AGENDA STAFF REPORT

Agenda Item AGENDA STAFF REPORT ASR Control 19-001239
MEETING DATE:	01/14/20
legal entity taking action:	Board of Supervisors
board of supervisors district(s):	1
SUBMITTING Agency/Department:	County Executive Office (Approved)
Department contact person(s):	Thomas A. Miller (714) 834-6019
	Richard Sanchez (714) 834-2830

Subject: Health Care Agency Lease at 1241 East Dyer Road in Santa Ana

ceo CONCUR

County Counsel Review

Clerk of the Board

Concur

Approved Agreement to Form

Discussion

3 Votes Board Majority

Budgeted: N/A

Current Year Cost: N/A

Annual Cost: See Financial Impact Section

Staffing Impact:

# of Positions:

Sole Source: N/A

Current Fiscal Year Revenue: N/A

Funding Source: See Financial Impact Section	County Audit in last 3 years: No

Prior Board Action: 09/30/2014 #26, 07/27/2004 #25

RECOMMENDED ACTION(S):

Find the project is categorically exempt from the California Environmental Quality Act (CEQA), Class 1 (Existing Facilities) pursuant to CEQA Guidelines, Section 15301.

Approve new Lease Agreement with W-GL 1241 OCBC Holdings VIII, L.P, a Delaware limited partnership, for 59,795 square feet of office space and 7,617 square feet of warehouse space located at 1241 East Dyer Road in Santa Ana, for a 15-year term commencing on or about November 1, 2020, through October 31, 2035, with three five-year options to extend the term.

Authorize the Chief Real Estate Officer or designee to execute subsequent documents, lease amendments and option terms that make non-monetary and/or monetary changes that do not increase County costs by more than $50,000 per year, as approved by County Counsel.

SUMMARY:

Approval of a new 15-year Lease Agreement with W-GL 1241 OCBC Holdings VIII, L.P. will allow for Health Care Agency's use of 59,795 square feet of office space and 7,617 square feet of warehouse space located at 1241 East Dyer Road in Santa Ana, for its Environmental Health division.

BACKGROUND INFORMATION:

On July 27, 2004, the Board of Supervisors (Board) approved a 10-year Lease Agreement (Initial Lease) for 46,081 rentable square feet (RSF) of office space in a portion of the first and second floors of the two-story building (Current Premises) located at 1241 East Dyer Road, Santa Ana, to support the Health Care Agency’s Environmental Health (HCA/EH) division. The Initial Lease was amended on September 30, 2014, (First Amendment) which reduced the Initial Lease square footage to 42,272 RSF and extended the term 10 years through the current lease expiration date of March 31, 2025 (Current Lease).

HCA/EH is a regulatory division comprised of various state-mandated programs authorized by the California Health and Safety Code aimed toward protecting the health and safety of Orange County businesses, residents and visitors from environmental health issues and conditions. Services include restaurant and mobile truck inspections to ensure the safety of the food served to the public, public pool safety inspections, ocean water quality monitoring, inspections regarding the safe handling and disposal of hazardous materials and medical waste and inspections of landfills and other solid waste facilities. Additional programs at the Current Premises include food facility plan check, which reviews the plans for all new and remodeled food facilities within Orange County in accordance with applicable requirements, and HCA/EH division administrative staff.

In efforts to optimize space and support program efficiencies of over 221 onsite employees, HCA/EH is seeking expansion from 42,272 RSF to 59,795 RSF of office space (Office Premises) and the addition of a 7,617 RSF warehouse space (Warehouse Premises) within the first floor of the Current Premises. The Office Premises will allow for consolidation of all onsite HCA/EH division programs onto the first floor of the Current Premises and will support the internal relocation of staff. The Warehouse Premises will be utilized by HCA Administrative Services for storage of County property and equipment necessary for business operations. The location is centrally located along major County connecting freeway corridors and is in close proximity to the State Route 55 and Interstate 5 on/off ramps. The location supports access and convenience for clients and employees, including over 100 HCA/EH field inspectors based out of the Current Premises, and the expansion will enhance the client service experience.

CEO Real Estate negotiated a favorable new 15-year lease term with three successive five-year options to extend the term with advance notice of at least nine months (Proposed Lease). The construction will be completed in phases without any interruption to client services. Under the terms of the Proposed Lease, the first year’s starting rental rates, at current market rates, will be $2.60 per rentable square foot (RSF) per month for the Office Premises and $1.65 per RSF per month for the Warehouse Premises (Rent), with two and one-half months of free Rent per year during the initial five years of the Proposed Lease for the Office and Warehouse Premises. This is a full-service gross lease with no pass-throughs for the building operating expenses. The Rent will increase annually at a fixed three percent and during the extensions term(s) will be at fair market.

HCA/EH will pay the Current Lease rental rate of $1.96 per RSF per month until the Proposed Lease is effective. HCA Administrative Services is currently in possession and in use of the Warehouse Premises through a month-to-month license agreement at no cost. This license agreement will terminate upon commencement of the Proposed Lease with HCA Administrative Services funding the rental obligations for the Warehouse Premises through the term of the Proposed Lease. The Proposed Lease will supersede and terminate the Current Lease upon the final completion of tenant improvements, which is anticipated to be on or about November 1, 2020, at which time the term of the Proposed Lease will commence.

Lessor will deliver the Office and Warehouse Premises in “turn-key” condition, with a tenant improvement allowance towards the costs of improvements not to exceed $80 per RSF, which equates to $4,783,600, for the Office Premises and $10 per RSF, which equates to $76,170, for the Warehouse Premises (Improvement Allowance). Lessor will provide an additional improvement allowance of $10 per RSF, which equates to $597,950, towards furniture, fixtures, equipment, moving and/or telecommunications costs that will help reduce any additional HCA/EH out-of-pocket expenses (Relocation Allowance). Prior to delivering the Premises to HCA/EH, Lessor will perform tenant improvements, including planning, architectural and design, per a mutually agreed upon space plan with standard building materials and finishes. If the costs for the tenant improvements exceed the amount of the allowances, HCA/EH will reimburse Lessor in a lump sum for any tenant improvement costs that exceed the Improvement Allowance and Relocation Allowance.

The Lessor is responsible for all utilities to the Current Premises. HCA/EH will have exclusive right to use 254 parking stalls, with 40 designated reserved parking stalls for mobile food truck inspections, employee and visitor parking at no additional cost.

Between the eighth and tenth year of the Proposed Lease, HCA/EH may request Lessor to complete new paint and/or flooring within the Current Premises, by providing six months prior written notice, at HCA/EH's sole discretion and cost. This shall be a one-time right during the initial term of the Proposed Lease. HCA/EH will have ability to amortize the costs of said new paint and/or flooring completed by Lessor into the Rent over the then remaining lease term, at an interest rate of eight percent, or HCA/EH may choose to reimburse Lessor in a lump sum for improvements upon completion. Prior to written notice to Lessor of the request, HCA/EH will review and approve all costs to be included in HCA's budgeting process for future years.

The Proposed Lease contains a limitation of liability provision in favor of Lessor that is nonstandard in the County lease form. Specifically, if Lessor maintains at least $3 million net equity in the premises during the Proposed Lease, the County waives its right to pursue damages related to the Proposed Lease from Lessor’s shareholders, officers, directors, partners and affiliates. In this case, the County’s sole remedy for claims related to the Proposed Lease would be an action against the Lessor and the sum of $3 million net equity in the premises, which should be sufficient to cover any liability that the Lessor may have. County Counsel and CEO Real Estate staff have approved this revision.

The Proposed Lease is consistent with HCA’s program goals and allows flexibility for future program needs.

Legal Requirements:

Compliance with CEQA: The proposed project is Categorically Exempt (Class 1) from the provisions of CEQA pursuant to Section 15301, because it involves the lease of existing office facility involving negligible or no expansion of an existing use.

General Plan: The project conforms to the General Plan of the City of Santa Ana.

FINANCIAL IMPACT:

Appropriations for this Proposed Lease will be included in HCA’s Budget Control 042 FY 2020-21 Budget and will be included in the budgeting process for future years.

Fees/Other:	82%
State:	14%
GF:	3%
Federal:	1%

The below table of fiscal-year costs is based upon a November 1, 2020, commencement date.

FY 2020-21	$ 924,193	FY 2028-29	$ 2,529,542
FY 2021-22	$ 1,624,059	FY 2029-30	$ 2,605,428
FY 2022-23	$ 1,672,781	FY 2030-31	$ 2,683,591
FY 2023-24	$ 1,722,964	FY 2031-32	$ 2,764,099
FY 2024-25	$ 1,774,653	FY 2032-33	$ 2,847,022
FY 2025-26	$ 2,314,889	FY 2033-34	$ 2,932,432
FY 2026-27	$ 2,384,336	FY 3034-35	$ 3,020,405
FY 2027-28	$ 2,455,866	FY 3035-36	$ 1,016,672

STAFFING IMPACT:

N/A

REVIEWING AGENCIES:

Health Care Agency

ATTACHMENT(S):

Attachment A – Lease
Attachment B – Acquisitions Questionnaire
Attachment C – Lease Summary