City Council Report

 

City Council Meeting: February 25, 2014

Agenda Item:  8-B

To:               Mayor and City Council 

From:           Andy Agle, Director of Housing and Economic Development

Subject:        Bergamot Station Arts Center Exclusive Negotiating Agreement

 

 

Recommended Action

Staff recommends that the City Council authorize the City Manager to negotiate and execute an Exclusive Negotiating Agreement (ENA) with 26Street TOD Partners LLC (“Development Team”) to develop the City-owned property located at 2525 Michigan Avenue, home to the Bergamot Station Arts Center.

 

Executive Summary

On November 27, 2012, Council directed staff to issue a Request for Proposals (RFP) for the Bergamot Station Arts Center Development Opportunity to the top three teams that were selected through an initial Request for Qualifications (RFQ) process.  After reviewing the proposals submitted in response to the RFP for the 5.6-acre, City‑owned site located at 2525 Michigan Avenue (“Site”), and conducting comprehensive review and due diligence, the evaluation panel determined that 26Street TOD Partners LLC best addresses the RFP selection criteria and the Council-endorsed public objectives. Staff recommends that Council authorize staff to enter into exclusive negotiations with the Development Team to initiate community outreach, in anticipation of negotiating entitlements and ground lease terms.

 

Background

The Site, known as the “Bergamot Station Arts Center,” is located at 2525 Michigan Avenue. It consists of 5.6 acres and contains five buildings totaling approximately 62,000 square feet.  In 1989, the City purchased the parcels with transit funds with the goal of serving future transit needs in Santa Monica and providing a source of revenue for the Big Blue Bus. The Exposition light rail line is scheduled to open in 2016, with a stop immediately adjacent to the Site, at the corner of Olympic and 26th Street.  Anticipation for light rail, which will bring significant changes to the Site and the area, informed the development of the RFP criteria for the City-owned property, as well as the creation of the broader Bergamot Area Plan.

Bergamot Station Arts Center is currently occupied by approximately 30 small, creative businesses, including art galleries, product designers, and a non-profit theatre company, as well as a café.   These tenants sublease the spaces from Bergamot Station Ltd, who leases the Site from the City for $528,000 a year.    The current lease, with options, expires on December 31, 2017.  The lessee, who is part of one of the proposing development teams, owns land adjacent to the City-owned property, which contains additional art galleries and the Santa Monica Museum of Art.   Another proposing development team owns property adjacent to the Site as well. The RFQ and RFP sought proposals for only the City-owned portion of Bergamot Station Arts Center. 

 

In anticipation of the operation of the Expo Light Rail’s Bergamot station, City staff began conducting extensive public outreach regarding the Site and the surrounding area in 2011. Staff solicited community input on both the future of the City-owned Site and on a community vision for the area within the larger context of the Bergamot Area Plan.  The planning effort has been guided by community participation that has included stakeholder interviews, focus groups, online surveys, community workshops, neighborhood meetings, and public hearings before the City Council, Planning Commission and other City boards and commissions.  Throughout the planning period, the project’s website, www.bergamotplan.net, has provided a consistent opportunity for public information sharing. 

 

The Bergamot Area Plan was adopted by the City Council on September 10, 2013.  The Plan seeks to maintain the essence of the district while allowing for attractive public open spaces, increased opportunities to ensure the presence of creative businesses and to provide access to the arts and culture, and new uses and amenities that serve art lovers, families and visitors. The Bergamot Area Plan identified the Site as the Conservation Art Center District (CAC). The Plan limits the intensity of development to a floor-to-area ratio (FAR) of 1.0 on the Site, and 1.5 FAR on the two adjacent, privately owned parcels.  The vision was developed as part of the extensive community outreach process that included eight months of community consultation focused on the Site, as well as a preliminary economic feasibility analysis of the development concepts.  Members of the Arts Commission, the Landmarks Commission, the Planning Commission and individual gallery owners, artists and arts professionals expressed strong support for preserving Bergamot Station Arts Center, acknowledging its importance as a cultural destination along with its unusually long-lived concentration of small arts businesses.  They reached consensus on the importance of building upon Bergamot Station Arts Center’s success by fostering a greater variety and diversity of arts options and cultural offerings at the site, including non-profit arts organizations and performing arts activities.  Other, complementary components of this vision for Bergamot 2.0 included expanding dining opportunities for tenants and visitors, balancing the “funky” nature of existing warehouse buildings with a new, state-of-the art museum, and adding a hotel component to complement the transit stop and further enhance the visibility and viability of the Center.  From this input, a preferred concept for the Site was created. The Bergamot Station Arts Center Preferred Concept (“Preferred Concept”) was established as an overarching vision for the Site that was developed in accordance with the principles, policies and recommendations set forth in the LUCE and the City’s Creative Capital strategy.   

 

The Preferred Concept balances the City’s three primary goals for the Site:  1) support the arts; 2) deliver a transit-oriented development; and 3) maximize revenue for the Big Blue Bus operations.  The Concept emphasizes retaining the concentration of art galleries and other cultural uses, providing space for a museum, creating revenue‑producing and visitor-serving uses, including a hotel and restaurants/bars, and delivering infrastructure improvements to complement the Arts Center and new Expo station.

 

On March 20, 2012, Council endorsed the Preferred Concept and authorized staff to prepare and release an RFQ to solicit development team qualifications. Five teams responded to the RFQ in July 2012.  On November 27, 2012, Council directed staff to issue an RFP to the top three teams that were selected through the RFQ process.

 

In February 2013, staff issued the RFP to solicit proposals from development teams led by 26Street TOD Partners LLC (formerly referenced as The Lionstone Group/Industry Ltd.), Bergamot Station Ltd./Worthe Real Estate Group, and REthink Development/Kor Group.  The RFP also included the opportunity for the development teams to propose developing a shared use parking structure on the adjacent City Yards site, and required them to outline the pricing and management of the parking operation if proposed.  Proposals were received on May 1, 2013. The proposals, staff reports, supporting documents and additional information related to the planning initiatives are available for review or can be downloaded at www.smgov.net/Bergamot.  The section below outlines the due diligence process leading to the staff recommendation.  One-page summaries of each proposal are attached (Attachment A), along with a Summary Table of the three development components (Attachment B).

 

Discussion

The following discussion outlines the selection process and the evaluation panel’s review of 26Street TOD Partners LLC, Bergamot Station Ltd./Worthe Real Estate Group, and REthink Development/Kor Group teams’ proposals, including their responses to follow‑up questions. The following discussion also describes the purview of an Exclusive Negotiating Agreement (ENA) and the next steps, if Council authorizes exclusive negotiations.

 

Selection Process

After receiving the proposals on May 1, 2013, staff initiated a review and due diligence process. An evaluation panel comprised of eight City staff members from Big Blue Bus, Community and Cultural Services, Housing and Economic Development, Planning and Community Development and Public Works, as well as two real estate finance consultants from Keyser Marston Associates (KMA), reviewed the proposals.  KMA also completed extensive review of each development team’s financial capacity to undertake a project of this scale and scope. 

 

The proposals were reviewed according to the selection criteria outlined in the RFP, as follows:

 

 

 

 

These four broad selection criteria encompass more specific Council-endorsed development objectives and priorities gleaned from community input prior to issuing the RFP.  The RFP identified eight development objectives to be addressed, summarized as follows:

 

1.     Inclusion of at least 75,000 square feet of arts-related space that is affordable to non-profit cultural organizations and for-profit art galleries, and provision of space for the Santa Monica Museum of Art (SMMOA);

 

2.     Provision of open space, infrastructure and other amenities to support public access to the light rail station and improvement of the environment and functionality of the Site;

 

3.     Preservation of existing buildings, where feasible;

 

4.     Inclusion of a mix of uses such as hotel, restaurant and bar, and other creative office and cultural uses to create a vibrant development;

 

5.     Provision of parking in accordance with LUCE guidelines with an emphasis on shared parking opportunities;

 

6.     Payment of ground lease based upon fair market values (at a minimum, provide $610,000 per year in ground rent to the City);

 

7.     Exceptional architecture and sustainable design with a focused transit-oriented development approach; and

 

8.     Coordination with the Bergamot Area Plan.

 

After reviewing the proposals, the evaluation panel conducted follow-up interviews with the three development teams and was attentive to the flexibility of each team in their ability to respond to evolving community priorities. The teams responded to questions regarding their ability to modify certain aspects of proposals to better meet public objectives or address community concerns, including business retention, building preservation, contextual development as part of the overall Bergamot Area Plan,  demonstrated experience with community engagement, and ability to undertake community-focused arts center programming and foster community collaboration.

 

One variable in the RFP which extended the due diligence process was the opportunity for a shared parking structure at the adjacent City Yards. Development teams were given the option of proposing to develop a shared parking structure on the City Yards site in association with their development proposals for the Site. Two of the teams proposed developing a shared parking structure on the City Yards to accommodate their proposed developments’ parking requirements. In both cases, the proposals suggested the City utilize its bond financing for the proposed shared use parking structure. As part of the due diligence process, staff evaluated the City’s financial capacity and timing potential to partner in the creation of a shared parking structure at the City Yards as a part of proposed Site development.  After further deliberation, staff determined that the City’s ability to commit to a coordinated construction timeline was not feasible, particularly if the proposals depended on the City financing the parking structure. Staff recommends moving forward without a City Yards shared parking as a component of Site development to avoid delaying the Bergamot Station Arts Center project. 

 

In late 2013, staff issued follow-up questions to the three development teams and sought clarifications and statements of commitment regarding their proposals. All three teams were asked questions about their proposals related to parking, financial estimates, art center management and design objectives.   In light of concern regarding the timing of and financing for  a shared parking structure on City Yards, staff requested that the two teams that proposed shared parking on the City Yards property modify their proposals to accommodate their proposed project’s parking on Site and indicate how that would impact their proposed ground lease payment, building retention and site configuration.  Staff received the teams’ responses on January 10, 2014. The evaluation panel reconvened to review the responses, and the City’s financial consultant KMA reviewed the additional information from the teams with an emphasis on the proposals’ economic feasibility and financial impacts to the City.

 

Proposal Review

The selection panel felt the proposals were thoughtful, creative, well prepared, and addressed the public objectives for the Site.  The following section outlines the evaluation panel’s review of the three proposals relative to the four selection criteria.

 

26Street TOD Partners LLC

The 26Street TOD Partners LLC team is led by Jim Jacobsen of Industry Ltd, Scott Ginsburg of Boulevard Partners and Lew Wolff of Wolff Urban Management Inc.  The Lionstone Group serves as the development sponsor.  Rios Clementi Hale Studios is the architecture, landscape design and branding team.  Carol Goldstein is the cultural planning consultant, Mark Pally is the art advisor and curator, and Greer/Daily and the Karie Group are the community outreach and engagement leaders.  Cedd Moses serves as the team’s hospitality, food and beverage curator.  Wolff Urban Management Inc. is the hotel developer and manager. 

 

Development Strategy: The evaluation panel found this team’s development strategy to be the most exciting, visionary and creative in its approach to realizing a vibrant arts and cultural center that would retain and build upon the success of the current center by retaining art galleries, supporting both emerging and established artists, and expanding the array of cultural offerings on the site, in particular in regard to public programming.  The development strategy in this proposal consists of a mixed-use development comprised of a hotel, creative office, retail, and museum space as well as contemporary art galleries, non-profit cultural uses and event spaces totaling 221,664 gross square feet. The proposal clearly articulates the significant regional role the Site can play as a critical cultural gateway to Santa Monica and its arts scene. The team proposes to build a space for the Santa Monica Museum of Art totaling 20,000 square feet that would directly front the Bergamot Expo Station and help serve as a gateway to the Site. The proposal also includes a 93-room, limited-service, six-story hotel totaling 68,777 square feet. The hotel development would be art-themed with each floor dedicated to celebrating a California artist. 

 

Eating and socializing opportunities would be dispersed throughout the Site with a total of 18,000 square feet of space dedicated to restaurant, café and bar operations.  The development includes 40,000 square feet of creative office space, the least amount of the three proposals, and a 200-seat public amphitheater. All tenant spaces would be designed to open directly onto ground-floor, outdoor walkways that accommodate both public art installations and spillover space for gallery events, helping to create a vibrant site beyond individual gallery opening events.

 

A total of 442 subterranean parking spaces are proposed to be built on site in a tandem configuration.  Parking would be shared among all on-site uses and could be used by the public during Bergamot’s off-peak hours.  In the event that spillover parking is needed for larger gatherings, the team manages 2,000 parking spaces in the Bergamot Area that can be shared on evenings and weekends.

 

Design Approach: The evaluation panel valued the design team’s history of preserving historic buildings and developing creative spaces within the community. Based on the preliminary design work in the proposal, the panel felt the proposed project’s design was the most compelling. The proposed project delivers iconic architecture from all elevations, balanced with the preservation of at least two buildings (34,700 square feet) and possibly up to four buildings (46,100 square feet). The proposal includes the largest dedicated tenant improvement budget ($95 per square foot) of the three proposals to help ensure that existing buildings are preserved well into the future. Proposed tenant improvements include creative use of the large ceiling heights for mezzanine storage to support the art galleries and maximize space utilization in building B that is sited along the Expo line.   The new buildings are envisioned to be built in a complementary, industrial-design style, with sustainable methods of utilizing materials and building elements from the existing warehouses, as well as incorporating solar generation.    The team also has the largest dedicated tenant improvement budget for the new museum building ($350 per square foot, equating to $7 million for overall construction) in effort to ensure the realization of a world-class, transformative museum building and overall gateway to the site.

 

The evaluation panel expressed concern with the initial design proposal to preserve just one of five buildings.  The development team indicated a willingness and flexibility with respect to preserving two additional buildings on site and creating additional open space, though the iconic project design, amount of parking, and development economics would be impacted. The overall goal of the team’s design is to create an authentic place inspired by the Site’s industrial heritage while also recognizing its new, multi-faceted role as an arts center, a gateway to Santa Monica, a regional transit hub, and an arts connector. The evaluation panel considered the project approach to be the most innovative. The team gave considerable thought to physically incorporating art throughout the fabric of the Site, including the creation of eight public art plazas with sculptures and media walls, and creation of five cultural programming spaces within the Site.

 

Community Approach:   The evaluation panel found the team’s vision of how the Bergamot Arts Center could transform the area while supporting the arts to be creative, thoughtful, and exciting.   The evaluation panel recognizes the team’s current experience developing in Santa Monica; they have a proven track record in transforming historic buildings and existing urban spaces into vibrant, creative hubs of activity throughout the region, such as 2700 Pennsylvania (“Penn Station”) and 1800 Stewart Street (“Agensys”), as well as the Dallas Design District (TX).  The team introduced KCRW and CalArts as the proposed cultural non-profit partners to work in collaboration with the museum and galleries to establish arts education initiatives and an array of cultural programs for the public.   The team proposes to introduce a Culture Lab managed by CalArts that would serve as a community and business hub for digital arts, technology and media education and incubation.  

 

The evaluation panel found the team’s proposed arts programming to be the most sustainable over the long-term due to the team’s commitment to creating a Cultural Trust Fund with initial seed funding of $200,000, and a business plan where portions of the rental revenue from commercial spaces, parking and naming rights would produce a dedicated and ongoing funding source. The proposed annual program budget for the art center is $180,000, which is the second highest of the three proposals. The team also proposes to make the outdoor performance spaces on the Site available at no cost to Santa Monica-based organizations that want to stage performances, workshops, classes and concerts for 50 days per year.  Additionally, significant attention is given to retaining Bergamot Station Arts Center tenants, with the opportunity for temporary relocation to the team’s adjacent property on Michigan Avenue.

 

The team envisions the development as a community and cultural gathering spot that will engage the broader Bergamot Area’s emerging residential base and workforce. The large amount of open space dedicated to outdoor performance and public art, coupled with the non-profit programming partners and large arts center budget, contribute to a new, exciting, and sustainable arts-focused community gathering location. 

 

Financial Analysis and Capacity: 26Street TOD Partners LLC is well financed and has the capacity and access to capital to finance the development.  The project is estimated to cost approximately $92 million to construct. The development team is proposing an initial $750,000 annual ground lease payment to the City, which is the second highest of the three proposals.  The team has also made a commitment to raising the initial match‑funding of up to $10 million to the Santa Monica Museum of Art’s capital campaign.

 

Bergamot Station Ltd/Worthe Real Estate Group

The Bergamot Station Ltd team is led by Jeff Worthe of Worthe Real Estate Group, with Frederick Fisher and Partners as architect. The Office of Jim Burnett is the landscape architect, SBE Hotel Group is the hotel developer, Community Arts Resources (CARS) is the community arts planning firm, Looking is the team’s branding firm and Wayne Blank is the arts curator.

 

Development Strategy: The development strategy consists of a mixed-use development comprised of a hotel, creative office, art gallery, retail, restaurant and museum space totaling 221,300 gross square feet. The development team possesses a unique understanding of the Site, by including the founder and original architect of the current Bergamot Station Arts Center, Wayne Blank and Frederick Fisher and Partners.  The development team envisions a new, two-story building of 21,100 square feet for the Santa Monica Museum of Art.  As the gateway to the complex, the museum would be located in the middle of the Site adjacent to the Expo light rail station. The entrance to the museum would be located in the interior of the Site, as opposed to the Expo light rail station frontage.  The evaluation panel expressed concern with the Museum turning its back on the Expo station, thus creating the potential for an inward-focused arts center that misses the opportunity to integrate with the new station.  The proposal outlined approximately 61,600 square feet of space dedicated to art galleries, the highest amount of for-profit art gallery space of the three proposals.  The proposal did not include any non-profit cultural organizations as part of the development plan apart from the museum and the existing theater, which was a concern for the evaluation panel as there was not a vision for incorporating a new set of community arts or event uses on the site in comparison to other proposals. 

 

The proposed 120-room, 83,000-square foot, seven-story hotel would be located in the Site’s northwest corner, envisioned as an “upscale Redbury” type of concept with 106 below-grade parking spaces beneath the hotel. Two creative office buildings totaling 48,500 square feet would occupy the southeast corner of the Site. Overall, the Site maintains the broad open space area between the existing buildings with plans to dedicate the 31,000 square feet for open space adjacent to the museum and utilize the remaining 103,000 square feet of the Site for surface parking and deliveries as per existing operations at Bergamot.  The surface parking area could also be used as flexible space for outdoor events, in which case shared, off-site parking would be needed.  Worthe Real Estate Group owns and operates approximately 1,000 parking spaces within walking distance from Bergamot and has offered to use these spaces when off-site parking is needed on evenings or weekends.  A small bike center, as well as retail and cafe space of 7,600 square feet is proposed in the center of the Site.

 

Initially, the team proposed to develop a shared parking structure on the City Yards site for the proposed development. Upon request from staff to revise the proposal in order to self-park on site, the team proposed building a 250-space, subterranean parking structure on site in addition to the 106 below-grade, hotel parking spaces and 27 surface parking spaces, for a revised total of 383 parking spaces. 

 

Overall, the evaluation panel deemed this team’s overall development proposal to be most consistent with the existing Bergamot Station in terms of operations and site plan.  However, apart from the new hotel, the selection panel found that the development concept did not maximize the synergy of the new transit station and therefore missed the opportunity of taking Bergamot Station Arts Center to a new level of community access, cultural programming, and long-term viability. 

 

Design Approach: The evaluation panel expressed confidence in the architect, who has helped shape the existing Bergamot Station, but also expressed concern that the overall approach was not as compelling as the other proposals’ designs.  The proposal maximizes preservation of the existing buildings, but there was concern that the proposal did not have the iconic design that the community expects of the Site.  The proposal includes a dedicated tenant improvement budget of $18 per square foot, an amount significantly lower than the recommended team, thus resulting in significantly less investment in the existing building infrastructure.  The selection panel expressed concerns about whether the proposed hotel design complements its surroundings. While the inclusion of the Site’s original design firm is valued, the selection panel felt that the proposal did not add to or diversify the Site’s overall design potential and circulation objectives in a way that would be beneficial to help usher Bergamot Station into a new phase of operations.  Bergamot Station Ltd/Worthe Real Estate Group’s proposal preserves three of the existing buildings, totaling 41,500 square feet. Dedicating a large proportion of the open space (103,000 square feet) to surface parking was also a concern as the site is anticipated to attract more pedestrians due to the adjacent light-rail station. 

 

Community Approach: The evaluation panel found this team’s community approach to be the least developed, but valued the team’s local presence and reputation in the arts community and creative office sector. The team proposed to work with Community Arts Resources to plan and develop an interim community outreach program. While the development team demonstrated a commitment to retaining all existing tenants, it did not have a well-developed community arts center management plan for sustaining or expanding cultural programs for the public at the Site.

 

The proposed 31,000 square feet of open space is second largest of the three proposals, and offers long-term flexibility of open space programming. Worthe Real Estate Group, the lead developer, proposes to manage the arts center and open space programming.  While the team proposes retaining Wayne Blank, the founder of Bergamot Station, his role in the proposed development and management of the art center is undefined.  Worthe Real Estate Group has extensive experience with creative office and retail property management, but not as much experience as some of the other teams in working with non-profits and art galleries.  The proposed annual program budget for the art center is $70,000, which is the lowest of the three proposals.  The team’s proposal anticipated that the galleries and museums would be individually responsible for most of the arts and cultural programming, which concerned the evaluation panel.  The development team also expressed a commitment to providing event space at the Site to support non-profit and community groups (averaging five to ten events per month) similar to how Bergamot Station Arts Center operates today.  The evaluation panel expressed disappointment that the team’s arts center management strategy was not more robust and was the least developed in regard to open space programming and community cultural activities. 

 

Financial Analysis and Capacity: Bergamot Station Ltd/Worthe Real Estate Group is well financed and has the capacity and access to capital to finance the development. It is estimated that the project would cost approximately $80.4 million to construct. The revenue assumptions are conservative, which reduces the amount of ground‑lease payments that can be supported. The development team is proposing an initial $700,000 annual ground-lease payment to the City with a one percent annual increase compounded every five years, representing the lowest ground-lease payment of the three proposals. To mitigate this, they proposed a potential revenue share with the City if net retail income were to exceed the proposal’s initial projections.

 

REthink Development/Kor Group

The Rethink/KOR team is led by Greg Reitz of Rethink Development in partnership with KOR Group as the hotel developer and operator.  Westport Capital Partner, LLC and Mission Capital are the investors.  Michael Maltzan Architecture is the museum architect, David Hertz Architect is the master planner, and Hornberger + Worstell is the hotel architect. Katherine Spitz Associates and Rebar Group are the landscape architects, and Sussman Prejza is the wayfinding designer.  Lord Cultural Resources is the arts management consultant, Merry Norris is the proposed interim director for the Bergamot Arts Center, and Imprint Projects is the communications consultant. 

 

Development Strategy: The development strategy in this proposal consists of a mixed‑use development project comprised of a hotel, creative office, retail, a black box theater, and a museum space, totaling 221,000 gross square feet. The development team likens the planned concept to a small village with the intent to preserve the collaborative nature of the current site. A six-story hotel of 85,000 square feet includes 8,000 square feet for a restaurant/bar and 3,300 square feet of meeting room and event space.  The Santa Monica Museum of Art would be located in a three-story, 20,000 square foot building adjacent to the Expo Station.  The development also includes 54,000 square feet of art gallery space, utilizing four of the existing buildings (totaling 45,300 square feet), a 3,500 square foot, 99-seat performance theater, an additional restaurant (5,000 square feet) and 59,487 square feet of creative office with limited on-site, surface parking. The hotel, museum, theater and retail uses cluster around a public plaza that compose a town square at the Site’s center, while the art galleries and creative offices occupy the lower-height periphery.

 

The evaluation panel questioned the team’s overall experience and ability to deliver a project of this complexity, given that the collective team has not worked together previously.  While the proposed uses are all identified in the Bergamot Preferred Concept, the location of the hotel in the middle of the Site is inconsistent with community planning efforts.  There is concern that the hotel would become the epicenter and focus of the development, and potentially detract from the Arts Center activities.

 

Initially, the team proposed to develop a shared parking structure on the City Yards site.  Upon request from staff to revise their proposal in order to self-park the project on site, the team proposed to build 380 spaces on site, subterranean and at grade.  Overall, the selection panel felt the proposed location of the various uses on the Site along with the inclusion of multiple architects on the team led to a confusing development that lacked overall synergy.  The panel commended the inclusion of a variety of public benefits throughout the Site, including a bike station, a Big Blue Bus transit station and turnout area, an electric car charging station, and significant, environmentally sustainable development objectives.  However, the panel did not find a holistic synergy to the overall development approach.

 

Design Approach: Based on the preliminary design work, the selection panel felt the design approach was the least compelling. While the proposed design delivers unique architecture, the overall site lacks a continuity of integrated design throughout the project.  The team incorporates the greatest level of environmentally sustainable design elements throughout the project with a thoughtful approach, in particular, to the landscaping on the Site. REthink Development’s proposal preserves four to five existing buildings on Site, totaling 58,900 square feet of building space being retained, which is the highest amount of building preservation of the three proposals.  

 

Community Approach: The evaluation panel viewed the community approach proposed by this team favorably; however, the development included the least amount of community open space (13,500 square feet) of the three proposals. The development team demonstrated a commitment to a high level of community involvement in the project’s design development by making public engagement central to the process. The evaluation panel considered the proposed crowd-funding techniques to garner community ownership a fresh approach, though questioned the tenants’ capacity to support it. The proposed annual program budget for the art center is $300,000, which is the highest amount of the three proposals and involved an overly ambitious, and likely unrealistic approach to funding the program.

  

Financial Analysis and Capacity: There was concern that the REthink development team might not have the capacity and access to capital to finance the development. It is estimated that the project would cost approximately $82 million to construct.  The team’s financial assumptions are aggressive, which resulted in a higher ground lease payment than may actually be supportable.  The development team is proposing an initial $600,000 annual ground lease payment to the City escalating to $1.2 million annually after construction, representing the highest ground rent at project stabilization. The proposal had a number of innovative development and business concepts such as the formation of a “B” or Benefit Corporation, creation of a Business Improvement District and crowdfunding, though the panel and the City’s financial consultant felt that that assumptions may be overly optimistic in terms of timing, implementation, and revenue generation.  Rethink Development proposes to provide a $1.7 million donation to the Santa Monica Museum of Art to initiate their fundraising effort so that they could fund the design and construction of the museum, which concerned the selection panel since the Museum may have difficulty self-funding a project of this scope and scale.  The proposal also assumes that the Museum will construct their building on the Site, which could also be problematic.

 

Proposal Comparison: Fiscal and Economic Impacts

This section provides a more in-depth analysis of the projected fiscal and economic impacts of the 26Street TOD Partners LLC, Bergamot Station Ltd./Worthe Real Estate Group, and REthink Development/Kor Group proposals. This data is strictly development team-reported and varies based on the teams’ assumptions, and estimated construction and design costs.  The table below outlines the development teams’ proposed ground rent terms and reported estimates of annual revenues to the City. Attachment B provides an overall comparison matrix outlining additional details of the three proposals.    

 

 

BERGAMOT STATION LTD / WORTHE

26STREET TOD PARTNER LLC

KOR / RETHINK

Estimated Public Revenue

 

 

 

Base Ground Rent

$700,000

$750,000

$600,000 during construction; $1.2 million/yr. post-construction

 

Increases annually, compounded every 5 years; Potential retail revenue share.

Increases every 10 years based on CPI or cumulative 15% increase over period.

Not stated.

Lease Terms

55 yrs. + two(2) x 10 yr. extensions

55 yrs. + 44 yr. extension

55 yrs. + extensions

Property Tax

$155,529

$121,200

$168,577

Sales and Use Tax

$645,000

$315,000

$180,600

Utility User Tax

$55,243

$64,100

$84,074

Hotel Transient Occupancy Tax

$1,330,950

$1,024,100

$1,395,623

Total Estimated Tax Revenue

$2,186,722

$1,524,400

$1,828,874

 

The revenue stream dedicated to supporting the arts is a very important element to the development proposals in regards to creating a sustainable and vibrant arts center.  All teams addressed the development objective of providing at least 75,000 square feet of arts-related space that is affordable to non-profit cultural organizations and for-profit art galleries.   Below is a comparison table of the Arts Center Management and Marketing Budgets that are proposed by each team and information on each team’s tenant retention strategy.

 

 

Arts Center Management + Marketing

 

BERGAMOT STATION LTD / WORTHE

26STREET TOD PARTNER LLC

KOR / RETHINK

Annual Budget

$70,000/yr., escalating every 5 yrs. + 3% of revenues (Mgmt. Fee)

$200,000 (Yr. 1 Cultural Arts Trust seed funding); $150,000/yr. annually from Parking Fees Additional $ anticipated from Naming Rights.

$295,000/yr. at stabilization, up to $700,000/yr. (incl. BID fees, private memberships & sponsorships)

Tenant Retention Goal

100%, temporary space w/adjacent private owned bldgs.; CARS marketing support

All who commit to long-term; temporarily relocate to adjacent property; interim marketing + branding strategy

Budgeted tenant retention funds, free valet parking + offsite parking rental

 

 

The table below compares the capital investments projected under each proposal, both in terms of total project capital investment and capital investment in major public benefits.

 

 

BERGAMOT STATION LTD / WORTHE

26STREET TOD PARTNER LLC

KOR / RETHINK

Total Development Costs

$80,365,350

$92,032,617

$81,693,426

Per SF GBA

$363.15

$414.56

$406

Includes Museum Costs

Yes; $8,917,986 ($136/sq ft)

Yes; $7,000,000 ($350/sq ft)

No.  Includes $1.70 million museum contribution.  Museum to be developed separately.

Budgeted Tenant Improvements - Existing Buildings

$18.49/sq ft  for core + shell TI's on existing buildings; $82/sq ft site work (landscape, public amenities)--$2.36 M overall in core, shell + site work

$95/sq ft on existing buildings; $3.1 M - $4.4M overall (depending on Bldg. A retention);

$15-$35/sq ft ; $1.82 M overall

Budgeted Tenant Improvements - New Build (retail, restaurant, creative office)

$100/sq ft

$50/sq ft

 

$25/sq ft restaurants; $35/sq ft creative office

Includes Prevailing Wage

Not stated

Yes

Yes.  But does not appear to include financing/leasing costs.

 

In summary, the City’s financial consultant KMA confirmed that two of the development teams are well financed and have the capacity and access to capital to finance the development. There were some concerns raised about the REthink Development/Kor Group partnership’s financing plan.   Most of the cost assumptions presented by the development teams were reasonable but each team had a few aggressive assumptions within their proposals. However, once Council authorizes staff to enter into an ENA with one of the teams, there will be additional analysis and negotiations that will go into the development of a Disposition and Development Agreement (DDA) that will stipulate the specific financial terms of a ground lease.

 

Evaluation Panel Recommendation

 

Through its review as outlined above, the evaluation panel concluded that the proposal submitted by 26Street TOD Partners LLC (Development Team) best responded to the Council’s adopted development objectives and the RFP selection criteria through their original proposal and their responses to staff’s follow-up questions. KMA reconfirmed that the Development Team has the financial resources and development experience to complete the project. The proposal offered a development strategy that demonstrates the team’s capability to successfully deliver the project.  The evaluation panel appreciated the attention given to integrating the arts throughout the Site, providing affordable space for emerging and existing artists, and creating extensive public open space for community cultural events, along with the addition of experienced cultural programming partners and a robust, sustainable budget allocated to on-site cultural programming to elevate Bergamot Station Arts Center.  The overall development provides a diverse mix of uses that responds to Council’s adopted project objectives. The design approach offers iconic architecture, sustainable design and construction, and blends building preservation objectives with sensitive new infill development and plentiful open space. The cultural programming approach is robust. Finally, the proposal represents the largest amount of viable economic investment in the Site and the local economy.

 

Staff recommends entering into an exclusive negotiating agreement (ENA) with the recommended Development Team to further advance the development proposal, and seeks Council direction to work with the Development Team to initiate a community planning process that ensures that the project remains financially feasible.

 

Staff’s recommendation to enter into an ENA with 26Street TOD Partners LLC does not indicate full endorsement of all aspects of their proposal. The selection panel identified some concerns with the proposal, and seeks Council direction to work with the Development Team to initiate a community planning process that ensures that the project meets all public objectives for the future of the Bergamot Arts Center while remaining financially feasible.

 

To ensure the ethos of Bergamot Arts Center is maintained, it is recommended that this team (or the selected final team) be required to submit annual Arts Center Management Plan to the City’s Community & Cultural Services Department in order to ensure affordable space and cultural community programming is provided for the duration of the lease.  The team has readily agreed to this request and submitted additional ideas for measurements that should be required in the Arts Plan.  To ensure that at least 75,000 square feet of the development remains affordable to art and non-profit cultural organizations, the development team should be required to provide copies of leases and annual rent rolls for the duration of the ground lease.

 

Further, recognizing the significance of Wayne Blank’s vision and knowledge to the creation and longevity of Bergamot Station Arts Center, staff also recommends that the team seek to include him in some capacity in the project.  His expertise and relationships could help ease the transition from the existing Bergamot Station Arts Center and assist with the retention of the existing tenants.    

 

Exclusive Negotiating Agreement

If Council concurs with staff’s recommendation to move forward with negotiations with the development team, then staff recommends that the City and development team enter into an ENA.  An ENA affirms that the City will not negotiate with any other development team for the development of the site for the duration of the ENA. Entering into an ENA does not convey project approval or obligate the City to grant any entitlements. The ENA would require that the Development Team make a good faith deposit with the City and demonstrate evidence of financing prior to execution of a ground lease.

 

The purpose of an ENA is to set forth the terms and conditions under which the City and development team will work together to develop the scope of the project. The ENA would establish a schedule of performance for the Development Team to solicit community input and pursue Council approval of design concept plans. Once design concept plans are approved, the ENA would stipulate an additional negotiation period, typically six to twelve months including a base period and extension options, to fully negotiate a Disposition and Development Agreement (DDA). A DDA would fully stipulate the project details and lease agreement terms and would be subject to Council approval. 

 

If the schedule of performance outlined in the ENA is met, community input is incorporated, design concept plans are approved, and negotiations regarding business terms proceed favorably, staff would return to Council with a recommendation to enter into a DDA with the Development Team at a later date. If these benchmarks are not met, the City would have the right to terminate the ENA and cease negotiations with the development team.

 

Alternatives

Council may elect not to follow the selection panel’s recommendation regarding a preferred development team, and may decide not to enter into an ENA with the recommended development team or to enter into an ENA with an alternate development team. Council may also decide to give staff additional or alternative direction regarding the development and ongoing negotiations. 

 

Environmental Analysis

Authorization to negotiate and execute an ENA is exempt from CEQA.  The project may also require additional environmental review and may conduct a project EIR, if necessary.

 

Public Outreach

As part of the development of the Bergamot Area Plan, extensive outreach was conducted and provided the basis for the project objectives included in the RFP. Public outreach conducted from July 2011 to March 2012 included two community workshops; multiple focus groups with local gallery owners, regional cultural arts organizations, and entrepreneurs; individual meetings with over 25 local stakeholders; and feedback received from the Arts Commission, Planning Commission and City Council.  

 

Once Council selects a team, opportunities for community input on the proposed project will be extensive. During the ENA period, the Development Team would begin a community process focused on the proposed development, and has committed to incorporating community input throughout the development approval process. The project would go through the standard development application process, including float ups and board and commission presentations, and entitlements would be subject to Council approval.

 

 

Next Steps

During the exclusive negotiating period, the Development Team would begin community outreach efforts on the project design and open space programming, and incorporate feedback from the community and from City Council, boards, and commissions gleaned during initial float-up presentations. A disposition and development agreement and environmental analysis would follow, in accordance with the Bergamot Area Plan.   A development agreement application would not likely be submitted until sometime in 2015 and construction would not be expected to commence until 2017 at the earliest.

 

Financial Impacts & Budget Actions

There is no immediate financial impact or budget action necessary as a result of the recommended actions. Staff will return to Council if specific budget actions are required in the future.

 

Prepared by: Jason Harris, Economic Development Manager

                     Jennifer Taylor, Economic Development Administrator

  

 

Approved:

 

Forwarded to Council:

 

 

 

 

 

 

Andy Agle, Director

Housing and Economic Development

 

 

Rod Gould

City Manager

 

 

Attachments:

 

A.    Proposal Summary Sheets

B.    Development Summary Table