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SUBJECT: HONORABLE MAYOR AND CITY
COUNCIL
COUNCIL DISTRICT: 4
RECOMMENDATION
Adoption of a
resolution authorizing the City Manager to negotiate and execute the following
agreements with eBay, Inc and Novell, Inc.:
(1)
An assignment
of the Agreement for Purchase and Sale of Real Property and Joint Escrow
Instructions by and between the City of San José and Novell, Inc., dated Dec.
20, 2002, to eBay for the property located on Orchard Parkway at Charcot
Avenue; and, if necessary,
(2)
A
reimbursement agreement to reimburse City for the costs, not to exceed
$326,000, incurred if City should need to recommence the process of preparing
the necessary bond documents related to the financing of the acquisition of the
property.
BACKGROUND
On June 25, 2002, the City Council adopted a resolution authorizing the
City Manager to negotiate and execute an “Agreement for Purchase and Sale of
Real Property and Joint Escrow Instructions” (“Purchase Agreement”) by and
between the City and Novell, Inc. for the purchase of a parcel of land on
Orchard Parkway (formerly O’Nel Drive) at Charcot Avenue (formerly Guadalupe
Parkway) in the amount of $30,000,000.
The property to be purchased is located in close proximity to the Norman
Y. Mineta San José International Airport and was to be acquired for the purpose
of accomplishing construction staging and sequencing so that phases of the
Airport Master Plan Program could be implemented more economically and
efficiently.
On December 20, 2002, the City and Novell entered into the Purchase
Agreement in accordance with the terms set forth in the resolution. In the weeks that followed, the City began
the development of the bond financing documents in order to meet the deadline
for purchase of the property.
In late January, Caltrans completed the acquisition from Novell of a
small portion of the property along Highway 101. The cost to Caltrans of this property was $785,000. As this acquisition had been expected, the
Purchase Agreement allowed for this contingency. The City’s purchase price thus diminished to $29,215,000
reflecting that portion of the property that had been sold to Caltrans.
The City completed its due diligence period on the property on February 3, 2003 and, by letter from the City Manager dated February 7, 2003, removed all contingencies to the purchase. Escrow was slated to close no later than May 4, 2003.
In late 2002, eBay
announced to the public that it was reaching capacity at its headquarters on
Hamilton Avenue in San José and had begun a search for a new campus capable of
accommodating its anticipated growth. After
discussions between the Mayor’s Office, the directors of eBay and City staff,
it was determined that the Novell campus, including the unimproved portion that
the City had committed to purchase from Novell, was the only property in San
José that met eBay’s anticipated needs.
City staff,
including persons from the Office of Economic Development, Planning and the
City Attorneys Office as well as the Redevelopment Agency met with eBay in late
February 2003. Several days later, City
and Agency staff met with representatives of Novell and eBay together. The three parties determined that no deal
between the three parties would be possible on the time frame contemplated in
the Purchase Agreement between the City and Novell. The City and Novell thus executed an amendment to their Purchase Agreement
providing an extension of the close escrow until June 11, 2003.
eBay and Novell have, meanwhile, entered
into an agreement establishing terms for the purchase by eBay of Novell's
existing campus on North First Street, consisting of five buildings totaling
511,000 square feet (“eBay-Novell Agreement”). Under the eBay-Novell
Agreement, eBay will make no binding financial commitmentsnot make a financial
commitment to purchase the Novell property
to Novell in the transaction pending the completion of its
"diligence" process. During this process, eBay will
be evaluating factors such as the physical condition of the property and the
condition of title. If these factors,
or “contingencies”, are deemed acceptable by eBay, and if the City authorizes the
City Manager to assign its right to purchase the property to eBay, eBay will
give its final approval to the transaction and proceed with the purchase of the
property from Novell.
ANALYSIS
The City is
contractually committed to purchasing the property from Novell. The parties are proposing that, in order to
allow eBay to acquire the entirety of the site for its expansion, the City
assign its right to purchase the property under the Purchase Contract
contract to eBay. In
other words, eBay would step into the shoes of the City and complete the
purchase in the City’s stead.
The proposed
assignment must be agreed and consented to by Novell and eBay and the City will
be reimbursed for its deposit as well as the costs expended on an ALTA survey
of the premises. No assignment will
occur, however, unless the contingencies are removed on the eBay-Novell
Agreement.
Novell entered into
an un
recorded agreement
with BMC Software (“BMC”) in 1999, which gave BMC certain rights of negotiation
and leasing on the Novell property.
This agreement also created an optional procedure whereby Novell could
terminate these rights as to the parcel of the land being purchased by the
City by offering BMC a right of first refusal on the property before it
sold the property to a prospective buyer.
Once the parties entered into contract, however, the BMC rights would
revest if the sale was not complete within 180 days of the contracts. Before the City and Novell executed the
existing Purchase Agreement, BMC was given the opportunity to purchase the
property and chose not to exercise their optionright to do so. The 180 day180-day
period for the City-Novell Purchase Agreement closes in mid-June.
Because Novell’s
extension for the City to purchase its property is only until June 11, 2003,
the Property purchase must be closed by that date. The City intends to finance the purchase of the property through
a bond issuance that requires various action be taken by the City prior to the
close. As a result, if the contingencies
in the eBay-Novell Agreement are still in effect at the end of the day on May
1, the City will have to reinitiate the process of preparing the bond documents
for City Council approval. The City
Council must approve those documents no later than June 3, 2003 to allow for
the City to purchase the property on June 11, 2003.
While Novell and
eBay could continue to negotiate from May 2 through May 13, the City will be
required during this time to reengage its financial advisor, bond counsel,
disclosure counsel, underwriter and liquidity provider (along with their
counsel), (“bond team”), entailing significant additional costs to the
City. In order to assure that the City
does not bear the burden of these additional costs, the parties have also
negotiated a reimbursement agreement that would require eBay and Novell to
reimburse the City for its out of pocket costs, up to $326,000, which is the
estimated cost of the fees and reimbursable costs of the bond team in the event
that the City is required to engage the bond team issue the bonds. In order to
have sufficient time to finalize the documents necessary to issue bonds, the
City will need to commit fully to a bond issue to purchase the Novell property
no later than May 14, 2003.
If the City must, in the end,
complete its purchase of the Novell property, Novell and eBay
will not be required to reimburse the City for the “bond team” costs. Instead, this figure will be paid for from the proceeds of the
bond issuance, as
is normally the case in a bond transaction.
It is therefore
proposed that the City Manager be delegated authority to execute the Assignment at any
time on or before May 14 as long as the assignment has been executed by eBay and
Novell by the end of the day on May 13.
It
is also
proposed
that the Manager be delegated the authority to execute the Reimbursement
Agreement on May 2 if the contingencies in the Novell-eBay
Agreement have not been removed and the parties are unable to execute theNovell and eBay
have not executed the Assignment by that date. If the contingencies
on the eBay-Novell Agreement have been removed by that date,
then the Manager shall be directed to execute the Assignment on behalf of the
City.
If by the end of
the day on May 13, eBay and Novell cannot remove the contingencies to their
transaction the City will still be contractually bound to purchase the
property. City staff would then bring
forward for Council consideration on June 3, 2003 the bond financing documents
necessary to complete the City purchase of the Novell property on June 11,
2003.
PUBLIC
OUTREACH
Not applicable.
COORDINATION
This item has been
coordinated with Departments of Planning, Building and Code Enforcement, Public
Works and Finance as well as the Office of Economic Development, the Airport and
the City Manager’s Office.
COST IMPLICATIONS
In
addition to staff time the City has expended funds
totaling less than ______ for appraisals and
consultant fees in preparation for the purchase this property. The City, will be reimbursed for the costs
of its ALTA survey approximately $10,300.00.
If the Purchase Agreement is assigned, all future costs for
this transaction will be paid for by eBay and Novell. The $300,000 deposit, plus interest, will be returned reimbursed by eBay within
three days of the execution of the assignment.
eBay will also reimbursepay the costs
of the ALTA survey of approximately $10,300. to the General Fund if the
assignment is completed. In addition to staff time, the City has expended some moneyfunds on the transaction to date
that will not be reimbursed, these funds including moneye about $8500 for
laboratory costs for soil and groundwater analysis for the Phase II study, $6500 in securing
an appraisal, and $250 on a title report expended in
securing an appraisal and engaging third party financial consultants.
If the
eBay and Novell are unable to remove the contingencies required to
complete eBay’s purchase of the entirety of the Novell site, the original
Purchase and Sale Agreement between the City and Novell will remain in effect
and the City will purchase the property for $29,211,848 with additional costs
of escrow, closing (estimated at $29,515) and financing costs.
CEQA
Exempt,
PP03-04-135
RICHARD DOYLE
City Attorney
By:_____________________________
William H. Hughes
Assistant City Attorney_
RICHARD DOYLE
City Attorney