City Council
Report
City Council Meeting: December 17, 2024
Agenda Item: 5.E
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To: Mayor and City Council
From: Rick Valte, Public Works Director, Public Works, Airport Subject: Approval of Lease with NEON Rated for 3200 Airport Ave and Associated Contract Modifications with Corporate Realty Group and Swinerton Builders Recommended Action
Staff recommends that the City Council:
1. Adopt a finding of Categorical Exemption pursuant to Sections 15301 (Existing Facilities) of the California Environmental Quality Act (CEQA) guidelines;
2. Authorize the City Manager to negotiate and execute a Lease with NEON Rated, LLC, dba (“NEON”), a California-based company for general office and administrative uses located at 3200 Airport Avenue;
3. Authorize the City Manager to negotiate and execute a second modification to professional services agreement #11419 in the amount of $251,565 with Corporate Realty Group (“CRG”) for commercial real estate broker services associated with these negotiations. This would result in a 5-year amended agreement with a new total amount not to exceed $3,675,462 with future year funding contingent on Council budget approval;
4. Authorize the City Manager to negotiate and execute a second modification to agreement #11365 (CCS) in an amount not to exceed $2,500,000 (including contingency) with Swinerton Builders (“Swinerton”) for costs associated with additional scope required for tenant improvements related to lease negotiations at 3200 Airport Avenue for the Public Works Department. This would result in an amended agreement with a new total amount not to exceed $12,084,792 with future year funding contingent on Council budget approval;
5. Authorize the Director of Public Works to issue any necessary change orders to complete additional work within contract authority; and
6. Authorize budget amendments as outlined in the Financial Impacts & Budget Actions section of this report (requires 5 votes).
Summary
NEON Rated, LLC (“NEON”) proposes to lease 8,200 square feet of commercial office and parking spaces from the City at 3200 Airport Avenue. The proposed term is for ten 2 of 7
years and three months beginning on or around July 1, 2025. However, NEON would have the limited right to terminate the agreement without cause after seven years and three months. Under the proposal, NEON would have the option to extend the agreement for an additional five years. If NEON exercises this option, the rental rate for that five-year period would be adjusted and priced at market rate. The proposed initial term for the lease would expire on September 30, 2035 (assuming that NEON does not terminate the agreement early). If NEON extends the agreement, then the lease term would run until September 30, 2040. Because the term of this proposed new lease extends beyond December 31, 2028, the City’s Airport Leasing and Licensing Policy (Attachment A) requires that the City Council approve the proposed lease term.
The current configuration of the office space at 3200 Airport Avenue does not meet the needs of NEON. Therefore, under the proposal, the City would be responsible for up to $2 million of tenant improvements to the property to modify the current space to a mutually agreed-upon design that is suitable for NEON’s business operations. NEON would be responsible for reimbursing the City for any incurred costs of improvement above $2 million. Furthermore, staff recommends a second modification to agreement #11365 with Swinerton Builders (“Swinerton”), the City’s current contractor that performed the initial renovations to 3200 Airport Avenue. The modified agreement would allow Swinerton to perform the required $2 million of building improvement work that the City would be responsible for under the proposal. The second modification would also provide for an additional $500,000 for any incidentals and tenant-specific scope that NEON might require. A second modification to the agreement would result in a five-year amended agreement with a new total amount not to exceed $12,084,792.
In addition, the City’s contract with its real estate broker will need to be modified to account for the real estate services provided to the City as a result of the proposed lease with NEON. Corporate Realty Group (“CRG”) is the City’s current real estate broker for non-aviation properties at the Airport. CRG has provided brokerage services to the City by soliciting and negotiating the proposed lease with NEON. If the City enters into the proposed lease, a second modification to the City’s agreement with CRG in the amount of $251,565 would be necessary to cover the real estate commissions 3 of 7
associated with the new lease, including the commission for NEON’s broker. The modified agreement with CRG would result in a new total not to exceed amount of $3,675,462.
Securing the proposed lease with NEON aligns with the City’s priorities of economic recovery and ensuring a healthy enterprise fund for future years. This lease provides stability for revenue sources that would not be impacted by the closure of the Airport.
The proposed lease with NEON would result in net revenue to the Airport Fund (after construction costs and broker commissions) estimated at $3.5 million over the initial tenyear and three-month term.
Discussion
Lease Terms and Conditions
NEON is an American independent film production and distribution company founded in 2017 by CEO Tom Quinn. NEON has produced blockbuster hit movies such as:
Parasite; Longlegs; I, Tonya; and Apollo 11. Over the past five years, NEON produced content has garnered 25 Academy Award® nominations (5 wins, including Best Picture) and grossed over $200 million at the box office.
NEON now seeks to relocate their headquarters to 3200 Airport Avenue. The proposed lease consists of 8,200 square feet of commercial office space and 15 parking spaces.
If approved by Council, the City and NEON would finalize negotiations and execute a lease agreement based on the following terms and conditions. • The proposed term of the lease is for ten years and three months, with one fiveyear option to extend the agreement. • The lease term shall commence on the later of July 1, 2025, or the day after the City has substantially completed the tenant improvements. • During the initial term of the agreement NEON will have one early termination option (after 87 months) with written notice of no less than nine months. NEON will be responsible to pay the City for the unamortized tenant improvements, 4 of 7
broker commissions, and rent abatement.
• Base rent and parking will be abated for months 13, 25, and 37 of the initial lease term, for a total of three months of abated rent.
• The proposed annual rent for the first year of the lease including parking fees would be $499,320.
• Base monthly rent for the office space shall increase three and a half (3.5%) percent per year. Parking rent for 15 spaces shall remain at $150 per space for the duration of the initial term of the lease
• In addition to the base rent, tenant is responsible for paying operating expenses. • NEON shall have the right to assign the lease to a qualified assignee. • NEON would provide the City a $100,000 security deposit and a $400,000 irrevocable letter of credit, with the City as the beneficiary. The letter of credit would be reduced by $100,000 after the 24th, 36th, 48th and 60th months if NEON is not in default.
• The City is responsible to make certain tenant improvements to the current configuration of the building to suit NEON. The current configuration was designed for two tenants and as such was divided into two office suites – approximately 3,000 square feet each – with a common area hallway and bathrooms. The mutually agreed upon tenant improvements would essentially combine the hallway, bathrooms, and two office suites into one functional office suite for NEON. The City would be responsible for up to $2 million of these improvements, which do not include furniture and tenant specific equipment. Any costs beyond the $2 million cap that the City might incur would be reimbursed by the tenant.
Modification to Swinerton Contractual Agreement
On February 28, 2023, the City Council awarded agreement #11365 (CCS) for a total contractual amount not to exceed $9,084,792 for construction associated with core and shell renovations at 3200 Airport Avenue. On March 19, 2024, an additional $500,000 was authorized to address unforeseen conditions and electrical upgrades, bringing the 5 of 7
total contractual amount to $9,584,792. Should the proposed lease with NEON be approved and executed, the City would be responsible for performing tenant improvements of up to $2,000,000. An additional $500,000 would be necessary to accommodate incidentals and tenant-specific scope that NEON might require and reimburse the City for.
The City is obligated to deliver the premises with the substantial tenant improvements to NEON by July 1, 2025. Staff will be unable to select a new vendor through the standard procurement process and also complete the required construction to 3200 Airport Avenue by July 1, 2025. Therefore, staff recommends a second modification to its agreement with its current contractor for this property in an amount not to exceed $12,084,792.
Modification to CRG Agreement
On September 26, 2023, the City executed professional services agreement #11419 with CRG for a total contractual amount of $1,164,803 over five years to provide commercial real estate brokerage services for City properties at the Airport. On December 19, 2023, the City Council authorized a modification to this agreement for an additional $2,259,094 for real estate brokerage services related to the City’s new lease with Snap, Inc, which resulted in a new total contract amount of $3,423,897. Should the proposed lease with NEON be approved and executed, the real estate commission fee due to CRG is estimated to be $251,565. This estimate is based on the commission rates set forth in the City’s agreement with CRG for new non-aviation Airport leases with a fixed term: 6% for years 1-5 and 3% for years 6-10. This amount is higher than budgeted at the time of the original contract and subsequent first modification.
Therefore, staff recommends a second modification to the City’s agreement with CRG for $251,565 for a total amount not to exceed $3,675,462.
Environmental Review
The agreement modifications are categorically exempt from the California Environmental Quality Act (CEQA) under Section 15301. Section 15301 of the CEQA State Guidelines provides Class 1 (existing facilities) exemption for projects that 6 of 7
consists of the operation, repair, maintenance, leasing, licensing, permitting, or minor alteration of existing public or private structures, facilities, mechanical equipment, or topographical features, involving negligible or no expansion of the existing or former use. The agreement modifications would provide for tenant improvements and real estate leasing services at 3200 Airport Avenue and therefore, would not expand or materially change existing facilities or operations. Therefore, the award agreements are categorically exempt as set forth in Section 15301 of the CEQA State Guidelines.
Past Council Actions
Meeting Date Description
08/14/2018 (Attachment A) Santa Monica Leasing and Licensing Policy 09/26/2023 (Attachment B) Original bid and award of PSA agreement with Corporate Realty Group, Inc. for commercial real
estate broker services at the Santa Monica Airport
12/19/2023 (Attachment C) First modification to agreement with Corporate Realty Group, Inc.
02/28/2023 (Attachment D) Original bid and award of agreement with Swinerton Builders for construction of the 3200 Airport Avenue
Renovation
03/19/2024 (Attachment E) First modification to agreement with Swinerton Builders for construction of the 3200 Airport Avenue Renovation
Financial Impacts and Budget Actions
The recommended action is expected to provide a net benefit of $3.5 million to the Airport Fund for the duration of the lease. Budget adjustments would be incorporated into the FY 2025-27 biennial budget, as needed.
Approval of the recommended actions require the following budget amendment. There is sufficient funding in the Airport Fund to support this new appropriation.
Appropriate Funds
Account Number(s) Amount
57500001.552010 $251,565
Total $251,565
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Staff seeks authority to approve available funding from the Airport Fund to increase the amount of the contract with Swinerton Builders for tenant improvements for the 3200 Airport Avenue Renovation project, and to increase the amount of the contract with Corporate Realty Group for commercial real estate leasing services.
Agreement Modification Request Agreement
Agreement
#
Current
Authorized
Amount
FY 2024-25
Request
Amount
Budget CIP
Account #
Total
Revised
Contract
Amount
11365 $9,584,792 $2,500,000 C5704690.689000 $12,084,792 11419 $3,423,897 $251,565 57500001.552010 $3,675,462
Future year funding is contingent on Council budget approval.
Prepared By: Stelios Makrides, Chief Operations Officer – Airport Director Approved Forwarded to Council
Attachments:
A. AIRPORT LEASING AND LICENSING POLICY 2018-08
B. Swinerton - Levine Act Initiative
C. Contract 11419_CRG_Original Agreement
D. Contract 11419_CRG_1st Modification
E. CRG - Levine Act Initiative
F. CRG - Oaks Initiative
G. NEON - Levine Act Initiative
H. NEON - Oaks Initiative
I. Contract 11365_Swinerton_Original Agreement
J. Contract 11365_Swinerton_Change_Order_01
K. Swinerton - Oaks Initiative