Provide direction to the Administration as to whether this term sheet is consistent in concept with the vision of the City Commission and, if so, authorize the Administration to continue its negotiations and develop the appropriate agreements for the City Commission’s consideration, subject to direction as to any policy and business terms.

The RFP proposed redevelopment of the Byron Carlyle Theater and abutting surface lot P85 (together, a combined 31,500 sf), with an option to include surface lot P80 (12,625 sf), which is located across Byron Avenue adjacent to the theater.

Top-ranked Pacific Star proposed an 11-story mixed-use hotel building, whereas Menin’s original RFP submission proposed a 7-story mixed-use residential building with 114 workforce housing units, +9,000 sf retail, +10,000 sf cultural component, and a 5-story office/retail building on surface lot P80. The Developer’s RFP proposal offered public benefits in the form of workforce housing and deeding back the cultural component space to the City (the latter being a mandatory requirement in the RFP). The proposal offered no lump sum or annual rent payments.

Earlier this year, the pandemic temporarily delayed development negotiations and cast uncertainty upon the City Commission’s articulated request that the cultural component include, at a minimum, a black box theater. Since Pacific Star Capital withdrew its proposal, Menin has submitted several revisions to its proposal documents, which no longer contemplate redevelopment of P80 as part of the Project. Negotiation meetings have been conducted almost weekly since that time and Menin provided revisions to its financial pro forma on August 19, September 21, October 28, November 9, and November 30.  

As a guide, the City provided the Developer with a detailed term sheet outline on September 15, 2020 and Menin submitted its written term sheet on November 4, 2020. Several meetings and term sheet revisions have transpired since that time and attached to this Memorandum is Menin’s Presentation and latest Term Sheet dated November 30, 2020.    

Terms

1.             No Proposed Parking. 

The City Commission amended the LDRs to relax parking requirements in the North Beach Town Center, which includes no off-street parking requirement for the 151 workforce housing units or retail uses. If operated as a theater space, the 10,500 sf cultural component could trigger a parking requirement in excess of 200 parking spaces. Notwithstanding, if the site remains zoned as “GU”, the parking requirement can be waived by the City Commission. As currently proposed, the residential units could revert to market rate housing upon expiration of the 30-year restrictive covenant, at which time the residential component would trigger a parking requirement throughout the +60-year remaining balance of the Lease term. Developer submits that there will be ample parking in the buildings surrounding the Project. Given the likelihood that the cultural space will have some theater component (e.g. O Cinema) and that the units would revert to market rate at the end of the 30-year restrictive covenant, the lack of parking is a concern.

2.             Term of Development Agreement and Project Milestones. 

City requested that Developer provide Target Dates and firm Outside Dates be associated with various milestones, i.e., DRB approval, Project Financing, Completion of Construction, and Opening Date. The Developer has proposed an outside date for completion of construction of 7 years from the Effective Date of the Development Agreement (subject to typical extensions such as force majeure delays), and an aspirational 5 years to achieve a Temporary Certificate of Occupancy (TCO). In order to ensure that the Project completion date is timely achieved, the Developer has proposed the following targets for earlier milestones:

• DRB approval- target date of 9 months following Effective Date of Development Agreement for (plus 1 month to exhaust all appeals).
• Completion of construction documents- target date of 1 year following DRB Approval.
• Final Building Permit- target date of 7 months following construction documents completion.

• TCO -5 year aspirational goal / Outside date of 7 years.

3.             Term of Lease / Restrictive Covenant Period for Workforce Housing. 

Developer initially proposed a longer Lease and a proposed “Restrictive Covenant Period” of 25 years for workforce housing, with the ability to thereafter charge tenants market rate rent for the remaining balance of the term.  Previously, Developer proposed that, upon expiration of the Restrictive Covenant Period, Rent would be proffered in the form of a “profit share” arrangement or a percentage of gross receipts. Developer now proposes a Restrictive Covenant Period of 30 years for workforce housing, in exchange for a proposed overall term of the lease of 99 years and elimination of any proffer for profit sharing or percentage rent shared with the City.

The Developer suggests that the provision of workforce housing to support the community serves as a public benefit that merits the City offer the Developer a 99-year lease with a nominal $1 annual rent payment. The Administration respectfully submits that, if workforce housing serves as consideration for the deal, then the Restrictive Covenant Period for the workforce housing should be in place for at least half of the term of the Lease, if not longer. 

4.             Rent of $1 per Year and Project Financial Valuation. 

In exchange for the proposed lease term of 99 years, Developer proposes that the City receive (1) the “gray shell” for the Cultural Center, with a  value purported by the Developer of $5.1 million, (2) workforce housing for a period of 30 years, and (3) annual rent of $1 per year. (The Developer previously offered to include an unspecified “profit-share” arrangement, but has since withdrew this term after agreeing to increase its contribution for tenant improvement buildout of the cultural Center from $1,000,000 to $1,500,000). 

The Administration believes that, if the proposed Lease is to provide Developer with the ability to charge tenants market rate rent for any period of time, subject to a financial valuation of the proposed Lease, the City should charge the Developer market rate rent for that period (factoring in the benefits to the City of the build out of the Cultural Center gray shell). In the absence of a financial valuation of the Lease, the Administration cannot formulate a recommendation as to whether the City is receiving fair market value for the Lease. Presently the percentage of rent and other value conferred upon the City pursuant to past long-term lease agreements is being evaluated by independent analysis, as required by City Commission Resolution No. 2019-30853 and City Code Section 82-39, requiring independent appraisal of the fair market or rental value of a property.  The Administration recommends that this financial analysis by a third-party financial consultant/appraiser be obtained and reviewed by the City Commission prior to proceeding with first reading of the Development Agreement and Ground Lease.

5.             Workforce Housing Tenant Income Mix. 

The Administration has recommended that the agreements provide parameters for targeting a diverse mix of workforce housing income ranges.  Under Chapter 58 of the City Code, households are considered “workforce” when their total household income is between 65% and 140% of area median income (AMI) for Miami-Dade County.  Presently, Miami-Dade County AMI (2020) is $59,100.  By comparison, in 2019, the median household income in North Beach was $43,439.

The Developer proposes to reflect a tenant mix with at least 20% of tenants at 100% AMI or less, and all other housing units in the Project shall be capped at 140% AMI.  If the Project was leased and occupied today at these proposed income levels, 80% of tenants would reflect single-person households with annual income of $89,600 (140% AMI in 2020). In contrast, the City’s 2019 Environmental Scan indicates that 70.8% of North Beach households (of all sizes—not just single persons) earned under $75,000. The Administration recognizes that the Developer deserves credit for proposing to introduce workforce housing in North Beach, but the proposed tenant income mix reflects above-market rates for North Beach, an area where 20.1% of individuals are categorized by the U.S. Census Bureau as below the poverty level (2019).

Subject to City Commission direction as to the policy objectives it would like to achieve, the Administration would recommend that the Lease include specific mechanisms to ensure the Project is accessible to workforce housing tenants across a mix of income ranges. 

6.             Process for Placement of Eligible Workforce Housing Residents.

The Developer has agreed that the process for placement of income-eligible residents – whether via a lottery system or other fair and equitable process—be subject to City approval. The Developer proposes to give priority to the following: City employees, any teachers working in Miami Beach (whether public or private schools), and medical personnel working in Miami Beach (collectively, “Tier 1”).  If there are insufficient income-eligible Tier 1 applicants for residence, the Developer proposes placement via a lottery system for all other income-eligible tenants.  In addition, the Administration proposes that the placement process and requisite City approval be established in the Lease, as a proprietary approval by the City, as Lessor.^[i]   

7.             “Gray Shell” for Cultural Center and Purported $5.1 Million Value.

The RFP’s Submittal Instructions and Project Requirements both stated that “The Cultural Component Space may be delivered as shell space (to be built out by owner), but must include base mechanical systems (i.e. HVAC, electrical, plumbing). No project will be considered without this minimum cultural component.” Instead, Developer proposes to deliver to the City a ground floor “gray shell” (cold shell) finish for the Cultural Center, consisting of a space that “includes bare stud walls, unfinished floors, with a point of connection for sewer within the space and electrical service within the electrical room.” In addition, the Developer is offering $1.5 million for buildout of the tenant space in the Cultural Center (the “Build Out”). Developer proposes that, upon receiving building permit approval, Developer will deliver to the City either a letter of credit or cash bond to secure the $1.5M commitment for the Build Out. If the City selects a tenant for the space within 60 days upon Developer obtaining a building permit, Developer will provide construction services for the Build Out as part of the Project construction.   If the City fails to select a tenant within 60 days of building permit issuance, the Developer proposes that the City be responsible for Build Out, with the $1.5M funds provided by Developer in escrow, and available to the City only for draws to cover hard and soft costs for the Build Out.

The Developer suggests that the direct costs associated with the Cultural Center are $5.1 million. The Administration recommends that, if the Developer’s costs of the Cultural Center are less than $5.1 million, the savings be applied to the Build Out of the Cultural Center. However, if the City Commission accepts the Developer’s assertion that the amount of $5.1 million—the purported cost of the Cultural Center—is sufficient consideration to warrant an $1 annual rent payment,   then $5.1 million in tangible benefits should be provided to the City. Despite the Developer’s proposal otherwise, the RFP’s mandatory project requirements stated that: “The Cultural Component Space may be delivered as shell space (to be built out by owner), but must include base mechanical systems (i.e. HVAC, electrical, plumbing). No project will be considered without this minimum cultural component.”  The current proposal is not in compliance with this RFP requirement.

8.             Condition of Property & Environmental Costs

Obtaining an environmental site assessment is an essential part of the due diligence process for any developer embarking upon a commercial real estate transaction. Most lenders require an environmental assessment of commercial property and banks will often oversee the consultant performing the study.

The Developer agrees to accept the Property in its “as is” condition, subject to review of the environmental phase I and/or II reports, to be obtained for the Project, if any, and confirmation of the non-existence of any environmentally hazardous materials or conditions affecting the property and/or abutting or adjacent properties. As the City is not able to make representations as to environmental condition until the phase 1 phase 2 reports are completed, the Development Agreement will include a due diligence period to permit the Developer to perform any environmental assessment reports and estimate any environmental remediation costs prior to the Project’s financial close and Lease Possession Date. The City has agreed to be responsible for any remediation necessary, up to a maximum City contribution of $350,000. Any amount in excess of $350,000 shall be approved by the City Commission at its sole discretion. If the City Commission declines to cover any excess costs, Developer has the option to either cover costs and proceed with the Project or terminate the agreement for convenience.

The Developer has not agreed to perform demolition of the existing structure unless the City provided a “soft credit” for equivalent amounts of permitting fees. Demolition is universally recognized as part of the construction process in real estate development and is incumbent upon the developer to perform. Moreover, the RFP’s Project Requirements clearly stated: “Scope. Pursuant to a long-term lease agreement, the Developer will design, finance, and build the project (demolition of existing theater structure and construction of all new improvements).”  While the Developer has insisted that the Administration refrain from injecting additional costs not properly noticed in the RFP solicitation, it is similarly inequitable for the Developer to disavow terms clearly drawn when the Developer submitted a bid.

9.             Proposed Purchase of Additional F.A.R. from Adjacent Private Property.

The Developer proposes that the City Commission, as part of the Development Agreement, authorize the Developer to purchase approximately 14,000 sq. ft. of excess floor area from the adjacent property at 6971 Carlyle Avenue, in order to incorporate the additional FAR as part of the Project. 

Pursuant to Section 118-5 of the Code, and as permitted by Section 1.03(c) of the City Charter, property owners with fee simple title to abutting parcels may execute a covenant in lieu of unity of title, to aggregate development rights on those unified abutting parcels (without the need for a voter referendum to increase the F.A.R. for the project).  Although the above approach may be permitted under the City Code, the City Commission, as the owner of the property, has no obligation to approve the arrangement if it does not approve proceeding with a unified development site to add 14,000 sq. ft. to the Project.  Accordingly, the Developer would have no entitlement to proceed with a unified development site, unless the City Commission, as owner of the property, granted such rights in the Development Agreement.

Furthermore, pursuant to Code Section 142-746(c), in order to transfer available FAR from 6971 Carlyle Avenue to the Project, the building at 6971 Carlyle Avenue must either be brought into conformance with TC-C regulations or formally declared as architecturally significant and perpetually maintained in compliance with historic preservation requirements specified in the Code.  

The decision to depart from the RFP requirements and develop a larger project as a unified development site, with the additional F.A.R. conferred by virtue of the excess F.A.R. available for purchase from the adjacent property, is a policy decision for the City Commission to determine, at its discretion. To this end, the Administration recommends that if the City Commission wishes to authorize the proposed arrangement of a unified development site to add 14,000 square feet to the project, the City should receive additional square footage in the cultural component. Any allowance for the purchase of FAR would constitute a concession from the City to the Developer and the City should receive additional public benefit.

Exhibit A – Developer Proposed Terms dated November 30, 2020

Exhibit B – Developer Pro Forma dated November 30, 2020

[i]   Proprietary vs. Regulatory Approvals.  The City’s approval rights are not limited to whatever is provided in the City Code, in City’s regulatory capacity. This is a proposed Ground Lease, whereby the City is not only acting in a regulatory capacity, but as the Lessor and owner of the Property.  For this reason, all of the Leases the City has negotiated provide the City with various rights of approval – in the City’s proprietary capacity as owner, and not just in furtherance of a limited, regulatory function. The Administration sees no reason to approach its right of approvals any differently here than it has under any other City lease.

While the City does not stand to gain recurring revenue or lump sum payment, indirect public benefits are proposed. The City’s financial responsibility is limited to potential, yet-to-be-determined environmental costs as well as the costs associated with build out of the cultural component in excess of the $1.5 Million proffer.  The totality of the value to both parties is not available to be confirmed until the financial analysis is complete by the independent appraiser.  On November 13, 2020 the Finance and Economic Resiliency Committee heard the item and referred it to the full Commission on December 9, 2020 without a recommendation directing the Administration to continue to negotiate the terms.

Subject to direction as to the policy and business issues outlined in this Memorandum, the Administration recommends that the City Commission review the term sheet in concept and, if the City Commission determines, authorize the Administration to continue its financial analysis and negotiations in order to develop the appropriate agreements for the City Commission’s consideration.

Pursuant to Section 1.03(b)(4) of the City Charter governing leases of ten years or longer for City-owned property, the Ground Lease requires approval by a majority 4/7 vote of the Planning Board and 6/7 vote of the City Commission. Accordingly, the Administration requests that the City Commission refer the Project and draft agreements to the appropriate land use boards for review, in accordance with the requirements of the City Charter and City Code.