PURPOSE:

The purpose of this report is for the Agency Board to consider a request from Maynard Retail Company (EQ3) to provide financial assistance for building and tenant improvements for the former Book City building located at 308 North San Fernando Boulevard. 

BACKGROUND:

The former Book City building is located at 308 North San Fernando Boulevard in the Village District of Downtown and has been vacant for over 18 months. The building is approximately 8,725 square feet and is owned by Palm Avenue Associates. It is located in the Burbank Center Commercial, Retail and Professional Zone (BCC-1), which is entirely confined to the Village District.  Ground floor retail and entertainment uses are required along San Fernando Boulevard from Magnolia Boulevard to Olive Avenue (Exhibit A).

Part of the Agency's comprehensive strategy to revitalize Downtown emphasizes the importance of attracting quality tenants to fill existing vacancies.  In September 2002, the Downtown Tenant Assistance Program was developed to help meet this need.  The purpose of the Downtown Tenant Assistance Program is to provide financial assistance for structural and tenant improvements for underutilized and vacant properties Downtown. The program provides forgivable loans as financial incentives to attract quality retail tenants to locate in the Downtown.  Additionally, this loan program is made available to retail tenants interested in locating Downtown or property owners interested in attracting quality retail tenants to the downtown area. 

In December 2002, the Agency Board approved its first loan under the Downtown Tenant Assistance Program by providing $675,000 in assistance to the Tucker Investment Group.  Funds were used for building and tenant improvement costs to help attract Urban Outfitters to lease the former Newberry Building located at 328-330 North San Fernando Boulevard.  Prior to the approval of the loan, the property had been vacant for over six years. 

ANALYSIS:

On November 8, 2004, staff received a proposal from Maynard Retail Company, Inc., as a franchisee of EQ3 Franchise Holdings (EQ3), requesting $424,380 in financial assistance for building and tenant improvements under the Downtown Tenant Assistance Program (Exhibit B).  This request was subsequently increased to $515,570 to include prevailing wage costs.  Maynard Retail Company, Inc. is in negotiations with Palm Avenue Associates (owner/landlord) to lease about 8,725 square feet in the former Book City building (through its parent company Palliser Furniture, Ltd.), to open an EQ3 furniture and home accessories store.  

Palm Avenue Associates has owned and managed several properties since it was established in 1949.   The company purchased the properties located in the 300-310 block of North San Fernando Boulevard in 1982. Current tenants include Starbucks, Rocky Mountain Chocolate Factory and Quiznos. 

EQ3 Franchise Holdings/Palliser Furniture, Ltd.

EQ3 Franchise Holdings is a private corporation established in 2003 in support of its EQ3 franchise programs across Canada and the United States.  EQ3�s mission statement is to provide innovative and affordable home furnishings for everyone who appreciates global design, and they market themselves as a modern, trendsetting furniture and home accessories retailer which combines international design with quality service and affordable value. Palliser Furniture, Ltd., EQ3�s parent company, is one of Canada�s largest furniture manufacturers with over 50 years of manufacturing wholesale experience.  The company exports home furnishings to retailers throughout North America.  EQ3�s product is received from Palliser Furniture and through third party suppliers throughout the world. 

Over the past two years, EQ3 has established over two hundred North American and nearly fifty international EQ3 stores within shopping centers.  In November 2003, EQ3 opened its first home furnishings store in Southern California in the City of Torrance.  Over the next 18 months, three new store locations will be added in Southern California.  EQ3 has over fourteen freestanding stores located in San Francisco, Los Angeles, Toronto, London, Ottawa, Peterborough, Burlington, Edmonton and Winnepeg.  They also plan to open twelve new stores throughout Canada and the United States by the end of 2005.  There are currently two corporate stores located in Winnipeg, Manitoba and Vancouver, British Columbia.  Annual sales for EQ3 were $17 million in 2003 with projected sales of over $30 million for 2004.

Proposed Lease Terms

• EQ3�s parent company, Palliser Furniture, Ltd. (EQ3/Palliser) is willing to enter into a ten-year lease with Palm Avenue Associates as well as make building and tenant improvements (estimated at $515,570 or $59 psf for the entire building).  Proposed improvements include new HVAC, electrical, flooring, as well as mezzanine and exterior upgrades.

• Based on the proposed lease with Palm Avenue Associates, EQ3/Palliser pays no rent while the building improvements are underway for up to 4 months (120 days) after the lease is executed or when EQ3 opens for business, whichever occurs first.

• EQ3/Palliser will pay 50% of $2.08 per square foot per month or $1.04 per square foot per month ($9,074 per month/$108,888 per year) during the next 20 months of the lease term.

• EQ3/Palliser will pay a fixed monthly rate of $2.08 per square foot per month ($18,148 per month/$217,776 per year) during years three through five and $2.29 per square foot per month ($19,980 per month/$239,760 per year) for years six through ten.

• In addition to the base rent, EQ3/Palliser will pay Palm Avenue Associates a percentage rent of 4% if annual sales exceed $5.4 million.

Development Costs

EQ3/Palliser estimated total development costs at $765,570 as indicated below:

Building and Tenant Improvements                                $515,570

Pre-Opening/Operating Costs                                       $250,000

Total                                                                                  $765,570

Agency Assistance/Keyser Marston Associates Analysis

As stated earlier, EQ3/Palliser is requesting $515,570 ($59 psf) in Agency assistance for base building and tenant improvements under the Downtown Tenant Assistance Program. Keyser Marston Associates conducted an analysis of the proposal submitted by EQ3/Palliser (Exhibit C).  Under the proposal, building and tenant improvement costs are estimated at $515,570 including prevailing wage requirements.  Keyser Marston Associates analyzed the proposed development costs for the entire building, assuming the terms of the proposed lease with EQ3/Palliser.

Proposed Downtown Tenant Assistance Loan

EQ3 has requested a tenant assistance loan to help off set the approximately $765,570 cash requirement to develop the former Book City space and to finance the substantial  pre-opening costs.  Keyser Marston Associates determined that eligible costs under the Downtown Tenant Assistance Program total $515,570 (essentially the estimate of the building and tenant improvement costs which EQ3 is required to spend to open this store). Under the Downtown Tenant Assistance Program guidelines, EQ3�s minimum private investment must be at least $257,785 (50% of eligible costs).  Therefore, while EQ3 is actually anticipating expenditures of approximately $765,570, they are only entitled to borrow $257,785 or $257,800 (rounded to the nearest hundred). 

Projected Participation Payment

In addition, EQ3/Palliser has projected gross annual sales for a Burbank store to range from $1.5 million in 2005 to $2.5 million in 2008.  Much the same as we required in both the Portos and Urban Outfitters tenant assistance loans, Keyser Marston Associates recommends that EQ3/Palliser be required to pay the Agency 3% of its annual sales that exceed $3 million in order to both amortize the outstanding debt sooner than the 10-year period and to assure that the Agency share in exceptionally strong sales volumes.  These funds would be used to reduce the principal loan amount received under the Downtown Tenant Assistance Program.

Corporate Guarantee

Keyser Marston Associates also recommends that the Agency Board secure some form of credit enhancement or corporate guarantee for the proposed program loan to provide adequate security for the Agency�s loan.  Palliser Furniture, Ltd., the parent company of EQ3 Franchise Holdings, indicated they would be the leasing and borrowing entity for the Downtown Tenant Assistance Program loan and has agreed to provide the necessary guarantee.  Keyser Marston Associates reviewed Palliser�s 2003 audited consolidated financial statements to determine whether it demonstrated financial resources sufficient to support the proposed transaction. Based on this review, it was determined that Palliser�s total assets exceeded $250 million with over $5 million held in cash.  In addition, Palliser�s current assets are larger than its current liabilities, indicating that it has the ability to meet its short-term obligations. Therefore, Keyser Marston Associates determined that Palliser has resources sufficient to secure the proposed $257,800 loan under the Downtown Tenant Assistance Program.

Commercial Rehab Loan Agreement

Under the Downtown Tenant Assistance Program, Palliser Furniture, Ltd., on behalf of EQ3, would enter into a Commercial Rehabilitation Agreement with the Burbank Redevelopment Agency.  The salient provisions of the Agreement are summarized below and the Agreement is attached as Exhibit D.

Loan Terms

The Agency would provide a forgivable loan of $257,800 to EQ3/Palliser for base building and tenant improvements.  The term of the loan would be ten years at a fixed interest rate of the then prevailing prime rate plus two percentage points as of the date the loan agreement is approved (currently about 7.75%). Scheduled annual principal and interest payments are forgiven during the time the approved tenant is in place.  For every year that the retail tenant, or an approved replacement tenant, no longer occupies the building during the 10-year period, 1/10^th of the remaining loan balance plus accrued interest shall be repaid.

If EQ3/Palliser decides to terminate the lease with Palm Avenue Associates prior to the end of the ten-year loan term, they will be required to make annual installment payments calculated on a pro rata basis until the earlier of 1) the end of the remaining lease term or 2) a new tenant executes a lease for the remaining lease term and occupies the space, subject to Agency approval.  There is no prepayment penalty, and the Agency loan can be assigned to another retail tenant subject to prior Agency approval.

Conditions to Agency Loan Disbursement

EQ3/Palliser is to fulfill various requirements prior to the close of the loan including, but not limited to, securing sufficient financing and equity, executing a note, and providing evidence of a fully executed lease agreement for a minimum of ten years with Palm Avenue Associates for approximately 8,725 square feet of space.

Participation Loan Payment

EQ3/Palliser has agreed to make annual participation payments to the Agency in the amount equal to 3% of gross annual sales in excess of $3 million.  These proceeds would be used to reimburse the Agency for building and tenant improvement funds, independent of the Agency loan.  The participation payments would be in effect during the ten year term of the loan and would be used to reduce the principal amount of the loan.  Should the business be sold and the loan assumed by a new owner (with the Agency�s approval), the participation terms would be transferred to the new owner, subject to any Agency renegotiation.  If EQ3/Palliser were to cease business operations, the loan terms require acceleration of the payments, resulting in the entire outstanding balance becoming due immediately. 

Security for Agency Loan

Palliser will execute a Promissory Note which will be a recourse obligation, meaning Palliser will be a guarantor for repayment under the Promissory note.  In the event of a default, Palliser will be legally responsible for repayment of the note.  For each anniversary year that EQ3 remains in the building and fulfills the requirements of this Agreement, 1/10^th of the remaining loan balance is forgiven.

Approval of Sublease, Transfer or Assignment   

Any sale, transfer, or assignment of EQ3/Palliser�s leasehold interest or the Agreement to any other entity will be subject to the approval of the Agency until the loan is repaid.

Design Review

The Agreement will require Agency staff review of the design of the exterior of the building and the base building improvements.

Construction Timeline

Building and tenant improvements are projected to be completed within 120 days from the execution of the agreement.  EQ3 plans to open the store within 10 days following completion of the improvements.

Prevailing Wages 

EQ3/Palliser will be required to pay prevailing wages for the proposed improvements.

Environmental Review/Remediation

This project is categorically exempt from the California Environmental Quality Act (CEQA) requirements, pursuant to Section 15301 of the State Guidelines pertaining to existing facilities.  A Public Notice of Environmental Determination has been posted at the Planning Division counter.

Base Building and Tenant Improvements

The Agency and EQ3/Palliser shall jointly develop a progress payment schedule for completed work items consistent with the scope of work for base building and tenant improvements.  EQ3/Palliser shall provide written evidence of the accrual of actual costs and expenses for base building and tenant improvements.  The disbursement of Agency loan proceeds shall be made upon the completion of a satisfactory inspection by Agency  and City staff in compliance with the scope of work. Total disbursements for base building and tenant improvements shall not exceed $257,800.  Any funds that remain from Agency loan proceeds after building and tenant improvements are completed will be used to reduce the principal balance.

SUMMARY:

Another opportunity exists to utilize the Downtown Tenant Assistance Program to attract a quality retail tenant to fill a vacant property Downtown. The former Book City building has been vacant for over 18 months and is in need of improvements.  EQ3, a unique furniture and home accessories retailer, is seeking Agency assistance to make these improvements and is willing to enter into a ten-year lease with the property owner.  In addition, they would contribute about $507,770 in private investment (or 66% of the total development costs) for this purpose.  Staff believes that EQ3 would complement the current mix of businesses in the Downtown.  Furthermore, their presence would help Burbank continue to fulfill its revitalization efforts downtown as well as providing opportunities for increased economic growth.  Based on $1.5 million in projected annual retail sales, $15,000 in sales tax revenue would be generated for the City's general fund each year.

FISCAL IMPACT:

Funds for the Downtown Tenant Assistance Program have been previously budgeted from tax increment funds.

RECOMMENDATION:

It is recommended that the Agency Board adopt a resolution approving a loan for $257,800 with Palliser Furniture, Ltd., on behalf of EQ3, under the Downtown Tenant Assistance Program.

EXHIBITS:

Exhibit A          Property Profile

Exhibit B          EQ3 Proposal

Exhibit C          Keyser Marston Associates Analysis

Exhibit D          Proposed Commercial Rehabilitation Loan Agreement