Agenda Item AGENDA STAFF REPORT ASR
Control 22-000470 |
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MEETING DATE: |
06/28/22 |
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legal entity taking action: |
Board of Supervisors |
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board of supervisors
district(s): |
2 |
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SUBMITTING
Agency/Department: |
County Executive Office (Approved) |
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Department contact
person(s): |
Thomas A. Miller
(714) 834-6019 |
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Brian Bauer (714) 834-5663 |
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Subject: 17th Street Clinic RFP
Master Developer Selection
ceo CONCUR |
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Clerk of the Board |
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Concur |
No Legal Objection |
Discussion |
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3 Votes Board Majority |
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Budgeted: N/A |
Current Year Cost:
N/A |
Annual Cost:
N/A |
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Staffing Impact: |
No |
# of Positions:
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Sole Source:
N/A |
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Current Fiscal Year Revenue: N/A
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Prior Board Action: N/A
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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:
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
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
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
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