ITEM TITLE:
Community Development Lease Work Session Discussion
SUBMITTED BY: Nicole LeRoy, Community Development Planning Technician
FISCAL NOTES:
Expenditure Required: N/A
Unencumbered Balance: N/A
Funding Source: N/A
RECOMMENDATION:
Receive and file
SUMMARY STATEMENT:
Staff is seeking to work with the Planning and Zoning Commission to develop a recommendation to City Council for setting policies and procedures for determining “fair rental value” for leased property as well as setting a prepaid fee schedule for lease applications by resolution per Valdez Municipal Code 4.08.050. As City Council is the lessor, and City Manager or her designee is responsible for negotiating and maintaining city leases on Council’s behalf, we want to ensure lease management is in accordance with City Council’s priorities. As a quasi-judicial body named in voting on recommendations to approve new lease applications in Title 4, we felt it was important to solicit your feedback as well.
Negotiated vs. Formulaic Determination of “Fair Rental Value” for Leased Property:
Valdez Municipal Code Title 4 Lease of City Property allows for relative latitude in interpretation of determining fair rental value. The definition of fair rental value under section 4.08.010 is 10% of fair market value annually and the fair market value is synonymous with the appraised value under Valdez Municipal Code. However, calculating the fair rental value as 10% of the appraised value is a baseline for calculating a rental rate and not a ceiling. No lease shall be leased for less than the fair rental value unless approved by a vote of not less than six Council members but leases can be negotiated to a higher rate if deemed in the best interest of lessor (see attached attorney comments on fair rental value.)
In the past, it has been mostly standard practice by Community Development to use the formulaic approach, with some instances of negotiated determination of fair rental value. For example, Land Use Permits executed by former staff were set with an administratively negotiated annual rental rate. Valdez Municipal Code also does not have a section addressing lease of City buildings, and the Medical Clinic and Public Health Nurse building square footage rates were negotiated between the former City Manager and the lessees. Ports & Harbor has addressed this by setting building square footage rates for the Airport by resolution (see attachment.) If a formulaic approach is preferable to City Council, Community Development can pursue a similar resolution until code revisions to address lease of city buildings can be adopted.
In the majority of cases, regardless of use of the leased site, staff has been setting fair rental value as 10% of the appraised value. Valdez Municipal Code formerly set 6% of appraised value as the baseline and many of our lease agreements are still calculated at 6%. The obvious upside of the formulaic approach is that it is easy to apply consistently, avoiding risk of accusations of favoritism or unfair rental calculation, etc. However, a disadvantage of this approach is that some parcels are potentially being leased for less than they are worth to the City based on use or risk associated with contamination at the site (for example, a fuel dock.) In addition, there is the added cost of ordering appraisals every five years for the purposes of adjusting fair rental value. The benefits of a negotiated approach are representative of the downsides of formulaic: the City can potentially get a better price for the land by taking into consideration use and risk rather than using a raw land appraisal to determine rental value. The downsides of the negotiated approach include accusations of unfair treatment, lack of consistency, and increased potential for conflict between the City and applicants.
Staff is suggesting a revaluation timeline of five years be set in place for these policies and procedures to revisit them as the City changes and/or Commission and Council priorities shift.
Establishing Prepaid Fees via Resolution of City Council:
Valdez Municipal Code 4.08.050 states the prepaid fee and application fee accepted at the time of application to lease city land should be set by Council resolution. The prepaid fee should be applied to the cost of survey and appraisal and the first year’s rental fee assuming the lease application is approved. The application fee has been waived per Resolution 12-72. However, staff searched for a resolution stating the prepaid fee and found none.
The current application for lease of City land outlines prepaid fees and intake policy (see attached application.) Staff has not been enforcing these fees and policies because they are not founded in resolution and we are seeking to set such a resolution.
We consulted with the City Manager on this topic and she proposed a prepaid of $3,000 for all lease applications, refundable if the lease is not approved by City Council. If the lease is approved, the $3,000 deposit would be applied to the appraisal, survey, and first year’s rental fee as necessary.
Phase I Environmental Site Assessments for Industrial Leases:
The lease of City Land application references the requirement for Phase I Environmental Site Assessments on all industrial land, however, this policy has not been consistently enforced by staff. After consulting with the City Attorney, the City Manager, and State of Alaska Department of Environmental Conservation, we are now requiring Phase I Environmental Site Assessments prior to commencement and at the termination of new industrial leases as deemed necessary. These reports will protect public assets from contamination associated with industrial leases. The lessee will be responsible for the cost of the Phase I Environmental Assessments when the lease is granted and at the termination of the lease.