Staff is recommending that City Council adopt a resolution authorizing the City Manager to execute all documents necessary to acquire a parcel of property directly adjacent to and north of the City Corporation Yard.

The subject property is located at 239 Commercial Street. The property is 1.23 Acres, or 53,578 square feet and is improved with a 10,000 square foot building. The building is split 20/80 between office and warehouse use. The remaining 43,578 s.f. of the property is comprised of paved and unpaved parking areas.

An organizational space study was conducted in FY 1999-2000 to determine the amount of office space needed to accommodate existing and future City staff over the next 10 to 15 years. Results indicated a shortage of 10,000 square feet of office space at the Corporation Yard. There has also been an increase in vehicular accidents that involve parking due to the lack of adequate storage area at the Yard. Purchase of this property is considered to be essential in providing additional space for Corporation Yard operations.

The purchase price is $2,530,000. The appraised valuation, dated March 14, 2002 was $2,300,000. Total closing costs, including environmental assessments and testing, are estimated at $20,000. Historically, the City’s Combined Utility Fund has not contributed towards the purchase of Corporation Yard land, although approximately 20% of the usage at the Yard is utility related. Therefore, it is recommended that funding for this acquisition come from the City’s Water and Wastewater Subfunds.

Council is asked to authorize the City Manager by resolution to execute all sales and escrow documents in order to complete this sales transaction and to approve Budget Modification # 8 to provide funding for the acquisition.

The City Property Manager first contacted the owner of 239 Commercial Street in August of last year. At the time, the owner was interested in discussing purchase scenarios with the City, however a development project on another property needed to receive priority. This project reached a stage where the owner could begin discussing options with the City in November 2001. Upon owner request, the City commissioned a real estate appraisal of this property. The appraisal report was completed in February 2002, stating a fair market valuation of $2,100,000.

On March 26, 2002, the City Council met in closed session to discuss purchase of the property at 239 Commercial Street. As a result of these discussions, the City Property Manager was directed by Council to negotiate with the property owner up to 10% above appraised value. Negotiations ended without agreement of the parties in mid-May.

In June, the owner once again approached the City, this time with a request for the appraiser to review certain assumptions used in the appraisal report while at the same time offering to lower his purchase price. Staff felt this new development was worth pursuing and began to work with the appraiser, Hulberg and Associates, to see if there was any validity to the owner’s concerns with methodology. Upon further review of the report, it was determined that the factor used for the Floor Area Ratio in the appraisal report was in fact low and that the February valuation should have been adjusted to $2,300,000.

The City Property Manager met once more with City Council August 13, 2002 and received permission to continue negotiations with the owner. These negotiations resulted in a mutually agreed upon purchase price of $2,530,000 on September 5^th, 2002.

The property at 239 Commercial Street is highly desirable for Corporation Yard expansion because it is directly adjacent to the Yard and it contains a 10,000 s.f. office / warehouse building that can be used to meet the existing office space shortage. The 40,000 square feet of additional parking area provided is also greatly needed.

This past year there were a number of vehicular accidents at the Corporation Yard, due in part to the overcrowded conditions. Employees have also been using on-street parking for their vehicles due to lack of adequate parking space within the Corporation Yard.

The Corporation Yard has not grown in area since the 1950’s. At present, over 180 personnel from the Public Works and Parks and Recreation Department are located on this 8.7 acre site.

Phase I and possibly limited Phase II environmental testing will need to be conducted on the property prior to the close of escrow in order to assess hazardous materials conditions. The property has a monitoring well on site that measures changes in groundwater contaminants from a well-documented superfund site across Central Expressway.

The building at 239 Commercial is in average condition and will need renovation prior to use as a City office building. It is anticipated that the Building Services Division will propose one or more capital projects to fund these improvements as part of the capital project budget process this fiscal year.

Historically, the Utilities Funds have not contributed funding for the costs associated with the existing Corporation Yard. As a result, staff is recommending that the Water Supply and Distribution and Wastewater Management Sub Funds provide funding for the purchase of the property. The Solid Waste Management Sub Fund will not be contributing as no solid waste staff or operations are located at the Corporation Yard.

Staff is recommending that the cost for the property be allocated to each fund based on the number of staff located at the Corporation Yard. Currently, there are 25 Water program employees and 14 Wastewater program employees located at the Corporation Yard. Allocating the cost based on this methodology places 64% of the cost burden on the Water Fund and 36% on the Wastewater fund. This works out to $1,632,000 for the Water Fund and $918,000 for the Wastewater Fund.

To fund the Water Fund’s portion of the purchase price, the Fund will take out a loan from the General Fund which will be paid back over 25 years at 6% interest. The General Fund Loan is a balance sheet item that provides cash to the Water Fund which can then be used to buy the property. The Wastewater Fund will pay for its share using existing reserves.

Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the report in the Library and the City Clerk’s Office.

1. Approve the following:

1. Resolution for the purchase of 239 Commercial Street
2. A loan from the General Fund to the Water Supply and Distribution Fund to be paid back at 6% over 25 years.
3. Budget Modification No. 8

2. Instruct staff not to enter into a sales agreement for this property

Staff recommends alternative #1.

Prepared by:
Michael A. Chan

Senior Administrator/Property Manager

Reviewed by:
Mary J. Bradley

Director of Finance

Marvin A. Rose

Director of Public Works

Approved by:
Robert S. LaSala

City Manager

1. Council Resolution

2. Purchase Agreement