Consideration and Approval of Resolution No. 2024-12:  A Resolution of the Flagstaff City Council, authorizing a Ground Lease and Master Development Services Agreement with Genterra Enterprises, LLC for the lease and development of approximately 31.468 acres of land located at 456 W. John Wesley Powell Boulevard near the Flagstaff Pulliam Airport; and establishing an effective date.
 

The City owns approximately 31.468 acres of land adjacent to Flagstaff Pulliam Airport that is zoned for Highway Commercial (HC) development ("the Property").   The Property was deeded to the City by the Federal Aviation Administration ("FAA") with the intention that any development or revenues generated be for the benefit of the Airport.  The Property may not be developed for residential use, as this would not be consistent with Airport operations (noise). 

The City Council is being requested to consider approval of a Master Development Services and Ground Lease Agreement ("Agreement") with Genterra Enterprises, LLC, an Arizona limited liability company ("the Developer"). Timothy Kinney serves as its manager.  

The City has been negotiating with Developer to develop the Property since 2021. As proposed, City and Developer will enter into a Ground Lease and Master Development Services Agreement (“Agreement”). Developer will construct the public infrastructure, build a Research Park for commercial/research and development use, and pay fair market value rent to City for the ground lease.
 
The primary terms of the Agreement are summarized as set forth below:

• The lease term is 40 years, with option to renew for up to two additional 25-year terms.
• The lessee will pay fair rental value ("FRV") over the term of the lease (see rent schedule attached to Agreement). 
  • Based on a recent appraisal, the parties have agreed that FRV at the outset of the lease is $527,500.  Rent will increase by 2% annually.  A new appraisal may be obtained every five (5) years and at that time rent will be adjusted to current FRV.
  • Rent is deferred in years 1-4 of the lease, then recovered via deferred rent payments with accrued 2.65% annual interest over a 15 year amortization (payback) period.  The interest rate is the previous 10 year Treasury Securities average based on economic data. Similar to what the City would earn on our reserved cash funds.
  • Rent is paid per a variable rent schedule as follows:
    • Year 1: 10% of FRV, as City is reserving the right to use the Property during this period.
    • Years 2-4: 50% of FRV.
    • Years 5-9: 75% of FRV, plus payment of deferred rent of $58,404.00 annually.
    • Years 10-17: 100% of FRV, plus payment of deferred rent of $58,404.00 and "recapture rent" of $243,650.64 annually.
    • Years 18-19: 100% of FRV, plus payment of deferred rent of $58,404.00 annually.
    • Year 20-end of term:  100% of FRV.
  • The recapture rent is paid in consideration of the variable rent schedule in Years 2-20.
• Use of the property is restricted. No residential housing is allowed per FAA. No more than 50% of the property may be used for short-term lodging, retail, or restaurant uses.  The intent is to develop property for research and development and Airport-related industries.
• Lessee is required to construct public infrastructure for the Property (may exceed $30 million cost).
• The lessee is given leeway as to the timing of development, based on market conditions.
  • The Development Plan needs to be completed within 30 months from lease start.
  • The project may be built in phases.
  • Any construction phase needs to be completed in three (3) years.
  • Full build-out is to be achieved within 25 years.
• Lessee has the option to terminate the lease prior to starting construction of public infrastructure, and in this case full FRV is due through the termination date.
• If City fails to approve the Lessee’s Development Plan even though it complies with City Code and the Lease, then City will be deemed in breach, will forfeit its right to recapture deferred rent, and will need to reimburse up to $3.74 million to Lessee as damages.
  • A Development Plan is defined per current City Code.
• Lessee has the option of securing financing from non-traditional sources (e.g. private equity partners) versus traditional lenders. The leasehold interest may be used as security for financing purposes. 
• Lessee will construct (or allow sub-lessees to construct) Research Park buildings.
• Buildings will need to meet or exceed sustainability standards adopted by the City.
• All Research Park buildings will be privately owned and subject to property tax.
• At the end of the lease, ownership of the buildings will revert to the City.

The Agreement will be attached prior to the March 19th City Council meeting. 

Project Name:  Airport lease of 31.468 acres of land
Cost: The City has incurred costs for appraisal services, financial consulting, and outside legal counsel as part of contract negotiations.  These costs were funded within the Airport operating funds.  No further costs are anticipated related to the approval of this lease. City will start receiving rent in Year 5 of the Lease. Lease revenues will be used for support of the Flagstaff Pulliam Airport.
Fund responsibility:  Airport Fund.  This fund will be responsible for managing the lease agreement and will received the revenues associated with the lease agreement. Lease revenues will begin at $527,500 per year but will deferred initially with all funds recouped over time.  
FY Budgeted Amount:  No expenditures related to approving this lease agreement.  
 

2021 - 2023 -  A handful of Executive Session for legal advice and property negotiations.
June 2021 – Council enters into Reimbursement Agreement, agreeing to reimburse Genterra for up to $100,000 of third-party costs if no agreement is reached.
May 2021 – Council enters into Pre-development Agreement committing to exclusive negotiations with Genterra for 5 years.
Dec 2020 – Council authorizes contract negotiations with Genterra.
August 2020 – City issues an Request for Statement of Qualifications (RSOQ) for Master Development Services.
April 2020 - Development Study Presented to Council. Council gives direction to lease (versus sell) the land.
September 2019 - Development Study commissioned by the City to determine best uses for the 31 acres.

1.  Approve Agreement (Recommended).
2.  Do not approve Agreement, and provide direction for further negotiation of the Agreement.
3.  Do not approve Agreement, and reimburse Genterra for up to $100,000 of its third-party costs, per separate Reimbursement Agreement. This would enable the City to start over with a new solicitation for sale or lease of the Property.

Liveable Community:  Support diverse employment opportunities and high quality jobs

Policy LU.15.1. Encourage the grouping of medical and professional offices, light industrial, research, and skill training with other necessary workforce services and
transportation options.
Policy CD.1.5. Require that new development pay for a fair and rough proportional share of public facilities, services, and infrastructure.
Policy E.1.4. Promote cost-effective, energy-efficient technologies and design in all new and retrofit buildings for residential, commercial, and industrial projects.
Policy ED.4.5. In an effort to promote the sustainability of resources, the City will encourage all new and expanded commercial and industrial development to be
energy and water efficient.
Goal ED. 5.The Pulliam Airport will continue to serve the Northern Arizona region for air transportation, multimodal connectivity and business growth potential.

Reduce Building Energy Use.
Encourage business development for businesses that have lower or beneficial impacts on natural resources.