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.