Westminster City Council
SUBJECT
Title
Addendum No. 2 to the Commercial - Industrial Lease - Triple Net Agreement at 15550 Beach Boulevard.
End
From: Christine Cordon, City Manager
Requested by: Administration
Prepared by: Ryan Salz, Senior Management Analyst
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RECOMMENDED ACTION
Recommendation
Approve and execute the draft Addendum No. 2 to the Commercial - Industrial Lease - Triple Net Agreement at 15550 Beach Boulevard.
BACKGROUND
On February 23, 2011, the former Westminster Redevelopment Agency approved the Purchase Agreement for the real property located at 15550 Beach Boulevard. The purpose of the purchase was to allow for the attraction and opening of a new automotive dealership. Upon completion of a comprehensive study to assess the property’s possible use and revenue generating potential, staff negotiated a purchase price of $18,000,000.
Following the execution of the Purchase Agreement, the former owner, NW Investment Co., Inc (“NW Investment”), executed an Assignment of Lease to the Westminster Redevelopment Agency on March 2, 2011 (Attachment 1). Prior to the sale of the land, the NW Investment executed a lease for the front portion of the property with The Dennis and Grace Lin Family Trust on November 12, 2010. Dennis Lin is the current owner and operator of the Orange Coast Infiniti automotive dealership located at 15550 Beach Boulevard. Section 6 of the Lease Agreement confines the use of the site to be “for a new automotive dealership selling and leasing new and used vehicles as well as providing repairs and service and other automobile related uses.” Following the Assignment of Lease, Dennis Lin became the Lessee to the City of Westminster, the Lessor.
One week prior to executing the Assignment of Lease, NW Investment collaborated with the City of Westminster and Dennis Lin to execute the Amendment to Lease on February 25, 2011 (Attachment 2). The key terms described in the Amendment include: the burden of property taxes to be assumed by the Lessor, waiving the first four months of rent following a sale to the City, rental payment increases to commence in the seventh lease year, and a commitment by the Lessee to complete a rehabilitation and renovation of the premises that would cost approximately $3,000,000. Following the Assignment and Amendment to the Lease, the Lessee began development of the Orange Coast Infiniti dealership. The dealership has been successful in the City for over a decade and has positively contributed to the City’s fiscal revenue generation goals, in addition to the rent payments paid monthly. Orange Coast Infiniti, along with the other major automobile dealerships in the City, are major contributors to the City’s overall sales tax revenue.
On June 13, 2013, the City of Westminster executed Addendum No. 1 to the Lease Agreement (Attachment 3). The purpose of Addendum No. 1 was to incorporate the rear portion of the site into the Lease Agreement. The original Lease Agreement only included the front portion bordering Beach Boulevard. A visual depiction of the front and rear portion is displayed in Attachment 4. Addendum No. 1 allowed for the development of an additional dealership, Airstream Motor Coach and Trailer (“Airstream”). The term for this Addendum was 36 months from the effective date of June 17, 2013. As substitution for a rent payment during this time period, the Addendum required the Lessee to construct certain improvements to the property. The Airstream dealership was developed on the rear portion of the property in accordance with Addendum No. 1; however, the dealership’s sales office ultimately relocated to Midway City in 2018. The point-of-sale location is important to the City because it defines where the sales tax is assessed. When the Airstream dealership moved to Midway City, the share of sales tax revenue went from the City of Westminster to the County of Orange.
In recent years, the City reengaged in discussions with Dennis Lin. The intent of these discussions has been to update the Lease Agreement to encompass the value of the rear portion and enable the development of another vehicle dealership on the property. As a result, the Draft Addendum No. 2 to the Lease Agreement (Attachment 5) was completed and successfully accomplishes both goals of the City.
Addendum No. 2 would raise the total monthly rent payment to $100,104. This new proposed monthly rent amount is validated by a Market Rent Value Appraisal produced by a professional appraiser. The Rent is $64,990 under the current version of the Lease Agreement. The Rent change will result in an annual increase of $421,368 to General Fund revenue. Each of these Rent figures will be adjusted for inflation annually in accordance with Section 53 of the Lease Agreement. Also, Addendum No. 2 allows for the development of “a secondary dealership, including, but not limited to, an "Airstream Motor Coach and Trailer" dealership, a second automotive dealership, a powersports dealership, an RV dealership, or other sale of new and used vehicles. Sales of used vehicles, repairs, parts and services shall be secondary and support the primary use.” Dennis Lin plans to develop a new sales office building and bring the Airstream Dealership back to the City of Westminster. The estimated cost of the development is over $2,000,000 and will be paid for entirely by the Lessee. The development will not only increase the overall value of the City-owned property, but also enable the success of the new dealership. The expanded definition of allowed uses provides more flexibility throughout the life of the Lease Agreement, which would enable the Lessee to pivot to another type of vehicle dealership if needed. For example, if the long-term market for Airstream vehicles becomes weak and outdated, the Lessee may choose to sell another vehicle type that has a higher demand and revenue potential in those future market conditions.
In addition to the major provisions described above, the following changes are also incorporated into Addendum No. 2:
• Restates and ratifies the inclusion of the Rear Portion, as described in Addendum No. 1.
• The term of the Lease is extended to November 30, 2041 and retains the Lessee’s right to the option of extending the term for an additional ten years.
• Lessee receives an abatement of rent for the Rear Portion for the first full 15 months of the lease in the amount of $34,000.00 per month.
• All uses shall have the City of Westminster as the primary point-of-sale.
• Any change of use from the defined allowable uses shall require the approval of the Westminster City Council.
• Termination of the Addendum is allowed if the cost of necessary CEQA studies and consultants exceeds $25,000 (City is confident that costs will be less than this amount).
During the course of discussions with the Lessee, the City utilized an economic consultant, Economic & Planning Systems (“EPS”), to evaluate the site via a Highest and Best Use Analysis (Attachment 6). The purpose of this study was to ensure that an additional automotive dealership is the “highest and best use” of the site from a fiscal revenue standpoint. The analysis resulted in a few key findings, all of which point to the conclusion that the highest and best use of the site, from both fiscal and development feasibility perspectives, appears to be its existing operation as an automotive dealership, particularly if the point-of-sale for the Airstream dealership is reallocated to the City. Based on these findings by EPS, the execution of Addendum No. 2 to the Lease Agreement should maximize the City’s long-term fiscal revenue potential for the City-owned site. Additionally, the City would have to adhere to the strict requirements of the Surplus Land Act if the rear portion of the site was to be considered for another commercial purpose.
FISCAL IMPACT
The Lessee, Dennis Lin, currently pays $64,990 per month to the City under the active Lease Agreement for the front portion of the property. With the inclusion of the rear portion, the total payment would increase to $100,104 per month. This would result in a $35,114 monthly increase in revenue to the City. Each of these Rent figures will be adjusted annually in accordance with Section 53 of the Lease Agreement. In addition, the introduction of a new vehicle dealership would generate a substantial annual increase in sales tax revenue.
LEGAL REVIEW
The City Attorney’s Office has reviewed as to form.
CONCLUSION
The City purchased the site located at 15550 Beach Boulevard in February 2011. Since the Assignment of Lease shortly thereafter, Dennis Lin became a Lessee to the City and developed the prominent automotive dealership, Orange Coast Infiniti. Execution of Addendum No. 2 to the Lease Agreement would facilitate a substantial annual increase in General Fund revenue by means of increased Rent and the introduction of a secondary dealership on the site. If Addendum No. 2 to the Agreement is executed tonight, it will become effective on November 1, 2024.
ATTACHMENTS
1. 15550 Beach Boulevard Assignment of Lease
2. Amendment to Lease
3. Addendum No. 1 to the Lease Agreement
4. Site Map
5. Draft Addendum No. 2 to the Lease Agreement
6. Highest and Best Use Analysis
REVIEWED BY
Erin Backs, Finance Director
Christian Bettenhausen, City Attorney
Christine Cordon, City Manager