05-07-2018 Council Work Session Packet

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WS – Item 7 WORK SESSION STAFF REPORT Work Session Item No. 7 Date: May 7, 2018 To: City Council From: Jeff Karlson, City Administrator Re: Lease Extension for New Creations Child Care Background The owners of New Creations Child Care & Learning Center want to make improvements in their leased facility, which includes the replacement of carpeting and floor tiles. Before investing in these improvements, New Creations asked if the City could extend their lease agreement for another five to ten years. This was brought up during the March 5th work session and the Council was amenable to a ten-year lease with an option to terminate after five years. I called Kevin Peck of KW Commercial, who negotiated the original lease agreement in 2014. Because the market was down, the City offered News Creations reduced rates and structured the lease to allow them to grow into the space. They are currently at $8.65 per square foot, which is consistent with the current market area. Asking rents in the area are in the $9-$10 range. The asking rate is usually negotiated down. Replacing a tenant for a specialty space can take several months to a year, even in a good market. Daycare tenants do not like to move once they are established. Keeping a good tenant on a 10-year lease has a lot of value—financially and for stability. Mr. Peck recommended increasing the rent by three percent every year of the lease. He proposed starting the new lease with $9.91 per SF starting July 1, 2019, and adding three percent annually. Peck also added the option of terminating the lease after five years after a 12-month notice. New Creations reviewed the proposal and accepted the terms as presented. Requested Council Direction Consider extending the lease. Attachments Draft Proposal from KW Commercial Market Comparisons