The agenda for our first meeting in September will include the issue of whether or not to approve the final agreement to sell the property the (PJCC) is located on, to them.
Some people have expressed concerns over the sale, and so I want to address those concerns here in this article.
The land is currently subject to a ground lease, originally entered into in 1998. There is about 45 years or so left on that lease. Presently, the annual cash portion of the rent for the land is about $170,000.
Nearly a year ago, a disagreement between the parties resulted in the City demanding arbitration of various rights and obligations under the lease. That arbitration has resulted in the parties incurring significant legal costs. Thus, a settlement and compromise was pursued.
The settlement includes a sale of the land by the City. The price is $20 million and the City is [offering the PJCC] financing for $19 million of that at 3.25 percent interest over 25 years. There will be an initial payment of $1 million and annual payments on the note will be more than $1.1 million per year.
The concerns expressed by various people have included the price, the interest rate, the loss of the current discount for Foster City residents, and the loss of the Cultural Arts Center. I will address each of those in turn.
The price: The site is just under 11 acres, with about three of those acres under the power lines, thus making them usable only for ground-level parking. Therefore, the eight or so acres of buildable land is being sold at more than $2 million per acre, which is at least current market value, if not above.
The interest rate: 3.25 percent interest is a low interest rate, but not terribly low given the current real estate market. However, due to legal restrictions on the amount of risk the City can take in its investments, and the current state of the investment market, we are currently earning about 1 percent on our other investments. Thus, for the short term, we will be getting more than three times the return on this investment as we are on our other investments.
The issue then, for the interest rate, is - what about the long-term?
Certainly, interest rates will not stay as low as they are for the next 25 years. I agree, but much of that will be ameliorated in the way we will be handling the money.
Also on the agenda for our September meeting will be a new section of our Municipal Code, which will require that all of the funds - including most, if not all, of the interest - will be placed in a capital asset fund and will be secured for future long-term major capital asset acquisitions or replacements, and will require a super-majority (at least four votes) to use it in any other way.
Since these funds will be segregated, and since interest payments are larger at the beginning of a loan than at the end, those interest payments will be invested and earn more interest, which will lessen, if not eliminate, the long-term effect of a 3.25 percent interest rate.
Foster City Resident Discount: As of Dec. 31, 2012, the PJCC will no longer be obligated to offer discounts to some Foster City residents. However, the PJCC is not required to increase the membership costs to those who already get the discount, and it is perfectly free to continue those discounts, should the organization choose to do so.
While this potential loss is certainly regrettable, it is important to know that these discounts are only offered to some of the PJCC’s members that live in Foster City. In contrast, the proposed sale will actually benefit all Foster City residents by ending the cost of further arbitration and by increasing long-term revenue and stability, in that the City will be able to monetize its interest in the land at least 20 years earlier than it otherwise could have, with the ground lease in place.
The Cultural Arts Center: The sale does not result in the loss of the Cultural Arts Center. The Cultural Arts Center can still be built. More importantly, under the ground lease, the City could not force the building of the Cultural Arts Center - rather, it would simply get that portion of the land back. Thus, the proposed sale does not effect whether or not the Cultural Arts Center will be built.
Overall, given the length of the lease, the amount of the rent and the pending arbitration issues, I believe that the terms of the sale are a material improvement for the City and all of its residents.
These are my thoughts. You can always share your ideas with me by e-mail at email@example.com or call me at 650-286-3504.
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