Date: November 1, 2017

To: Recreation and Park Capital Committee Through: Philip A. Ginsburg, General Manager Dawn Kamalanathan, Director Planning and Capital Management Dana Ketcham, Director, Permits and Property Management

From: Nicole Avril, Project Director, Capital Partnerships Subject: Geneva Car Barn and Powerhouse - Lease and Financing

Agenda Item Wording:

Discussion and possible action to recommend that the Board of Supervisors 1) appropriate funds for the renovation of the Powerhouse building of the Geneva Car Barn and Powerhouse (the “Project”); 2) authorize the Department to enter into a Funding Agreement with the Community Arts Stabilization Trust ("CAST") to help finance the Project; 3) authorize the Department to enter into a Development Services Agreement to allow payment of construction costs and related expenses out of the Project financing; 4) authorize the Department to enter into indemnification agreements with CAST and the other financing partners in connection with the Project financing; 5) authorize the Department to enter into a 55-year lease for the public purpose of renting the Powerhouse to a Qualified Active Low Income Business (“QALICB”), and to award CAST a 7-year option to lease and develop the Office Building next to the Powerhouse; and 6) authorize the General Manager, in consultation with the City Attorney, to enter into agreements substantially in the form as presented to the Commission and to modify and amend these forms and to enter into further agreements if needed to further the Project so long as there is no material change to the Department’s rights or obligations. Strategic Plan Reference: Strategy 1: Inspire Public Space

Objective 1.1: Develop more open space to address population growth in high-needs areas and emerging neighborhoods

Objective 1.4: Preserve and celebrate historic and cultural resources Strategy 2: Inspire Play

Objective 2.1: Strengthen the quality, responsiveness, and accessibility of recreation programs Objective 2.2: Strengthen and promote the safety, health and well-being of San Francisco’s youth and seniors

Strategy 3: Inspire Investment

Objective 3.1: Increase public investment to better align with infrastructure needs and service expectation

Objective 3.3: Cultivate increased philanthropic support Background/Description: The City owns the Geneva Car Barn and Powerhouse (“GCBPH”) and has placed it under the jurisdiction of the Recreation and Park Department (“RPD”). The GHBPH is comprised of two structures, the “Powerhouse” and the “Office Building”. It is located in San Francisco’s District 11, and is the last physical reminder of San Francisco’s first electric railway system. First owned by private railway companies and then by the San Francisco Municipal Transportation Authority (“SFMTA”), it was occupied until 1989, at which time it was heavily damaged in the Loma Prieta earthquake.

The GCBPH sat vacant for a decade at which point Muni announced plans to demolish the buildings (see Appendix A). A group of community members, the Friends of Geneva Car Barn and Powerhouse, mobilized to save the buildings. RPD acquired jurisdiction of the GCBPH in 2004, at which point a Stabilization Project for the Office Building was completed. In 2010, the GCBPH was listed on the National Register of Historic Places. Between 2004 and 2015, in partnership with the D11 community, the vision for GCBPH was developed as a community arts center. Since 2015, the Department, in partnership with the Office of Economic and Workforce Development, the Office of District 11 Supervisor Ahsha Safai and former Supervisor John Avalos, and the San Francisco Arts Commission, has focused on securing funding for the restoration of the Powerhouse. Project Overview RPD proposes to complete the restoration of the GCBPH in two phases. Phase 1 will consist of the Powerhouse only. The Powerhouse is 3,000 sq. feet (approx. 35’ x 89’) with 35’ high ceilings. Skylights and arched windows flood the space with natural light, and period details lend the space a hip, industrial vibe. It will be an exceptionally beautiful and unique space to hold performing and visual arts-related programming for preschoolers, youth, teens, adults and seniors. The space will be available for rent for short-term events such as art exhibitions and performances by arts groups, and can also accommodate large events. Improvements to be made to the Powerhouse during Phase 1 include a seismic upgrade, the installation of modern utility systems, the restoration of historic features, hazardous materials remediation, new circulation systems to accommodate ADA access, streetscape improvements, improved entrances, a new roof, restored windows, and a new floor with radiant heating. In addition, the Project will achieve a LEED Gold rating (see Appendix B). Phase 2 will include the restoration of the Office Building and installation of additional Powerhouse improvements.

Phase 1 Financing

The Phase 1 construction cost is now estimated to be approximately $13M. Of this, approximately $1.3M has already been spent on planning, design, permitting and other pre-construction Project related-expenses. Funding sources are as follows:

2000 GO Bond $838,000 CA State Grant Funds $3,500,000 CCSF General Fund $2,500,000 Community Opportunity Fund $600,000 Supervisor Safai - Mayor's Budget $200,000 CAST Contribution $1,000,000 Historic Preservation Tax Credits $1,826,767 New Market Tax Credits $2,022,000 Neighborhood Asset Activation Fund $306,000 RPD Capital Budget $210,612 Total Funds $13,003,379 These Sources reflect several new developments.

On June 15, 2017, the Commission authorized RPD to enter into negotiations with CAST for the financing and leasing of the GCBPH.

In July 2017, the Project was awarded a grant from the State of California (the “State”) in the amount of $3.5 million. RPD and the State have determined that the State Funds should be used to complete Phase 1, as they must be expended in a manner that results in the building being open to the public by June 30, 2020. The Commission has recommended that the Board authorize RPD to accept and expend the State grant, and that Board approval is currently pending. RPD proposes to use the proposed State grant in lieu of a portion of Community Opportunity Funds for Phase 1 and reallocate Community Opportunity Funds for additional Phase 1 construction contingency, tenant improvements and/or Phase 2 planning and design.

Also in July 2017, the Board of Supervisors approved the release of $2,500,000 placed on the General Fund Reserve per Ordinance No. 42-16 during the fiscal year 2015/2016 budget process for facilities improvements to the Powerhouse. On August 22, 2017, the San Francisco Community Investment Fund (“SFCIF”) adopted a resolution awarding a $13M New Market Tax Credit (“NMTC”) allocation to the Project, netting the Project $2,189,000 in NMTC funding. This tax credit allocation will be bundled with Federal Historic Rehabilitation Tax Credits (“FHTCs”), which are expected to net the Project an additional $1,662,244.

Finally, CAST and RPD have executed a Memorandum of Understanding to summarize their shared expectations and requirements for the Project, including CAST’s contribution of $1 million to the Project, RPD’s contribution of approximately $6.8 million into the Project, and CAST’s request that it be reimbursed for certain fees and transaction costs out of the Tax Credit Financing, or in the alternative by RPD if the Financing does not close through no fault of CAST. (See Attachment A, Ex. 1). RPD is in the process of negotiating similar agreements with the other proposed financing partners, U.S. Bancorp Community Development Corporation (“US

Bank”) and the San Francisco Community Investment Fund (“SFCIF”). Overview of Tax Credit Financing Process

To finance the Project, RPD, CAST, US Bank (acting as a private tax credit investor) will provide funds to a controlled investment fund created for the Project by US Bank. These funds will be invested in a special purpose entity created by the SFCIF, which will in turn direct the funds to a special-purpose legal entity created for the Project that is known as a Qualified Active Low Income Business (“QALICB”), to be created by CAST. RPD will lease the Property for 55 years to the QALICB, who will then sublease the Property for 25 years to a newly formed for-profit entity, the “Master Subtenant”, which is necessary for US Bank to receive FHTCs. The Master Subtenant will in turn lease the property to the Performing Arts Workshop. RPD will be requesting that the Board of Supervisors take certain actions and approve a series of agreements to facilitate the Tax Credit Financing, to ensure compliance with the NMTC and FHTC requirements, and to ensure proper and timely disbursement of the Project funds, as detailed below. We expect to receive the proceeds of the Tax Credit Financing in February 2018. A Notice to Proceed to the Contractor for construction will not be issued until this happens. 1. General Fund Appropriation

As an initial matter, RPD will be seeking an appropriation for Project costs as an advance to fund the Project until the Tax Credit Financing funds are received. RPD expects to pay Project costs out of this appropriation, and then to repay the General Fund after being reimbursed by the QALICB out of the proceeds of the Tax Credit Financing. RPD currently expects that it will begin work on the Project and that it will begin to receive the proceeds of the Tax Credit Financing from the QALICB in early 2018.

2. Funding Agreement with CAST

The Funding Agreement will outline RPD and CAST’s participation in the Tax Credit Financing, in particular the amounts they will each contribute towards the QALICB and the treatment of certain fees and expenses (please see Attachment A). In summary:

• CAST agrees to contribute $1,000,000 to the Project to be offset by future rent credits as set forth in the Ground Lease with the QALICB (detailed below). This funding shall first be prioritized to cover anticipated construction costs for Phase 1. Any remaining funds shall then be prioritized to cover up to 50% of the gap of the cost of mutually agreed upon tenant improvements to the space. Should there exist remaining funds after construction and tenant improvements are completed, CAST agrees to invest the remainder at its discretion in either Phase 1 or on Phase 2 (the Office Building).

• The City will contribute $6,800,000 to the Project.

• CAST will receive a fee for its advice and consultation on the Project related to Project feasibility and negotiations ($100,000) as part of the initial Project costs.

• CAST will receive a $7,500/month developer fee commencing September, 2017, and continuing until the Property is placed in service (i.e., receives a certificate of completion).

• CAST will receive a $15,000/year management consultant fee for its services related to the Tax Credit Financing administrative, audit, accounting, and reporting requirements, for each calendar year of the of the NMTC seven year compliance period.

• CAST will be reimbursed for third-party transaction expenses associated with the Tax Credit Financing including legal fees, tax credit consultant fees, third party accounting fees, and advance deposits paid to the Tax Credit Financing parties, the appraiser, the surveyor, and others.

• CAST will be reimbursed for expenses related to the administration and reporting requirements for NMTCs and HRTCs, including accounting fees, to be paid from a reserve account funded at closing of the Tax Credit Financing.

• CAST will be reimbursed for certain legal fees it will incur related to the Project.

• CAST will not be liable for, and will be indemnified by RPD against, any fee, cost, expense or liability incurred with respect to the Property’s renovation.

• CAST, either directly or indirectly, will have no liability or obligation under the Ground Lease or the Master Lease prior to the time the Property is placed in service.  

• RPD and CAST expect that CAST will be reimbursed for its fees and expenses from the proceeds of the Tax Credit Financing. If for some reason the Tax Credit Financing does not occur, CAST would look to RPD to pay those costs.

3. Development Service Agreement with QALICB The NMTC and FHTC programs treat the QALICB as the “Owner” of the Project for tax credit purposes, and the City as the “Developer.” Accordingly, the QALICB and the City (RPD, and the Department of Public Works, on behalf of RPD) will enter into a Development Services Agreement giving the City the authority and the obligation to undertake the following key services, among others, for the benefit of QALICB and the Project (please see Attachment B):

• negotiate and enter into all necessary contracts (including the Construction Contract) for the Project;

• receive bids, prepare bid analyses and report outcomes, conclusions, and actions taken to QALICB with regard to Developer award of contracts or rejection of bids;

• choose the products and materials necessary to equip the Project in a manner which satisfies all requirements of the Plans and Specs;

• monitor for reimbursement purposes the disbursement and payment of amounts owed to the architect, contractor, engineers, and any third party consultants selected to complete the Project;

• undertake alternative solutions within the scope of the approved budget whenever design details affect construction feasibility or schedules;

• prepare a detailed schedule of realistic activity sequences and durations, allocation of labor and materials and processing of shop drawings and samples; perform regular monitoring of

the schedule as construction progresses, identify potential variances between scheduled and probable completion dates, and review the schedule for work not started or incomplete;

• provide regular monitoring of the approved estimate of Project cost, show actual costs for activities in process and estimates for uncompleted tasks, and identify variances between actual and budgeted or estimated costs;

• develop and implement systems for review and processing of change orders as to the Project and of applications by contractors for progress and final payments;

• ensure contractor obtains all necessary permits and approvals for and in connection with the development and construction of the Project, including but not limited to securing all Project code approvals and obtain certificates of occupancy for the Project, and in obtaining a contractor payment and performance bond;

• issue a Notice of Substantial Completion when the Project is substantially complete; and

• upon completion of the Project, assign and transfer to QALICB all warranties, including, without limitation, any construction warranties, in any way related to the Project.

In addition, the Development Services agreement outlines the following:

• The QALICB agrees to pay the City (“City Developer Fee”) a development fee of $666,114 for Construction Management Services.

• The QALICB will reimburse the City for its actual costs incurred in performing the Development Services, including any amounts paid under agreements entered into for the purpose of completing the Project, including the construction and architect contracts (the “Project Costs”). Alternatively, at the City’s request, the QALICB shall pay Project Costs directly to any third party identified in writing by Developer within five business days following the delivery of an invoice for reimbursement.

• The QALICB acknowledges and agrees that it may not disburse or release any Project Funding except as authorized.

4. Ground Lease with QALICB In June 2017, the Commission approved the following Powerhouse Ground Lease terms and Office Building Lease Option between RPD and the QALICB. Key terms include:

• 55 year lease of the Powerhouse to the QALICB

• Contribution by CAST of $1,000,000 towards the Phase 1 project

• $1,000,000 rent credit

• 7- year option to lease the Office Building to CAST, which lease would require CAST to finance and perform the Phase 2 improvements

• With the Master Subtenant, the QALICB would oversee and pay for day-to-day maintenance and, after lease year 10, the structural and exterior components of the improvements of the Powerhouse, including its exterior walls, windows, and roof (collectively, the “Structural Components”). The Department would maintain the Structural Components for the initial 10 years of the lease term.

RPD has continued to develop the lease in consultation with CAST and now seeks Commission and Board of Supervisors approval for the lease with the QALICB and lease option with CAST (please see Attachments C and D). Lease Terms

Term: Fifty-five (55) years, commencing on the full execution of the lease (“Lease Effective Date”) and ending on the fifty-fifth (55th) anniversary of the Lease Effective Date.

Rent: The initial monthly base rent shall be $5,213.00, which was determined based on a review of the available and relevant data and in consultation with the Direct of Property to be the fair market rent. This initial monthly base rent shall be increased annually by any increase in the Consumer Price Index and have a fair market rent adjustment at lease year 15.

Rent Abatement: To facilitate the Tax Credit funding structure, base rent will be abated until the tax credit structure unwinds. In addition, in consideration of CAST’s $1,000,000 contribution to the QALICB to fund its payment of the Phase 1 project, rent will be abated for the first 15 lease years.

Use: Recreational, educational, and cultural programming, with an emphasis on such areas as literacy, visual, dance, musical, performing, digital, design and technical arts (the “Primary Uses”), the performance of QALICB’s obligations under the Lease, and to the extent reasonably necessary to support the Primary Uses, administrative/office use, arts rehearsals and performances, visual, performance, and design arts space, classrooms, theater, and public and private special events and exhibitions.

Programming: QALICB shall cause the Building to be actively programmed with cultural, recreational and educational programming by offering classes throughout the year, and including (1) daily arts-focused programming for area youth during weekday after-school and summer hours; (2) cultural, recreational and educational programming for adults and families during the evening and weekend hours; (3) weekly cultural, recreational and educational early childhood development classes for preschool students and caregivers; (4) quarterly public student and professional performances and exhibitions; and (5) summer work-force development opportunities for high-school students.

Utilities and Services:

The Phase 1 Improvements will include the installation of separate meters to measure electricity and water service to Premises. City shall pay for, at its sole cost and expense, electricity and water services to the Premises up to $600 per month, which shall be increased annually by any increase in the Consumer Price Index. QALICB shall reimburse City for any electricity or water fees that exceed such monthly cap.

QALICB shall pay, at its sole cost, for garbage and recycling disposal, pest control, and all telephone, fax and internet connection charges, including the

cost of bringing any such service(s) to locations in the Premises.

Maintenance: QALICB shall be responsible for all maintenance and repair of the Powerhouse and the adjacent SFMTA Area (used for trash facilities, a modular restroom, and a transformer); subject to City’s maintenance obligations for the Structural Components during the initial ten (10) Lease Years.

Approved Subleases:

QALICB shall sublease the Premises to the Master Subtenant for 25 years, which sublease shall require the Master Subtenant to comply with the QALICB’s obligations under the Lease and include the Master Subtenant sublease terms described in the Lease. QALICB shall also require the Master Subtenant to sub-sublease the Premises to the Workshop, which sub-sublease will require the Workshop to comply with the QALICB’s obligations under the Lease and the Workshop sub-sublease terms described in the Lease.

Other Noteworthy Provisions:

If CAST does not exercise its option to lease the Office Building, the tax credit deal unwinds, and the Department has a written agreement with a third party for the rehabilitation of the Office Building and the use of the Office Building for recreational purposes, then City shall have the right to require QALICB to assign all of its interest under the Lease and to the Powerhouse to a City-designated party at no cost on one (1) year’s prior notice. If the Department exercises this assignment right, the Powerhouse can only be used for the Primary Purposes through the fifty-fifth (55th) anniversary of the Lease Effective Date.

Office Building Lease Option with CAST

CAST will have an exclusive 7-year option (“Option”) from RPD, to be exercised in CAST’s sole discretion, to lease and independently control and manage the rehabilitation and use of the Office Building (“Phase 2 Property”).

Term: 7 years, commencing on execution of City-QALICB Powerhouse lease.

Rent: Fair market rent, taking into account any limitations or restrictions on use.

Use: Recreational, educational and cultural programming, including opportunities for job training and apprenticeships in areas including, but not limited to, the culinary, media, literary, visual, dance, musical, performing, film/cinema/television production, digital, design and technical arts (the “Office Building Primary Uses”), and in connection therewith the Premises may be used for: (i) administrative/office use, (ii) arts rehearsals and performances, (iii) visual and design arts studios, (iv) classrooms, (v) theater, (vi) public and private special events and exhibitions, (vii) operation of a café and culinary training, and (viii) the operation of a visitor-serving retail as permitted on park property

Form of Lease: If CAST timely exercises its option to lease the Office Building, the parties would have one year to negotiate a form of lease mutually approved by RPD and CAST, which will be subject to the approval of the Recreation and Parks Commission and the Board of Supervisors. The form of lease must describe the Phase 2 improvements and alterations that CAST will be permitted and required to make to the Office Building at its sole cost and any rent credits that the City will provide.

5. Indemnification Agreements with CAST, QALICB, US Bank, SFCIF

Because NMTC and FHTC transactions require a significant up-front investment, it is a normal business practice in such transactions for the parties to seek certain indemnities and guarantees from a Project guarantor, who in this case would be the City. The Project cannot proceed without the proposed NMTC and FHTC transactions and the NMTC and FHTC transactions cannot proceed without these indemnities and guarantees. Accordingly, RPD, in consultation with the City Attorney and Risk Manager, will seek Board of Supervisors approval to enter into Indemnification Agreement(s) with CAST, the QALICB, US Bank, and SFCIF to address these matters, including the following:

• unknown environmental conditions at the Property;

• construction issues such as cost over-runs, delays, and defect claims;

• operating deficits for 5 years from completion of construction;

• specified up-front costs (such as legal fees, accounting fees, tax credit consulting fees, and other fees and expenses), in the event the Tax Credit Financing does not close through no fault of the Indemnified party; and

• losses experienced by the investors in the event that the U.S. Treasury recaptures or disallows the NMTCs or HRTCs based on a failure of the Project to comply with tax credit requirements. The indemnity would be limited to situations under the reasonable control of SFCIF and City staff, and before the Internal Revenue Services declares a recapture event it will provide notice and a 12 month cure period (except in the case of certain “bad acts” such as willful misconduct, gross negligence, fraud, or malfeasance).

Outreach

In an effort to gather input and keep the community informed of Project plans and progress, regular community meetings have been held since 2009, including meetings at Balboa High School, the Ingleside Presbyterian Church, and Lick Wilmerding High School. Informational and design presentation meetings were held at Sunnyside Conservatory and the El Rey, and Ingleside Terraces Anniversary events, as well as at Lick Wilmerding High School, the Excelsior Library and the Muslim Community Center. At each of these events the status of the project was presented, and input and feedback gathered. The Project has also presented regularly at neighborhood association, District 11 Council and Balboa Station CAC meetings. Car Barn staff and board members have also attended Excelsior and OMI Community Convener meetings as well as meetings with youth service organizations such as the Mission YMCA and Excelsior Boys and Girls Club, the OMI-Excelsior Denman

Beacon Center, cultural centers and faith based organizations, area high schools such as Balboa High School and SFMTA-sponsored open houses addressing safety and future improvements near the Geneva and San Jose Avenue intersection.

In addition, staff attends the Friends of the Geneva Car Barn and Powerhouse Board Meetings to provide project updates on a bi-monthly basis. Lastly, in June 2017, representatives from District 11 Council, the Friends of the Geneva Car Barn and Powerhouse, Ocean Avenue Association and OMI Neighbors in Action spoke at the RPD Operations Committee Commission meeting in support of the Department entering into negotiations with CAST for the financing and leasing of the Geneva Car Barn and Powerhouse.

Supported by:

District 11 Council Friends of the Geneva Car Barn and Powerhouse Ocean Avenue Association Office of Economic and Workforce Development Office of Supervisor Safai OMI Neighbors in Action Performing Arts Workshop San Francisco Arts Commission

Opposed by:

None known.

Recommendation: Recommend that the Board of Supervisors 1) appropriate funds for the renovation of the Powerhouse building of the Geneva Car Barn and Powerhouse (the “Project”); 2) authorize the Department to enter into a Funding Agreement with the Community Arts Stabilization Trust ("CAST") to help finance the Project; 3) authorize the Department to enter into a Development Services Agreement to allow payment of construction costs and related expenses out of the Project financing; 4) authorize the Department to enter into indemnification agreements with CAST and the other financing partners in connection with the Project financing; 5) authorize the Department to enter into a 55-year lease for the public purpose of renting the Powerhouse to a Qualified Active Low Income Business (“QALICB”), and to award CAST a 7-year option to lease and develop the Office Building next to the Powerhouse; and 6) authorize the General Manager, in consultation with the City Attorney, to enter into agreements substantially in the form as presented to the Commission and to modify and amend these forms and to enter into further agreements if needed to further the Project so long as there is no material change to the Department’s rights or obligations. Appendices: Appendix A: Powerhouse – Present Appendix B: Powerhouse and Exterior Car Barn Renderings

Attachments:

Attachment A: Funding Agreement Attachment B: Development Services Agreement Attachment C: Geneva Powerhouse Lease Attachment D: Option to Lease

Appendix A: Powerhouse – Present

Appendix B: Powerhouse and Exterior Car Barn Renderings