The following is the text of the letter delivered to city council members:
August 6, 2015
Hon. Ashton J. Hayward, Mayor
Hon. Andy Terhaar, Council President
Hon. Larry B. Johnson, Council Vice-President
Hon. P.C. Wu
Hon. Sherri F. Myers
Hon. Gerald Wingate
Hon. Brian Spencer
Hon. Jewel Cannada-Wynn
Hon. Charles Bare
City of Pensacola
222 Main Street
RE: Ground Sub-Leases for Parcels 3, 6, and 9, Vince Whibbs, Sr.
Community Maritime Park, proposed by Studer Community Investments
Ladies and Gentlemen:
The Mayor and members of Council have requested that I summarize the matters that I discussed with Scott Remington and Charles James, attorneys for Studer Community Investments (“SCI”), at their office on July 22 concerning SCI’s proposed subleases for Parcels 3, 6 and 9. The Mayor has also requested that I prepare a template Maritime Park sublease for the Council’s consideration, so this letter may also provide a basis for future discussion of pertinent sublease issues with the Council. At the outset of our meeting on July 22, I told Mr. Remington and Mr. James that I had reviewed the proposed subleases for Parcels 3, 6 and 9, but did not have any specific changes authorized by the City. Instead, I had identified provisions in the subleases which I felt I needed to discuss with representatives of the City and wanted to know SCI’s position on those issues before discussing them with the City. I felt that many of the discussion items were ones on which we could readily agree and others might involve more discussion, if the City wanted to pursue them at all. For the items on which we could readily agree, I agreed to promptly produce a revised sublease. For those requiring additional discussion, I would meet with City representatives to determine which items the City wanted to discuss further. Mr. Remington indicated that this approach was agreeable. At the end of our meeting, Mr. Remington said that he was scheduled to meet with his client the following Monday (July 27) and that he would send their responses to me no later than Tuesday (July 28), possibly sooner. Our entire discussion was cordial, professional and positive. Except in
a few instances noted below, Mr. Remington neither agreed nor disagreed with the discussion points outlined.
The following are the items that I discussed with Mr. Remington and Mr. James:
1. Use of Leased Parcels and Right to Assign and Sub-sublease. The subleases proposed by SCI do not allow the City any right to approve how the leased parcels are used, who actually occupies the leased parcels and for what purpose or who controls the leased parcels and is obligated to perform the sublessee’s obligations. The subleases as originally proposed by SCI permit the sublessee to use the leased parcels for any use allowable by law, without any other restriction and without any prior approval from the CMPA or the City being required. The CMPA negotiated a modification to require the CMPA’s approval, but the CMPA-approved subleases still do not require the City’s approval. Similarly, the proposed subleases allow the sublessee to transfer the subleases to anyone and to sub-sublease the leased parcels to anyone, in each case without the CMPA or the City having any right of approval. As a consequence of these provisions as proposed by SCI and approved by the CMPA, during the entire proposed 99-year sublease term, the City would not have any say in how the leased parcels are used, who actually occupies the leased parcels and for what purpose, or who controls the leased parcels and is obligated to perform the sublessee’s obligations under the subleases. I echoed Mr. Johnson’s observation made at the July 16 Council meeting that based on Mr. Remington’s statements at that meeting, it appeared that this issue has been resolved in favor of affording the City the right of approval in its discretion. (In a follow up voice mail to Mr. Remington after our meeting, I suggested that it would be reasonable to carve out sub-subleases of office space in the ordinary course of business so as not to require CMPA or City approval of standard offices leases.)
2. Term. The proposed 99-year term (consisting of a 54 year initial term plus a 45 year renewal term) was not requested in SCI’s April letter of intent and is generally not warranted for non-residential uses. The subleases, as approved by the CMPA, provide for an initial term of 54 years (that is, the remaining term of the Master Lease between the City and the CMPA) and the right of the SCI, at its sole option, to extend the lease term for an additional 45 years, resulting in a potential total lease term of 99 years. I noted that the 45-year renewal term was not requested in SCI’s April 9 letter of intent; rather, SCI’s requirement was simply that the sublessee not be precluded from seeking an extension of the 54-year term if SCI were to use the leased parcels for a use (for instance, residential) that might necessitate a longer term. I suggested that the 45-year renewal term should be deleted, since at this point SCI has not committed to or even proposed any residential use and that the appropriate time to deal with the renewal term issue would be if and when a residential use is requested for any of these three parcels. With respect to the proposed 54-year initial term, I asked whether SCI would be interested in discussing a shorter initial term. While I did not suggest that 54 years was unreasonable, provided that customary rent escalator provisions are in place (as discussed in paragraph 3 below), a term in the range of 30 to 45 years should allow SCI to receive the full benefit of its investment in construction improvements on the leased parcels, while allowing the City to receive the benefits of ownership of the improvements at a somewhat earlier date.
3. Rent. We discussed the adequacy of a 7% rent increase every 5 years for 99 years, without periodically re-calculating rent based on changes in market value. A long term ground lease typically includes a provision for periodic increases in the ground rent to account for inflation, as well as intermittent adjustments in ground rent to current market rent to account for changes in the value of the leased property. The subleases as originally proposed by SCI provided for the ground rent to increase by five percent (5%) every seven (7) years during the proposed 99-year lease term, or by an average of 0.71% per year. The subleases as modified by the CMPA now provide for an increase in the initial ground rent by seven percent (7%) every five (5) years, or an average of 1.4% per year, which is consistent with the Maritime Place sublease. Since no one can foresee the rate of inflation that may occur during the next 99 years or whatever shorter sublease term as may be mutually agreeable, we discussed periodic rent adjustments based on the changes in the Consumer Price Index rather than a fixed rate of seven percent (7%) every five (5) years, possibly with a cap to prevent unexpectedly high increases in rent due to unusual increases in the CPI. We discussed that a fixed percentage increase as proposed had the virtue of simplicity and could work well in conjunction with intermittent rent increases based on increases in market value, which currently is not part of the proposed subleases. We discussed that it might be appropriate to re-set the ground rent to the current market rental rate every 15 to 20 years to insure that the City continues to receive a fair return on the value of its capital / real estate. Finally, I noted that at least some existing ground leases of City property include percentage rent provisions whereby the City receives a small percentage of the gross revenues derived from the leased premises and asked whether SCI would be willing to discuss whether and for what uses percentage rent provisions might be appropriate.
4. Parking. At our meeting, SCI’s attorneys submitted a revised parking provision for the City’s consideration, acknowledging that the proposed parking provision does not accurately reflect SCI’s proposal. The subleases as originally proposed by SCI granted the SCI 95 parking spaces in any parking lots or garages on the park property. The original parking provision included conflicting language as to whether those 95 spaces were to be “non-exclusive”, meaning others could also park there, or “reserved”, meaning others could not park there. Also, the parking provision which SCI proposed stated that these 95 parking spaces “may be” (as opposed to “shall be”) the same parking spaces provided by the CMPA to Northwest Florida Professional Baseball (“NFPB”). In addition to these 95 spaces, the SCI proposed subleases granted the SCI the right of ingress, egress and parking on, over and across any parking lot or garage on the park property. The revised CMPA-approved subleases provide up to 95 reserved parking spaces to the sublessee during normal business hours Monday through Friday, which 95 spaces may, at the option of the CMPA, be the same parking spaces as provided to NFPB. In addition to these 95 reserved spaces, the proposed parking provision grants non-exclusive parking rights at no charge on any parking lots or garages within the public improvements in the park (present or future) and any existing parking lots on the private parcels which are not presently under a sublease, thereby encumbering all such parking. As a consequence, the CMPA and the City would be effectively precluded from granting exclusive parking rights to any future sublessee of other parcels in the park without the SCI’s consent. All in all, it did not appear to me that the proposed parking provisions were consistent with what I thought was SCI’s expressed intent, so I began the discussion of parking by asking Mr. Remington to clarify the nature and extent of the parking rights desired by his client. Mr. Remington explained that 100 parking spaces (as well as other spaces) near the stadium are presently allocated for the exclusive use of NFPB during the 70 home games each season. Mr. Remington further explained that SCI’s intent is to have the exclusive right to use 95 of these 100 spaces during the term of the subleases, since as a practical matter these spaces cannot be dedicated to the exclusive use of any other park tenant because they are already encumbered for 70 days of the year. Mr. Remington and I agreed that the current amended parking provision did not appear to reflect that intent. Mr. James then handed me a revised parking provision for the City’s consideration. I told Mr. Remington and Mr. James that I would present their revision (which I saw for the first time at our meeting) to the City and would get back with them on this item.
5. Standard for Construction of Initial Improvements and Future Alterations. Under the proposed subleases, neither the CMPA nor the City would have the ability to ensure that the improvements maintained on the leased parcels over the next 99 years meet the high standards established by the stadium, Maritime Place and Maritime One. The design and appearance of improvements constructed in the park is of considerable importance to the CMPA and the City. While SCI has a proven track record of high quality development, the SCI subleases will be in effect for many years and it is certainly possible, if not likely, that during the life of the subleases control of the leased parcels will eventually pass from the Studer family to other presently unknown persons. (As noted in paragraph 1 above, the proposed subleases allow the subleases to be freely transferred without approval of the CMPA or the City.) Therefore, the CMPA and/or the City should have the ability to ensure that any improvements constructed, altered or maintained on the leased parcels meet the same high standards that have been established by the stadium, Maritime Place and Maritime One. Neither the CMPA nor the City would have that ability under the SCI subleases as amended by the CMPA revisions. While Section 2(a) of the SCI subleases provides that “the architectural design, plans and specifications of any improvements shall be in general conformance with any design criteria established for the leased premises”, that provision is too vague to be enforceable in any meaningful way. Mr. Remington informed me that the “design criteria” published on the CMPA’s website were the product of the original developer’s plans for the park and are no longer considered applicable. We discussed including in the subleases customary language requiring CMPA and/or City approval of the architectural design, plans and specifications of any improvements constructed on the leased parcels and any future alterations of the initial improvements, such approval not to be unreasonably withheld. This provision would also require improvements and alterations to be constructed in a good and workmanlike manner and in conformance with applicable laws, rules and regulations and would prohibit the filing of construction liens against City property. Finally, I suggested and Mr. Remington agreed that payment and performance bonds should be required, noting that payment and performance bonds were voluntarily provided for the Maritime Place construction.
6. Maintenance. The SCI subleases do not include the usual requirement that the sublessee must maintain the improvements constructed on the leased parcels in good condition and must make all necessary repairs and replacements. Rather, the SCI subleases simply provide that the sublessee shall maintain the improvements at its sole cost and expense, without providing any enforceable standard for maintenance other than to keep the leased parcels safe, neat and orderly and free from trash, debris or unsafe, unsightly or unsanitary matter. We discussed that the proposed subleases should include a customary provision requiring the sublessee to maintain the leased premises and improvements in accordance with a mutually agreeable standard (e.g., good condition and repair, first class condition, etc.) and to make all necessary and repairs and replacements. Also, the subleases should provide that at the end of the sublease term, the improvements constructed on the leased will be turned over to the City in good condition, ordinary wear and tear excepted, not “as is” as provided in the SCI subleases, since under the “as is” standard there would be no assurance that the improvements received by the City would be usable.
7. Default and Remedies. The subleases lack customary provisions that enable the sublessor to obtain the full benefit of its bargain in the event of a sublessee default. The default provision in the SCI subleases does not provide that the sublessor will be entitled to the present value of future rent in the event that the sublease is terminated because of an uncured default by the sublessee. Florida law requires that the right to accelerate rent, or words to that effect, be included in a lease in order for a landlord to be entitled to sue for and receive the present value of future rent in the event a lease is terminated because of a tenant default. Without an acceleration provision, a landlord would be required to file multiple, separate lawsuits during the remaining lease term, as and when rent accrues, in order to receive the benefit of its bargain. While there is no concern related to SCI’s payment of rent, such a provision should be considered in light of the possibility, even likelihood, that persons other than the Studer family will eventually become the sublessee under the proposed subleases. Additionally, notwithstanding that rent is due and payable on the first day of each month, under the SCI subleases the sublessee would not be in default for non-payment of rent until 30 days after the CMPA gives written notice to the sublessee of the sublessee’s failure to pay rent. Since rent is a known amount, non-payment of rent customarily does not require written notice from the landlord, and the grace period for non-payment of rent is typically five to ten days, not thirty days.
8. Insurance. The proposed subleases do not require the sublessee to provide builder’s risk insurance during construction of improvements on the leased parcels as is customary. Accordingly, we discussed that the builder’s risk insurance requirement included in the Maritime Place lease should be added back to these subleases. I also mentioned that I needed to obtain confirmation from the City’s risk management department that the City’s insurance requirements in effect at the time of the Maritime Place lease, as carried forward in the proposed subleases, have not changed.
9. Future Mortgages by the City. The provision in the proposed subleases concerning future mortgages would hamper the City’s ability to use the leased parcels as collateral for any future loans. Section 46 of the SCI subleases contains the unusual provision that the City, as property owner, may not place any future mortgage on its fee simple interest in the leased parcels that would be superior to the SCI subleases. Typically, a lease will provide just the opposite – that the lease will be subordinate and inferior to any future mortgage by the landlord, provided that the mortgage lender enters into a satisfactory subordination, non-disturbance and attornment agreement (“SNDA”) whereby the mortgage lender agrees that the tenant’s rights under the lease will not be terminated or otherwise disturbed as a result of any foreclosure of the mortgage so long as the tenant complies with its lease obligations. Thus, as currently drafted, Section 46 would effectively prevent the City from mortgaging its interest in the leased parcels as collateral for a future loan without SCI’s consent because a conventional lender will require that its mortgage be a first priority mortgage, superior to any existing leases or subleases. We discussed that Section 46 should be modified to reflect accepted practice so as not to preclude the City from obtaining future financing secured by the leased parcels.
10. Option to Prepay Ground Rent. The proposed subleases grant the sublessee the option to prepay rent at a fixed discount rate, which is not typical in ground leases and may be detrimental to the City. The proposed subleases grant SCI the option to prepay ground rent at a discount rate of 5% any time during the first thirty years of the sublease term. By contrast, the sublease for Maritime Place gave the sublessee the right to prepay ground rent during the initial three years. We discussed whether this prepayment provision (which is not typical) should be deleted, as it benefits only SCI and not the City, and in fact could be detrimental to the City since no one can predict what a market discount rate may be during the next thirty years. We discussed that if there came a point in time that the SCI wanted to prepay the ground rent, it could simply make a proposal to the City based on circumstances at the time. Conversely, if the City should ever desire for the ground rent to be prepaid, the City could make a proposal to the SCI based on the circumstances at the time. In any event, further investigation would be necessary for the City to determine whether five percent is a reasonable discount rate in the current interest rate environment, and whether the prepayment option should be limited to three years, not thirty.
11. Common Area Maintenance (“CAM”) Expenses. We discussed creating a CAM provision based on actual CAM expenses that would be preferable to both parties. As with the Maritime Place sublease, the proposed subleases provide that the SCI shall pay a fixed amount (equal to 0.75% of the fair market value of the leased parcel) as its share of common area maintenance expenses and that this amount will increase 7% every 5 years. Mr. Remington and I agreed that this CAM payment bears no relation to actual CAM expenses incurred by the City and CMPA. We agreed that a true CAM provision that is based on the actual common area maintenance expenses would be preferable to both parties. Mr. Remington pointed out that the existing provision was put in place because at the time of the Maritime Place sublease, actual CAM expenses could not be identified. It is my understanding that actual CAM expenses can now be identified, and we agreed that I would obtain a list of actual CAM charges
which would be the subject of further discussion to consider the extent to which CAM expenses should be allocated to subleases of the private improvement parcels.
12. Contingencies. We discussed relatively minor adjustments to clarify the circumstances under which the sublessee would be entitled to terminate the sublease. Section 18 of the proposed subleases sets forth four contingencies that, if not satisfied, would allow the SCI to rescind the subleases. First, either the CMPA or SCI may “rescind” the sublease if the sublessee is unable to obtain necessary construction permits within five years. Second, the SCI may “rescind” the sublease if unacceptable environmental conditions are discovered within 90 days after execution of the subleases. Third, SCI may “rescind” the sublease if its construction loan does not close within five years. The term “rescind” implies that any rent that was paid prior to rescission of the sublease would be refunded to the SCI. I suggested that “terminate” rather than “rescind” would be the more appropriate term and that for each contingency there should be a clear statement as to whether or not SCI intended for previously paid rent to be refunded (noting that the financing contingency provided that rent would not be refunded, but the other contingency provisions were silent on the matter). The final contingency would allow the sublessee to “terminate” the sublease if it is unable to obtain an acceptable title insurance policy within five years after the execution of the Agreement. I pointed that the sublessee’s title insurance policy will be based on the state of facts that exists on the date the executed sublease is recorded in the public records, not on the date five years after the recording of the sublease. Therefore, we discussed that the duration of this contingency should be 60 to 90 days, not five years and, again, there should be a clear statement as to whether or not SCI intends for rent to be refunded.
13. Damage and Destruction. We discussed clarifying the language of section 15 of the SCI subleases concerning the respective rights and obligations of the parties in the event that the improvements are damaged or destroyed by fire or other casualty. It appeared that we were in agreement on the actual intent of this provision but that some adjustments in language would add clarity and eliminate potential inconsistencies. We discussed that if the SCI terminated the sublease because of the total damage or destruction of the premises, then the City should be entitled to receive a portion of the insurance proceeds based on the value at the time of its reversionary interest in the damaged or destroyed improvements. In other words, the insurance proceeds should be divided between the sublessee and the City based on the values of their respective interests in the improvements at the time of termination.
14. Environmental Clean-up. We discussed whether Section 16 concerning environmental clean-up is superfluous in light of the environmental site assessment provisions in Section 18(b). Section 16 of the SCI-proposed subleases would have required the CMPA to perform certain environmental remediation, all of which is now believed to have been done. Accordingly, the CMPA-approved subleases revised Section 16 to allow SCI to request that the City remediate any environmental hazards that exceed applicable standards as determined by Florida licensed, experienced environmental and hazardous substances firm. This modified provision should be acceptable to the City so long as it is clear that the City is not obligated to perform any remediation work. I suggested that Section 16 could be deleted as being superfluous, since Section 18(b) allows the SCI to obtain an environmental site assessment within 90 days after the sublease is executed and to terminate the sublease if the environmental site assessment discloses any hazardous substances on the leased premises.
15. Environmental Indemnity. We discussed the advisability of the CMPA’s willingness to indemnify the sublessee against environmental contamination and the constitutional prohibitions that prevent the City from indemnifying a private party. Section 23(b) would require the CMPA to indemnify the SCI against any pre-existing environmental contamination on the leased premises. We discussed that this provision might be deleted because a landlord would not typically assume such an unknown and potentially costly liability and because this provision is inconsistent with revised section 16 which would give the City the option, but would not require the City, to remediate environmental matters that are disclosed by a current environmental report. More typically, a lease would include a provision, such as Section 18(b) of the proposed subleases, which affords the lessee the opportunity to perform environmental investigation and testing during a “due diligence” period before becoming obligated under the lease For similar reasons, we discussed the deletion of the additional requirement in Section 23(b) that the CMPA indemnify the sublessee from “any act or omission of the CMPA, its agents, contractors, licensees or employees”. If the CMPA is nevertheless agreeable to these indemnity provisions, we discussed that it should be made clear that the City will not be bound by them, for instance if the City were to become the “sublessor” under the subleases in the event that the CMPA is dissolved for any reason. The City’s indemnification of a private party under these circumstances would violate the Florida constitutional prohibition against pledging the City’s full faith and credit without voter approval.
16. Mutual Indemnity. Again, we discussed the advisability of a broad indemnity by the CMPA and the constitutional prohibitions that prevent the City from indemnifying a private party. I suggested that the CMPA, as a quasi-governmental body, should not agree to a broad indemnity provision such as set forth in section 29 of the proposed subleases, but rather that the sublessee should simply rely on its own insurance for protection. A provision should be added to make clear that the City will not be bound by any indemnification obligation of the CMPA in the event that the City becomes the “sublessor” under these subleases.
17. Condition of Premises. We discussed modifying Section 11 of the subleases which Mr. Remington agreed was no longer applicable. Section 11 of the SCI subleases requires the CMPA and/or the City to do various things related to the infrastructure construction, environmental remediation and surveying or platting of the park property. Mr. Remington acknowledged that this provision was a carry-over from the Maritime Place sublease because these items had not been completed at that time so the sublessee needed assurance that they would in fact be accomplished; however, these items have since been completed so this provision as written is no longer applicable. Accordingly, I suggested that this provision be changed to provide that the SCI accepts the leased parcels in their “as is” condition, subject to a due diligence period during which the SCI could conduct whatever investigations it deems desirable and terminate the subleases (and receive a refund of any rent that had previously been paid) if it found any unacceptable conditions. This provision should also provide that during this due diligence period the CMPA and the City would provide all relevant information and documentation for SCI’s review and inspection.
18. Condemnation. We discussed making the condemnation provision mutual, a minor issue. I noted that the right to terminate the sublease if more than 50% of the leased premises are taken by eminent domain should be mutual, that is, at the option of either the sublessor or the sublessee.
19. Compliance with Governmental Regulations. We discussed deleting a sentence in Section 22 which in any event is inconsequential. The last sentence of Section 22 would require the CMPA to support SCI before any governmental or municipal agency and to support ordinances and regulations that further the SCI’s intended use of the leased premises. We discussed that this sentence should be deleted because (1) there presently is no stated “intended use” for the leased premises and (2) since it is impossible to know what ordinances and regulations a sublessee may desire during the many years the sublease will be in effect, one is ill-advised to agree in advance to support whatever those requested ordinance and regulations may be.
20. Holdover by Sublessee. We discussed a minor adjustment to the holdover provision in the proposed subleases. Section 25(a) appropriately provides that if the sublessee holds over after the expiration of the lease term with the consent of the City and the CMPA, then the sublease will be deemed to be a month-to-month tenancy that can be terminated only upon 60 days’ notice by either party. However, subsection (b) provides that a holdover without the consent of the City and the CMPA would also result in a month-to-month tenancy that could be terminated only upon 60 days written notice. A holdover without the consent of the landlord would customarily result in a tenancy at sufferance, which would allow the lease to be terminated immediately. This is a provision that would have no likely effect on SCI but would be important if the sublease is assigned to some other entity.
21. Estoppel Certificates. On a minor point, I suggested that the last sentence of section 40 be deleted.
22. Legal Formation of Sublessee Entity and Identification of Principals. We discussed that the sublessee entities should be formed prior to submission of subleases for Council approval. I noted to Mr. Remington that, based on prior comments by members of Council, it is important for the sublessee entities to be legally formed and in existence prior to the subleases being submitted to the City Council for approval and that the principals of the sublessee entities be identified if there are any in addition to Mr. and Mrs. Studer.
23. No Waiver of Sovereign Immunity. We discussed adding customary protections against the City’s unintentional waiver of sovereign immunity. I asked that the subleases include a provision that nothing in the subleases should be construed as a waiver of the City’s sovereign immunity with respect to tort liability and that any waiver of the City’s sovereign immunity with respect to contractual liability would extend only to the express terms of the sublease agreements.
24. Personal Guaranty. The question of personal guaranties, previously raised by the CMPA’s attorney, was discussed but not pursued. I asked if there had been any discussion of the suggestion by the CMPA’s attorney that future sublessees of these parcels (excluding of course Studer-related entities) should be required to provide personal guaranties. Mr. Remington indicated that there had been no discussion of that question, as the CMPA and the City would be adequately secured by the value of the improvements that would be built by the sublessee. We discussed the fact that SCI’s position on this issue was reasonable.
I am happy to answer any questions and to provide any further information or detail that the Mayor or Council may desire.
Very truly yours,
John P. Daniel
For the Firm
cc: Lysia H. Bowling, Esq. City Attorney
Rusty Wells, Esq., Assistant City Attorney and Council Liaison