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HomeMy WebLinkAbout10/1/2008 - STAFF REPORTS - RA.3. �O pALM sp4 c v � ��ffOR4rtx'R, fx x C'4f7FO �p Community Redevelopment Agency Staff Report DATE: OCTOBER 1, 2008 NEW BUSINESS SUBJECT: REQUEST BY SUNQUITZ, LLC (LAURICH PROPERTIES) FOR AGENCY ASSISTANCE IN THE DEVELOPMENT OF A VONS- ANCHORED SHOPPING CENTER AT THE NORTHWEST CORNER OF SUNRISE WAY AND TAHQUITZ CANYON WAY, SECTION 14 (MERGED AREA #2) FROM: David H. Ready, Executive Director BY: Community & Economic Development Department SUMMARY: The developer of a 8.74-acre Vons-anchored shopping center at the northwest corner of Sunrise Way and Tahquitz Canyon Way has made a request for Agency assistance in order to move forward with the project. The shopping center was approved by the City Council on March 15, 2006 and the Developer has worked since that time to finalize the two Indian leases for the site, as well as work through a number of cost increases that have required some redesign of elements of the project. In the end, the combination of increased development impact fees, such as TUMF, an increase in the appraised value of the parcels, and increased costs of materials and construction, have created a financing gap in the project of approximately $1.5 million. The developer has made a request for Agency assistance that is a combination of relief on a portion of Vons' ground lease, as well as the construction of certain oft-site improvements. RECOMMENDATION: 1. Direct Staff to Return to the Agency with an Agreement, fs"EA4 PiO.�.—1 BACKGROUND: Sunquitz, LLC (Laurich Properties of Las Vegas, Nevada), the developer (the "Developer") of an 8.74-acre Vons-anchored shopping center at the northwest corner of Sunrise Way and Tahquitz Canyon Way (the "Project") has made a request for Agency assistance in order to move forward. The shopping center was approved by the City Council on March 15, 2006 and the Developer has worked since that time to finalize the two Indian leases for the site, as well as work through a number of cost increases that have required some redesign of elements of the Project. At issue are a number of cost factors that have increased dramatically since the Developer and Vons signed their lease: (1) the cost of utility undergrounding; (2) the appraised value of the parcel; and (3) the TUMF fees. Other development costs have also increased but not as significantly. Nevertheless, the costs have increased to the point where both Vons and the Developer are unable to move forward without some relief. The Developer sold to the Agency the 4.96 gross acre corner parcel in 2004 to allow the Agency to exchange it for a 7,8 parcel on East Palm Canyon Drive, to assist VIP Motors to expand. The exchange was finally completed in 2006, which resulted in his leasing back the corner from the allottee, as well as executing a lease for the adjacent 5 acre parcel with the 13 allottees. Undergroundin4 Costs One issue is that undergrounding the utilities would reroute the power lines, which currently bisect the property north-to-south, all the way around the property in the street, which would keep the line in a public utility easement but doubles the amount of line that's already there. The practice has been to route all the utilities in a Public Utility Easement located in the public right-of-way. This has been especially important in Section 14, where recently the Bureau of Indian Affairs has held that easements could only be granted for the term of the lease. That opinion was problematic for developers, the City and the utilities, though recently the BIA has modified its view, based on guidance from their Sacramento office; now easements can be granted for a period "without limitation." Keeping the utilities in the right of way in your case would require that the power lines, which currently bisect the property north-to-south, be routed all the way around the street, which would double the amount of line from what's already there. The estimate the Developer provided us was that the cost of undergrounding the existing line around the property would be about $550,000, or almost $6.00/s.f. for the tenants in off-site improvement costs. The Developer has asked that the City consider a change to the City's undergrounding policy and approve an amendment to the Developer's PDD to • - _ CMG allow the Developer to convert the existing overhead utility easement to public utility easement, which would to shorten the distance to underground the line by half, and be able to be done with the on-site improvements rather than working in the right of way. It would probably take Council action to approve the change in policy and amend the conditions of approval on the project, but could save the project up to $300,000. In order to facilitate this, the City would require the Developer to obtain a BIA sign off on the new easement as "without limitation" and not tied to the term of the lease. The Increased Appraisal Part of the exchange process required that the BIA appraise the parcels for the purpose of establishing the exchange, and ultimately leasehold, value. Since over two years have gone by since the land exchange described above without the leases being finalized through the BIA, the BIA reappraised the parcels in order to ensure the transactions are at fair market value. The new appraisal on the corner parcel is now $3,460,000, a 58.8% increase in value in less than three years. The City does not have a copy of the full appraisal. The Developer has asserted that the Section 14 Specific Plan actually reduces the gross leasable area that could be built on the parcel and imposes more stringent landscaped setback requirements; as a result, the value of the land should be less under the Specific Plan than under the City's previous C-1-AA zoning. It is unlikely, however, that the BIA would challenge the appraisal. If the Developer requested a reappraisal through the BIA and such an appeal was successful, the resulting savings could provide a portion of the requested assistance amount. TUMF Fees Another consequence of the delay in receiving the approval of the exchange, and then the subsequent approval of the lease by the allottees and the BIA, was the increase in TUMF fees, which increased at the beginning of 2007. Because TUMF fees are paid at the issuance of the building permit and not at the entitlement stage, it does not matter if the project was entitled in 2005 or 2006 if the permits were not ready to be issued until 2008. The difference in TUMF fees from a permit that could have been issued in 2006 and one that would be pulled today is $319,248, reflecting an increase from $1.82/s.f. to $5.18/s.f. over the whole 95,000 s.f. project, a 284% increase in TUMF due to the combined delays. Staff Recommendation Staffs recommendation is for the Agency to contribute $300,000 toward off-site improvements for the project, or undertake improvements In that amount as part of the Line 8 Storm Drain project currently under construction. 2.9 On the issue of the requested rental subsidy, staff recommends entering an agreement with Vons, not the Developer, to offset half the requested amount, or $35,000 per year off their ground lease. However, in return for the assistance, the Agency would require that Vons open a Pavilions store at the site, rather than a regular Vons, and commit to keep and upgrade the Rimrocks store. One of the factors in the consideration of assistance is the state budget's take of redevelopment funds. The latest numbers the Agency has received from the California Redevelopment Association is that Palm Springs would lose approximately $898,000 per year under the current budget proposal, which represents 7.7% of gross tax increment. John S. Ram nd, Director of omas J. Wilson 'GQMm ity conomic Development Assistant Citywnager David H. Ready, Ex ire r " Attachments: 1. August 13, 2008 Letter from Laurich Properties LAURICH P H O P E R T I E: S INC. v AUG 1 9 2008 August 13, 2008 QEv��aFr,�,Nr Mr. John Raymond Cormnunity Development Director Palm Springs Redevelopment Agency ("Agency") City of Palm Springs 3200 East Tahquitz Canyon Way Palm Springs, CA 92262 Ref Tahquitz Village, NWC Tahquitz and Sunrise, Palm Springs CA Dear Mr. Raymond: Pursuant to our many meetings and discussions with City Officials, I respectfully request the City's participation in our Company's proposed development of a shopping center on the above referenced property. As you are aware, certain cost increases combined with the current weak development climate necessitates the City's participation in the project. At their July 18, 2008 meeting,the Safeway Real Estate Committee (Vons is a subsidiary of Safeway) conditionally approved of our lease in the center, subject to the following: l. The City/Agency to make an annual rent rebate payment to Vons in an amount of $72,000 plus increases of 10% each five years for 25 years to maintain their ground rent at its current rate_ This subsidy was necessary due to the increase in the BIA's appraised value of the land from the original date Safeway approved the lease to the date the Master Ground Lease was approved by the BIA for the undersigned. This subsidy would terminate in the event Vons (or a subsequent first class grocery market) stops operating a grocery market for a period of one year. 2. Participation in the amount of$500,000 toward the costs of public improvements to the subject property. This participation can be achieved through a reimbursement to the developer of the cost of installing eligible improvements; through the City and/or Agency directly installing certain eligible public improvements; or,through the elimination of condition of approval requiring the developer to install such improvements; all with an estimated cost savings of at least$500,000. 3. Extend the "Entitlements" (Development Approvals) previously granted by the City for one year from September 2008 (the expiration date). 1770 N. BUFFALO DR., SUITE 101 • LAS VEGAS, NEVADA 89128 (702) 220-4500 • FAX (702) 220-4900 Page two August 13, 2008 John Raymond 4. Approve of the revised site plan required by Vons. A draft of the revisions were shown by me to Craig Ewing and Marcus Fuller. Both had no problem with it. Ilowever, I did not submit a formal revised plan until Vons gave approval. I will be submitting that within a week to the City. The basic change is moving the westerly pad building at the north end to the north side of the Vons building. Therefore this is a minor change that did not increase the GLA or disrupt the circulation on the site and gave greater visibility and effective parking to the market. It is important to note that all of the above subsidies are directly related to, or on behalf of Vons and not our portion of the development costs. We have substantially reduced our Return On Investment to accommodate this development Now that I have expressed our challenges to make this project work, the following is how it will benefit the City and surrounding community: I. We anticipate that the total development costs, not including land, will be Twenty Million Dollars ($20,000,000). Based on that cost, this will increase the gross property tax from zero (0) to Two Hundred Thousand ($200,000) per year. That is based on my estimate of the Possessory Interest Taxes that will be assessed on the project_ I understand that the Agency receives 60% of the total of such tax, or about $120,000 per year. 2. Retail sales tax: We project that the center will generate Thirty Four Million Dollars ($34,000,000) in gross sales with about 70% taxable. This would result in Two Hundred and Thirty Eight Thousand Dollars ( $238,000) being paid to the City annually. This should also increase annually as inflation increases such retail sales. 3_ Jobs created: short term construction jobs will be created over the next year during a period of time that constriction has slowed considerably in the City. Two hundred full time jobs should be created from the finished and occupied center. While it could be argued that we are not creating that many new jobs since the Vons employees will be moving from their existing location (on Tahquitz)to this new store, Vons has indicated that they will close that store in the event we catmot make this happen since the store is unprofitable. Therefore,the existing jobs would be lost. CS Page three August 13, 2008 John Raymond 4. Helping the Palm Springs Mall: I know you are familiar with the Hopkin's plan for the redevelopment of this mall. This relies on moving Vons and Rite Aid out to allow the mall owners to demolish that portion of the blighted center and remodel it, thus creating space fox new national retailers that may not be in Palm Springs and increase the tax increment as well as sales tax to the City. 5. Highest and Best Use of the property: We believe that the shopping center is the highest and best use for the property. In quoting from the appraisal made for the BIA, dated April 29, 2008, from Merrill Appraisal on the west '/ of the property: "Based upon the location of the subject property,the demand for well located new, grocery-anchored neighborhood retail development, and the proximate existing residential development in the subject neighborhood, it is my opinion that the maximally productive use of the subject property is for assemblage with the adjacent parcel to the east and the planned g7ocery-anchored commercial development." I understand that Merrill Appraisal is a well-respected appraiser in the Coachella Valley and a firm that the City has used on many occasions. We are ready to go with a financial partner (Regency Centers) committed to the project. Regency is a NYSE, REIT that specializes in grocery anchored centers in the US. In summary, this is a win/win proposal for the City and us but could not happen without the City's assistance. It creates or retains jobs in the community, creates new tax increment and sales tax for the City and Agency, and helps facilitate the redevelopment of the Palm Springs Mall. Therefore I request that this matter be placed on the City Council's agenda for September 16, 2008 Page four August 13, 2008 John Raymond Awaiting your reply 1 remain, very truly yours Sunquitz NWC LLC by Sunquitz NWC Mgmt. Co., Inc, its Manager by dt' President Hal lac Gordon HG/hg cc: David Ready, City Manager Mayor Steve Pounget Paul Loubet, Regency Centers Briau Braaten, Vons Companies Jan Martin, Safeway Stores Inc.