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/Ó-BJ/ Redwood Shores Child Care Report 11/13/00 Page 4 of 7 able eventually to recover its investment in the project through either rental income receipts or the sale of the property. To evaluate Mr. Keech's proposal and project economics, the City's real estate consultant, Keyser Marston Associates, Inc., was asked to review the project as negotiated. Keyser Marston concluded that the project, with the income as projected, produces a return that is on the higher end of the range for projects today, but not beyond the range necessary to attract equity in today's investment environment. Particularly in light of the restricted use for most of the building and other site factors which would likely constrain the upside income and capital appreciation potential of the project, Keyser Marston viewed the terms negotiated by staff with the developer as reasonable. Staff negotiated the following basic terms: 1. An initial 31-year lease at $1,000 annually, with successive renewal te.rms at then-prevailing market rates. When the site lease converts to a market rate, it will pay at 9% of the site's market value, to increase annually at the CPI, and to be marked to the market after 10 years. This lease term complies with the City's charter. The nominal rate for the initial term represents a land subsidy of up to approximately $10 per square foot of net rentable area2, or approximately $525,000. In providing this discount, the City is in effect "buying" the restriction that the property be limited in its use to a childcare facility. 2. The project will include 5,000 additional square feet of commercial space. This additional space (and its intended use) was critical to making the project "pencil out" for the developer. 3. The City's Financial Commitment to the project will increase to a maximum of $3.2 million. The commitment will a) amortize over 20 years, b) at the City's option, be subject to a demand for repayment after 10 years, c) include the equivalent of interest at the State of California's Local Agency Investment Fund ("LAIF") rate plus 1.5 percentage points, d) be pre-payable by the developer at any time without penalty, e) be non-transferable and due and payable upon sale of the building. 4. Pursuant to the site lease, a "Base Rental Rate" will be established for the office space at $4.S0/month, triple net, to increase annually at the Bay Area consumer's price index ("CPl"). Fifty percent of the office rents in excess of the Base Rental Rate will be payable to the City. 5. The City will have an easement from the owner of the adjacent hotel site, in perpetuity, for egress and for utilities. 6. The project will be exempt from paying the GID 1-64 facility fee of $7.50/ square foot of developed area ($112,500). Mr. Keech represents that the 2 See Attachment 1 for an explanation of how this figure was calculated.