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To the Honorable Mayor and City Council <br /> From the City Manager <br /> <br />Presumably, the benefits of the below market financing that the City is providing will <br />be capitalized into a higher sale price should Mr. Keech sell this project. <br /> <br />Staff has analyzed the proposed changes and finds them, from a strictly financial <br />and legal perspective, acceptable. In making a decision to eliminate the prohibition <br />on subordinate loans and to eliminate the due-on-sale clause, the Council should be <br />comfortable with the fact that doing so creates the likelihood that someone other <br />than Mr. Keech may own this facility in the future. It is too speculative for staff to <br />offer an opinion as to how an owner other than Mr. Keech will or will not affect the <br />delivery of childcare services at this facility. <br /> <br />Rent Sharing <br />Staff and Mr. Keech identified two options for the City to select from, each of which <br />is designed to further limit the profits generated by this project: <br /> <br /> 1. Reduce the monthly rental rate at which the City and Mr. Keech equally share <br /> in excess revenues from $4.50 per square foot to $3.50 per square foot; or <br /> <br /> 2. Maintain the existing lease rate of $4.50 per square foot and increase the City <br /> share of the participation from 50% to 70%. <br /> <br />It is staffs .recommendation to elect the first of these two options (participation <br />begins at $3.50 per square foot). Although this is a significant reduction from the <br />current $4.50 per square foot, this amount continues to be increased annually by the <br />Bay Area consumer price index. With current market rates at approximately $2.00 <br />per square foot, local commercial real estate markets will need to experience a <br />substantial upswing in demand before the City will begin receiving any revenue <br />under this provision. <br /> <br />Alternatives <br />The Council may elect not to accept the changes proposed by Mr. Keech. We are <br />not certain what Mr. Keech's response would be but he has indicated that he would <br />likely abandon the entire project. <br /> <br />Should Mr. Keech abandon the project, the Council could direct staff to find another <br />location in the Redwood Shores area at which the City could construct a <br />combination childcare center and branch library. Under this concept, the City could <br />lease the childcare center to a private operator and use the proceeds of this lease to <br />provide additional funds to cover the increased operating costs associated with <br />operating the branch library. <br /> <br /> Page 6 of 7 <br /> <br /> <br />