storage operations. if the sfmta requests additional lease improvements, the sfmta would pay the landlord prologis high interest rates, nine to ten percent. he is considering our recommendation. the related costs to be paid by the sfmta could increase by over 39%, or 690,070 in first year from 1.8 million dollars at pier 70 to 2.5 million daly city. presently under sfmta's lease at pier 70 the rental cost for towing and storage operations are fully reimbursed from the license fee charged to auto return. that fee is not anticipated to be increased, sfmta tells us, therefore the increased rental expense is

to be borne by the sfmta; in other words, a new expense. according to sfmta prologis moved faster than sfmta to purchase the proposed bayshore site. the sfmta decided to lease with total renter of 70.2 million over the first 20 years. that does not include the two five-year options. such rental costs of 70.2 million exceed the purchase price of 2650 bayshore boulevard, or the price including interest to purchase other comparable properties. they told us they looked at other comparable property. that price exceeds by 34.1 million. so we are talking -- we are looking at a 94.5% more to

rent this property than to acquire it. we understand the statement by mr. risken that they were not able to move fast enough. the proposed rent requires 3% annual increases which, to me, is reasonable. there is an additional 4% increase in addition to the 3% every year. over 30-year term including the five-year term they would pay the 4% extra every five years. regarding additional 4% increase when we asked her about it she stated sfmta had limited leverage because of theser competing tenants and therefore had to accept the additional 4%. however we asked ms. bose to provide the names of the competing tenants, she did

not do so. the proposed lease results in a three-month overlap, as mr. risken indicated, whereas sfmta must pay the rent at pier 70 as well as the proposed daly city site. the city can't terminate the lease that. soot thing ms. boes told us they wanted to do, wanted to have the flexibility in case they did acquire some other alternative site. the city can't terminate the lease until year 2010 yet prologis still receives this 4% increase. interingly they had an appraisal of this property. the appraiser they hired stated it was fair market rental. what he didn't state is it did not included a decisional 4% every five years so this is not fair market rental, just based on what the appraiser

reported. the lease does not expire until july 31st of 2015. i understand the logistics but it is a matter of fact the port lease does not, pyre until july 2013. regarding mr. risken's statement about relocations and ms. boes also mentioned other potential lease terminations, there's no guarantees whatsoever, if you approve this item, that such lease terminations or relocations will take place. the purpose of that would be to save money. that is good but there's no guarantees that's going to happen. the sfmta initially intended to purchase rather than lease the property. again, because of the prologis was able to do that in a swifter manner.

so consequently prologis purchased this property, supervisors, at $21 million. that purchase price for $21 million is over $49 million less than the rent of $70.2 million that the sfmta is required to pay. that is just for the first 20 years. so prologis is going to make a lot of money on this deal. at $70 million their guaranteed rent, plus additional two five years, which we did not put in our calculation, compared to the purchase price of $21 million. let me clarify something. mr. risken said the budget analyst concluded this was the only alternative site. that statement in our report came from the sfmta,

not from the budget analyst. it was their statement, which we objectively reported back to the supervisors that they stated that this was the only -- the best alternative -- the best site available. but it was not the budget analyst statement. that is why i did say in the recommendation that it is a policy matter. i relied on their statement, but we made no verification of that whatsoever. finally our recommendations on page 13 of our report, as mr. risken has indicated and he stated and concurs with recommendations is they report back to the board on this report that they are doing for the real estate and tax facilities vision for the 21st century report. and also that the sfmta, if they decided they need

improvements, which probably they will, as we understand it, that they would pay for that up front. of course that will be another budget expense rather than paying exorbitant interest rates of 9% to 10%. so overall we consider approval of the proposed resolution as recommended by the two recommendations to be a policy matter by the board of supervisors. we would be happy to respond to any questions. >> thank you, mr. rose. supervisor campos. >> thank you very much, madam chair. i want to thank the transportation director for the city for his presentation, as well as his staff for the work on this item and our budget and legislative analyst and his staff. i have a great deal of respect for mr. risken and ms. bows. i appreciate a lot of the work they are trying to do to address some of the issues that have been raised over the years about the mta. so the questions i have are not about them but

specifically about the specifics of this lease. so if i may, through the chair, if i can ask -- i don't know if it is mr. risken or ms. boes to come up. before i go into some of the questions about the lease -- let me say a couple points: one, i don't question the need to move out of this site. that it is inadequate, there are many challenges that are presented to people who work there. i think that goes without question. clearly, we need to move. i don't believe we should move and move into something that is essentially a bad deal. i don't think that moving for the sake of moving justifies entering into a deal that is not good for the city. so the question is, is this a good deal for the city. the first question that comes up, to be honest, goes to the last point --

last couple of points that mr. rose made. this company bought this for $21 million. over the course of a 20-year lease we will pay about $70 million in rent. even if we hadn't just spnt the $21 million, if we had financed that purchase, you are talking about paying $34 million to actually own the property and have that asset. instead, we are talking about spending $70 million in rent. after 20 years we're not going to own that property. so what happened here in terms of, you know, managing the writer's money. you and i have had the conversation, the challenges the mta has had to en counter the last few years. the county transportation gave the mta * $7 million

because there was a shortfall in the budget so that, you know, we could lessen the impact of the service cuts that had to be made by the mta. and yet we have a situation that we could have bought this property for $21 million. maybe as high as $34. why didn't that happen? >> okay. thank you, supervisor campos, through the chair. i will let the folks involved in the actually transaction speak directly to your question. i do want to apologize for the budget analyst for putting or words in his mouth. his report states clearly according to the sfmta the best existing option is this lease. so sorry. my bad on that one. in terms of how this deal emerged, whether we had an opportunity at $21 million, i'm going to ask either ms. boes or ms. mcgeary to speak to. i will say, you know, it's

not 21 to 70 isn't apples to apples or 34 to 70 even isn't apples to apples because there are operating costs the landlord will be paying over the course of this. i will also say my understanding -- they can correct me -- is that the appraisal did include the 4% increase. it would be good for us to all be clear on that. if i got that wrong, i apologize. my understanding is that it did. again, based on the appraisal, to answer your first question, i do believe it is a good deal, or at least a reasonable deal for the sfmta -- i guess what i would say is just because it is a good deal for the person on the other side of the signature block doesn't necessarily mean it is a bad deal for us. how we got to the point of seeking the purchase versus now bringing this lease to you, i would like to ask

our real estate manager, cfo, to speak more directly to that. >> i appreciate that. i have specific questions about the lease. i don't have a problem with people making money on the other side, just don't want the mta to be taken advantage of. i think we need to get -- because if this is something that -- you know, if this is something that is a systemic problem where we are missing out on these opportunities, i would like to know how this happened because i think it really is an important issue. >> fair enough. good morning, supervisors. i'm kirsten mcgeary, senior management real estate, mta. so it's been a long process for us to find this site. we have looked at a number of properties for many years. we've been asked, why this site? we've looked at sites owned by goodmans. for instance, 12 to 13 acres in the southeast industrial area. it would

take an eminent domain process. there's 20 or more small businesses in that property. the property for the land would be about $40 to $45 million, in addition to build a building the same size, 250,000 square feet would be another $20 to $30 million. we would be in the $60 to $65 million range. we have looked at sites for hazardous materials, south of the facility is owned by pg&e called the marantz and another site by jenon, that needs a lot of remediation. we have looked at port properties with state trusts on them. it's been a long process. this property we have negotiated for 14 months with prologis. it was a tough set of negotiations. this side has been through a lot of due diligence. the price of $21 million

versus going out and finding another site, is they were able to move more quickly than the city and mta were able to move. we did purchase a site recently for our sustainable street shots. again, did a lease with an option to buy. we were able to convince prologis to have right of first negotiation. they didn't want to sell. they are a real estate investment trust, they just purchased this property last summer so need to gone rate dividends for shareholders. this enables sfmta the time to get our money together to purchase. we would like to purchase before 20 years, no doubt about it. >> again, i appreciate the information and i appreciate the work you've put into . this my question was not what other properties you have looked at but if we have known since 2004 there was a need to move somewhere else, if have known two years, got notice from the port for two years, that's a long time, how it is if we knew we had this need, why is it that someone like that would be

able to move in quicker than we? is there something about the way in which the real estate department at the mta approaches its deals that makes it hard for you to be competitive relative to companies like this one that actually want to maximize the revenue? what happened exactly? >> again, it is a process. it's been 14 months no negotiate the lease. it is more time consuming for the city to do a deal. we don't have $21 million sitting around, waiting for us to do a deal. it takes time to get the grant funds or get the operating funds. we have done that with other properties. so the loose option, or in this case rider first negotiation gives us the opportunity to get the purchase as opposed to having to do it say within a 90-day closing period. >> i have a problem with that, because i understand the lease option has its benefits in terms of putting deal together. but clearly, relative to a

purchase, a lease option here is a lot more expensive. whether the purchase price was $21 million or $34 million with interest, or even if it was $40 million or $50 million, you are talking about having to spend tens of millions more that we could have saved if we had actually moved in and bought it. so i would like to really figure out, you know, how do we address that systemic issue to make sure we don't find ourselves in a similar position where we are having to go down the road of leasing properties for things we know we need, when we could have purchased properties for a lot less. >> we agree with you. in an ideal world that would be the case. in a competitive commercial situation, where you have two parties -- two willing parties, a buyer and seller, they can close in 90 days . in the case of prologis, they are national and

international and have billions at their fingertips. the city and mta do not have that type flexibility. >> i appreciate that. so if i can go into some of the specifics of the lease. >> certainly. >> so why guarantee a ten-year term. you know, you are basically stuck. you're agreeing to be stuck with this lease for ten years at $2.4 million a year. so if in three, four, five years you found a better option, you're stuck. why would we agree to that term? >> again, prologis did not want to give us the right to terminate at the end of ten years. and they're looking at -- they were looking at up to 22 other companies that were negotiating with them at the same time as we were. so it was very competitive. as we said, as an reit, want to generate dividend dents, don't want to sell

right away. we had to convince them for the right of first negotiation so if they decided to sell we could purchase through the right of first negotiation. >> who were the other companies you were competing with? >> i can tell you the categories, if you'd like to know some of those. >> the budget and legislative analyst says they never got that information. >> we gave them the categories. prologis -- again, because it is confidential information, it is five food uses ranging from baking to produce. three storage uses, including traditional storage and vehicle storage. three recreational uses. three freight uses. four consumer products and distribution uses and two retail uses. >> but we verify that those companies were actually in the mix, or is that information that was given to us by -- >> that was given to us by

the brokers and by prologis. >> the brokers verified that information for us? >> correct. >> why -- you know, you are paying an annual increase of 3%. why an additional 4% after five years? >> well, it is to alleviate prologis risk of forgoing higher rent. we are building it in, for our budget purposes and their budget purposes, stepping up instead of having an appraisal every five or ten years, which is what mta would have preferred. it was, again, negotiated. >> i just don't understand, given that the lease at the port doesn't expire until 2015, why don't we take the time to actually -- whether it is a better deal with this company, with prologis or, you know, this is a very dynamic market -- real estate market. why not take the time to actually find something where we are actually not being taken advantage of.

what is wrong with waiting? >> again, as exexplained, it's been a long search. so the other properties we look at. for instance let's look at the good man. that would take five years to get into at a minimum * because of the eminent domain process. having to demolish existing warehouses and planning and funding and actually building an alternative property on the 12 to 13 acres. the port property is bare land that needs everything, from infrastructure up. the property that is south of pier 70, the jenon company property is, again, in total remediation need. the plan might be done by 2015. after that the remediation would occur. so this does not fit in with the time where the port has a one-year termination notice provision in their mou with the mta, so we can't turn

on a dime, unfortunately. in terms of getting property of that size in the city. there is very little left. daly city is welcoming us, incredibly, to their city in this facility. >> have you approached prologis about, you know, the fact that some at least one member of the board but maybe others have questions about this. are they willing to renegotiate some of the terms of the lease? >> i have understood that that could be a deal-killer. >> what is wrong with verifying that and going back to them and saying we have issues with some of these terms. we have an issue with being locked in for ten years, we have an issue with 4%, we are not going to pay the 9% to 10% interest on some of the improvements, we want to renegotiate those terms. what is wrong with asking them that. >> we have asked them that. again, phase ii of the

tenant improvements, it is an alternative if mta doesn't have the money. it is not that mta would prefer to use the 9% to 10% interest money. we would prefer not to but gives us an opportunity to get operating fund ready, which includes other mta uses. we have spoken to prologis, as i said. it's been 14 months of negotiations and approvals. so they are here if you would like to hear them speak. >> yeah, maybe we can hear from them. >> hello, my name is dan letter. i'm with prologis. >> yes, sir. so i guess, you know, i understand that, you know, any company wants to make as much money they can out of every deal that they are working on. but you are talking about, you know, doing business

with the city and county that doesn't have unlimited resources. we don't have a lot of money and we have had to make many cuts over the years. this is a property that as i understand you bought for $21 million. the deal, as it is, you're set to make $70 million over the 20-year lease. are you open to renegotiating some of the terms that we have discussed? >> i will answer your question, then i would like to expand a little, if you don't mind. >> yes, please. >> we are not interested in renegotiating that lease. candidly, your team was very difficult to deal with. there's been a focus today and in the report that we move more quickly than the mta, when the reality behind it is this building was not on the market. the building became vacant.

i am charged with finding real estate for our company. that requires me knocking on a lot of doors. i happened to knock on this door because of this uniqueness of this property. prologis were a global provider of warehouse space, pier 71. my goal is to have properties we can own long-term. * that requires me sitting in offices, talking them into selling things. this is a process that was long. although yes could we move quicker than the mta, yes. do we have billions sitting around, no. but it is a process that i sat and talked this owner into selling to us. knowing we were going to have a tremendous amount of interest from our global customers. we own 600 million square

feet globally, 4,500 customers. we are name brands. i'm respecting the privacy of them. >> no, i understand. >> so i was the one that decided to not release those names because it is strategic decisions that affect employees and things like that that shouldn't be in the public arena. but it is important to know that i had a decision to make. your team is very shrewd. they are good negotiators. i looked at them across the table and i said i'm making a decision that we're going to work with you, but we're going to have this thing done by june, right? here we are in october. so with that we continued to negotiate. the deal changed many times. there was a lot of back and forth. and because we committed to your team to work in good faith, i have not continued negotiating with a number of these groups. we have lost a significant

amount of money carrying this property much longer than we expected because of the amount of interest. as a matter of fact, not only do we lose that money by carrying the property longer but we are getting much less rent than we expected to get for this property. the market is very dynamic. this building today would be substantially more expensive. i would be likely not the winner of that because if somebody went to market this building, as you can read in the chronicle or business journal, prices are escalating at rates that are uncontrollable. to look at this property and say that it is $70 million compared to $21 million is a very -- i think there should be more focus on how that analysis is done. $70 million over 20 years, you need to put an npv, net present value on that.

that is presently $37 million, right? so when you look at the pricing of this, it is a very fair deal. there was two things i had to go back to my board to get approval to agree on because i'm never allowed to give those in leases. the right of first negotiation to purchase the property. i had to go back and get approval. typically i will have decision making ability but i had to go to the entire board for that approval because your team was so strong that this deal was not happening without that. >> i appreciate your comments. something you said was very interesting in terms of how you found this property. to your knowledge, does the mta or other agencies do what you describe you did, which is you actually, knock on doors and identify properties that might work. >> i don't know that. i can't answer that.

kirsten. >> kersten mcgeary. yes, we knock on doors, meet with property owners. i have brokers calling me on a daily basis. yes, we are pounding the pavement trying to find property. >> can i add to that actually. one of the only ways you can purchase property today in this very competitive environment is to provide that certainty. so we are buyers of property. one thing we have to prove to sellers is that when we look at you in the eyes and shake your hands and say we are going to deliver that, we have to deliver it. if i ever fumble on that, word will get out that prologis does not close on deals. so they can't make that happen. so we had to convince this guy we were going to sell. that certainty that we are able to provide is how we are able to get this thing purchased. >> listen, i will turn it over to my colleagues. i want to thank you for being here. i think that you should be very happy. i think your board should be very happy.

i think you have done a really good job for your company. i think it is definitely a good deal for you guys. i will be honest, i understand the challenge. i understand the very difficult situation. i am not comfortable with this deal. i think that as a city agency that we still have to figure out, you know, how do we maximize the use of the very limited resources we have through our riders. i'm not convinced we are there. i say that respectfully. i know a lot of work went into it. i want to respect and acknowledge that work, but there are times even if this is as good as it gets, that is still not enough. for me where things are right now for this item i don't think we are there. and i think that we should take the time to do this right. but thank you for your time. thank you, colleagues, f