DATE: August 18, 2020
SUBJECT:
Title
ORDINANCE GRANTING A 13-YEAR, 11-MONTH AND 13-DAY LEASE WITH BAE SYSTEMS SAN DIEGO SHIP REPAIR INC., A CALIFORNIA CORPORATION, DBA BAE SYSTEMS FOR 6.77 ACRES OF EELGRASS MITIGATION LOCATED AT THE FORMER SOUTH BAY POWER PLANT COOLING INTAKE CHANNEL IN CHULA VISTA, CALIFORNIA
Body
EXECUTIVE SUMMARY:
BAE Systems San Diego Ship Repair Inc., a California corporation, (BAE) has a 50-year lease (Master Lease) with the District for the operation of a ship repair facility at 2205 E. Belt Street (Attachment A, Master Lease Location Map). The Master Lease covers landside area of approximately 9.8 acres and includes industrial facilities, including production shops, offices and other related utilities and infrastructure. The waterside parcel is approximately 16.6 acres and currently has three working piers (Pier 1, 3,
and 4) to moor large naval and commercial vessels for maintenance, repair, overhaul and conversion-related activities.
In 2013, BAE submitted a project to the District for the construction and operation of a new floating drydock on the north side of BAE’s existing Pier 1 (Project). In November 2015, the Board of Port Commissioners (Board) approved BAE’s Project and certified the Final Environmental Impact Report (EIR). The EIR required mitigation for eelgrass and shading impacts associated with the Project and analyzed two sites as potential mitigation locations. Under a Right of Entry License Agreement (ROELA), BAE constructed 6.77 acres of eelgrass in a portion of the former South Bay Power Plant cooling intake channel in Chula Vista (Mitigation Parcel). The District has prepared a 13-year and 11-month lease for the eelgrass habitat (Mitigation Lease) that is coterminous with their Master Lease and includes incremental new revenue to the District. The Mitigation Lease would provide annual rent payments to the District in the amount of $181,045, which will be adjusted annually in accordance with the Consumer Price Index (CPI). Additionally, the Mitigation Lease would provide a one-time payment to the District in the amount of $476,763 as consideration for the use of the property for the period August 1, 2016 through September 17, 2020. The Mitigation Lease is a unique lease that was heavily negotiated and is not to be used as an example for future leases with BAE or any other District tenants.
RECOMMENDATION:
Recommendation
Ordinance granting a 13-year and 11-month lease with BAE Systems San Diego Ship Repair Inc., a California corporation, dba BAE Systems for 6.77 acres of eelgrass mitigation located at the former South Bay Power Plant cooling intake channel in Chula Vista, California.
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FISCAL IMPACT:
The proposed Mitigation Lease would result in annual rent payments in the amount of $181,045 with annual CPI adjustments between 2% and 4%. Additionally, the Mitigation Lease would provide a one-time rent payment to the District in the amount of $476,763 as consideration for the use of the property from August 1, 2016 through September 17, 2020.
Compass Strategic Goals:
This agenda item supports the following Strategic Goal(s).
• A thriving and modern maritime seaport.
• A Port with a healthy and sustainable bay and its environment.
• A Port with a comprehensive vision for Port land and water uses integrated to regional plans.
DISCUSSION:
Background
BAE is a current District tenant that operates and maintains a shipyard at 2205 E. Belt Street, San Diego under a Master Lease. The Master Lease commenced on
September 1, 1984 and has a term of 50 years, which expires on August 31, 2034. The Master Lease is comprised of both landside facilities covering approximately 9.8 acres and waterside improvements covering approximately 16.6 acres to support ship repair, maintenance, modernization and related industrial activities.
In 2013, BAE submitted a project to the District for the construction and operation of a new 950-foot long, 205-foot wide drydock (Pride of California Dry Dock) on the north side of BAE’s existing Pier 1. BAE estimated the overall cost of the new drydock and associated improvements to be approximately $104 million. In April 2014, the District, as lead agency under the California Environmental Quality Act (CEQA), commenced the preparation of an EIR for the Project. The Project was approved by the Board on November 17, 2015 and the Pride of California Dry Dock was delivered to the site on December 8, 2016. As shown on Attachment B, the Pride of California Dry Dock is partially located on a parcel that was previously occupied by SDG&E (Former SDG&E Parcel) and leased to BAE under a short-term Tideland Use and Occupancy Permit (TUOP).
Eelgrass Mitigation Requirement
The Project required significant dredging to portions of the Master Lease and Former SDG&E Parcel to accommodate the depth requirements of the Pride of California Dry Dock which resulted in the need for eelgrass mitigation. Additionally, as a result of the Clean-up and Abatement Order (CAO), which was issued by the Regional Water Quality Control Board (RWQCB) on March 14, 2012, remediation of marine sediment along the eastern shore of central San Diego Bay was required. This action became known as the San Diego Shipyard Sediment Remediation Project which involved marine sediment that was located within BAE’s Master Lease and on the Former SDG&E Parcel, as well as other properties in the vicinity. Due to the Project’s dredging and bay coverage impacts as well as the San Diego Shipyard Sediment Remediation Project dredging impacts, eelgrass mitigation was required. A portion of the dredge material (up to 80,000 cubic yards) from BAE’s leasehold was approved to be taken down to the Mitigation Parcel to help provide a suitable depth and environment for eelgrass habitat and to serve as mitigation for the eelgrass and bay coverage impacts.
The EIR identified two locations that were suitable to construct eelgrass habitat. One location was outside of the District’s jurisdiction and the other was within the District’s jurisdiction, located in the former South Bay Power Plant cooling intake channel in Chula Vista. BAE determined that the parcel located in the former South Bay Power Plant cooling intake channel in Chula Vista (Attachment C - Mitigation Parcel Location Map) was the best location for construction of the eelgrass mitigation.
Mitigation Parcel ROELA
In order to construct the mitigation, BAE was granted a ROELA in August 2016 for a one-year period to allow BAE to construct, monitor and maintain the eelgrass mitigation while the long-term real estate agreement could be negotiated. Due to negotiations for the long-term real estate agreement taking longer than anticipated, the ROELA was subsequently amended and extended while staff and BAE negotiated a long-term real estate agreement.
The Project and San Diego Shipyard Sediment Remediation Project resulted in the need for approximately 5.25 acres of eelgrass mitigation. BAE constructed 6.77 acres of eelgrass at the Mitigation Parcel to ensure there was adequate coverage and density to fulfill the mitigation requirements for both projects. BAE overbuilt the Mitigation Site with an excess of 1.52 acres of eelgrass that BAE may be able to use for future projects requiring eelgrass mitigation. BAE estimates construction of the Mitigation Site to be approximately $5 million.
Mitigation Parcel Valuation
To determine the value of the Mitigation Parcel, staff engaged Rasmuson Appraisal (Rasmuson) to appraise the property using a residual land value approach. The residual land value approach begins with the value of the mitigation bank credits and works backwards, subtracting out development costs and the developer return required to create a mitigation bank, to ultimately arrive at the value of the land. Unlike most property types managed by the District, there are very few comparable properties from which to derive a valuation for the submerged Mitigation Parcel. While there are no known eelgrass mitigation banks, the most similar known saltwater mitigation bank is the San Francisco Bay Wetland Bank operated by Keech Properties, LLC. Rasmuson’s appraisal notes that eelgrass mitigation credits would likely have a higher value than the saltwater mitigation credits due to its scarcity. Rasmuson indicated that the value of credits being sold in that mitigation bank ranged between $700,000 and $1,000,000 per acre. Based on the comparables above, netting out BAE’s construction cost ($5,000,000) and developer rate of return (5%), staff negotiated the value of the Mitigation Parcel to be $250,000 per acre. For fixed rent leases, rent is calculated as a 9.5% annual rate of return on the value of the land.
Mitigation Lease
Staff and BAE have negotiated a 13-year and 11-month lease for the Mitigation Parcel that is coterminous with BAE’s Master Lease. The Mitigation Lease includes “back rent” for the four years BAE used the Mitigation Parcel under the ROELA, annual rent based on a 9.5% annual return on the final agreed upon value of the Mitigation Parcel with annual CPI increases and a set fee for the participation of assignment proceeds (Attachment D - Proposed Lease Information Summary). The Mitigation Lease is a unique lease that was heavily negotiated with BAE and is not to be used as an example for future leases with BAE or any other District tenants, as it has unique provisions and terms applicable to the premises and use of the premises.
Conclusion
Staff believes that the Mitigation Lease represents a favorable deal for the District because it establishes a strong comparable for future mitigation banks, provides annul rent to the District in the amount of $181,045 which is adjusted annually by CPI, and provides a one-time payment of $476,763. Additionally, the Mitigation Lease includes a set Assignment Participation Fee of $130,000 should BAE assign the lease to another party in the future (Attachment E - Mitigation Lease). Staff recommends the Board adopt an Ordinance granting a 13-year and 11-month lease with BAE for 6.77 acres of eelgrass mitigation located at the former South Bay Power Plant cooling intake channel in Chula Vista, California.
General Counsel’s Comments:
The Office of the General Counsel has reviewed this agenda sheet and attachments presented to it and approves the same as to form and legality.
Environmental Review:
The proposed Board action, including without limitation, an ordinance granting a lease for eelgrass mitigation at the former South Bay Power Plant Cooling Intake Channel in Chula Vista, was adequately covered in the Final Environmental Impact Report (FEIR) for the Pier 1 North Drydock, Associated Real Estate Agreements and Removal of Cooling Tunnels Project (UPD #EIR-2014-31, SCH #2014041071; Clerk Document No. 64501) prepared and certified by the District on November 17, 2015 by Resolution No. 2015-152. The proposed project is not a separate “project” for CEQA purposes but is a subsequent discretionary approval related to a previously approved project (CEQA Guidelines § 15378(c); Van de Kamps Coalition v. Board of Trustees of Los Angeles Comm. College Dist. (2012) 206 Cal.App.4th 1036.). Additionally, pursuant to CEQA Guidelines Sections 15162 and 15163, and based on the review of the entire record, including without limitation, the FEIR, the District finds and recommends that the proposed Board action does not require further environmental review as: 1) no substantial changes are proposed to the project and no substantial changes have occurred that require major revisions to the FEIR due to the involvement of new significant environmental effects or an increase in severity of previously identified significant effects; and 2) no new information of substantial importance has come to light that (a) shows the Project will have one or more significant effects not discussed in the FEIR, (b) identifies significant impacts would not be more severe than those analyzed in the FEIR, (c) shows that mitigation measures or alternatives are now feasible that were identified as infeasible and those mitigation measures or alternatives would reduce significant impacts, and (d) no changes to mitigation measures or alternatives have been identified or are required. Because none of these factors have been triggered, the District has the discretion to require no further analysis or environmental documentation (CEQA Guidelines §15162(b)). Pursuant to CEQA Guidelines §15162(b), the District finds and recommends that no further analysis or environmental documentation is necessary. Accordingly, the proposed Board action is merely a step in furtherance of the original project for which environmental review was performed and no supplemental or subsequent CEQA has been triggered, and no further environmental review is required.
The proposed Board action complies with Sections 21, 35, and 87 of the Port Act, which allow the Board to pass resolutions and to do all acts necessary and convenient for the exercise of its powers, and which authorizes the use of tidelands for the establishment and maintenance of those lands for open space, ecological preservation, and habitat restoration. The Port Act was enacted by the California Legislature and is consistent with the Public Trust Doctrine. Consequently, the proposed Board action is consistent with the Public Trust Doctrine.
The proposed Board action was covered in the non-appealable CDP for BAE Systems Pier 1 North Drydock Project (CDP-2015-03; Clerk Document No. 64451) approved by the District on November 17, 2015 (Resolution No. 2015-154). The proposed Board action is consistent with the project in that CDP. No additional action under the California Coastal Act is required at this time.
Equal Opportunity Program:
Not applicable.
PREPARED BY:
Amber Jensen
Asset Manager, Real Estate
Attachment(s):
Attachment A: Master Lease Location Map
Attachment B: Former SDG&E Parcel Map
Attachment C: Mitigation Parcel Location Map
Attachment D: Proposed Lease Information Summary
Attachment E: Mitigation Lease