To:   HONORABLE MAYOR AND                   From:   Jose Obregon

                        CITY COUNCIL

 

   Subject:   APPROVAL OF AN AMENDMENT       Date:   June 9, 2003

                        TO THE LEASE WITH RIVER

                        STREET DEVELOPMENT GROUP

 

COUNCIL DISTRICT:  3

 

RECOMMENDATION

 

The General Services Department is recommending authorization for the City Manager to enter into the following agreements:

 

1)   An amendment to the lease (“Lease”) with River Street Development Group, dated June 4, 1996, covering the City of San Jose’s Historic Enclave located in the River Street Historic District on the Eastside of the Guadalupe River near the intersection of West Julian Street and Pleasant Street to:

 

a.       reflect acknowledgement and approval of the change in the structure and membership of the River Street Development Group Partnership;

b.      change the conditions triggering commencement of the lease and retroactively commence the Lease as of June 1, 2002;

c.       make such minor changes as are necessary to reflect the current relationship between the City and the River Street Development Group; and

 

2)   A “Recognition Agreement” with Heritage Bank of Commerce (Heritage Bank) consenting to Heritage Bank’s acquisition of an interest in the Leasehold interest of the River Street Development Group which Recognition Agreement will amend the Lease by:

a.   Noticing Heritage Bank at any time that the River Street Development Group is in breach of the lease;

b.   Allowing Heritage Bank additional time to cure breaches to the lease that may be committed and not cured by the River Street Development Group;

c.       Requiring the City to replace the existing Lease with a new lease between City and  Heritage Bank, on the same terms and conditions, if Heritage Bank succeeds River Street Development Group as the lessor;

d.      Requiring City to provide estoppel certificates from time to time on behalf of the Heritage Bank; and

e.       Allowing Heritage Bank, if it succeeds the River Street Development Group as lessee, to assign the Lease to a third party with the reasonable consent of the City.

BACKGROUND

 

On June 4, 1996 the City Council approved a Master Agreement for the development of a historic enclave with the River Street Development Group. The Master Agreement called for the development of nine buildings and established a ground lease agreement covering the land where the enclave is located. The enclave is located within the River Street Historic District which is located on the Eastside of the Guadalupe River, near the intersection of West Julian Street and Pleasant Street. The commencement of this lease was to occur upon the issuance by the City of a certificate of beneficial occupancy on any of the structures located on the site.  The rent on this lease is $1 per year for the first 30 years increasing to 2% of gross revenues from the 30th to 35th years of the lease, then increasing to 3% of gross revenues from the 35th to 40th lease years, increasing to a maximum of 4% of gross revenues during the final ten (10) years of the initial lease term.  The lease contains options that will allow the tenant to extend the lease for four (4) additional ten (10) year periods, for a total of 90 years. 

 

The River Street Development Group now wishes to borrow One Million Three Hundred and Twenty Thousand Dollars ($1,320,000) secured by a deed of trust covering their leasehold interest in the premises.  Heritage Bank of Commerce has agreed to make the loan, contingent upon the parties entering into a Recognition Agreement that would require that the City enter into an a “Recognition Agreement” with Heritage Bank and the City’s execution of an estoppel indicating that River Street Development Group is in substantial compliance with the Agreement.

 

Staff received a request from Green Valley Corporation, one of the Partners in the River Street Development Group, asking that the City enter into a recognition agreement and an estoppel with Heritage Bank of Commerce, to allow the River Street Development Corporation to receive its loan.  After review of the Recognition Agreement by the City Attorney, it was determined that the lease terms established in the existing Master Agreement would have to be amended in order for the City to enter into a “Recognition Agreement “ with Heritage Bank, and to allow staff to execute an estoppel indicating that River Street Development Corporation is in compliance with all lease terms. At the time of staff’s review, a certificate of beneficial occupancy had not been issued, and the River Street Development Corporation had not provided the City with proper notification of changes in the partnership.  Both of these actions are requirements within the existing lease agreement, therefore, staff determined that it would not recommend execution of an estoppel as River Street Development Corporation was not in full compliance with the current lease terms.

 

Section 21.02 of the Lease Agreement states that the “Tenant may encumber its interest in the Premises, furnishings, equipment, fixtures, and personal property thereon and this lease for purposes of financing or refinancing construction costs associated with the project”. Staff has determined that the areas of the lease with which River Street is currently not in compliance are not essential to a continued good relationship between the City and the River Street Development Corporation.  Staff has also determined that it would be in the best interests of the City, and the River Street development project, that River Street Development Group receive this financing.  The parties have thus agreed to work toward amending the Agreement to create a situation whereby the River Street Development can be brought into compliance with the Lease, thus allowing the City to execute an estoppel stating that the Lease is in full force and effect and that the City is aware of no outstanding breaches of the Lease. General Services is recommending authorization for the City Manager to negotiate and execute the Recognition Agreement with Heritage Bank

 

 

ANALYSIS

 

In analyzing the Lease, staff realized that River Street Development Corporation is out of compliance with several sections of the lease, including:

 

a.   Section 5.3.3 of the lease, which places limits on the Tenant’s ability to make changes in the ownership of the Partnership and requires the City’s approval of changes in ownership excluding transfers between owners.  At the time the Master Agreement was approved by Council the River Street Development Group was a General Partnership consisting of 5 partner companies each with a 20% interest in the Partnership. , Today the River Street Development Group has 7 owners with Green Valley Corporation owning 90% of the partnership and the remaining 10% spread among the remaining partners one of whom is a vice-president of Green Valley Corporation.   General Services is recommending that the lease be amended to reflect acknowledgement and approval of the change in the structure and membership of the River Street Development Group Partnership. Section 1.3 of the lease states that the lease shall not commence until a “certificate of beneficial occupancy” has been received.  Though the River Street Development Group has received a “certificate of occupancy” a “certificate of beneficial occupancy” is not available to the Partnership.  As a result, staff proposes amending the lease to remove this language and to state that the Lease shall be deemed to have become effective on June 1, 2002.

 

Additionally, the Master Agreement called for the Developer to provide certain documents for the City to review within the time specified in the schedule of performance.  Though Developer failed to forward many of these documents in a timely manner to the City, all such documents are now in the possession of the City, including a current proof of insurance.

 

In analyzing the Recognition Agreement with Heritage Bank, staff has concluded that this agreement will further amend the terms of the Lease as follows:

 

  1. It will require the City to notice Heritage Bank at any time that the River Street Development Group is in breach of the lease and allowing Heritage Bank or its successors and assigns additional time to cure breaches to the lease that may be committed and not cured by the River Street Development Group;
  2. It will require the City to replace the Lease with a new lease between City and Heritage Bank, on the same terms and conditions, if Heritage Bank succeeds River Street Development Group as the lessor.
  3. It will require the City to provide estoppel certificates from time to time on behalf of the Heritage Bank; and
  4. It will allow Heritage Bank, at any time after it might acquire the River Street Development Group’s rights to the Lease (through foreclosure, bankruptcy or other acceptable succession of rights) to assign the Lease to a third party with the reasonable consent of the City. However, the agreement will require that Heritage Bank seek out a lessor who has the same qualities and characteristics as those held by the River Street Historical Development Group.

 

Staff has determined that these conditions are acceptable to the City and would not substantially compromise the City’s interest in the maintenance and development of the River Street Historical District. 

 

 

PUBLIC OUTREACH

 

Not applicable. 

 

 

COORDINATION

 

This item has been coordinated with the City Attorney’s Office. 

 

 

COST IMPLICATION

 

There is no direct cost to the City associated with this item.

 

 

CEQA

 

Not a project

 

 

JOSE OBREGON

Director, Department of General Services