Agenda - Council Work Session - 01/10/2012

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CC Work Session 2.3. Meeting Date: 01/10/2012 By: Aaron Backman, Administrative Services Title: Proposed Lease Agreement for 6745 Hwy 10 by Independent Auto Service Background: In October of 2011 the Economic Development/Marketing Manager was notified that Independent Auto Service needed a new business location to meet its needs. The business owner, Allen Berg, indicated that he operates out of a shop next to his home located at 7470 152nd Lane in Ramsey. He has outgrown his current location and would benefit from more customer space and better visibility. Mr. Berg is interested in leasing the City -owned property at 6745 Hwy 10 (also known as the former Midwest Car Care site that was vacated in November). The City's property (see attached site map) encompasses a 17,130 sq. ft. building on a 1.84 acre parcel. The existing building includes 5,930 sq. ft. of retail space/five service bays and 11,200 sq. ft. of cold storgage space in the rear that is leased by Sharp & Associates for storing boats, RVs and other vehicles. Allen and Shannon Berg submitted a letter of intent to lease the front portion of 6745 Hwy 10 to the Economic Development/Marketing Manager on November 3, 2011. They would relocate the business to the new location as soon as possible. Mr. Berg would be responsible for certain leasehold improvements, including: Replacing any carpet, interior painting, electrical improvements in shop/bay areas, replacing 6 overhead doors, and installing 4 commercial hoists. The estimated cost to the Bergs for installing these improvements is $35,000 (plus significant sweat equity). The City of Ramsey would be responsible for replacing radiant tube heaters in the three larger bays. The estimated cost for installing these overhead heaters is $2,500 each. (The overhead heaters in the smaller bays are in good shape.) The Bergs initially proposed a five-year lease with free rent for the first six months, $1,087 per month the next six months, and $1,730 per month the second year. The business would be responsible for all utilities and the City would pay the real estate taxes. After further negotiations between Mr. Berg and the Economic Development/Marketing Manager, the proposed lease has been changed to a six -year lease with a lease rate of $494 per month (or $1.00 per sq. ft.) for the first six months, $1,483 per month ($3.00 psf) for the next six months, $1,977 per month ($4.00 psf) for the second year, $2,224 per month ($4.50 psf) for the third year, $2,471 per month ($5.00 psf) for the fourth year, $2,619 per month ($5.30 psf) for the fifth year, and $2,693 per month ($5.45 psf) for the sixth year. The estimated property taxes for the entire building for pay 2012 are $31,000. The Sharp & Associates lease for its portion of the property is $1.97 psf or a total of $21,788 for the year. The proposed Independent Auto Service lease would generate $11,856 in year one and $23,724 in year two. In addition to paying the taxes, the City is likely to have ongoing maintenance costs pertaining to 6745 Hwy 10. Repairs by the City would be paid for out of the RALF Fund -Maintenance Account for the building. Recommendation: City staff recommends that the City Council consider approving the proposed six -year lease with Independent Auto Service. The business would like to move ahead with the new location as soon as is practicable. Funding Source: City repair costs are paid out of the RALF Fund -Maintenance Account for 6745 Hwy 10. The tenant would be responsible for leasehold improvements as outlined in the case. Council Action: