2.1.
CC Work Session
- Meeting Date:
- 12/12/2017
Information
Title:
6745 Highway 10 Lease Renewal Request
Purpose/Background:
BACKGROUND
The City purchased 6745 Highway 10 in 2006. Since then, the City has attempted to lease the property back to the private sector. In 2011, City negotiated a 5-year lease agreement with Independent Auto for use of 6745. The original lease term began February 2012, and is set to expire in March of 2018. Attached is the original lease agreement (reference map on last page).
The original lease agreement provides a 3-year renewal/ option-period for the tenant, at the identical rent rate currently being paid (i.e. no increase in rent for 3-years). The original lease agreement also contains several provisions that allow the City to not renew the lease. Independent Auto is seeking to renew the lease for an additional 3-year term, at the rate outlined in the original lease agreement (i.e. the same rent rate they are paying now).
City staff would like to discuss alternatives for proceeding with this lease agreement. Included in this case are three alternatives. Based on feedback from the City Council in worksession, staff will bring back formal a formal case in January. Independent Auto and Premier Commercial Realty were invited to attend the Council worksession.
OBSERVATIONS
Staff, Independent Auto, Premier Commercial Realty, and the City Attorney believe inconsistencies and ambiguity exists within the original lease agreement language. Said inconsistencies are resulting mixed expectations for the landlord and tenant, and have created several issues with administering this lease agreement. As a result, if the lease were to be renewed, City staff would strongly recommend the original lease agreement be completely redrafted.
The original lease agreement for 6745 was drafted/ approved previous to the City having a formal policy for leasing City-owned land or a template lease agreement (2011). At that time, lease agreements were drafted on a case-by-case basis. Since 2011, the City has adopted a template lease agreement and lease policy.
6745 Highway 10 is not a high-quality building/ property, and is in poor/ fair condition. Property maintenance issues are an ongoing problem. Premier Commercial recently did a survey of the building/ property to see what maintenance items were outstanding (fall 2017). Premier came up with estimations totaling well over $100,000 of property maintenance needs now, or in the foreseeable future (next 1-5 years). Several life/ safety improvements were identified by the City's Building Official and Fire Marshal. Staff immediately addressed/ completed all life/ safety improvements (to keep up with City Code). Remaining/ additional maintenance items identified for the next 1-5 years included: asphalt replacement/ patching, replace/ repair concrete aprons creating flooding issues, repair/ replace sidewalk, repair decaying siding, paint/ pressure wash exterior, pit area repair and maintenance/ paint, ongoing electrical conduit repairs, garage door repairs, roof repairs. See attached.
Examples of items that need to be addressed within a new lease agreement:
(1) Building/ property maintenance issues.
The new lease agreement will clearly define who is responsible for what maintenance. The lease currently has conflicting language. This is resulting in growing frustration from all parties involved with this lease agreement.
ALTERNATIVES
The City purchased 6745 Highway 10 in 2006. Since then, the City has attempted to lease the property back to the private sector. In 2011, City negotiated a 5-year lease agreement with Independent Auto for use of 6745. The original lease term began February 2012, and is set to expire in March of 2018. Attached is the original lease agreement (reference map on last page).
The original lease agreement provides a 3-year renewal/ option-period for the tenant, at the identical rent rate currently being paid (i.e. no increase in rent for 3-years). The original lease agreement also contains several provisions that allow the City to not renew the lease. Independent Auto is seeking to renew the lease for an additional 3-year term, at the rate outlined in the original lease agreement (i.e. the same rent rate they are paying now).
City staff would like to discuss alternatives for proceeding with this lease agreement. Included in this case are three alternatives. Based on feedback from the City Council in worksession, staff will bring back formal a formal case in January. Independent Auto and Premier Commercial Realty were invited to attend the Council worksession.
OBSERVATIONS
Staff, Independent Auto, Premier Commercial Realty, and the City Attorney believe inconsistencies and ambiguity exists within the original lease agreement language. Said inconsistencies are resulting mixed expectations for the landlord and tenant, and have created several issues with administering this lease agreement. As a result, if the lease were to be renewed, City staff would strongly recommend the original lease agreement be completely redrafted.
The original lease agreement for 6745 was drafted/ approved previous to the City having a formal policy for leasing City-owned land or a template lease agreement (2011). At that time, lease agreements were drafted on a case-by-case basis. Since 2011, the City has adopted a template lease agreement and lease policy.
6745 Highway 10 is not a high-quality building/ property, and is in poor/ fair condition. Property maintenance issues are an ongoing problem. Premier Commercial recently did a survey of the building/ property to see what maintenance items were outstanding (fall 2017). Premier came up with estimations totaling well over $100,000 of property maintenance needs now, or in the foreseeable future (next 1-5 years). Several life/ safety improvements were identified by the City's Building Official and Fire Marshal. Staff immediately addressed/ completed all life/ safety improvements (to keep up with City Code). Remaining/ additional maintenance items identified for the next 1-5 years included: asphalt replacement/ patching, replace/ repair concrete aprons creating flooding issues, repair/ replace sidewalk, repair decaying siding, paint/ pressure wash exterior, pit area repair and maintenance/ paint, ongoing electrical conduit repairs, garage door repairs, roof repairs. See attached.
Examples of items that need to be addressed within a new lease agreement:
(1) Building/ property maintenance issues.
The new lease agreement will clearly define who is responsible for what maintenance. The lease currently has conflicting language. This is resulting in growing frustration from all parties involved with this lease agreement.
Independent Auto’s current rent rate is below market. If this lease is renewed per the original lease agreement language, it would stay below market rates. If the City moved forward with a lease renewal, staff would strongly recommend all property maintenance be the responsibility of the tenant (including structural). In other words, the tenant is taking the property as-is. Staff would support working with Independent Auto before this lease renewal, to see what items need to be fixed. The City may be able to participate in a one time upfront limited property maintenance investment (for example, not-to-exceed $10,000). We do have some limited surplus RALF funds available from this lease agreement. However, staff would not support ongoing/ open-ended property maintenance responsibility based on this lease rate.
(2) Zoning code and building code compliance.
Code compliance has been a problem with 6745 (storage of inoperable vehicles, amount of stored vehicles, storage of tires, exposed electrical wires, oil-water separates, building safety items, etc.). More specifically, who's responsible for addressing what code compliance issues, and when (tenant or landlord)? Staff would like to clarify/ re-write language pertaining to this item in the new lease agreement. This would specifically include a default process/ penalties/ inspections. The City will require the tenant to keep the property/ building up to code, at their cost, moving forward.
Code compliance has been a problem with 6745 (storage of inoperable vehicles, amount of stored vehicles, storage of tires, exposed electrical wires, oil-water separates, building safety items, etc.). More specifically, who's responsible for addressing what code compliance issues, and when (tenant or landlord)? Staff would like to clarify/ re-write language pertaining to this item in the new lease agreement. This would specifically include a default process/ penalties/ inspections. The City will require the tenant to keep the property/ building up to code, at their cost, moving forward.
(3) Late rent payments.
Late rent payments have been an ongoing item with this lease agreement. The existing lease language doesn't have a late fee, for late rent payments. This item will be addressed within the new lease agreement. If violations exist, the City will have enforcement/ default provisions within the lease.
ALTERNATIVES
(A) Do not renew the lease.
Allow the current lease term to expire. In this scenario, due to the status of the building, staff would recommend consideration of demolishing and cleaning up the site. Independent Auto is opposed to this option.
(B) Renew the lease, at the rent rate outlined in the original agreement.
Tenant is in favor of this option, and feels this is what was agreed to by the City. The original lease agreement shows a provision allowing for a 3-year extension, at the existing lease rate. As mentioned, the lease agreement also includes provisions that allow the City to not renew the lease agreement. If this alterative is selected, staff would strongly recommend a complete rewrite of the lease agreement, to address the items outlined in the observations section of this case; and to come into compliance with the City's template lease agreement.
(C) Renew the lease, and adjust the rent rate up to market.
Staff anticipates the tenant would be opposed to this option, that it would be a hardship for the tenant's operations, that the tenant would feel this alternative is unfair treatment, and would be a deviation from the original agreement. It's staff's assumption, if the tenant were to be accepting of this option, they would likely want the City to be responsible for all/most property maintenance. Due to the poor shape of the building, and the status of the relationship with the tenant/ history, staff does not recommend this alterative. This alternative would expose the City to a significant liability, which is known to be well over $100,000. And, it would expose staff to a large workload (i.e. trouble shooting maintenance requests and managing maintenance projects requests on a regular basis).
Allow the current lease term to expire. In this scenario, due to the status of the building, staff would recommend consideration of demolishing and cleaning up the site. Independent Auto is opposed to this option.
(B) Renew the lease, at the rent rate outlined in the original agreement.
Tenant is in favor of this option, and feels this is what was agreed to by the City. The original lease agreement shows a provision allowing for a 3-year extension, at the existing lease rate. As mentioned, the lease agreement also includes provisions that allow the City to not renew the lease agreement. If this alterative is selected, staff would strongly recommend a complete rewrite of the lease agreement, to address the items outlined in the observations section of this case; and to come into compliance with the City's template lease agreement.
(C) Renew the lease, and adjust the rent rate up to market.
Staff anticipates the tenant would be opposed to this option, that it would be a hardship for the tenant's operations, that the tenant would feel this alternative is unfair treatment, and would be a deviation from the original agreement. It's staff's assumption, if the tenant were to be accepting of this option, they would likely want the City to be responsible for all/most property maintenance. Due to the poor shape of the building, and the status of the relationship with the tenant/ history, staff does not recommend this alterative. This alternative would expose the City to a significant liability, which is known to be well over $100,000. And, it would expose staff to a large workload (i.e. trouble shooting maintenance requests and managing maintenance projects requests on a regular basis).
Timeframe:
5-20 minutes
Funding Source:
NA
Responsible Party(ies):
Brama
Outcome:
Direction on the alternatives outlined in this case.
Attachments
Form Review
| Inbox | Reviewed By | Date |
|---|---|---|
| Kurt Ulrich | Jo Thieling | 11/22/2017 11:55 AM |
| Kurt Ulrich | Kurt Ulrich | 12/07/2017 11:16 AM |
- Form Started By:
- Patrick Brama
- Started On:
- 11/21/2017 08:05 AM
- Final Approval Date:
- 12/07/2017