COUNCIL AGENDA: 11/15/16 ITEM: 4.1 CITY OF SANJOSE CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR AND CITY COUNCIL Memorandum FROM: Kim Walesh SUBJECT: SEE BELOW DATE: Approved TT>-PS N Date //A//c. COUNCIL DISTRICT: 4 SUBJECT: APPROVAL OF INDUSTRIAL PROJECT COMPLETION AGREEMENT WITH CMK, LLC (DBA BAPC, LLC) RECOMMENDATION 1) Conduct a Public Hearing regarding an economic subsidy in connection with an Industrial Project Completion Agreement with CMK, LLC (Broadcom Limited), pursuant to California Government Code Section 53083; and 2) Approve the Industrial Project Completion Agreement with CMK, LLC, in which the City will provide a traffic impact fee reduction from $14.44 per square foot to $5 per square foot for the equivalent of a net gain of 100,200 square feet in industrial development at 3200 Zanker Road pursuant to the North San Jose Area Development Policy. OUTCOME Approval of the Agreement will allow CMK, LLC, a wholly owned subsidiary of Broadcom Limited ("Broadcom") to develop the initial phase of their redevelopment of the Innovation Place campus, supported by the Traffic Impact Fee Incentive Program under the North San Jose Area Development Policy and resulting in the equivalent of a net gain of 100,200 square feet in industrial development. Broadcom will invest an estimated $230 million in Phase 1 improvements and support the creation of approximately 1,800 new jobs. BACKGROUND North San Jose Area Development Policy The North San Jose area plays a vital role in the achievement of San Jose's economic goals. In 2005, the City adopted the North San Jose Area Development Policy ("Policy") which
Page 2 established a policy framework to guide the ongoing development of the area as an important employment center for San Jose. The Policy provides for a specified amount of new development including an additional 26.7 million square feet of new industrial development and brings additional consistency and predictability to the development process by standardizing traffic mitigation responsibilities within the Policy boundaries. In order to provide certainty to developers with regard to the public infrastructure requirements and to fund roadway improvements to mitigate the impacts of increased traffic generated by new development under the Policy, the City adopted a North San Jose Traffic Impact Fee, based on a nexus study analyzing, among other things, expected trip generation for categories of development. When implemented, this fee was set at $10.44 per square foot of industrial development with an annual 3.3% construction cost escalator (compounded every two years). The current North San Jose Traffic Impact Fee for industrial development is $14.44 per square foot. On January 31, 2012, the City Council adopted a resolution amending the North San Jose Area Development Policy to promote near-term industrial development of up to a total of one-million square feet through a Traffic Impact Fee Incentive Program. This program reduced the traffic impact fee to $5 per square foot for industrial projects larger than 100,000 square feet that have completed both planning and building permits before December 31, 2014. On February 12, 2013, the City Council approved a further amendment that expanded the square footage allocation by an additional 250,000 square feet (1.25 million square feet total) to accommodate qualifying development projects in the pipeline at that time (referred to as Tier 1 of the incentive). On December 17, 2013, the City Council adopted a resolution increasing the total square footage available for the incentive program by 2.75 million square feet to four-million square feet total, and reducing the Traffic Impact Fee to $2/square foot for a build-to-suit Office/R&D campus of over one-million square feet (referred to as Tier 2 of the incentive). On December 15, 2015, the City Council adopted Resolution No. 77631 amending the policy to extend the deadline to qualify for the reduced traffic impact fee under the short-term incentive program for new industrial development for both Tier 1 and Tier 2 incentives, if developers obtain all building and planning approvals by December 31, 2017 and obtain a certificate of occupancy within two years of last planning or building approval or by December 31, 2019, whichever occurs first. A maximum total of 4,000,000 square feet of new industrial development located in the North San Jose area is eligible for the reduced traffic impact fee. Pursuant to the Policy, in order to take advantage of the Tier 1 or Tier 2 incentives as described above, a fully executed Industrial Project Completion Agreement is required to make sure the proposed project meets the timing and other requirements of the Policy. Broadcom Broadcom Corporation is a Fortune 500 fabless semiconductor company operating in the wireless and broadband communication sector. The company was acquired by Avago
Page 3 Technologies in 2016 and currently operates as a wholly owned subsidiary of the merged entity called Broadcom Limited. In 2015, Broadcom completed the purchase of the 26-acre Innovation Place campus in North San Jose located at 3200 Zanker Road. Since then the company has been considering how best to utilize the space and has been improving the campus. The resulting relocation of existing operations into North San Jose is a consolidation of the eight sites Broadcom currently leases in the Bay Area including Sunnyvale, Santa Clara and North San Jose. The two existing Broadcom Limited (formerly LSI and Avago) sites on Ridder and Fox drive will remain. ANALYSIS Since its introduction in January 2012, the incentive program has successfully attracted significant development interest in the area, with four qualifying development projects entering into agreements with the City to implement the incentive and obtaining all planning and building approvals, including a certificate of occupancy, within the specified timeframe and therefore paying the reduced traffic impact fee. These projects include the Samsung Semiconductor R&D/HQ expansion which utilized 394,659 of the $5/square foot incentive, the Cisco Systems HQ intensification projects which built a total of three additional parking structures utilizing 345,300 square feet of the $5/square foot incentive, the 101/Tech development utilizing 440,000 square feet of the $5/square foot incentive, and Super Micro utilizing 446,500 square feet of the $5/square foot incentive. If Council approves this agreement, approximately 2.2 million square feet will remain available in the incentive. The relocation of Broadcom into the Innovation Place development represents a consolidation of a number of Silicon Valley operations into North San Jose and demonstrates the changing nature of the area's real estate market. The company is a significant tax generator and major employer, and therefore Broadcom's relocation and consolidation in North San Jose is strongly aligned with the City's economic development priorities of catalyzing job creation, private investment and revenue generation. Even during the past few years of strong economic growth, the high costs of construction in the San Francisco Bay Area have prevented development of significant new office/industrial space, making Broadcom's decision to invest in the purchase of a prominent site with significant development capacity already approved particularly noteworthy. The incentive is an important consideration in Broadcom's determination on where to add employees and additional investment. Phased Development Program This proposed agreement is intended to memorialize the City's consideration of the proposed parking structure as a part of the ultimate build out of the campus. Due to the consolidation of operations on site, Broadcom has an immediate need to reconfigure the existing buildings to support additional employees on the site. This in turn requires additional parking to support these employees. To facilitate the near term relocation of their employees, staff is recommending that
October 26,2016 Page 4 the City Council approve an Industrial Project Completion Agreement to allow Broadcom to utilize the TIF incentive to construct a parking garage and reconfigure on-site surface parking to add 334 spaces above their existing allowance under the Policy. Under the provisions of the Policy, projects that propose adding parking over 105% of their Zoning Code requirement are considered "High-Intensity Uses". The Policy specifies that these additional, spaces be converted into equivalent square footage at the rate of 1 space per 300 square feet. In the case of Broadcom, the additional 334 spaces would equate to 100,200 square feet of development subject to the TIF. At full build out, the project will not be over parked. To avoid penalizing Broadcom for the consolidation of their current operations by effectively making them pay for the same parking capacity twice, staffs recommendation considers the construction of the garage a phased buildout of the complete development project. This means that when Broadcom comes to develop the remainder of the project, they will have effectively pre-paid the TIF on the first 100,200 square feet of development using the incentive. The remainder of the build out will be subject to the TIF as it stands at the time of development. For example, if the remainder of the development proceeds after the end of 2017, the TIF incentive would have expired and any development beyond the 100,200 square feet would be subject to the $15.41 per square foot fee. In providing this incentive to Broadcom the City is consolidating a major Silicon Valley corporation into North San Jose, maintaining the momentum which continues to provide strong job growth in the area. In addition, staff believes that the use of the incentive in this manner and directly with the end user, provides a significant incentive to develop the site to its full potential and support the company's growth in North San Jose. Recommended Incentive As a charter city under its municipal and police powers the City may provide financial assistance to Broadcom, which will be of benefit to the residents of the City. Broadcom's relocation will add quality jobs, provide additional tax revenue to the City (see below) and strengthen the local manufacturing ecosystem. Given the size of Broadcom's investment in North San Jose and the importance of Broadcom as a local employer, the Office of Economic Development proposes including Broadcom in the $5 incentive fee program. Development of up to 100,200 square feet for Broadcom is receiving the amount of $945,888 in equivalent subsidy from the City. Participation in Business Cooperation Program Broadcom will participate in the Business Cooperation Program (BCP), also known as the Use Tax Incentive Program. Under this program, Broadcom or its contractors will designate use tax from applicable equipment and materials purchases to San Jose, enabling the City to recoup use tax revenue that would otherwise be allocated to the countywide pool.
Page 5 Benefits from Broadcom's Expansion Broadcom's investment in Innovation Place will significantly increase the value of the property. Based on construction costs, Phase 1 improvements are conservatively estimated add $230 million in value, while Phase 2 will bring another $260 million of investment to the site. Increased property value will result in additional local property tax revenue estimated at $390,000 for Phase 1 and $360,000 for Phase II. As Innovation Place is located in a former redevelopment project area, property tax revenue will accrue to the Successor Agency for the duration of that project area. In addition to property tax revenue, Phase 1 of Broadcom's project is estimated to result in ongoing general fund revenue of $200,000 annually from a combination utility user tax and business tax. 1 Phase 2 of Broadcom's expansion will generate an additional $200,000 annually from the same sources. In addition to ongoing revenue, the City will receive one-time construction taxes estimated at $2.3 million for Phase 1 and $2.6 million for Phase 2. Through Broadcom's participation in the Business Cooperation Program, the City will also gain an estimated $200,000 in use tax revenue from each phase of construction, due to the designation of use tax from construction materials and equipment to San Jose rather than the county pool. EVALUATION AND FOLLOW-UP City staff will monitor the economic incentives and provide updates to the Community and Economic Development Committee and as required by Government Code 53083. PUBLIC OUTREACH The memorandum will be posted on the City's website for the November 15, 2016 City Council agenda. COORDINATION This memorandum has been coordinated with the Department of Transportation, Planning Building and Code Enforcement, City Attorney's Office and the City Manager's Budget Office. 1 This business tax estimate is based on the City of San Jose's current business tax formula, which is capped at $25,000.
Page 6 COMMISSION RECOMMENDATION/INPUT No commission recommendation or input is associated with this action. FISCAL/POLICY ALIGNMENT The project aligns with the City's Economic Development Strategy #1 "Encourage Companies and Sectors that Can Drive the San Jose/Silicon Valley Economy and Generate Revenue for City Services and Infrastructure." Benefits One-time construction taxes estimated at $2.3 million for Phase 1 and $2.6 million for Phase 2. One-time use tax from construction materials and new capital equipment estimated at $200,000 for each phase. Ongoing annual revenue of $590,000 from a combination of property tax, utility user tax, sales tax and business tax from Phase 1. Phase 2 will generate an additional $560,000 from the same tax sources. Addition of 1,354 new jobs to San Jose in Phase 1 and 1,000 FTE jobs in Phase 2. The table below addresses the requirements set forth in the recently adopted State of California AB 562 (Government Code 53083) for publication of information related to an economic development subsidy and a public hearing. i. Name/address of beneficiary of the subsidy CMK, LLC 3200 Zanker Road, San Jose, CA 95134 ii. Start and end dates, and schedule, for the Obtain all planning and building approvals prior subsidy to December 31, 2017 and obtain Certificate of Occupancy within two years of the last planning or building approval, or December 31, 2019, whichever occurs first iii. Description of the subsidy, estimated total amount of expenditure of public funds or revenue lost The City will reduce the traffic impact fee from the current amount of $14.44 square feet to $5.00 square feet of industrial development for the equivalent of a net gain of 100,200 square feet in industrial development for CMK, LLC. Total revenue subsidy will be up to $945,888.
Page 7 iv. Statement of public purpose As discussed in detail above, to encourage sectors that can drive the San Jose/Silicon Valley economy and generate revenue for City services and infrastructure by retaining an important local company that performs a critical function in the region's innovation ecosystem, provides quality jobs and contributes to local tax revenue. v. Projected tax revenue Phase 1 is expected to generate an additional $590,000 in annual tax revenue to the City of San Jose and the Successor Agency. Phase 2 will result in an additional $560,000 annually. In terms of one-time revenue from construction taxes and use tax, Phase 1 will generate $2.3 million in revenue to the City of San Jose, and Phase 2 will contribute an additional $2.6 million. vi. Estimated number of jobs created by the subsidy, broken down by full time, part-time and temporary positions The incentive will support the attraction of 1,354 Full-Time Equivalent (FTE) jobs in Phase 1, and an additional 1,000 FTE jobs in Phase 2. COST SUMMARY/IMPLICATIONS As a result of the reduction of the traffic impact fee for the Broadcom, the estimated revenue impact will be $945,888. As described in previous memoranda, the incentive program discounting the traffic impact fee for four-million square feet of industrial development, in combination with the loss of planned contributions from the former San Jose Redevelopment Agency, results in an estimated funding shortfall of approximately $50 million for implementing Phase 1 of the transportation improvement plan for North San Jose. The strategy to make up for this shortfall is described in Manager's Budget Addendum #8 and was approved by the City Council with its inclusion into the adopted Mayor's June Budget Message for Fiscal Year 2014 2015. The strategy, in part, directs Building and Structure Construction Taxes from North San Jose projects that begin after July 1, 2014 be held in reserve and help offset approximately $35 million of the shortfall. In accordance with this direction, the Building and Structure Construction Tax revenue expected from this development, approximately $1 million, will be placed in the North San Jose New Development Reserve, which currently contains $2.2 million.
Page 8 CEOA North San Jose Development Policies EIR, Resolution No. 72768 and Addenda thereto. /s/ KIMWALESH Deputy City Manager Director of Economic Development For questions please contact Chris Burton, Sr. Business Development Manager, Office of Economic Development at (408) 535-8114.