June 9, 2020 – In furtherance of stage one of a two stage real estate strategy, the Debtors requested Court authority to enter into (i) a lease and purchase option agreement with TMG Bay Area Investments II, LLC (“TMG BAI”), an affiliate of Bay Area property developer, TMG Partners R.E., LLC (“TMG”), and (ii) subject to the satisfaction of certain conditions, to enter into a lease and purchase option agreement with BA2 300 Lakeside LLC (“Landlord”) for the property located at 300 Lakeside Drive, Oakland, California (the “Lakeside Building”) [Docket No. 7852].
The second stage of this strategy, is the sale of the Debtors existing downtown San Francisco property (the "SFGO complex") in the near-term, for which it will seek approval from the California Public Utilities Commission (the “CPUC”).
The motion states, “The Utility seeks Court authorization to move forward with the first stage of the Utility’s real estate strategy: entry into an Agreement to Enter into Lease and Purchase Option (the 'Agreement') with TMG BAI, and after the satisfaction of certain conditions precedent (discussed below), its entry into a form of agreed upon Office Lease (the 'Lease and Purchase Option Agreement,' and collectively, with the Agreement, the 'Agreements') with Landlord, who will acquire the Lakeside Building and redevelop it to the Utility’s specifications.
As part of executing its vision for a comprehensively transformed PG&E, the Debtors have made a number of commitments to better-position PG&E to serve California for the long term, including commitments to change how the company is organized so that it can deliver improved safety and operational performance and lower its overall cost structure for customers. In furtherance of these commitments, the Debtors plan to move forward with a lease and option to acquire an existing building in Oakland that will enable it to consolidate various Bay Area locations into one Bay Area headquarters that is considerably less expensive, more productive, and ultimately would replace its current, less efficient San Francisco General Office headquarters complex (the ‘SFGO’).
The Oakland lease and purchase option begins the implementation of a two-stage real estate strategy designed to provide significant benefits to the Utility and its key stakeholders, including significant long-term cost savings for its customers (including, subject to CPUC approval, the gain on sale of the SFGO), and a more productive, collaborative workspace for employees that brings them together across the Bay Area. Moving forward in this manner will (i) reduce the Utility’s real estate operating and capital costs relative to its current facility costs over the life of a more efficient headquarters, (ii) enable the Utility to consolidate several different corporate offices into one anchor location in an improved work environment promoting greater communication and efficiency, and (iii) allow the Utility to monetize its existing headquarters in the near-future and return the net gain on the sale to its customers in the form of meaningful rate reductions.
This real estate strategy is the culmination of many years of work by the Debtors exploring options to optimize, and monetize, their real estate portfolio to meet the Debtors’ needs for the future. The specifics of the first stage, the Oakland lease and purchase option, have been heavily negotiated by the Debtors and their advisors, undergone detailed evaluation by the Debtors’ employees and advisors, an independent third-party expert, and the subcommittee on real estate matters established by the Utility’s Board of Directors (the 'Real Estate Subcommittee'). The final terms of the potential transaction have been approved by the Real Estate Subcommittee and the Utility’s Board.
Pursuant to the Lease and Purchase Option Agreement, the Utility will occupy portions of the Lakeside Building as the redevelopment is completed and floors become available for the Utility to occupy. The Utility negotiated a favorable lease rate at $57/sq. ft., which is below market rates even accounting for COVID-19 conditions. Additionally, the Utility negotiated for TMG to provide the entire cost of the renovations to the Lakeside Building, including the seismic and other custom tenant improvements that the Utility may elect to implement, without any upfront cost by the Utility. These allowances are atypical in the market and highly favorable for the Utility’s cash flow management, as it avoids the need for immediate cash investment.
Instead, the estimated building improvement costs are built into the Purchase Option, which the Utility may exercise during the Option Period (defined below). Specifically, the Purchase Price is an all-in cost of up to $892 million, which includes: an acquisition cost of $420 million.
Pursuant to the terms of the Lease and Purchase Option Agreement, Landlord is required to create a legal parcel that contains the Lakeside Building that can be sold to the Utility in compliance with the (constituting an allocation of a portion of TMG’s purchase price on the full project to the Lakeside Building); required code improvements and base building improvement costs of $141 million; allowances of $160 million (i.e., $230 per rentable square foot) for the Utility’s specific tenant improvements for information technology, security, floor arrangements, and seismic work; and development fees, carry costs, and transaction fees and costs of $171 million. By agreeing in advance to a fixed purchase price that includes the estimated costs of improvements, the Utility takes on zero risk of cost over-run on the scope of landlord work, which is instead borne entirely by the developer.
Further, the Utility and Landlord will share fifty-percent (50%) of the savings on base building costs. Moreover, if the Utility spends less than the $160 million in tenant improvements, the $892 million Purchase Price will be reduced on a dollar-for-dollar basis. This structure permits the Utility to purchase a ‘build-to-suit’ building without any responsibility for capital expenditures necessary to complete the building upgrades prior to exercising the Purchase Option.”
Key Terms of Lease and Purchase Option Agreement:
- Premises: Approximately 910,146 rentable square feet (the “Premises”), which will be delivered to the Utility in two phases (“Phase A” and “Phase B”, respectively, and each a “Phase”). Each of Phase A and Phase B consist of separately demised spaces (each, a “Sub-Phase”). The Utility will occupy each Sub-Phase as it becomes available all in general accordance with a schedule set forth in the Lease and Purchase Option Agreement.
- Rent: The base rent is $57 per year per rentable square foot, as increased by; (i) amortized additional tenant improvement allowance as described below; (ii) amortized seismic costs above $8 million but only after the Option Period has expired, and (iii) annually by 3% increases. Rent for each Sub-Phase commences upon the delivery of each Sub-Phase.
- The Utility shall also pay (i) its pro rata share of increases in operating expenses over the base year (2022), (ii) its pro rata share of increases in real property taxes over the base year; (iii) costs to maintain the Premises; and (iv) costs to maintain base building systems exclusively serving the Premises.
- Term: The term of the Lease and Purchase Option Agreement (the “Term”) begins upon the date of delivery of the first Sub-Phase which is expected to occur in early 2022 and runs for 34 years and 11 months.
- Purchase Option: The Lease and Purchase Option Agreement shall grant to Tenant an option to purchase the Property (the “Purchase Option”).
- Option Period and Option Exercise: The Purchase Option may be exercised between: twenty-four months after the execution of the Lease; and nine months thereafter, each of which shall be subject to extension for completion of the Subdivision process, extension for satisfaction of certain conditions, and acceleration in the event of certain casualty or condemnation. Should the Utility not exercise the Purchase Option during the Option Period, the Purchase Option automatically terminates. If the Purchase Option terminates, the Lease and Purchase Option Agreement will remain in full force and effect.
- Purchase Price: The purchase price for the Property if the Utility exercises the Purchase Option is $892 million (the “Purchase Price”), subject to the following adjustments:
- decreased for any Phase A tenant improvement costs below $230 per rentable square foot of Phase A paid for by Landlord;
- decreased for the difference between actual seismic costs and $38 million;
- decreased by 50% of any cost savings in base building and landlord work completed by Landlord and 100% of the budgeted amount for any base building work that has not yet been completed at Closing;
- increased or decreased for standard credits, debits, adjustments for prorations, and any outstanding amounts owed by or to the Utility under the Lease and Purchase Option Agreement; and
- credits related to any prior casualties or condemnation of the Property prior to the Closing
The Court scheduled the hearing to consider the motion for June 30, 2020, with objections due by June 23, 2020.
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