On January 18, 2019, the City issued Request for Proposals No. 2019-100-KB for development of a mixed-use project with a cultural component at the Byron Carlyle Theater site (the “RFP”).

On October 19, 2019, the City Commission adopted Resolution No. 2019-30149 and authorized negotiations with the two entities that provided responses to the RFP, Pacific Star Capital, LLC and Menin Hospitality/KGTC, LLC (“Menin” or “Developer”).

On August 3, 2020, via Letter to Commission 275-2020, the Administration notified the City Commission that Pacific Star Capital, LLC had withdrawn its proposal, and that City staff intended to negotiate with Menin, the sole remaining proposer.

On November 13, 2020, the Finance and Economic Resiliency Committee reviewed the Developer’s proposed terms and recommended the City Commission authorize negotiations with Menin to develop the Project.

On December 9, 2020, the City Commission reviewed the Developer’s initial term sheet and requested that, upon completion of independent analysis by consultants, certain terms be negotiated further, including increasing the value attributed to the proposed cultural component (the “Cultural Center”).

On December 9, 2020, the City Commission directed the Administration to (1) complete its due diligence analysis performed by outside independent consultants (including a property appraisal, financial analysis of project terms, and environmental site assessment), and (2) work with the Developer to concentrate on several key components of the proposed deal, including, without limitation, maximizing the value of the Cultural Center, ensuring timely delivery of the completed Project, and providing as many overall public benefits as possible.

The latest, revised Project Term Sheet, representing Developer’s “Best and Final” offer, is attached as Exhibit A to this Memorandum.

Transaction Structure and Sale of the Property

The previous term sheet provided for a lease term of 99 years with no renewal periods. A long-term ground lease of 99 years is tantamount to a fee simple sale because the reversionary interest upon lease expiration is so distantly removed.

In the interest of working with Developer to present a “best and final” offer for the City Commission’s consideration, the Administration believed it is in the best interest of the City to explore ALL potential options to creatively achieve the delivery of the Project, including the option of a sale of the Project under a condominium structure, with the City to receive full ownership and control of the Cultural Center condominium unit.   

The current proposal provides that the City would temporarily lease the Property to the Developer only during the construction period, so that the City retains ownership and control of the entire Property, and does not sell the Property, until the Project is completed.  Upon construction completion, the City would sell the Property to the Developer, the Property would be condominiumized, and the City would receive a warranty deed with full ownership and control of the new Cultural Center, without restriction, along with a cash payment of $2 million at Closing. 

Combined, the consideration to the City of the Cultural Center and the cash payment of $2 million significantly exceeds the appraised value of the Property (i.e. the value of the proposed grey shell Cultural Center, together with the $2 million cash payment, will exceed the current value of the Property by at least $1 million, as explained further below), thereby ensuring a maximum public benefit to the City (consistent with the goals established by the City Commission at its December 9, 2020 meeting).

The Administration recommends the proposed structure, as reflected in the attached Term Sheet, as a more straightforward approach that yields greater benefits to the City.

Independent Consultant Reports

·       Environmental Site Assessment (“ESA”) by E Sciences, Inc.

On January 22, 2021, the Phase 1 ESA report concluded that the Byron Carlyle site is “clean” and without evidence of hazardous substances. Whereas the previous term sheet reviewed by the City Commission held the City responsible for amounts up to $350,000 related to any potential environmental remediation, this liability to the City has been removed following completion of the ESA. Accordingly, under the proposed term sheet, Developer is solely responsible for all construction, demolition and environmental costs associated with the Project, and City has no financial or other obligations with respect thereto.   

·       Land Value Appraisal (the “Appraisal”) by Cushman & Wakefield – See Exhibit B

On February 5, 2021, the Appraisal concluded that the City’s existing fee simple interest in the Property has a fair market value of $6 million. The Appraisal notes that its site valuation is based on the zoning code and not the Developer’s proposed plans. The appraisers determined that a market participant would seek underwriting of maximum development potential of 152 workforce housing units. The Appraisal concluded that workforce, rather than market rate housing, is the most viable housing model for a developer, since the TC-C zoning district incentivizes workforce (e.g., an 80% density bonus and zero off-street parking requirement).

The Appraisal also notes that “we do not believe the existing improvements have any remaining economic value and [we] have deducted demolition costs” before arriving at the $6 million land value conclusion. The cost associated with demolition of the existing structure is projected at approximately $113,340, based on demolition costs of $4 per square foot. It is important to note that since the City Commission last reviewed a term sheet, the Developer now agrees to assume costs associated with demolition and site preparation, estimated to be more than $100,000.  

·       Economic Analysis and Appraisal (the “Report”) by Colliers International – See Exhibit C

On February 19, 2021, the Report concluded that the City’s existing fee simple interest in the Property has a fair market value of $4.7 million, an estimated value of $5.3 million for the “grey shell” Cultural Center, and the Project will be valued at $46.8 million upon stabilization. The report’s executive summary notes that the proposed development would lease up very quickly because workforce housing is in high demand, enhance the surrounding area, and generate a positive impact to the City as it relates to employment, sales taxes, and property taxes.

The Report projects the following impacts from the Project:

• One-time $60 million in output and 427 temporary jobs earning $28 million during construction
• $120,000 in one-time consumption and production taxes from development (excluding property taxes and impact fees)
• $16 million in annual output and 119 permanent jobs earning $5 million associated with recurring annual retail sales, Cultural Center activities, and consumption expenditures from new households, occurring every year (2021 dollars)  
• The addition of 151 multi-family units targeting workforce households will create roughly $9 million in aggregate household income and generate $2.2 million in annual demand for food-away-from-home, retail, and entertainment spending
• $75,000 annually in consumption and use taxes from annual retail, Cultural Center activities, and household consumer spending (excluding property taxes) solely benefiting the City each year (constant 2021 dollars), and an additional $535,000 annually benefitting other State and Local taxing jurisdictions.

Given the results of the consultant independent analyses, the proposed deal terms are of significantly greater value than when the City Commission last reviewed the Project.

Value of existing site:                                                  $4.7 - $ 6.0 million

Developer’s Cost for Grey Shell Cultural Center:      $ 5.3 million

+ Cash Payment to City:                                            $ 2.0 million

= Total Value of Cultural Center                                 $ 7.3 million

Not only does the City stand to gain a Cultural Center valued significantly greater than the Property is currently worth, but the revised Term Sheet now provides that the City will have no financial obligations for site preparation costs (demolition and remediation, if any), all of which will be covered by the Developer.

At the request of the Administration the Capital Improvement Projects (CIP) Department has provided planning level estimates for some of the potential construction costs.  The value of the grey shell was estimated at approximately $5.6 million.  In addition, CIP was asked to estimate the build out of the Cultural Center for our selected Cultural Partner after delivery by the Developer of the grey shell.  Obviously, as we do not know who our future Cultural Partner may be, it is impossible to anticipate the actual needs but based upon construction costs for build out of anywhere from $300 to $600 per square foot for high end to extremely high end finishes it may cost anywhere between an additional $5 – $10 million in order to complete the facility into a finished product ready for use.

Residential and Commercial Uses

Whereas the previous term sheet provided for the development of 151 workforce housing units, the Developer has requested the flexibility to allow the market to determine which type of multifamily residential units to include in the Project. It should be noted that the City’s outside real estate appraisers believe that workforce housing is the most likely development model, since the City Code allows for a greater density than market rate units and no parking requirement is associated with workforce units.

The proposed term sheet does not require the Developer to stipulate to workforce housing. This was not a requirement of the initial RFP, which focused on delivery of a Cultural Center component. If, however, the Developer endeavors to benefit from the Code incentives for workforce housing, the Developer will be required to record a restrictive covenant maintaining the affordability of the units for a period of no less than 20 years.

In addition to the Cultural Center, the ground floor of the Project will contain shared back of house service areas and commercial retail space available for lease (previously estimated at 9,000 sf).

The Developer has agreed to provide the City with the right of first option to lease the remaining ground floor commercial area, or portions thereof, at market rates, for additional space for the City’s Cultural Center tenant or for other City purposes. If, however, the City does not elect to rent any ground floor commercial space, the Developer will be permitted to use such available spaces for the following uses: artisanal retail (for on-site sales only); grocery stores; alcoholic beverage establishments (except stand-alone bars); offices; restaurants or outdoor café options; or retail. The following uses are explicitly prohibited from the Project: hotels; micro-hotels; co-living units; indoor entertainment establishments (other than the Cultural Center); stand-alone bars; and neighborhood fulfilment centers.

Parking

The terms provide that the City Commission will waive the required off-street parking for the Cultural Center, estimated at approximately 200 parking spaces. This is the only required parking believed to be associated with the Project, assuming the Developer constructs workforce housing and retail uses, neither of which have a parking requirement in the Town Center Central Core district. The Developer pledges to utilize best efforts to make available to the City or its Cultural Center tenant, at the Developer’s then-prevailing market rates, parking for up to 10% of the total seating capacity at the Cultural Center (or up to a maximum of 30 spaces, whichever is less) at a location within reasonable distance of the Project. This additional concession is in contrast to the previous term sheet, where the Developer proffered no parking accommodation.

The proposed Cultural Center, which will occupy and use approximately half of the ground-floor space of the property, was valued by the financial analysis approximately equivalent to the current value of the entire Property. Beyond the value of the Cultural Center, the City will also receive a $2 million cash payment at Closing (i.e. following completion of the Project) which can be used in the build-out for the needs of the future cultural partner or, for any other purpose as the City deems advisable. The City’s financial responsibility is limited to the costs associated with the build-out of the Cultural Center. The actual build-out cost cannot be determined at this time as we do not know the needs of our future cultural partner that will occupy this space.

The Administration recommends that the City Commission approve the attached Term Sheet and authorize the Administration and City Attorney’s Office to negotiate final agreements with the Developer, in accordance with the business terms contained in the Term Sheet.

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, including the Planning Board, in accordance with the requirements of the City Charter and City Code.