COUNTY OF SAN MATEO

Inter-Departmental Correspondence

County Manager’s Office

 
 

DATE:

November 29, 2010

BOARD MEETING DATE:

December 14, 2010

SPECIAL NOTICE/HEARING:

None

VOTE REQUIRED:

Majority

 

TO:

Honorable Board of Supervisors

FROM:

Steve Alms, Manager, Real Property Services Division

SUBJECT:

Lease with 2700 Middlefield LLC, a California limited liability company, of the entire three-story, medical office building of approximately 36,000 square feet to be constructed by the Landlord at 2700 Middlefield Road in Unincorporated Redwood City, (“Building”), for the consolidation of three health clinics in southern San Mateo County. (Lease No. 1292)

 

RECOMMENDATION:

Adopt a Resolution authorizing the County Manager, or the Manager’s designee, to do the following, on behalf of the County of San Mateo:

    1) Negotiate the terms of, and execute a Lease with 2700 Middlefield LLC, a California limited liability company, for the County to lease the entire three story, medical office building of approximately 36,000 square feet to be constructed by Landlord at 2700 Middlefield Road in Unincorporated Redwood City, at an initial annual rent of $1,175,000, for a term of thirty years, with two options to extend for an additional five years each, and

    2) Negotiate an offset against such rent in the annual amount of $215,000 in consideration of the payment to Landlord of $4,300,000 in funds granted to the County by the Sequoia Healthcare District as a contribution toward the cost of leasehold improvements made to the Building by Landlord on behalf of the County, and

    3) Execute notices, options and documents associated with the Lease including, but not limited to, construction and maintenance agreements, and extension or termination of the agreements under the terms set forth therein.

 

BACKGROUND:

In 1989, the County leased approximately 8,484 square feet for the Fair Oaks Clinic together with 21,451 square feet of warehouse space on Middlefield Road in Unincorporated North Fair Oaks. The Fair Oaks Clinic was originally a primary care adult and pediatric clinic. In response to an expanding demand for medical care in the area, it was necessary to establish a separate pediatric clinic in North Fair Oaks, and the Health System now provides adult care at this location. The warehouse space is shared between the Public Administrator and the Public Guardian. The County occupies the premises under the terms of the Lease as amended. The most recent amendment extends the term of the Lease through August 14, 2015, and provides the County with the right to terminate early by giving 12 months written notice to the Landlord at any time after August 14, 2012, resulting in a minimum extension of three years from the date of the Lease Amendment.

 

In 2005, the Fair Oaks Children’s Clinic was opened at 630 Laurel Street, Redwood City, in order to reduce overcrowding at the Middlefield site, and to meet the expanding demand for medical care. The 5,000 square foot prefabricated structure is owned by the County, and located on the Hoover Elementary School property.

 

The third South County medical clinic, the Willow Clinic, serves adult and pediatric patients. The clinic occupies approximately 11,500 square feet in the Veterans Administration Hospital in Menlo Park. The Health System has a “Sharing Agreement” with the Veterans Administration (VA) which addresses shared staff and equipment resources in addition to the use of the facility. The VA has for many years indicated a desire to terminate any use of the facility by other agencies. More recently, the VA has refused to enter agreements that are more than a year in length.

 

In addition, the Redwood City Women, Infants and Children (WIC) office occupies a leased facility of 2,500 square feet at 2342 El Camino Real. Most of the community served by WIC in Redwood City also obtains primary medical care from the County. Expiration of the lease has been coordinated with that of the Fair Oaks Adult Clinic to facilitate consolidation.

 

The Health System’s South County clinics are critical components of the County’s system of care for uninsured and low-income patients. Nearly one-third of all the Medical Center’s outpatient visits each year occur at Willow, Fair Oaks and Fair Oaks Children Clinics. As clinic volumes continue to increase, the facilities will be inadequate to meet growing demand, and the aging infrastructure will render these facilities unfit for safe and effective medical care.

 

Consolidation of the three clinics and the WIC office at a single facility provides an opportunity to modernize operations, increase efficiency and reduce overall operating costs. The four sites currently occupy a combined area of approximately 29,500 square feet. The Health System indicates that there is significant demand that cannot be met in the existing facilities. The expansion to 36,000 square feet can facilitate an increase from a total of 39 exam rooms in the three clinics to 52 in the new facility.

 

The Health System projects that a consolidated facility will enable the County to increase the number of South County patients served from 19,000 to 26,000, a 37% increase. In addition, it is projected that the cost per visit will decrease from $255 to $227 while total patient visits increase from 69,000 to 91,000. The increased volume and decreased cost per visit should more than offset any increase in rent for the consolidation. The projections are based on existing current demand that cannot be met in the current locations.

 

On October 19, 2010, your Board authorized acceptance of a grant for construction costs for the South County Clinic consolidation from the Sequoia Healthcare District (SHD) in the sum of $4,300,000.

 

DISCUSSION:

The Health System has recommended the construction of a new South County medical facility to integrate the three clinics. This will eliminate increasingly costly repairs and provide an opportunity to add additional exam rooms and improve patient access. A new structure will also provide a higher quality of care while improving the patient experience. Expansion of dental clinic facilities is also recommended. The consolidation will eliminate redundancies in staffing, allow reductions in inventory and facilitate streamlined clinic operations. Building access and parking will also be greatly enhanced.

 

At the request of the Health System, Real Property Services is in the process of negotiating a long-term lease for a medical office building that is to be constructed by the Landlord at 2700 Middlefield Road. The conceptual plan for the facility calls for construction of a three-story medical office building of approximately 36,000 square feet. The facility will be constructed by the Landlord at its cost, except that the County will use the $4,300,000 SHD grant funds to cover the estimated cost of leasehold improvements that are specific to medical office use. In recognition of that contribution, the negotiated annual rent, initially $1,175,000, will be offset by a credit in the amount of $215,000. The resulting net annual cost to the County of $960,000 is equivalent to a monthly rate of $2.22 per square foot. In addition, the County will be responsible for reimbursement of the cost of all applicable operating costs; real property taxes, insurance, maintenance, services and utilities for the facility. Monthly operating costs are estimated as an additional $1.10 per square foot, resulting in a total occupancy cost of $3.32 per square foot. Rent for the new facility will commence upon completion of construction.

 

The Landlord has agreed to the rent set forth above on the condition that the Lease is in final form and signed by February 11, 2011. After that date, the County would risk incurring additional costs resulting from increased financing costs incurred by the Landlord. It is projected that design and construction of the new facility will be completed, and the rent will commence, approximately 24 months from the date of execution of the Lease. The full amount of the initial base rent, without offset for the annual credit, is subject to fixed adjustment once every five years from the date of rent commencement at the rate of 3% per annum, compounded.

 

The Lease will include an option for the County to purchase the facility. The earliest date that the County could exercise its option is at the beginning of the sixth year of occupancy of the new building. The right to exercise the option will extend from that date through the full term of the lease. The price upon exercise of the option will be the fair market value of the property, but not less than the actual, documented cost of the land and building. For the purposes of calculating the actual cost, it has been agreed that the land value will be $2,647,500, and that developer overhead and profit will not exceed $600,000. Fair market value will be determined based on fair rental value at the time of the exercise of the option. The SHD grant of $4,300,000 will be credited toward the purchase price in escrow.

 

As part of the new lease agreement, the County will continue to occupy the existing facility at 2700 Middlefield. An “Interim Lease”, attached as an exhibit to the new lease, will reflect continued occupancy on essentially the same terms and conditions as the existing Lease as Amended. The primary difference will be provisions which facilitate the demolition and construction activities necessary to establish the new medical office building.

 

In order to enable the Fair Oaks Clinic to continue to operate during construction of the new facility, phased construction is anticipated. Temporary construction to separate the clinic and warehouse areas will allow the clinic to continue to operate while the warehouse is demolished, freeing a portion of the site to serve as the footprint for the new facility. The initial step in the process will be to relocate the Public Administrator and Public Guardian to another warehouse facility. After the warehouse section of the existing building is vacated, the monthly rent of $22,765 for that area will terminate, and the County will continue to pay monthly rent for the Clinic of $34,145 pending completion of the new facility.

 

When the new facility is complete, and the Fair Oaks Clinic moves, the original clinic will be demolished, freeing additional area that will be improved as parking for the new facility.

 

The combined annual rent for the three clinics and Redwood City WIC is currently about $940,000. Additional facility operating costs of approximately $150,000 bring the total occupancy cost to about $1,090,000 annually. Including base rent and estimated operating costs, it is estimated that the new facility will cost approximately $1,435,000. The Health System projects that the increased annual cost will be offset by increased revenue of from the 32% increase in annual patient visits, and an 11% reduction in cost per visit.

 

The Health System projects one-time moving and related costs of $1,700,000. Those costs include moving existing furnishings and equipment, acquisition of new required new furnishings and equipment, telephone and data related costs and anticipated loss of revenue as a result of move related service disruption.

 

Performance Measure(s):

Real Property Services strives to maintain an average cost of leased facilities that compares favorably with the average asking rate for comparable facilities in the County.

 

Measure

Lease-Actual
Actual

Avg. Asking Rate

San Mateo County Q3-2010

Monthly Rate

$3.32

$2.64

The Lease Premises are to be constructed as medical and dental offices, and such space leases at a higher rate than a standard office facility. The County will pay initial base rent annually of $1,175,000, which amount will be subject to the credit of $215,000 in recognition of the $4,300,000 contribution toward leasehold improvement costs. The resulting annual cost of $960,000 represents a monthly payment of $80,000, or $2.22 per square foot net of operating expenses. In addition, the County will pay the cost of utilities, maintenance, real property taxes, janitorial service and all other services provided to the Building. Adjustment for the estimated cost of utilities, taxes and services increases the overall cost of occupancy from the negotiated base rent of $2.22 per square foot per month to an estimated $3.32 per square foot on a full-service basis for the fully improved facility. Although the adjusted rate exceeds the current countywide Average Asking Rate of $2.64 ($2.99 for Class A buildings), it compares favorably with the rate for medical office buildings in the County, particularly when considering that the County’s facility must meet OSHPD 3 building standards.

 
   

The Chief of the Health System and the CEO of the Medical Center concur in this recommendation. County Counsel has reviewed and approved the Resolution as to form.

 

FISCAL IMPACT:

There is no fiscal impact in the current fiscal year. The rent for the ongoing use of the existing facility on Middlefield Road is included in the Health System 2010/11 budget. The adjusted annual rent for the new facility of $960,000 is expected to commence in the 2012/13 Fiscal Year, and will be incorporated in the Health System proposed budget at that time.

 

cc:

Lee Thompson, Deputy County Counsel

 
 

Jean Fraser, Chief of the Health System
Dr. Susan Ehrlich, CEO, San Mateo Medical Center
Arthur Morris, Deputy Director of Administration, Health System