The city’s ongoing efforts to redevelop downtown Morgan Hill
continue, as the redevelopment agency plans to spend up to $3.7
million to buy property at 95 East Third St. that is currently
occupied mostly by retail and dining establishments.
The city’s ongoing efforts to redevelop downtown Morgan Hill continue, as the redevelopment agency plans to spend up to $3.7 million to buy property at 95 East Third St. that is currently occupied mostly by retail and dining establishments.

The city council, acting as the RDA board of directors, approved an option to purchase the property at a cost of $1.7 million Wednesday. The option gives the city the exclusive right – until 2016 – to complete the purchase of the property for about $2 million more.

Plans for the property will eventually resemble those called for at two downtown sites on Monterey Street, when the city received proposals for the blocks that house the defunct Granada Theater, Downtown Mall and Royal Clothiers late last year. That means new mixed-use developments combining residential, retail and office uses, plus parking.

“Our strategy is to find a developer that would like to develop the property,” said Assistant to the City Manager David Heindel. “This option to purchase would allow us to offer the property to a developer. We have six years to execute the option but it’s our intention to move as quickly as possible.”

When the city sent out a request for qualified developers for four downtown properties in September 2009, Depot Center was one of them. Some of the 17 responding developers showed interest in the site, but it was the only one of the four properties in which the city did not have an ownership interest. Thus its development was delayed until the city could secure a stake.

The other three sites are the two on Monterey Street and the six-acre Caltrain parking lot across the railroad tracks from Depot Center.

In April, the city began negotiations with Barry Swenson Builder of San Jose to develop the two city-owned sites on Monterey Street with a new multi-screen cinema, ground-floor retail stores, and upper-level residences of varying types and sizes. City staff expect to complete an “exclusive negotiating agreement” between the RDA and the builder by July, and a more detailed contract to sell the property by early 2011.

Depot Center currently houses BookSmart book store, Peking restaurant, Jesus restaurant, United Academy of Martial Arts, Marco Polo Eastern Treasures, Mac Plastics and Morgan Hill Access Television. It is owned by Llagas Valley Investments, LLC, of which Gilroyan Gary Walton is a partner.

Redevelopment at the site is distant enough that the current tenants are not yet thinking about where they can move to.

“It’s premature to think about moving,” said BookSmart co-owner and property manager Brad Jones, who is confident the city will give them plenty of notice, and even try to ensure they can stay downtown.

Jones is also a partner in the company from which the RDA will purchase the option – Depot Center Morgan Hill Inc. He is also the “master lease holder” at the site, and sub-leases other spaces to existing tenants and manages rent payments.

“We think selling the option is the best way for BookSmart to remain viable during this harsh economic climate,” Jones added. “We hope if and when the city decides to develop the property, that they will work very closely with BookSmart and other tenants to find permanent homes for us downtown.”

As part of the option agreement, Jones waived his rights to possible relocation benefits that might be available from the RDA when the agency decides to purchase the property. He also cannot grant any new or extended sub-leases that go beyond Nov. 30, 2011, and the RDA has to give him and other tenants a minimum of about one year’s worth of notices before he is required to vacate the site.

Tenants at other downtown city properties have been pleased with their relationship with the landlord. Two tenants at the Granada Theater site – Berriez face and body parlor and the Music Tree – struck deals with the city on their rent earlier this year, in order to help them regain some ground in the struggling economy before they have to move.

The RDA forgave the Music Tree about $23,000 in back rent and late fees, and cut its monthly rent by half, to about $3,203 per month for two spaces in the Downtown Mall. Music Tree owner Darin Dixon agreed to give up his right to relocation expenses from the RDA – valued at about $69,000, according to city staff.

The RDA also cut Berriez’ rent by half, to $618 per month. The day spa is located on the north side of the Downtown Mall, on First Street. The day spa owners also agreed to give up their future relocation expenses.

The owners said this week they plan to stay in their current location until Barry Swenson Builder begins demolition and construction, which they estimate to be about three years into the future. They said they hope to stay downtown when they are eventually required to move.

“The city has been taking good care of us,” said co-owner Melanie Mendes. “They’ve done a good job keeping us informed, and they’ve been very sensitive about addressing our concerns.”

Berriez and the Music Tree both approached the RDA about making the deals, which were approved April 28, due to declining sales at the stores in recent months.

If the city decides to purchase the property at 95 East Third St. before the April 30, 2016 deadline for the option, it will pay LVI about $2 million.

Morgan Hill resident Frank Manocchio questioned the total worth of the property at Wednesday’s city council meeting. He said $3.7 million – the combined cost of the option and potential purchase – “astounds” him.

City staff said the total price is supported by an appraisal completed in May 2009 by a Member of the Appraisal Institute. The MAI website says its appraisers are recognized by courts, government agencies and financial institutions for their high qualifications, and Heindel added that most residential appraisers are not normally MAI-certified.

The $2 million “strike price” to purchase the property was negotiated in 2004, according to Walton. That was the same time he initially sold the option to Jones. He declined to say how much he sold the option for.

The RDA has already budgeted money for the purchase of the property.

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Michael Moore is an award-winning journalist who has worked as a reporter and editor for the Morgan Hill Times, Hollister Free Lance and Gilroy Dispatch since 2008. During that time, he has covered crime, breaking news, local government, education, entertainment and more.

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