Within weeks, two proposed San Francisco leases with big real estate firms have drawn criticism from supervisors over costs, and the debate has also revealed that a new “green” requirement can hike The City’s lease payments.
The Department of the Environment plans to lease 24,490 square feet of office space at 1455 Market St., a 22-story building in the growing tech industry hub a block away from the new Twitter headquarters. The building is owned by Hudson Pacific Properties, which recently announced a new high-tech tenant, Square, a mobile payment system company started by Twitter co-founder Jack Dorsey.
On Wednesday, the Board of Supervisors Budget and Finance Committee was troubled by the Department of the Environment’s $2 million price tag for fixing up the 12th-floor office space in the new building. Supervisors also questioned plans for the department to take out a loan from the landlord to help pay for the improvements.
The $2 million in improvements includes a $244,000 loan from the landlord at an 8 percent interest rate. The loan amount was decreased to $123,790 after the agency held a fundraiser last week. The seven-year lease will cost $5.1 million, beginning at $28 per square foot, with the tenant improvement loan adding an additional $162,044.
The lease cost is the second within weeks to raise questions.
Last week, some supervisors criticized a San Francisco Municipal Transportation Agency deal for a parcel owned by Prologis in Daly City for the transit agency’s auto-tow operation. The 20-year, $71 million lease between the SFMTA and Prologis was approved by the board in an 8-3 vote. Some supervisors were not happy that while the transit agency had been looking to purchase the same site, Prologis was able to swoop in and buy it in July 2011 for $21 million.
Prologis relocated its corporate headquarters to San Francisco last year when it merged with AMB Property Corp. and took over its Pier 1 lease. It has became politically active, with its CEO and an employee donating a combined $5,750 to support Mayor Ed Lee’s bid for mayor last November.
Included in both of the deals are new requirements for facilities leased by The City to meet LEED Gold requirements. LEED is a green building rating system where points of up to 100 are awarded for a project’s greenness. A project can earn silver, gold or platinum status.
That requirement was put in place last year as part of legislation introduced by the mayor and approved by the board in an 11-0 vote.
“That is new and something fairly unique to San Francisco,” said acting director of real estate John Updike.
The revelation about the upgrade costs led Supervisor Jane Kim to request that these costs be highlighted in future lease proposals.
“I’m not saying that it’s not the right way to invest city funds,” Kim said. “But I just would like to have a sense of what the larger impact of that is throughout The City.”
For the Department of the Environment deal, Kim said the extra cost for tenant improvements “doesn’t seem worth it.”
“So I am reluctant to support this,” she said.
Melanie Nutter, Department of the Environment director, said the space is currently a “cold shell” and “that is one reason why the cost sounds high.”
“The LEED process is very complex,” she added. “I can assure you we are doing everything that we can to maximize LEED points.” Nutter said they gave up going after five HVAC-related points because it would have cost $200,000 and “we don’t have that money.”
The full board plans to vote on the Department of the Environment deal Tuesday.