and mix of uses. The following section briefly discussed each of the Council’s guidelines for the revitalization of the Arts Center with respect to the Advisory Committee’s recommendations.
Minimize displacement and disruption to the fine art galleries and other creative businesses on the Site – Retention of existing Bergamot tenants is a priority shared by all participants. The Advisory Committee’s recommendations related to phased construction, temporary relocation options, leasing priority for displaced tenants, off-site parking, and outreach and signage during construction all speak to minimizing impacts on existing tenants. A majority of the Committee also voted against inclusion of a hotel on the Site, which would further minimize disruption, and likely continue to make Building T available for existing creative tenants.
Incorporate space for additional nonprofit arts and cultural uses - The Advisory Committee’s recommendations would allocate the amount of space available for nonprofit arts and cultural uses by up to 65,700 square feet. If Building T were retained as cultural-focused space, an additional 11,214 square feet could be available for nonprofit cultural uses.
Support the Expo Station and bus integration through amenities and services (e.g. public restroom, bike center) – The Advisory Committee envisioned the museum and adjoining café as a prominent gateway, helping to visually promote and integrate the Arts Center with the Expo Bergamot Station. Although reduced in size from the 20 of 27
original Worthe Group proposal, the Advisory Committee also recommended a bike center of 600 square feet in the preliminary plan.
Add a permanent home for a museum or other significant cultural institution – The Advisory Committee recommended a 21,100-square-foot museum building adjacent to the Expo station.
Generate a minimum of $622,000/year ground lease payment, to be increased over time as a revenue source for Big Blue Bus – The Developer has proposed to set the annual ground rent at $700,000 for each of the three plan scenarios. However, these amounts may be revised up or down based upon further feasibility testing once a more detailed development program is approved.
Generate additional municipal revenues that could be used to supplement Big Blue Bus funds. – The role of the Site as a BBB revenue-producing asset adds additional complexity to the overall plan. BBB’s revenues come from a variety of sources, including federal, state, and regional funds, farebox revenue, advertising, and real estate income. When Council voted to increased BBB fares in 2010, Council recognized that higher bus fares have a disproportionate impact on transit-dependent riders who are often at the lowest end of the economic spectrum. Recognizing the impacts, Council directed staff to explore opportunities to maximize returns on BBB real estate in order to reduce pressure on bus fares.
Bergamot Station represents one of BBB’s primary real estate holdings. If the City’s overriding goal were to maximize ground rent in order to reduce pressure on the BBB fares, significant ground rents could flow to the BBB from a long-term re-positioning of the property. For example, the Papermate site, directly across Olympic Boulevard from the Arts Center, sold in 2015 for a reported price of over $500 per square foot of building area and nearly $400 per square foot of land area. The Arts Center is arguably comparable in terms of location, and if maximizing its value was an overriding priority, it could be expected to command annual rents of several million dollars per year.
Given that the BBB’s total passenger revenue is projected to be approximately $11 21 of 27
million in FY 2017/2018, generating several million dollars per year from the Arts Center site could dramatically reduce pressure on bus fares. However, because the regulations and plans for the Arts Center envision a low floor-to-area ratio and many subsidized tenants, the expected ground rent to the BBB is not expected to increase significantly.
Not including the ground lease payment, a plan without a hotel is expected to generate approximately $640,000 annually in additional City revenues, relative to current City revenues of approximately $180,000 generated by the Site. With the inclusion of a hotel, the plan is projected to generate between $1.9 million (100-room hotel) and $2.2 million (120-room hotel) annually in revenue to the City’s General Fund. The primary drivers of the increased revenues is Transient Occupancy Tax (with a hotel), supplemented by additional property taxes, and sales taxes. Attachment H provides a summary of expected municipal revenues under the three scenarios.
Additional municipal revenue derived from the Bergamot Arts Center would go to the City’s General Fund, though Council could choose to allocate some or all of the increased revenue to support the BBB, given the low ground-rents that are expected to accrue to the BBB. The additional Bergamot ground rent revenue, coupled with any additional public revenues earmarked to the BBB, could help to reduce pressure on bus fares, as the BBB grapples with the cost increases that are similar to those facing the City generally (pension costs, workers compensation, health care), as well as revenue impacts related to regional and national declines in bus ridership. Understanding that the Council has consistently reinforced that revenues from the Site should be used to keep fares low for Santa Monica residents and BBB customers, and that BBB has one of the lowest transit fares in the county, additional Site revenue could help BBB reduce pressure on fare increases. As a result, the City’s choices regarding the project are expected to affect bus fares for BBB customers in the long run.
Alternatives for the Site
Council could consider alternative approaches to the preliminary plan. Council could direct the Worthe Group to pursue incorporation of either a 100-room, six-story hotel or a 120-room, seven-story hotel. If Council does not support a hotel use on the Site, staff 22 of 27
requests that Council provide direction on the desired use(s) for the T building (as either gallery, nonprofit arts use, cultural; restaurant/café or creative office) or if another use/building for the location be considered.
Additional alternatives for Council consideration include retaining the existing uses, buildings, and conditions on the Site, including the surface parking and allowing the ENA with the Worthe Group to expire, though this approach would not address many of the guidelines established for the Site. Council could also direct staff to prepare a new RFP with revised project goals and directives, if the proposed preliminary plan is not deemed acceptable. The approach would delay implementation of many of the guidelines, as well as extending uncertainties as to the City’s plans for the Site, which could cause further concern to the current tenants and disruption to the on-going operations of the Arts Center.
Exclusive Negotiating Agreement (ENA)
The ENA between the City and the Worthe Group expires on August 31, 2017.
If Council is supportive of proceeding with the revitalization of the Arts Center and continuing to partner with the Worthe Group, staff recommends Council authorize an extension to the ENA. The recommended extension is for a term of three years with two, one-year options conditioned upon the Worthe Group working in good faith to implement the revised preliminary plan selected by Council. This extension time period will allow the Worthe Group to continue their efforts to obtain the necessary land use entitlements and approvals. There is no cost to either the City or the Worthe Group in extending the ENA.
Interim Property Management
The Master Lease Agreement with Bergamot Station Ltd. expires on December 31, 2017, at which time the existing tenants’ subleases and parking agreements on the Site will expire as they run concurrent with the master lease. Staff has identified four potential options for interim management or ground leasing for Council consideration.
1. If Council decides to proceed with revitalization of the Arts Center and continue to partner with the Worthe Group, then the City could enter into an interim master lease with the Worthe Group to oversee the management of the Site until land-use entitlements are in place and a long-term ground lease is executed. This approach would provide the Worthe Group with an 23 of 27
opportunity to begin working with the Arts Center tenants in advance of any significant revitalization.
2. The City could extend the current lease with Mr. Blank (Bergamot Station Ltd.) during the interim, which could enable continuation of some of the existing arrangements, such as parking agreements with Agensys and the owner of the privately owned portion of the Arts Center.
3. The City could act a direct lessor, with individual leases with each tenant and overall property management responsibility. Because staff does not have capacity or expertise in providing direct property management, a property management contract would be necessary. However, such an approach is not recommended because City oversight of leasing responsibilities could have negative consequences for the Arts Center, as each lease would be subject to the competitive public procurement process. When vacancies occur, re-leasing could be significantly delayed, potentially creating extended vacancies that detract from the vitality of the Arts Center.
4. Select a third-party, interim ground lessee who could manage the property and take responsibility for leasing. Staff does not recommend such an approach as completing the process of procuring a ground lessee, as well as executing a ground lease, could extend beyond expiration of the current ground lease and create further uncertainty among Arts Center tenants.
If Council approves the extension of the ENA with the Worthe Group, staff recommends that the City enter into an interim ground lease with the Worthe Group pursuant to the following parameters:
A. The term of the interim ground lease should be three years with two, one-year options at the City’s sole discretion.
A revitalization plan could be expected to undergo environmental review, obtain entitlements, and enter into a long-term ground lease with the City over a two to four-year period. The interim ground lease would spell out what occurs until construction begins. If the environmental review or entitlement period is extended beyond the three-year period, the ground lease options could be exercised.
B. During the term of the interim ground lease, sublease rents may increase by no more than the Consumer Price Index.
Many Arts Center tenants’ continued viability is a concern if their subleases are subject to significant rent increases. The proposed parameter is designed to ensure rent stability.
C. Ground rent to the BBB would increase each year by the Consumer Price Index. 24 of 27
The proposed parameter would ensure that ground rent for BBB keeps pace with inflation during the interim.
D. To the extent that rental income exceeds operating costs, ground rent, and a fair return to the ground lessee, excess operating income would be invested in Site improvements and building repair and restoration.
Arts Center tenants and patrons have noted a variety of building and Site improvements and other infrastructure that are in need of upgrades. The proposed parameter would ensure that excess income would be invested in the Site.
Commission Action
Staff presented the preliminary plan, associated analysis, and interim site management options to the Arts Commission on April 17, 2017. Approximately 30 members of the public attended, including former members of the Bergamot Advisory Committee and Bergamot tenants. The commission had a variety of questions regarding the plan concepts and process going forward with particular concern raised about protecting the art uses at the Site. The Arts Commission met again on May 15, 2017 to develop their recommendations, with input from the Arts Commission’s Bergamot Ad Hoc Committee, which is comprised of five members of the Arts Commission. Seventeen members of the public attended the meeting, including Bergamot tenants, City staff and the developer’s team. The Arts Commission reviewed and discussed the Bergamot Ad Hoc Committee’s recommendations, which formed the Commission’s recommendations to Council.
The Arts Commission recommended that the ENA with the Worthe Group be extended for three years and that the Worthe Group be selected as the interim ground lessee.
The Commission also recommended a variety of leasing policies for the Site during the interim management of the Arts Center. The Commission has committed to develop an arts management plan for the Arts Center with the assistance of a newly formed Arts Center management committee (Arts Management Committee) in which representatives comprised of Bergamot tenants and community representatives would be represented, following the form and guidelines established for the Public Art Committee of the Arts 25 of 27
Commission. The Arts Management Committee would prepare a draft arts management plan within twelve months to address curation of arts programming, guidelines for tenancy selection, and preserving the art uses and architectural character of Bergamot.
The Committee would report back to the Arts Commission to recommend an Arts Management Plan to Council. The Arts Commission incorporated their overall recommendations in a memo (Attachment I).
In addition, the Worthe Group submitted a letter to the Arts Commission (Attachment J) in which Worthe proposes to form a non-profit organization to implement the Arts Center Management Plan. The organization would be funded by the Worthe Group annually by $270,000 with additional annual fundraising efforts. The non-profit organization would have a board comprised of representatives of the Arts Commission, the Worthe Group, and community members to advise the organization’s staff who would be responsible for community programming, oversee an artist residency program and other programs, coordination of gallery openings and Arts Center events, and assisting with tenant selection.
Environmental Analysis
If a preliminary plan moves forward into entitlements and ground-lease negotiations, environmental analysis pursuant to the California Environmental Quality Act (CEQA) will be necessary. Providing conceptual direction regarding a preliminary plan is exempt from CEQA.
Next Steps
If Council provides direction to move forward with a preliminary plan and approves extending the ENA, the Worthe Group would prepare conceptual plans and a development agreement application, solicit additional community feedback, and provide float-up presentations to the Architectural Review Board and Planning Commission.
Following the Planning Commission float-up, the project would return to the Council for conceptual approval of initial business terms regarding the lease of the property and authorization to enter into development agreement negotiations. With Council direction, staff would then prepare environmental analysis and negotiate a development agreement and a disposition and development agreement. The project would proceed in 26 of 27
tandem with the City Yards Master Plan process in regards to negotiating the terms of the parking arrangement within a shared parking structure, and the two efforts would continue to be coordinated.
Financial Impacts and Budget Actions
There is no immediate financial impact or budget action necessary because of the recommended actions. Staff will return to Council if specific budget actions are required in the future.
Prepared By: Jason Harris, Economic Development Manager Approved Forwarded to Council
Attachments:
A. March 20, 2012 City Council Staff Report
B. September 9, 2014 City Council Staff Report
C. February 10, 2015 City Council Staff Report
D. List of Bergamot Advisory Committee Members
E. Key Deliverable Chart per Flipchart Notes FINAL
F. Bergamot Advisory Committee Recommendation Report
G. Worthe Group Revised Financials
H. Bergamot Public Revenues
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I. Arts Commission Bergamot Recommendations
J. Worthe Group Letter to SM Arts Commission re Arts Management Plan K. Written Comments
L. Powerpoint