REPORT/RECOMMENDATION TO THE BOARD OF SUPERVISORS
OF SAN BERNARDINO COUNTY
AND RECORD OF ACTION
June 27, 2023
FROM
TERRY W. THOMPSON, Director, Real Estate Services Department
DIANE RUNDLES, Assistant Executive Officer, Human Resources
SUBJECT
Title
Lease Agreement with Shaco Inc., for Office and Training Center Space in San Bernardino
End
RECOMMENDATION(S)
Recommendation
1. Find that approval of a 10-year lease agreement with Shaco Inc. is an exempt project under California Environmental Quality Act Section 15301 Existing Facilities (Class 1).
2. Approve the Real Estate Services Department’s use of an alternative procedure in lieu of a Formal Request for Proposals as allowed per County Policy 12-02 - Leasing Privately Owned Real Property for San Bernardino County Use, to lease approximately 40,616 square feet of office and training center space from Shaco Inc., for 10 years for the projected period of January 1, 2024 through December 31, 2033, subject to the earliest to occur of (i) landlord’s substantial completion of certain tenant improvements, (ii) San Bernardino County’s receipt from landlord of a temporary or final certificate of occupancy, or (iii) written acceptance of the improvements by San Bernardino County, with two five-year options to extend the term of the lease located at 217 East Club Center Drive, Suite A, in San Bernardino.
3. Approve a lease agreement with Shaco Inc., including non-standard terms, for 10 years for the projected period of January 1, 2024 through December 31, 2033, subject to the earliest to occur of (i) landlord’s substantial completion of certain tenant improvements, (ii) San Bernardino County’s receipt from landlord of a temporary or final certificate of occupancy, or (iii) written acceptance of the improvements by San Bernardino County, with two five-year options to extend the term of the lease, for approximately 40,616 square feet of office and training center space located at 217 East Club Center Drive, Suite A, in San Bernardino, in the amount of $18,738,371.
4. Authorize the Purchasing Agent to issue purchase orders, as necessary, for a total amount not to exceed $100,000, for approved unforeseen contingencies and/or approved change orders that may arise in order to complete the tenant improvements set forth in the 10-year lease agreement with Shaco, Inc. (Four votes required).
5. Approve $1,500,000 appropriation adjustment to fund San Bernardino County’s purchase of furniture and completion of information technology upgrade work for the premises, with the total cost of this purchase estimated to be $4,500,000 and authorize the Auditor-Controller/Treasurer/Tax Collector to post the necessary budget adjustments as detailed in the Financial Impact section (Four votes required).
6. Direct the Clerk of the Board of Supervisors to file and post the Notice of Exemption for the project as required under the California Environmental Quality Act.
(Presenter: Terry W. Thompson, Director, 387-5000)
Body
COUNTY AND CHIEF EXECUTIVE OFFICER GOALS & OBJECTIVES
Operate in a Fiscally Responsible and Business-Like Manner.
FINANCIAL IMPACT
Approval of this item will not require additional Discretionary General Funding (Net County Cost). The total cost of this 10-year agreement is $18,738,371, comprised of $15,030,114 for total rent and $3,708,257 for tenant improvements, which will be entirely amortized over the initial 10-year term of the lease. The total cost will be funded 66% by Performance, Education and Resource Centers (PERC) and 34% by the Human Resources Department (HR).
Lease payments and anticipated annual costs associated with the lease will be made from the Real Estate Services Department (RESD) Rents budget (7810001000) and reimbursed from the Human Services Administrative (HS) Claim budget (5010001000). Sufficient appropriation will be included in the 2023-24 Rents and HS recommended budgets and will be included in future recommended budgets. Annual lease costs for a projected commencement date of January 1, 2024, are as follows:
|
Year |
*Annual Lease Costs with Tenant Improvements |
Anticipated Annual Costs Associated with the Lease |
|
January 1, 2024 - December 31, 2024 |
$ 1,681,910 |
$ 248,570 |
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January 1, 2025 - December 31, 2025 |
$ 1,721,243 |
$ 253,541 |
|
January 1, 2026 - December 31, 2026 |
$ 1,761,755 |
$ 258,612 |
|
January 1, 2027 - December 31, 2027 |
$ 1,803,483 |
$ 263,784 |
|
January 1, 2028 - December 31, 2028 |
$ 1,846,463 |
$ 269,060 |
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January 1, 2029 - December 31, 2029 |
$ 1,890,732 |
$ 274,441 |
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January 1, 2030 - December 31, 2030 |
$ 1,936,329 |
$ 279,930 |
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January 1, 2031 - December 31, 2031 |
$ 1,983,294 |
$ 285,529 |
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January 1, 2032 - December 31, 2032 |
$ 2,031,668 |
$ 291,239 |
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January 1, 2033 - December 31, 2033 |
$ 2,081,494 |
$ 297,064 |
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Total Cost |
$ 18,738,371 |
$2,721,770 |
* Includes monthly amortized tenant improvement payments.
The purchase of furniture and completion of information technology upgrade work (separate from the tenant improvements to be provided by landlord under the lease) for the premises will be made by HS with partial funding from HR. Sufficient appropriation will be included in HS’s 2023-24 recommended budget. The total cost of this purchase is estimated to be $4,500,000 with $1,500,000 to be funded by HR salary savings in 2022-23. The following budget adjustment is necessary to transfer funds from HR to HS to fund this one-time purchase for the new office space.
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Fund Center |
Commitment Item |
Description |
Action |
Amount |
|
7200001000 |
51001010 |
Regular Salary |
Decrease |
$1,500,000 |
|
7200001000 |
55305030 |
Operating Transfer Out |
Increase |
$1,500,000 |
|
5010001000 |
40909975 |
Operating Transfer In |
Increase |
$1,500,000 |
BACKGROUND INFORMATION
HS, HR, and PERC wish to relocate staff from their current location at 295 East Caroline Street, Suite C in San Bernardino, and to move into 40,616 square feet of office space located at 217 East Club Center Drive, Suite A, in San Bernardino, which is near the former PERC facility. This will enable HS, HR, and PERC to increase the scope of their onsite training initiatives and will have the capacity for trainings, meetings, and large events for all County departments to utilize when available.
The move will make it possible for development programs to better serve the public and County departments by offering a training space, as well for onboarding new employees through HR. This facility will be furnished with cutting-edge technology to support its focus on recruiting and retaining talent. This lease offers a bigger footprint for HS, PERC, and HR onboarding to increase training capacity at all levels as well as the onboarding experience for new employees. The new 10-year lease with Shaco Inc. will better serve the needs of the County.
On April 24, 2023, the County Administrative Office approved Capital Improvement Program (CIP) Project Request No. 23-179 submitted by HS, HR, and PERC to lease approximately 40,616 square feet of office space located at 217 East Club Center Drive, Suite A in San Bernardino.
RESD negotiated a 10-year lease with two five-year options to extend the term of the lease. The term of the lease is for 10 years for the projected period January 1, 2024, through December 31, 2033, subject to the earliest to occur of (i) landlord’s substantial completion of certain tenant improvements set forth in the lease, (ii) County’s receipt from landlord of a temporary or final certificate of occupancy, or (iii) written acceptance of the improvements by the County. While the County standard is for the commencement date to be the latest to occur of the foregoing rather than the earliest, which could trigger the commencement of rent prior to the County having full use or access to all or portions of the premises and parking, RESD recommends approval of the lease because the landlord would not agree unless the commencement date was the earliest to occur of the foregoing events. The desired area and location, as well as amount and configuration of space required by the departments resulted in limited available options for office space. The tenant improvements are projected to be completed by January 1, 2024, and the departments are expected to move into the building within 90 days of this date.
The total cost of the 10-year lease is $18,738,371, comprised of $15,030,114 for total rent and $3,708,257 for tenant improvements, which will be entirely amortized over the initial 10-year term of the lease. The initial rent, excluding improvements, is $2.69 per square foot per month, modified gross, with the rental rate subject to 3% annual increases. The tenant improvements include additional staff workspace, conference rooms to accommodate staff as well as meetings, hiring and onboarding events, trainings and other special events. The County shall have the right to terminate the lease for the premises or any portion thereof at any time after the end of year eight of the initial lease term by giving the landlord written notice with the effective termination date being at least 365 days after the date of said notice.
Although tenant improvements are included in the monthly payments, RESD requests, on behalf of HS, HR, and PERC that the Board of Supervisors (Board) authorize the Purchasing Agent to issue purchase orders, as necessary, for a total amount not to exceed $100,000 for any unforeseen contingencies and/or change orders that may be needed to complete the tenant improvements set forth in the initial lease. All change orders and/or contingencies will be approved by HS, HR, and PERC prior to authorizing any work or payment(s) to the landlord.
The lease provides the following authority for the RESD Director in administering the lease: to exercise the County’s early termination right; to execute a commencement date certificate to verify the occurrence of the actual commencement date so long as that date is within 180 days of the projected commencement date; to execute estoppel certificates confirming facts regarding the lease and subordination, non-disturbance, and attornment agreements to preserve the County’s lease rights during landlord’s financing transactions involving the real property, provided that lender requested modifications that materially differ from the County’s standard form shall be subject to Board approval; to execute amendments to the lease that solely reflect a successor landlord following the original landlord’s sale of the real property and assignment of the lease; and to make determinations regarding the occurrence of reimbursable maintenance events payable due to the intentional misconduct of County employees and invitees to the premises, so long as such reimbursement does not exceed $5,000 per event.
The project to approve a 10-year Lease agreement with Shaco Inc., was reviewed pursuant to the California Environmental Quality Act (CEQA) and determined to be categorically exempt under Section 15301 - Existing Facilities (Class 1) because there is no possibility that the leasing of the subject property will have a significant effect on the environment.
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Summary of Lease Terms |
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Lessor: |
Shaco Inc. (Peter Ahn, President) |
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Location: |
217 East Club Center Drive, Suite A, San Bernardino, California |
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Size: |
40,616 square feet of office and training center space |
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Term: |
10 years with projected commencement date of January 1, 2024, subject to the earliest to occur of (i) landlord’s substantial completion of certain tenant improvements, (ii) County’s receipt from landlord of a temporary or final certificate of occupancy, or (iii) written acceptance of the improvements by the County |
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Options: |
Two five-year options to extend the term of the lease at fair market value by providing not less than 180 days’ notice prior to the expiration of the preceding term; County is irrevocably bound by arbitration if the parties do not mutually agree on fair market value |
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Rent: |
Cost per square foot per month: $2.69* Modified gross (excluding improvements) |
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Monthly: $109,257 (excluding improvements) |
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Annual: $1,311,084 |
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*High-range for comparable facilities in the San Bernardino area per the competitive set analysis on file with RESD |
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Annual Increases: |
3% |
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Improvement Costs: |
$3,708,257 which shall be amortized over the initial 10-year term of the lease, and an allocation of up to $100,000 for approved unforeseen contingencies and/or approved change orders to the tenant improvements to be authorized and paid by purchase orders as needed |
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Custodial: |
Provided by Lessee |
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Maintenance: |
Provided by Lessor, excluding the County’s furniture, fixtures, and equipment |
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Utilities: |
Provided by Lessor, including the heating, ventilation and air conditioning services with ambient air temperatures approved by the County during normal office operations from 7:00am - 6:30pm, Monday through Friday and upon request, except all County recognized holidays, but paid by the County |
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Insurance: |
The Certificate of Liability Insurance as required by the lease will be obtained by RESD prior to occupancy |
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Right to Terminate: Holdover |
At any time after the end of year eight of the initial lease term, the County shall have the right, at its option, to terminate the lease to the premises or any portion thereof by providing prior written notice to landlord with the effective termination date being at least 365 days after the date of said notice In the event the County shall holdover and continue to occupy the premises with the consent of the landlord, expressed or implied, the tenancy shall be deemed to be a tenancy from month-to-month upon the same terms and conditions, including rent, as existed, and prevailed at the time of the expiration of the term of this lease |
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Parking: |
25 reserved parking spaces shall be provided and allocated for County’s exclusive use; and shared use of approximately 400 unreserved parking spaces on the property |
The lease includes terms that differ from the standard County contract. The non-standard terms include the following:
1. If the parties do not agree on the fair market rent for an extension option term at least 90 days prior to the commencement of said term, the parties are irrevocably bound by arbitration and the party whose proposed fair market rent is not selected by a third-party arbitrator shall pay the third-party arbitrator’s costs.
• The County standard contract does not require arbitration.
• Potential Impact: The County would be bound by rental rates determined by a third-party arbitrator regardless of the amount and arbitration decisions are not appealable.
2. The lease requires the landlord to carry commercial property insurance to insure for 80% of the replacement cost.
• The County standard contract requires landlords to carry commercial property insurance to insure for 100% of the replacement cost.
• Potential Impact: The landlord may have a shortfall in the event of an insured event that may impact its ability to restore the premises. RESD recommends approval of this non-standard term because the Lessor required insurance coverages to be the same as other occupying tenants of the industrial complex.
3. The lease is effective the earliest of the (i) landlord’s substantial completion of certain tenant improvements set forth in the lease, (ii) County’s receipt from landlord of a temporary or final certificate of occupancy, or (iii) written acceptance of the improvements by the County, projected to be January 1, 2024.
• The County standard contract often requires the commencement date to be the latest to occur of the foregoing rather than the earliest.
• Potential Impact: County would potentially have to pay rent on a space that is not ready for County’s use.
RESD recommends approval of the lease, including non-standard terms, as the location will make it possible for development programs to better serve the public and County departments by offering a training space, as well for onboarding new employees through HR.
PROCUREMENT
RESD is requesting the Board to approve the use of an alternative procedure in lieu of a Formal Request for Proposals (RFP) as allowed per County Policy 12-02 - Leasing Privately Owned Real Property for County Use (Policy 12-02), to lease approximately 40,616 square feet of office space in San Bernardino for HS, HR, and PERC for 10 years for the projected period of January 1, 2024 through December 31, 2033, subject to the earliest to occur of (i) landlord’s substantial completion of certain tenant improvements, (ii) County’s receipt from landlord of a temporary or final certificate of occupancy, or (iii) written acceptance of the improvements by the County, with two five-year options to extend the term of the lease. Policy 12-02 provides that the Board may approve the use of an alternative procedure to the use of a Formal RFP process whenever the Board determines that compliance with the Formal RFP requirements would unreasonably interfere with the financial or programmatic needs of the County, or when the use of an alternative procedure would otherwise be in the best interest of the County.
RESD, acting in its approved capacity as the County Administrative Office designee to review proposed real property leases under Policy 12-02, completed a competitive analysis of the area and found the lease rate is competitive for a 10-year term and this premises best meets the requirements of the department due to its proximity to the PERC and HR main campus.
REVIEW BY OTHERS
This item has been reviewed by County Counsel (Agnes Cheng, Deputy County Counsel, and Cynthia O’Neill, Deputy County Counsel, 387-5455) on April 19, 2023; Human Resources (Diane Rundles, Assistant Executive Officer, 387-5570) on March 28, 2023; Purchasing (Bruce Cole, Supervising Buyer, 387-2148) on April 20, 2023; Finance (John Hallen, Administrative Analyst, 388-0208, and Yael Verduzco, Principal Administrative Analyst, 387-5285) on June 2, 2023; and County Finance and Administration (Cheryl Adams, Deputy Executive Officer, 388-0332, and Valerie Clay, Deputy Executive Officer, 387-5423) on June 2, 2023.
(AR: 893-0002)