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  Agenda Item   22.    
City Council Meeting
Meeting Date: 11/17/2020  
FROM: Bill Gallardo

Third Amendments to the Hotel and Retail Parcel Ground Subleases with Nesbitt Partners Brea Venture, LTD
Approve the third amendments to the Ground Subleases between the City of Brea and Nesbitt Partners Brea Venture, LTD for the properties located at 900  E. Birch Street (Hotel Parcel) and 910 E. Birch Street, Brea, CA (Retail Parcel) for rental payments deferred due to the COVID 19 pandemic.
The City of Brea (City) as the successor to The Brea Foundation owns two parcels, located at 900 E. Birch St. (Hotel Parcel) and 910 E. Birch Street (Retail Parcel).  In 1989, these parcels were leased to the former Brea Redevelopment Agency that subsequently entered into a ground sublease with Brea Hotel Joint Venture for the construction of a hotel and retail commercial center.  In 1995, the ground sublease was assigned to Nesbitt Partners Brea Venture, LTD (Sublessee) and in 2012, the former Brea Redevelopment Agency was dissolved and the City assumed the rights and obligations of the Agency.  The current hotel operator is Embassy Suites Hotel and the Embassy Court Retail & Office Center (Retail Court) has various retail, office and service-oriented tenants.  Windsor Capital Group Inc. (Windsor) is the authorized representative for the Sublessee. 

As a result of the COVID-19 pandemic, Embassy Suites Hotel and most of the Retail Court tenants were required to close or operate at dramatically reduced levels beginning in mid-March 2020 which resulted in those businesses having difficulty paying rent to Windsor.   As a result, on May 1, 2020, Windsor formerly requested that amounts which were owed or to be paid to the City from March through June 2020 be deferred.   These amounts included base rent for the quarters ended December 31, 2019, March 31, 2020 and June 30, 2020 along with gross receipts rent due on the Hotel Parcel for calendar year 2019.  These payments totaled, $425,879 as outlined below:
Description Q4-2019 Q1-2020 Q2-2020 Total
Hotel Parcel  $302,280 $25,000 $25,000 $352,280
Retail Court Parcel $24,533 $24,533 $24,533 $73,599
Total $326,813 $49,533 $49,533 $425,879

City staff met with the City Council in closed session on June 2, 2020, to obtain authorization for the deferral of lease payments and direction regarding repayment of any amounts deferred.  Staff subsequently negotiated the following payment schedule for City Council consideration which will bring the lease payments current by December 15, 2020:

Description 08/31/2020 09/15/2020 10/15/2020 11/15/2020 12/15/2020 Total
Hotel Parcel $85,456 $85,456 $60,456 $60,456 $60,456 $352,280
Retail Court Parcel $29,440 $29,440 $4,907 $4,907 $4,905 $73,599
Total Due $114,896 $114,896 $65,363 $65,363 $65,361 $425,879

The proposed Third Amendment to Ground Sublease documents have been prepared to memorialize this agreement.  As of November 10, 2020, the City has received the first three payments totaling 69.3% of the total amount due.  Additionally, the amounts due for the quarter ended September 30, 2020 have also been received.  Payments for the fourth quarter of 2020 are due on December 31, 2020.
City Council has authorized staff to negotiate the deferral and repayment of lease payments of $352,280 and $73,599, respectively on the Ground Subleases for the Hotel Parcel (Embassy Suites Hotel) and the Retail Parcel (Embassy Court Retail & Office Center).  These amounts total $425,879 and are to be paid in full no later than December 15, 2020.  Staff is recommending the City Council approve the proposed Third Amendment to Ground Subleases to memorialize this deferral and repayment schedule.  

Deferred lease payments made after August 31, 2020, which total $310,983 that would have been received in FY 2019-20 will now be recognized in FY 2020-21 which results in lower revenues than estimated for FY 2019-2020; however, there is no net financial impact to the General Fund over the course of both fiscal years as a result of this deferral.  It is noted that due to the COVID-19 pandemic, gross receipts rent for calendar year 2020 on the Hotel Parcel which is due on March 31, 2020 will be dramatically reduced.  The revenues now deferred from the prior fiscal year and now included in the FY 2020-21 projected revenues, will likely offset this reduction.
William Gallardo, City Manager
Prepared by: Cindy Russell, Administrative Services Director
Third Amendment to Ground Sublease (Hotel Parcel
Third Amendment to Ground Sublease (Retail Parcel)

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