City approves expedited leases, accepts $3.25M to vacate 875 Stevenson and signs ten-year leases for multiple departments

At a special 3 p.m. committee-of-the-whole hearing, the Board of Supervisors considered and then approved lease and exit agreements to relocate multiple city departments from 875 Stevenson Street, Real Estate Director John Updike told the board.

Why it matters: The leases and exit agreement accelerate relocations for a number of city departments and include monetary consideration to the city to cover moving costs and higher rent; they also commit the city to new long-term space and tenant-improvement arrangements.

What the Real Estate Department presented

John Updike, Director of Real Estate, said the city currently occupies about 81,400 square feet at 875 Stevenson Street and that the landlord (Shorenstein) sought early vacancy. As part of the negotiated exit, the city would vacate by no later than Feb. 4, 2013 and receive payments totaling $3,250,000 to cover move costs and rent differentials.

New leases and terms described

- 1155 Market Street (headquarters location): A 10-year lease with an exit option after five years (also described as an exit after 92 months). Initial lease rate stated at $31.67 per square foot, rising to $39.14 per square foot in the second year (the first-year rate reflects months of free rent blended into the first year), followed by 3% annual increases. Tenant-improvement allowance: $25 per square foot, with an additional $35 per square foot able to be amortized over the lease term.

- ReproMail operations: Relocation to 110 Twelfth Street (also referenced as 101 South Van Ness) into a single-use building of roughly 10,000 square feet; 10-year lease with exit rights after five years. Initial stated rate $30.95 per square foot with roughly 4% annual increases.

Budget and timing implications

Updike said the early-exit payment largely covers physical move costs (cubicle refinishing, new cubicles if needed), and that the budget impact is deferred to fiscal year 2014–2015. He explained the board needed to consider and approve the lease before landlords fronted tenant-improvement costs and other expenditures required to meet the landlord’s construction schedule during the holiday season.

Board questions

Supervisor Kim asked about landlord-financed tenant-improvement amortization at roughly an 8% interest rate and whether the city could find lower-cost borrowing mechanisms. Updike said market conditions had reduced landlord TI allowances and that for relatively small individual deals it was difficult to access cheaper borrowing methods; he said the department would work with the Controller’s Office to track collective spending and explore bundling options in the future.

Public comment and action

The public hearing record was opened, public comment was taken and then closed. The board adopted the lease-related items (items 9–11) by roll call after the hearing; the clerk recorded unanimous adoption (11 ayes).

Ending

The board approved the expedited exit and entry agreements and directed staff to proceed with relocation steps consistent with the approved leases; departments affected will move forward with implementation per the terms described by Real Estate.