PROPOSED RESOLUTION AUTHORIZING THE CITY OF OAKLAND TO ENTER INTO A FIFTY-FIVE YEAR LEASE WITH THE FIRST TWENTY YEARS PREPAID IN AN AMOUNT NOT TO EXCEED $2,340,000 FOR BASIC RENT WITH THE ADDITIONAL THIRTY FIVE YEARS OF THE LEASE TO BE FOR AN AMOUNT NOT TO EXCEED $5,100,000 FOR 8,500 SQUARE FEET OF SPACE IN THE FRUITVALE TRANSIT VILLAGE FOR THE SAN ANTONIO MULTIPURPOSE SENIOR CENTER

SCOPE

We have reviewed the accompanying Public Works Agency Council Agenda Report and draft resolution proposing authorization by the Oakland City Council for the City Manager to negotiate, enter into, and execute a fifty-five year lease between the City of Oakland and the Fruitvale Development Corporation. Our review was limited to evaluating the accuracy of amounts involved and the availability of funds. We did not attempt to evaluate the amount of space that the senior center will need and the feasibility of entering into a long-term lease at a time when rental costs for commercial properties are declining.

BACKGROUND

City Council Resolution No. 73524 dated May 27, 1997 authorized a master agreement between the City of Oakland and the Spanish Speaking Unity Council in an amount not to exceed $2,340,000 in Measure K Series 1997C Bond monies for the design, construction and project management services for the Fruitvale/San Antonio Senior Project.

On February 1999, this agreement was assigned to the Fruitvale Development Corporation, the development arm of the Spanish Speaking Unity Council. The Fruitvale Development Corporation has requested that the Measure K 1997C funds be used to fund lease payments instead of the design, construction, and project management services. The lease is a requirement for the corporation to secure financing for the Transit Village Project. Conversion of the agreement to fund a lease is permissible according to the City Attorney.

The Senior Center will occupy approximately 8,500 square feet of space on the second floor of the Fruitvale Transit Village at 3301 E. 12th Street. Negotiation of the specific lease terms is under way and has not yet been finalized.

PREPAID RENT AND FUNDING

The City will be required to enter into a 55-year lease and to make basic rent payments totaling $7,440,000. The pre-payment of $2,340,000 will cover a pre-payment of the first 20 years of the lease and will be funded from Measure K Series 1997C Bond Fund 5006 appropriations in capital projects H13173 and H11073 and other funding sources as follows:

H13173	$2,032,448.85
H11073	200,000.00
Public Art - funding restoration	117,000.00
Total Available Funds with Council Approval	2,348448.95

RENTAL RATES

The Agenda Report did not show the status of commercial rental rates in the Oakland or the Bay Area. The prepayment of $2,340,000 in lease was solely based on the amount agreed upon as bond money assistance to the Spanish Speaking Unity Council for the construction of a Fruitvale/San Antonio Senior Center Project. Nor did the Agenda Report show how the total lease of $7,440,000 for 55 years was arrived at.

OPERATING COSTS

The annual contract cost to the City for the Spanish Unity Council to maintain and operate the Fruitvale/San Antonio Multipurpose Senior Center is estimated at $240,000 for the first year. From Year 2 through 6, the contract cost with the Spanish Unity Council will be at $200,000 a year, including service costs, common area maintenance charges, and furniture, fixture and equipment. No impact is expected on the budget for Fiscal Years 2001-2003. However, a budget change request for Fiscal Years 2003-2005 will be made to cover these operating costs.

No estimate has been made as to how the contract costs with the Spanish Speaking Unity Council will behave after Year 6. The City, it seems, will have no control on these future costs. The Spanish Speaking Unity Council will have sole control on these costs.

TENANT IMPROVEMENTS

The proposal is silent as to whether there will be tenant improvements that may cost the City.

CONCLUSION AND RECOMMENDATION

The costs involved in the project are significant. In our opinion, the City Council should approve the proposed resolution only after carefully evaluating: (1) the amount of space that will be needed for the senior center; (2) the amount the City is being asked to pay in prepaid rent in comparison to actual market rates, and (3) the prospect that the City has no control over operating costs starting from Year 7.

Respectfully submitted by:

Elmer L. DeLeon, CGFM, CIA
Deputy Auditor

Issued by:

Roland E. Smith, CPA
City Auditor

Report Number:02-099.1