HomeMy WebLinkAboutRS2- Development Department VELOPMENT DEPARTMI T
OF THE CITY OF SAN BERNARDINO
REQUEST FOR COMMISSION/COUNCIL. ACTION
FROM: KENNETH J. HENDERSON SUBJECT: FREEWAY HOME CENTER
Executive Director
DATE: December 17, 1993
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Synopsis of Previous Commission/Council/Committee Action(s):
On December 9, 1993, the Redevelopment Committee forwarded the subject proposal to the Community
Development Commission without a recommendation and instructed staff to complete its due diligence so the
matter could be favorably considered by the Community Development Commission on December 20, 1993.
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Recommended Motion(s):
(Community Development Commission)
MOTION A: That the Community Development Commission approve a $2.5 million dollar loan guarantee to
Allan Steward, Inc., for the purchase and development of the Freeway Home Center project
subject to review and approval of Allan Steward's financial capacity, approval by the
Community Development Commission of an Owner Participation Agreement and close of
escrow within ninety (90) days of Commission approval. Further, that staff be authorized to
pay to the Resolution Trust Corporation (RTC) a deposit in the amount of$85,000 with only
75% of such deposit ($63,750) to be repaid by Allan Steward, Inc., to the Agency in the event
escrow fails to close.
or
We—
Administrator KENNETH J. 14NDERSON
Executive Director
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Contact Person(s): Kenneth J. Henderson/Emily Wong Phone: 5081
Project Area(s): Southeast Industrial Park Ward(s): Three (3)
Supporting Data Attached: Staff Report: Attachments 1• II• III
FUNDING REQUIREMENTS: Amount: $2,500,000 Source: Tax Increment
Budget Authority: Requested
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Commission/Council Note
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KJH:DJN:nml:fwyhome.cdc COMMISSION MEETING AGENDA
MEETING DATE: 12/20//1993
Agenda Item Number: kl-)`
—r?
REQUEST FOR COMMISSIC "OUNCIL APPROVAL
Freeway Home Center
December 17, 1993
Page Number -2-
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MOTION B: That the Community Development Commission authorize and direct staff to submit
a $2.5 million loan application to a private lender for the purpose of reloaning such
loan proceeds to Allan Steward, Inc., subject to review and approval of Allan
Steward's financial capacity, approval by the Community Development Commission
of an Owner Participation Agreement, execution of a personal guarantee by Allan
Steward and close of escrow within ninety (90) days of Commission approval.
Further, that staff be authorized to pay to the Resolution Trust Corporation (RTC) a
deposit in the amount of$85,000 with 100% of such deposit to be repaid by Allan
Steward, Inc., in the event escrow fails to close.
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KJH:DJN:nml:fwyhome.ede COMMISSION MEETING AGENDA
MEETING DATE: 12/20/1993
Agenda Item Number:
DEVELOPMENT DEPARTMENT
STAFF REPORT
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Freeway Home Center
PROPERTY DESCRIPTION
The Freeway Home Center, located at 1408-1680 South "E" Street, is a showroom retail
center specializing in home furnishings and accessories. The property consists of seven (7)
concrete tilt up buildings constructed in 1985 with 144,503 net rentable square feet on 8.43
acres. The site contains 693 parking spaces and is zoned commercial general. All buildings
are currently under the control of the Resolution Trust Corporation (RTC).
The Freeway Home Center is generally attractive and in good condition with minor deferred
maintenance items. It is conveniently situated near the intersection of I-215 and I-10 and has
good visibility directly from the freeway. It is also located within close proximity to the
Inland Center Mall.
PROJECT PROPOSAL
Allan Steward, Inc.'s proposal is requesting a loan guarantee from the Agency in the amount
of $2,500,000. The proceeds of the loan will be used to purchase the buildings from RTC at
a total cash price of $1,700,000. The remaining $800,000 will be used to improve the
properties and provide working capital. In return, the Agency will participate in receiving
' twenty-five percent (25%) of the project's net operating income as well as twenty-five percent
(25%) of the net proceeds from any eventual sale of the property. The key terms, conditions
and deal points are summarized below:
Loan Amount: $2,500,000
Proposed Financing: Nine percent (9%) interest rate amortized over twenty
(20) years, due in seven (7) years. The monthly debt
services is calculated to be $269,917 with a balance of
$2,064,214 due at the end of year seven.
RTC Purchase Price: $1,700,000
Improvements/Working Capital: $ 800,000
t/ ----------------------------------------------------------------------------------------------------------------------
KJH:DJN:nml:fwyliome.cdc COMMISSION MEETING AGENDA----
MEETING DATE: 12/20/1993<<
Agenda Item Number: ,)
DEVELOPMENT DEPARTMENT STAFF REPORT 0
Freeway Home Center
December 17, 1993
Page Number -2-
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Deposit: Agency will submit a five percent (5%) deposit (85,000)
on behalf of Allan Steward, Inc. to open escrow. Should
escrow fail to close, Allan Steward, Inc. will refund
seventy-five percent (75%) or $63,750 back to the
Agency. If escrow closes, the Agency will be reimbursed
its full $85,000 deposit from the loan proceeds.
Security: Allan Steward, Inc. will execute both a quit claim deed
and an assignment of rents in favor of the Agency with a
condition subsequent which will not go into effect unless
and until such time as Allan Steward, Inc. defaults on the
loan.
GROUND LEASES
The use of the land is provided by the following ground leases:
1. City of Riverside - 5.133 acres with an original term of fifty (50) years which
terminates on April 30, 2035. The current annual lease payment is $226,374. The
lease payment is to be adjusted every ten (10) years to fair market rent, based on fair
market value.
2. D. & E. Teakell and B. & S. Barrad - 3.3 acres with an original term of fifty-five (55)
years which terminates on November 10, 2040. The current annual lease payment is
$188,573. Annual CPI increases are scheduled to begin on November 11, 1988,
subject to a five percent (5%) minimum. At the end of twenty (20%) years (2005) and
forty (40) years (2025), the annual rental payment is to be adjusted to the fair market
rent with continued annual CPI increases.
The total ground lease payment for Year 1 is $414,947 with continued annual increases.
APPRAISAL VALUATION
According to the "due diligence" report provided to RTC dated August 6, 1993 (see
Attachment I), a recent appraisal dated March 11, 1993 valued the leasehold estate at
$3,000,000. This was based on an assumed market rent of $.60 per square foot. triple net and
a sixty-two percent (62%) vacancy rate.
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KJH:DJN:nml:fwyhome.cdc COMMISSION MEETING AGENDA
MEETING DATE: 12120/1993
/
Agenda Item Number: ! �J
DEVELOPMENT DEPARiMENT STAFF REPORT
Freeway Home Center
December 17, 1993
Page Number -3-
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VACANCY RATE
The project's current vacancy rate is approximately seventy percent (70%). According to a
rent roll dated September 25, 1993, submitted by Allan Steward, Inc., indicates that 72,461
square feet is currently under lease. However, four (4) of the eight (8) tenants are delinquent.
A portion of those tenants have vacated or are in the process of vacating the premises.
Actual rents collected are estimated to be $24,282 per month or $291,384 per year, which is
insufficient to pay the $414,947 ground lease.
FINANCIAL ANALYSIS
Staff has submitted a cash flow projection (see Attachment III) based upon the following key
assumptions:
1. 144,503 square feet @ $30/square foot
2. Twenty (20) year amortization of the loan.
3. Vacancy rate projected at fifty percent (50%) (year 1), thirty percent (30%) (year 2),
fifteen percent (15%) (year 3) ten percent (10%) (year 4 - 7).
4. Staff projections show a negative cash flow of <$239,217> for year 1. Years 2
through 7 show a positive cash flow of $18,175 (year 2) $204,995 (year 3) $251,656
(year 4) $227,638 (year 5) $202,420 (year 6) $175,940 (year 7).
The summary of operations detailed in the RTC Report indicates a negative Net Operating
Income (NOI) of <$63,000> in 1992. The NOI for the six (6) months ending June 30, 1993
was approximately breakeven.
CONDITIONS FOR LOAN GUARANTEE
According to Mr. Steward, his company must open escrow with a good faith earnest money
deposit of $85,000 no later than December 22, 1993. After December 22, 1993, the RTC will
invite purchase offers from the general public. Public bidding could result in a higher or
lower sales price, but would not appe�u- to preclude Allan Steward, Inc. from the process.
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KJH:DJN:nml:fwyhome.cdc COMMISSION MEETING AGENDA
MEETING DATE: 12/20/1993
Agenda Item Number: �)
DEVELOPMENT DEPAk 1'MENT STAFF REPORT
Freeway Home Center
December 17, 1993
Page Number -4-
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Due to time constraints, staff has not had the opportunity to evaluate Allan Steward, Inc. in
regards to financial capacity. Additionally, it would be prudent to execute a Disposition and
Development Agreement specifying all dealpoints including conditions for providing the
deposit, proof and documentation of financial capacity, and pledges of security if any.
Financial assistance has been requested in the form of a loan guarantee. Should Mr. Steward
be unable to obtain financing based upon a guarantee by the Agency, he has requested that
the Agency apply for a loan with a financial institution, which in turn would be made to
Allan Steward, Inc.
The current state of the subject property has, to a great extent, resulted from the recession and
the consequences of non - intensive property management through foreclosure. Proper
management coupled with an aggressive marketing/leasing campaign may help to remedy the
situation. However, a continued recessionary decline may result in decreasing fair market
rental values and a change in retail use.
o
Attachments I through III are provided for your information.
Based upon the foregoing, staff recommends adoption of the form motion.
��66!
KENNETH J. HENDERSON, Executive Director
Development Department
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KJH:DJN:nml:fwyhome.cdc COMMISSION MEETING AGENDA
MEETING DATE: 12/20/1993
Agenda Item Number: _
FREEWAY HOME CENTER
1408.1680 I, Street RTC REPORT
San Bernardino, California
REOMS # 823994935
Control # 8
IDENTIFICATION
The subject property, known as Freeway Home Center('Center"), i4 a showroom retail center specializing in
home fun3ishings and accessories. It is located on the vest side of"E" Street id the City of Sari Berttafd1no,
California. The site is immediately north of the intersection of Interstams 215 and 10 (I-215 and I.10), with
prominent freeway exposure along the easterly side of I-215. The site is centrally located in the "Inland
Empire" area. within a quarter mile of the Orange Show Convention Center.
The property consists of 7 buildings of Class "C" concrete tilt-up construction. completed in 1985 and
comprises about 144.503 net rentable square feet on 3.43 acres of leased land. The site contains 693 perking
spaces including 125 compact and 14 handicapped spaces, according to the on-site manager. Other sources
quote considerably fewer total spaces but this may result ft=a large number of compact spaces being added.
Per the most recent appraisal, the concludcd land size of 8.433 acres was obtained fit m the stunmadon of sizes
indicated on the subject's two land lease agreements. In addition, an ALTA Survey dated 12/28192 indicates
the size of the parcels to total 8.76 acres. These figures differ from the size according to both the Orange
County Assessor Parcel Map and these provided by Home Fed, which both indicate the size of the land area
to be approximately 9.3 acres. This analysis assumes a. size of 8.433 acres per the appraisers review of the
grotmd lease documents.
GROUND LEASES
The use of the land is provided by two ground leases. One lease is with the City of Riverside for 5.133 acres
with an original term of 50 years, beginning on 511185 and terminating 4130/2035. There are approximately
42 years remaining on this lease agreement The original lease payment was at established$186.988 per annum
with annual CPI increases capped at a maximum of 6 percent. The lease payment is to be adjusted every 10
years to market rent, based on the then fair market value of the I" by negotiations between the lessor and
lessee subject to arbitration. The first such adjustment is 4130195. Cumut annual lease payments are$226,374.
The other lease is with D. and E. Teakell and B. and S. Barra& Each couple is a 1/2 owner in the property
subject to this ground lease. The lease encompasses 3.30 acres and has an original term of 55 years beginning
on l li 11185 and terminating 11/10/2040,leaving approximauly 47 years remaking until maturity, The original
lease was $132,000 annually. Annual CPI increases were scheduled to begin 11/11/88 subject to a
4 percent minimum. At the end of 20 years (2005) and 40 years (2025), the annual rental payment is to be
adjusted to the fair market rental value based on the fair market value of the land. Within each of those
Periods,the annual CPI increases continue with the 5 percent annual minimum Current annual lease payments
are s188,573,
n
LEASING
Based on discussions with the asset and property managers and review of the limited file information as of July
28, eleven of the twelve tenants (except for GTEL) are in the process of either vacating the premises or
renegotiating their leases to the current market rent. Five have physically vacated and a sixth bas given verbal
node. These tenants are in various stages of litigation with Horne Fed regarding past due amounts. There
art two renegotiated lease proposals which have been wntadvely agreed upon; both of which are under review
by the RTC. RTC anticipates that other renegotiations are possible.
Red Estate Recovery, Inc. >{ >✓
ATTACHMENT I
� •t
FREEWAY HOME CENTER
1408.1680 E Street
San Bernardino, Callfornia
REONIS g 823994935
Control S 8
A tenant-by-tenant review based on the above information indicates a potential remaining occupancy of the
center might be about 38 percent at an average base rent of S.71 PSF, triple net. The remaining tenants would
consist cf the following,.
Tena4¢
Potential Status (based on anticipated 3eMements)
Waterbed Gallery 9,022 SF renegotiated to $0.615 PSF
Lamps Plus 11,166 SF renegotiated to $0.75 PSF
13chr Window Fashion 6,931 SF renegotiated to S0.57 PSF
Furnirure rifart 8,065 SF renegotiated to $0.62 PSF
GTEL' 3,466 SF as is at$1.56 PSF
I
*GTEL signed a five year lease in October 1990 and is expected to continue to honor it.
L OCATXON
The subject's neighbcrhued is well developed and located In the south central section of San Bemardino where
the bulk of the development is industriallservire related along secondary roadways, with commercial
development along the major thoroughfares. No new constriction appears to be underway In the immediate
area and trtany of the structures are relatively rew and in good condition. The area appears to be stable with
future development anticipated to be limited as a result of',ack of demand in the area.
TLe focal point of the sub-market and major influmc:e in the neighborhood is the Inland Center Mail, 'located
at the intersection of 1-215 and Inland Canter Drive, which contains 900,000 square feet. SurmundLng the
immediate subject area am a number of automobile dealerships and, to the south, a small retail center whii;h
appears to be fully occupied and in good condition. There is also a vacant 12 acre parcel available for sale.
GENERAL �NIARKF CQIYDITiONS
Historically. the area maritet for this type of center has seen good; however, the subject center is occupied
primarily by tenants in tho ftunistifag/home improvement business which is particularly sensitive to remi3ions.
Consequently, the recession and the phase out of two local Air Fora Bases had a significant impact on this
marker ThC Subj='s location at the intersection of two freeways with excellent visibility and acorn, as well
as excellent visibility and access from street traffic, rnske it one of the best centers of its type in the market
area. In the past.the current owner has discotxaged the targeting of non-furnitureJho(isebold tenants. However,
there is an oppornmity to seek other retailers sina) parking to provided at approximately 4,5 spaces per 1,000
SF.
According to individuals familiar with Freeway Center, the current state of the subject property has resulted
from the recession and the consequences of non-intensive property management through foreclosure. They
believe that an extensive marketing/leasing campaign at the cement lower market feats through a local
aWessive brokerage could result in achievement of stabilized occupancy of 80 percent within one to two ye-era,
even in today's economy..
Real Estate Recovery, Inc. = 9/&93
rr
t
FREEWAY HOME CENTER
1448-1680 E Stmt
San Bernardino, California
REOMS M 823994935
Control 0 8
RECENT APR AIS&U
The most recent appraisal,dated 3/11/93,valued the Leasehold Estate at$3,000,000. The appraisal valued the
leasehold interest by subtracting the value of the Leased Fee from the Fee Simple value. The appraisers
conclusion was that, based on the subject's historical occupancy level acid rental rates, it is still a desirable
center that may take four years to reach stabilized occupancy. The appraiser assumed the current ma*et rent
to be$.60 PSF, triple net. [Some of the renegotiated rents with current tenants are higher than that. possibly
due to the leverage of the lessor (ground lessee) with the tenants in default.] The appraiser also assumed a
current vacancy of 62 percent with no rentals completed in the first year,
EHYSICAL CONDITION
The center Is in good coition with minor deferned maintenance louts. Work In progress includes re-slurry
and re-striping of the parking lot, painting of the storefront signage areas where tenants have moved and
providing additional lighting throughout the complex. The canter is generally attractive and the quality of the
improvements is comparable with most buildings of similar type in the area. All vacant testant space is second
gcneradon space with the interior improvements in good condition.
E;NVJROtMNTAL ST&US
' A Phase I Environmental Site Assesment was performed by PHR Environmental Consultants, Inc., dated
12/12192 which indicated that no contamination was found. A Comprehensive Asbestos Survey/Report dated
6/103 also indicated char no asbestos containing material was found.
SUMMARY OF 0 E ATIO S
Net Operating Income for 1992 was negative $53,000, and the NOI for the 6 months ended 630/93 was
approximately breakeven. The recent operating history of the subject reflects the current situation with the
tenants and the impact of the above-market land leases on operating expenses,
Real Estate Recovery, 1ne. s 1V6ro3
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