Since May 28, 2020 City staff located at the Third Precinct have been working remotely and at the Minneapolis Convention Center while Finance & Property Services searched for a temporary site. The office/warehouse building at 2633 Minnehaha Ave emerged as the best option for a temporary Third Precinct location. Last January, the current tenant decided to relocate and that move will be finished by August 31, 2020.
The subject property has I-2 Zoning and contains 78,500 interior square feet and 90 surface parking stalls. Police stations are allowed in I-2 Zoning under an Interim Use Permit.
Proposed 2020 Costs
Under the current proposal, the City would sublease the entire building from the current tenant for an initial term of three years starting October 2020. The City would also get an option to extend the lease through 7/30/2024. The sublease will require the consent of the property owner and constitutes a change in the permitted use of the premises.
Adapting the building for the police needs will take an estimated $1.2 Million in one-time costs and rent during 2020. These costs will be initially funded from the Property Services Asset Preservation Fund 06220-8201430 with a reimbursement plan in future years. The current tenant is contributing office furnishings and fixtures valued at approximately $100,000. They will also pay for HVAC upgrades up to $100,000.
Estimated Costs for 2021-2024
The annual costs to the City are estimated at $1.2M and includes:
Gross Rent of $840,000 plus a 2% increase on each anniversary
Utilities including heat and electricity are estimated to be $145,000 per year
Routine maintenance and non-structural repairs/snow plowing/cleaning costs, estimated to be $100,000 per year
Reimbursement of Sublandlord’s premium for property insurance, estimated to be $100,000 per year
Premium for $2M of commercial general liability insurance, estimated to be $10,000 per year
1.2 Million TOTAL (rounded)
Staff recommends funding the 2021 costs through a transfer of General Fund Contingency to the Property Services Fund in 2020. For 2022 and beyond, the annual costs estimated at $1.2M will be funded through the City’s rent cost allocation model.
Risk Management Considerations
The proposed insurance solution for this lease has unique and significant risk exposures. Although the City of Minneapolis has traditionally self-insured most of its property, both real and personal, including all police precincts, this lease would make us financially responsible for costs to repair or rebuild a non-owned building if it is extensively damaged due to civil unrest. The sublandlord’s insurance, which we will be reimbursing, is sub-limited at $1M for damage due to civil unrest, well below the $8.8M value of the building. Additionally, the policy has a $250K self-insured retention for civil unrest claims. While City staff will continue working on insurance options to minimize the City’s exposure before signing the lease, the above description of the financial risk may not change significantly.
Other proposed lease provisions include:
The City is also being asked to indemnify the property owner and the current tenant against any environmental issues related to the City parking cars in the building. Finance and Property Services recommends approval of this indemnification provision.
Each party will indemnify the other party for losses attributable to their negligent acts or omissions.
The sublease is not assignable without the consent of the current tenant.
Because this is a sublease, the City bears the risk of termination due to default by the current tenant under the master lease. The City may attempt to mitigate this risk through negotiation of a non-disturbance agreement with the property owner.