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Google gets deal on latest city lease

Wide gap in cost of side by side lots on Charleston East

Google may have gotten a bargain for its 53 year lease of 9 city owned acres by paying for it all at once with $30 million, but city officials say they made the most of a down real estate market with a "win-win" deal.

The deal is best illustrated in relation to a lease agreement the city made with Google for a virtually identical piece of land in 2007.

In 2007 Google leased the northern 9.2 acres of the city's vacant "Charleston East" based on an appraised value of $40 a square foot, said Ellis Berns, Mountain View's economic development director. But when Google leased the southern 9.4 acres of Charleston East in April, Berns said the value of the land dropped to $24 a square foot.

The result is two much different lease payments for a pair of nearly identical vacant lots. For the northern half, the city began receiving $1.2 million a year in 2007. For the southern half, Google paid a $30 million lump sum for a 53-year lease -- the equivalent of a $580,000 a year payment on average over the life of the lease. Berns said the council decided to propose the $30 million payment to Google after appraising the land's value and estimating future increases in lease payments and re-appraisals of the property every 10 years.

The numbers didn't seem far out of whack to Mike Cobb, senior vice president of real estate firm Colliers International. He said the city's appraisals appeared "pretty darn close" to average.

"It was a tough couple years in this market," Cobb said, adding that prices for this sort of property are "volatile."

Cobb said that if the recent land appraisal favored Google, it could be argued that the 2007 appraisal was equally favorable for the city.

Google, which has plenty of cash, accepted the deal because it simply wanted to get the lease "off their books" by paying for it all at once, said Mayor Jac Siegel. And Google would also not have its lease subject to new appraisals of the value of the property every 10 years, as it is in the 2007 lease agreement, Berns said.

To the city's credit, it is now able to invest the $30 million and take an estimated average interest payment of $1 million a year, which is close to the annual payment for the northern 9 acres. That is a "very reasonable way" to make up for the diminished value of the property, Berns said. And "the interest rate will potentially go up."

Finance director Patty Kong projects average interest earnings of 3.5 percent a year on the $30 million. The city's investment portfolio has paid interest ranging between the current 2.4 percent to a high of 5.7 percent in the last 10 years, Kong said.

Last week, council members talked of spending the $30 million sooner rather than later, as inflation would make the $30 million worth only $5 million in 53 years, Kong said. But, of course, if the council decides to spend the money, the interest earned would decrease, Kong said.

Perhaps fortunately, what to do with all the $30 million doesn't need to be figured out anytime soon. Kong said the lease money cannot be spent all at once. Interest payments aside, the council may only spend $580,000 in the first year and after every subsequent year of the 53-year lease. It could take many years for that to add up to an amount worth spending.

Comments

Posted by Duke, a resident of Old Mountain View
on May 13, 2011 at 2:08 pm

How much is it when translated into monthly lease per square foot?


Posted by Carl, a resident of Shoreline West
on May 14, 2011 at 10:23 am

Please correct me if I'm wrong, but I think the calculation would be:
1 acre = 43,560 sf
9.4 acres = 409,464 sf
$580,000/year divided by 404,464 sf = $1.42 per sf per year (rounded)
$1.42 divided by 12 = $0.12 (twelve cents) per foot per month


Posted by HoleInTheHead, a resident of Old Mountain View
on May 14, 2011 at 2:01 pm

Just to compare (apples & oranges?), Google's Eric Schmidt is paying $5.54 ($18,000/3,250 sf) for his personal VC shop (Tomorrow Ventures) @ Palo Alto according to this story: [Web Link]


Posted by Steve , a resident of Sylvan Park
on May 16, 2011 at 7:28 am

Once again our city government put its short term interests ahead of the long term needs of us schmuck citizens. Giving such a long term lease with no future adjustments sold us out. Does anyone here believe, for even one second, that there will be no inflation over the next 53 years?
Whoo-hoo! let's party! we just scored another 30 million to blow!


Posted by Observer, a resident of Old Mountain View
on May 16, 2011 at 9:26 am

Well said. These are the type of deals you can expect when a much smarter and competitive private sector, better equipped with leaders, lawyers and accountants, go up against the public sector administration types that are just sniffing around for more quick-fix revenue streams. They are like junkies at this point. In the meantime, we the citizenry are expected to believe that Google or the city does it out of a genuine concern and compassion for us the taxpayers.


Posted by KD, a resident of Waverly Park
on May 16, 2011 at 8:21 pm

"Berns said the council decided to propose the $30 million payment to Google after appraising the land's value and estimating future increases in lease payments and re-appraisals of the property every 10 years."

The time honored adage is negotiation is "the first person to speak, loses"


Posted by Appraiser Dude, a resident of another community
on May 17, 2012 at 5:25 pm

From an appraiser's viewpoint: The article indicates that in 2007 (near peak in market) land value of north parcel was $40 PSF x 9.2 acres (x 43,560 SF per ac) = $16,030,080. The 2007 lease payment was negotiated at $1.2 million or about 7.5% of land value. By mid 2011 the land value had fallen to $24 PSF for the south parcel = 9.4 ac x 43,560 x $24 = $9,827,136. So at the 7.5% land lease rate the current annual market rent would be about $737,035. Well below the 2007 rental of $1.2 million for the slightly smaller north parcel. The north lease had typical escalation provisions. When good credit tenants like a Google sign unsubordinated long term ground leases, with typical escalation provisions, landlords (THE CITY) will rarely get more than 16 to 20 x net annual rents (based on aprox 5% to 6% capitalization rate). At the lower cap rate (higher value) of 5% the current market value to an investor for the south parcel would be as follows: $737,035 / 0.05 = $14,740,700. Somehow, the City got Google to agree to a lump sum payment of $30,000,000 ($73 PSF based on rounded parcel areas reported). This is tantamount to a below market (SELLER FAVORABLE) cap rate of 2.46%. This effective sale price is way above the 2007 appraised site value of $40 PSF when the market was stronger. Plus the City gets the site back at the end of the lease term. Citizens should be praising the parties responsible for this deal rather than criticizing them, and thanking Google for their generosity.


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