CITY OF C7 S2 SAN JOSE CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR AND CITY COUNCIL COUNCIL AGENDA: 05/09/17 ITEM: 4.1 Memorandum FROM: Kim Walesh Jim Ortbal SUBJECT: SEE BELOW DATE: COUNCIL DISTRICT: 3 SUBJECT: APPROVAL OF A CAPITAL EQUIPMENT ASSISTANCE AGREEMENT AND AUTHORIZATION FOR THE CITY MANAGER TO NEGOTIATE AND EXECUTE A PARKING INCENTIVE AGREEMENT WITH TECHSHOP SAN JOSE AND ESTABLISHMENT OF AN ENTREPRENEURIAL MAKER SPACE PARKING VALIDATION PROGRAM RECOMMENDATION A. Hold a Public Hearing and take public comment on Capital Equipment Assistance and Parking Incentives to TechShop San Jose under Government Code 53083. B. Adopt a resolution authorizing the City Manager to execute a Capital Equipment Assistance Agreement with TechShop San Jose, in which the City will provide an amount not to exceed $150,000 for the HVAC upgrades. C. Adopt a resolution authorizing the City Manager to negotiate and execute a Parking Incentive Agreement and amend the agreement to increase or decrease the total number of Parking Permits D. Adopt a resolution amending the City's Master Parking Rate Resolution to establish an Entrepreneurial Maker Space Parking Validation Program. OUTCOME Approval of these agreements will support the retention of TechShop San Jose (TechShop) and its expansion and relocation to a new facility. As such, TechShop will continue to provide important services to local businesses, students and entrepreneurs and foster growth in manufacturing.
Page 2 BACKGROUND In June 2013, the City Council approved the creation of the Filling Empty Storefronts Pilot Programto provide financial incentives to address street level vacancies that negatively impact surrounding pedestrian retail corridors. Up to 15 financial incentives were authorized, targeted to Neighborhood Business Districts (NBDs) and Downtown, withone-time funding of $250,000 in the 2013-2014 Operating Budget. The Council subsequently extended funding in the 2015-2016 Operating Budget, providing an additional $220,000 of one-time funding. In February 2015, Office of Economic Development staff (staff) began working with TechShop on the retention of their Downtown San Jose location. TechShop is a membership-based, innovation/maker space that provides access to, and appropriate training on, a wide range of tools that support projects including sheet metal working, woodworking, welding, plastics, machining, prototyping, fabrics and sewing. TechShop opened their third Bay Area location in Downtown San Jose in 2011 and have partnered with the Office of Economic Development on a number of workforce development and manufacturing initiatives. In anticipation of TechShop's previous lease at 300 South Second Street expiring, staff worked extensively to present several suitable options within Downtown San Jose. TechShop ultimately selected 38 South 2nd Street as their new location, the site of the former Zanotto's grocery store. This space had been vacant for six years, contributing to difficult safety and aesthetic problems on Second Street. Staff also worked with TechShop and other partners, including property owners Saratoga Capital and the Knight Foundation, to identify a mean to offset the high cost of relocation due to the condition and configuration of available space, and prior use as a grocery store. As the retention and relocation of TechShop aligned with the goals of the Filling Empty Storefronts Pilot Program, staff began discussions regarding a potential incentive, with assistance from the Department of Transportation to identify ways to support TechShop's approximately 850 members with an associated parking incentive. ANALYSIS TechShop TechShop is a strategically important asset for Downtown San Jose. With approximately 850 members, TechShop brings a significant number of people into the city's urban core on a regular basis. These patrons contribute to the overall health of the city's economy by spending an estimated $250,000 annually at businesses proximate to TechShop. TechShop also hosts a variety of regular events and "meet-ups" that attract people to Downtown that might not otherwise come.
Page 3 TechShop provides access to equipment that wouldn't otherwise be available to makers, entrepreneurs and local artisans, and trains members on how to use new types of equipment. Their close affiliation with San Jose State University (SJSU) and proximity to campus is important for their business and further ties the SJSU student body to Downtown. TechShop has also become a significant workforce development partner for the City and private industry. In partnership with Work2Future, TechShop participated in a training cohort for 3D printing and rapid prototyping at Foothill Community College. Some local and regional employers also leverage TechShop's equipment and educators for more formal on-the-job skill upgrades. TechShop has worked with prominent companies such as Tesla, who used TechShop's San Jose location for employee Computer Numerical Control machining training. TechShop is unique in that it offers workshop space for hardware and manufacturing development. Manufacturing represents 1 in 7 jobs in San Jose and is an equitable career pathway for low and middle-skilled employees. TechShop is an important part of the manufacturing ecosystem as it provides opportunities for entrepreneurs and innovators to develop new ideas and products that in-turn evolve into manufactured products or manufacturing companies in and around San Jose. Downtown San Jose Downtown has experienced healthy growth in its residential population and a decline in commercial office vacancy in recent years. Nevertheless, vacant ground-floor storefronts remain. Based on a report produced by CoStar on the South Bay/San Jose Retail Market, general retail vacancy in Downtown San Jose is 4.1%, compared to 2.5% across the metro region. For several years, the largest concentration of Downtown ground-floor vacancies existed on Second Street, between Santa Clara and San Fernando streets - TechShop's new location. During this same period, Downtown enjoyed an increase in tech and innovation spaces, including significant growth in co-working spaces such as NextSpace and WeWork, and accelerators such as Manos, Hackers, and Founders. TechShop serves as an anchor and attractor for other co-working spaces and reinforces the notion of this section of Second Street as the City's maker/innovation corridor. 2 nd Street Location TechShop originally located Downtown in 2011 in a large, open, industrial-type space on Third Street. The building was purchased in 2015 and entitlements for a 1,000-bed student housing project began. Realizing the significance of TechShop, City staff proactively reached out to company executives to facilitate the retention of the business. It was not easy to find a space that could accommodate the needs of a growing maker/manufacturing community. TechShop needed a building that included a large footprint, lots of electrical capacity, loading docks and high ceilings. The former Zanotto Family Markets space on Second Street had been vacant for six years. It was extremely difficult to find a tenant that could utilize 20,000 SF of ground floor
Page 4 space however, the former grocery store checked all TechShop's boxes. Additionally, top TechShop executives "really liked the space itself," stating that "it has some nice touches" and positive intangibles. Proximity to light rail was also viewed positively. Despite the positive attributes of the building and location, it would take approximately $1.5 million in private investments to ready the space. In addition to the difficult nature of the upgrades to the space, build out has been further complicated and delayed by necessary upgrades to the building's electrical service and additional engineering requirements. Staff from OED, the Mayor's Office and PBCE have worked extensively with the TechShop team to keep the project on track and minimize construction delays. TechShop has collaborated with building owner Saratoga Capitol to ensure a successful relocation, and with the Knight Foundation who provided $450,000 in direct financial support. Capital Equipment Incentive The Office of Economic Development recommends that the City Council approve a Capital Equipment Assistance Agreement with TechShop that will reimburse them for up to $150,000 of capital equipment acquisition. A new HVAC heating and cooling system is required to upgrade the space at an estimated cost of over $560,000. Provision of this incentive will make a significant difference in TechShop's ability to complete the relocation and remain in San Jose, and it will directly benefit the City through an increase of associated City taxes; fostering new opportunities for innovators, entrepreneurs, and hobbyists to develop and prototype products and ideas; and, by providing a platform for existing San Jose small businesses to test, refine and develop their products. TechShop will be required to reimburse the City for the Capital Equipment Assistance in accordance with a schedule based on the date of termination if they cease operations or vacate the facility within the first three years of occupancy. Parking Incentive TechShop has approximately 850 members at its San Jose location coming from across the South Bay. One of the significant differences between TechShop's existing facility and its new location in the former Zanotto's space is the lack of private off-street parking. Due to its widespread membership base and nature of their business models, regular TechShop patrons are often bringing projects or materials to the site and may remain at the facility for long periods of time. To continue attracting these users, staff proposes that the City Council approve a Parking Incentive Agreement that will allow TechShop to provide some parking permits for their staff and those members that regularly stay for long periods of time. The term of the proposed Parking Incentive Agreement is for five years. The major provisions of the proposed agreement include the following:
Page 5 - Up to 85 monthly parking permits split between the Globe Garage (up to 35) and 2 nd /San Carlos Garage (up to 50). - A discount of 50% of the City's Monthly Parking Rates as outlined in the Master Parking Rate Resolution for each respective parking facility, currently $110 per month per permit at The Globe Garage and $100 per month per permit at the 2 nd /San Carlos Garage. - Authority for the Director of Transportation to approve amendments to the parking agreement, including increasing or decreasing the number of parking permits provided, up to a maximum of 85 parking permits, during the term of the agreement. In addition to the Parking Incentive Agreement, TechShop sought a solution for infrequent or short-term visitors. Staff has proposed the establishment of an Entrepreneurial Maker Space Parking Validation Program which would allow businesses to validate parking at the Globe Garage, where parking would be charged to the customer at the incremental rate, (currently $1 per 20 minutes) and capped to a maximum of $5 per day. The initial term of the proposed validation program will be for a period of five years with the ability for the Director of Transportation to extend annually if demand and parking supply is sufficient to support continuation of the program. This validation program would also be available to similar businesses whose primary service is to provide access to industrial equipment, tools, space, and instruction to consumers. To establish this program, Council must amend the City's Master Parking Rate Resolution. The subsidy provided by the City for the Parking Incentive Agreement includes potential forgone revenue from the 85 parking permits for a period of 5 years, which totals $265,500. The value of the validation program would vary greatly depending on the volume of usage. Availability of Parking The Globe and 2 nd /San Carlos Garages have a combined total of 570 parking spaces. As of March 2017, the average weekday peak occupancy at the Globe Garage was 55%, and 77% at the 2 nd /San Carlos Garage, leaving adequate space to accommodate the TechShop on most weekdays. With the additional monthly parking activity at these facilities, it is anticipated that there will be occasional weekday periods when both garages approach peak occupancy and may require limitation of visitor parking, redirecting them to other available parking facilities. Fiscal Benefits of TechShop As a charter city, San Jose has the authority to provide financial assistance to TechShop to invest in capital improvements that will benefit San Jose residents. Improvements to the premises will benefit San Jose by adding jobs and tax revenue to the City. 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.
Page 6 i. Name/address of beneficiary of the TechShop San Jose subsidy 38 S. Second Street, San Jose, CA 95113 ii. Start and end dates, and schedule, for the The subsidy will start when the following subsidy conditions have been met: TechShop occupies the premises; the Capital Assistance and Parking Incentive Agreement are executed. The subsidy will start no earlier than the first date of TechShop's occupancy of the premises. The subsidy will end no later than the fifth anniversary of TechShop's occupancy of the premises. iii. Description of the subsidy, estimated The City shall reimburse TechShop for up to total amount of expenditure of public funds $150,000 for HVAC capital equipment upgrade or revenue lost exclusively for their new location on Second Street. If TechShop ceases to operate at the premises at any time prior to the third year of occupancy, TechShop shall be required to repay the amount specified in the Capital Equipment Assistance Agreement. The Parking Incentive agreement subsidy includes approximately $265,500 for 85 monthly permits across two Downtown garages for five years. iv. Statement of public purpose To preserve and strengthen manufacturingrelated activity in San Jose, bringing exposure and investment into the City via members prototyping the next generation of products. v. Projected tax revenue TechShop's investment of $1.5 million in improvements to their location on Second Street is estimated to result in ongoing annual revenue of $8,000 from a combination of secured and unsecured property tax, utility user tax, and business tax. In addition to ongoing revenue, the City will receive one-time building and structure construction taxes estimated at $15,000. vi. Estimated number of jobs created, TechShop has 10 full-time and 15 part-time broken down by full time, part-time and employees along with 40 on-call contractors. temporary positions EVALUATION AND FOLLOW-UP The Office of Economic Development will provide an update to the Community and Economic Development Committee through its semi-annual report on business development activities.
April 17,2017 Page 7 PUBLIC OUTREACH This memorandum will be posted on the City's website for the May 9, 2017 City Council agenda. COORDINATION This report was coordinated with the Office of the City Attorney and City Manager's Budget Office. COMMISSION RECOMMENDATION/INPUT No commission recommendation or input is associated with this action. BUDGET REFERENCE The table below identifies the fund and appropriation to fund the Capital Equipment Assistance Agreement recommended in this memorandum. Fund # Appn # 001 2585 Appn. Name Small Business Activation and Assistance Total Appn Amt. for Contract 2016-2017 Adopted Operating Budget Page Last Budget Action (Date, Ord. No.) $182,500 $150,000 IX-13 10/18/2016 Ord. No. 29803 CEOA Not a Project, File No. PP10-066, Agreements and Contracts that will result in no physical changes to the environment. /s/ KIM WALESH Deputy City Manager Director of Economic Development /s/ JIM ORTBAL Director of Transportation For questions, please contact Chris Burton, Senior Business Development Manager, at (408) 535-8114.