Agenda Item   

AGENDA STAFF REPORT

 

                                                                                                                        ASR Control  22-000470

 

MEETING DATE:

06/28/22

legal entity taking action:

Board of Supervisors

board of supervisors district(s):

2

SUBMITTING Agency/Department:

County Executive Office   (Approved)

Department contact person(s):

Thomas A. Miller  (714) 834-6019 

 

 

Brian Bauer (714) 834-5663

 

 

Subject:  17th Street Clinic RFP Master Developer Selection

 

      ceo CONCUR

County Counsel Review

Clerk of the Board

Concur

No Legal Objection

Discussion

 

 

3 Votes Board Majority

 

 

 

    Budgeted: N/A

Current Year Cost: N/A

Annual Cost: N/A

 

 

 

    Staffing Impact:

No

# of Positions:

Sole Source: N/A

    Current Fiscal Year Revenue: N/A

  Funding Source: N/A

County Audit in last 3 years: No

 

 

    Prior Board Action: N/A

 

RECOMMENDED ACTION(S):

 

 

1.

Select a Primary and Secondary Proposer in response to the Request for Proposals for the redevelopment of the County’s property located at 1725 West 17th Street, Santa Ana, to negotiate option and lease terms and conditions.

 

2.

Authorize the Chief Real Estate Officer or designee to negotiate an Option and Lease Agreement with the selected Primary Proposer for the development of the property located at 1725 West 17th Street, Santa Ana, mutually acceptable to the County and the Primary Proposer and return to the Board of Supervisors for approval of the final Option and Lease Agreement.

 

3.

Authorize the Chief Real Estate Officer or designee to negotiate an Option and Lease agreement with the Secondary Proposer, in the event agreements cannot be reached with the selected Primary Proposer, for the development of the property located at 1725 West 17th Street, Santa Ana, mutually acceptable to the County and the Secondary Proposer and return to the Board of Supervisors for approval of the final Option and Lease Agreement.

 

 

 

 

SUMMARY:

 

Selection of a developer to lease, develop, construct, manage, and operate a mixed-use development, including a new Health Care Agency Clinic and revenue generating private uses on County-owned land located at 1725 West 17th Street, Santa Ana or on the property and, if appropriate, a mutually agreed to offsite location which will deliver a new health care clinic to the County and maximize the private development potential for the property to provide a fair market financial return to the County and developer.

 

 

BACKGROUND INFORMATION:

 

The Orange County Health Care Agency (HCA) is a regional provider, charged with protecting and promoting individual, family and community health through the coordination of public and private sector health care resources. The existing 9.3-acre clinic property located at 1725 West 17th Street, Santa Ana (Property) includes one of HCA’s largest health care facilities that provide core public health services and programs to Orange County residents (17th Street Clinic). The Property is bounded by 17th Street on the south, College Avenue and Kindred Hospital Santa Ana on the east, an existing single-family development on the north and most of its westerly border, and a small commercial development at its southwesterly border.

 

The existing 17th Street Clinic is comprised of the following HCA Clinic buildings:

  • Public Health Services (PHS) building: 90,000 square feet (SF)
  • Four single-story modular (SSM) buildings:

o   Annex to the PHS: 6,100 SF

o   Early Pregnancy Unit: 6,000 SF

o   Learning Center adjacent to the PHL: 3,000 SF

o   Employee Conference Room: 1,500 SF

  • Public Health Laboratory (PHL) -approximately 18,000 SF (not a part)
  • Surface Level Parking: 447 standard stalls and 12 handicap accessible stalls

 

The PHS building provides mandated public health activities such as surveillance of communicable diseases, interventions to control outbreaks and spread of disease, and planning and preparedness activities to protect health and well-being in the event of a pandemic or other public health emergency. It also provides disease prevention and clinical services, such as immunizations, tuberculosis treatment, HIV care and sexually transmitted disease testing, treatment and control activities. Additionally, the SSM buildings house programming supporting health promotion for pregnant women, infants, children, adolescents, senior adults, and others to promote better health outcomes.

 

In early 2018, the County of Orange (County) completed a conditional assessment of the PHS building. The assessment performed by the County determined that the building’s roof, windows, mechanical, electrical and plumbing systems have reached the end of their functional life. The cost of a complete rehabilitation of the existing PHS building was estimated to be equal to or slightly greater than the estimated cost of constructing a new building, but without the benefit of a more efficient layout, modern programming, improved building systems and operating costs efficiencies, and improved earthquake safety measures. After comparing the total cost of rehabilitation, overall building performance, and long-term cost for facility operations, it was determined that the PHS building has surpassed its useful economic life and does not offer a design that aligns with modern public health service needs or operating cost efficiencies. Therefore, the County identified the replacement of the existing PHS building and the SSM buildings as a strategic financial priority necessary to ensure the continued health and safety of both the clients who obtain services at the 17th Street Clinic and the County staff who work there.

 

Currently, co-located on the Property, is the PHL that provides communicable disease testing, including testing for agents of bioterrorism. As a public health laboratory, the PHL facility helps monitor, detect and respond to health threats such as the current Coronavirus Disease Pandemic (COVID-19) affecting the world. COVID-19 has highlighted the County’s need to construct a new modern and upgraded laboratory facility that can properly and effectively respond to pandemics and other health emergencies. While construction of a new PHL is a priority for the County, the new PHL will be constructed at an alternate, off-site location. Development of the Property requires the developer to include demolition of the existing PHL in their development plans. It is anticipated that the existing PHL will be demolished in approximately 2 years. 

 

On September 9, 2021, CEO Real Estate released a Request for Proposals (RFP) seeking qualified and experienced development teams interested in entering into a public-private partnership (P3) with the County with two potential development components, a public facility development of a new health care clinic and private development of revenue generating uses on the Property or on the Property and a mutually agreed upon alternate location. On November 16, 2021, CEO Real Estate received three proposals in response to the RFP. Proposals were received from Birtcher Development, LLC (Birtcher), Tait & Associates, Inc. and SteelWave, LLC (Tait-SteelWave), and 17th Street Partners, LLC (17th Street Partners).

 

The three proposals offered different options for the ground lease and different offers for development and ownership of the new PHS building and for the lease of the Property. Tait-SteelWave and 17th Street Partners teams offered to develop the PHS building on the Property and lease it back to the County.  Birtcher proposed to develop and finance the building for the County at an alternate location, and the County would own the building at the end of the financing period. The ground lease offers were also different. Birtcher proposed lease terms and structure with a stated predictable payment and annual escalations. Tait-SteelWave proposed a lease based on a percentage of gross revenues collected by the lessor. 17th Street Partners proposed a lease where the County rent was based on project cash flow after the developer received a preferred return.

 

Evaluation Panel Scores and Rankings

 

A three-member evaluation panel reviewed and ranked the written proposals. Evaluation of the written proposals was followed by oral interviews. All three teams were invited to present their team and proposed project, as well as respond to questions posed by the evaluation panel. Based upon the evaluation and selection criteria set forth in the RFP the evaluation committee ranked the proposers as follows:

 

Proposer

Written Scores

Interview Scores

Total Scores

 

Birtcher Development, LLC

 

1965

1350

3315

Tait & Associates, Inc. and Steelwave, LLC

2205

990

3195

17th Street Partners, LLC

1800

1200

3000

 

 

Summary of Proposals

 

 

 

 

Birtcher Development, LLC

The Birtcher team consists of Birtcher Development, LLC (Master Developer), Anton Partners (Residential Developer), Boulder & Associates (Architect), Snyder Langston (General Contractor: Medical Office), Wulff Hansen (Finance) and Cushman & Wakefield (Health Care Advisory Group).

 

 

Financial Offer

Birtcher proposes to construct the new Health Care Agency Clinic at an offsite location. They have requested a lease term between 75 to 99 years for the Property.

 

For the PHS building, the Birtcher proposal uses an example of an off-site, 108,000 gross SF building with a range of potential costs between $38,685,000 ($358/SF) and $63,165,000 ($585/SF). The lower cost building would require an annual rent payment of $3.5 million plus $1.3 million for building operating expenses (which are an annual obligation of the County, and generally include all reasonable and necessary expenses incurred to operate, maintain, repair and manage the building) while the higher cost building would require an annual rent payment of $4.25 million plus $1.3 million for building operating expenses. Annual base year building operating expenses were calculated at $12.00 per SF (108,000 SF x $12 per SF = $1.3 million) and will increase over time, but the rent component would remain fixed. Under this “lease to own” structure using either bond financing or conventional debt and equity financing, at the end of approximately 30 years, the building reverts to the County.

 

For the private development on the Property, Birtcher proposes to rezone the Property for a 360-unit residential development with a mixed-use component. They are proposing a ground rent of $2.5 million during the initial three-year construction period. Beginning in year 4, they have proposed an annual rent payment of $1.65 million, which would increase by 2.0 percent annually. This structure provides the County a predictable arrangement as it proposes a fixed rent with less potential variables.  The rent the County receives is not affected by how the project performs. The typical lease using this structure, however, will usually have a CPI increase rather than a fixed annual percentage increase. Over a 99-year lease term the ground rent payment to the County would total $472.2 million and have a net present value (NPV) of $29 million, discounted at 7.0 percent reflecting the relatively lower risk of this structure.

 

Comments

  Traditional ground lease, fully amortizing with ownership reverting to County at the end of  the lease term, with a choice of either private or bond financing;

  The alternate location for the new Health Care Agency Clinic is not identified, thus it is unclear what the final terms of the actual acquisition of that property will be;

  Construction budget for the renovated building based on a rough order of magnitude pricing with soft and hard costs are in line with industry standards; and,

  The residential project return at 6.7 percent falls within the market range for apartment projects in the current market.

 

 

Tait & Associates, Inc. and SteelWave, LLC

The Tait-SteelWave team consists of Tait-SteelWave (Master Developer), Gensler (Architect), Devenney Group, Ltd. (Healthcare Architect) and McCarthy Building Companies, Inc. (Master Builder).

 

Financial Offer

Tait-SteelWave is proposing to construct both the private and public facility development on the Property. They have requested a 99-year ground lease. For the public facility development, Tait-SteelWave proposes to construct a new 80,000 SF health care clinic over three levels with an estimated construction cost of $38 million ($475/SF). They are proposing to lease the building to County for 99 years at an annual cost of $4.2 million plus $813,000 in building operating expenses (which represents a reduction from the annual cost of $6.4 million plus $781,000 in building operating expenses set forth in their written proposal). Rent and expenses would increase at 3.5 percent annually.

 

For the private use development Tait-SteelWave has proposed two options. The first option includes 18,000 SF of retail and office space, a 44,000 SF Skilled Nursing Facility (SNF), 4,000 SF Community/Pharmacy building, and a 3.5 level parking structure with 509 spaces. The second option includes 18,000 SF of retail and office space, 130,500 SF of Affordable/Supportive Housing, 4,000 SF Community/Pharmacy building, and a four and one-half level parking structure with 570 spaces. For the SNF, they are proposing to pay the County $5,000/month for the 18-month construction period, no rent during years one through three, 2 percent of rental revenues in year four and 4 percent of rental revenues beginning in year five. This ground lease structure exposes the County to some market volatility. If overall rents fall or vacancy increases, County returns will decline. Conversely, if overall rents increase and vacancy falls, overall County returns will increase.  Over a 99-year lease term the ground rent to the County would total $263.0 million and have an NPV of nearly $4.8 million, discounted, per the proposal, at 9.0 percent reflecting the higher risk of this structure.

 

Comments

  • Overall project does not require a 99-year lease, instead a 65 to 75-year lease is financeable and would need to be negotiated;
  • A lease based on a percentage of gross revenues typically includes a minimum rent provision, but this proposal does not include a minimum rent provision;
  • The new health care clinic could be amortized over a 25 to 40-year period;  
  • Project returns are excessive, with an initial net operating income resulting in a 10.75 percent return on cost; and,
  • The projected rent payments to County are below market and do not reflect an equitable return on the County contribution of the Property to the project.

 

17th Street Partners, LLC

The 17th Street Partners team consists of Bridgecreek Development (Residential Developer), Inception Property Group (Healthcare Facility Developer), Cataldo Architects (Architect), and Bernards Construction (General Contractor).

 

Financial Offer

17th Street Partners is proposing to construct both the private and public facility development on the Property. They propose to ground lease the Property for $1.00/year from the County. For the public facility development, 17th Street Partners has proposed to construct a new 90,000 SF health care clinic over three levels with an estimated construction cost of $21.9 million ($243/SF) They propose to lease the building to County for 30 years at an annual cost of $3.2 million. Rent would increase at 3 percent annually. This rent figure amounts to a monthly rate of $3.00 per square foot on a full-service gross basis (landlord pays for all operating expenses related to the tenant’s occupancy of the space such as common area maintenance, utilities, property insurance, and property taxes). The estimated construction cost included in the proposal appears low to support the construction of the new health care facility based on the proposed rental rate.

 

For the private use development on the Property, 17th Street Partners is proposing a 632-unit residential project with 17,400 SF of commercial space. For the mixed-use building (primarily residential), the proposal states that after the developer has collected a preferred return, the project, upon stabilization (end of Year 3) may annually distribute approximately $1 million evenly between County and developer based on revenues. This distribution would continue until the project is refinanced in Year 4. The proposal text states that once the project is refinanced in Year 4, the project would distribute approximately $130 million, but the cash flow projections indicate that the developer would receive $134 million and then $10.6 million would be evenly distributed between the County and the developer. Upon sale in Year 7, the proposal text indicates that the project would distribute an estimated $50 million to the County. Based on the cash flow projections provided by the Proposer, the County would receive $53.2 million, which has a net present value of $21.2 million discounted at 15 percent, reflecting the high risk of this structure.  The County would receive no rent after Year 7, as presented by the Proposer.

 

Comments

  • At the end of the 30-year building lease, the County will need to enter into a new lease with the then future lessee of the Property or the County will need to build a new PHS elsewhere since the PHS will still be a part of the leasehold;
  • The proposal is presented as a limited partnership with the County basically an investor in the project, and not a conventional lease structure (i.e., no guaranteed fixed or percentage rent), which does not provide the County any assured return to the County;
  • In a typical structure for this type of transaction, the County would receive a preferred return along with the equity investors, but this is not the case here, as the County receives a return only after repayment of costs, fees and the preferred return to equity investors;
  • The project includes greater density of residential units when compared to the other proposals and adjoining development (however, the City has previously expressed a willingness to CEO Real Estate staff to consider greater density on the Property).

 

Board Selection

 

Following selection by the Board of Supervisors of a Primary and Secondary Proposer, CEO Real Estate will negotiate an Option and Ground Lease and, upon completion of negotiations, submit final negotiated documents to the Board of Supervisors for approval.

 

CEQA COMPLIANCE:

This action is not a project within the meaning of CEQA Guidelines Section 15378 and is therefore not subject to CEQA, since it does not have the potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment.  The approval of this agenda item does not commit the County to a definite course of action in regard to a project since the action authorized herein is the selection of a developer to lease, develop, construct, manage, and operate a mixed-use development, including a new Health Care Agency Clinic. The developer would be responsible for obtaining all required permits and environmental approvals. This proposed activity is therefore not subject to CEQA. Any future action connected to this approval that constitutes a project will be reviewed for compliance with CEQA.

 

 

 

FINANCIAL IMPACT:

 

N/A

 

 

STAFFING IMPACT:

 

N/A

 

ATTACHMENT(S):

 

Attachment A - Evaluation Panel Scores & Ranking