Commercial Real Estate Blog

Tesla has signed a lease for 89 acres of land in North San Jose off Zanker Road north of highway 237. Tesla is proposing to build a 600,000 square foot headquarters and factory facility. From what is being reported, it seems Tesla got a great deal.

Tesla signed a 40-year lease, of which the first ten years rent will be abated. The next 10 years has Tesla paying $1.5 Million per year ($.03 per square foot, per month), and the next 10 will continue the same schedule except that rent will increase annually at a rate of 2%.

In contrast, the Google ground lease at NASA was at a much higher rate of $.16 per square foot per month, and other ground leases in Santa Clara/San Jose for office development have historically been done at the $.14-.15 per square foot per month rate. In fact, Great America is even paying more for its 181-acre ground lease which was signed in 1989 - nearly $.06 per square foot, per month. On top of that, Great America thinks it’s such a great deal that in their negotiations with the 49ers, they are asking $110M for the park, with much of the value likely being attributable to the leasehold interest they have.

Granted the land is a “bit out there”, but if the city was looking to lure jobs, it could essentially do the same thing by ground leasing the land away to developers at these same give away rents and allow them to build Office, R&D, or BioTech buildings on them with the condition that any company leasing space at the project has to be a transplant from another city. In addition, those companies could be required to be “green” companies - making the whole site as “green”, if not more “green” than the Tesla Motors project. With the developer’s land costs being essentially zero, they would be able to deliver new Class A product at rates far below competitors anywhere up and down the Peninsula and South Bay. It would likely piss off other developers for sure, but it would accomplish the goal of luring companies from other areas. In fact, if you figure that on the 89 acres you could very easily accomodate 1,000,000 square feet of office development, then that would translate to roughly about 4,000-5,000 jobs, compared to the 1,000 that the city is celebrating this deal for.

On top of that, you have to remember that of the 1,000 jobs that are expected, many will be manufacturing jobs with average incomes nearly a third of what the jobs in the nicer office building will likely be paying and jobs which Tesla has said would stay on the Peninsula or South Bay even if they planted the factory elsewhere.

In addition, Tesla was able to arrange so that the state buys $100M worth of equipment and leases it back to Tesla so as to avoid sales tax, but it is unclear what will happen if Tesla goes under and the taxpayers are stuck with $100M of what will likely be worthless equipment.

The best part of the deal is Mayor Chuck Reed’s quote about what happens if Tesla doesn’t make it:

“If they don’t make it, we’ll have our land back and probably a pretty nice building on it”.

By building, he means the special purpose electric car factory that probably will be functionally obsolete the second Tesla leaves. And don’t forget the city wouldn’t have collected any rent for the first ten years anyways to help it recover any of its costs.

Yahoo has entered into a non-exclusive agreement with Google (NASDAQ:GOOG) to allow Google to run ads on Yahoo’s web properties. The deal is estimated to ad approximately $800M a year in cash flow to Yahoo. As of June 8th, Microsoft and Yahoo have concluded their negotiations as well.

Microsoft (NASDAQ:MSFT) has expressed interest in continuing negotiations for a portion of Yahoo, but supposedly is no longer interested in an outright takeover of all of Yahoo. Yahoo still is not out of the woods though, their will undoubtedly be some anti-trust scrutiny of the deal, as well as continued pressure from Carl Icahn, Boone Pickens, and other large shareholders as they likely still seek to oust Jerry Yang and supplant the board with their own, presumabely so they can push through a deal with Microsoft.

Yahoo’s shares (NASDAQ:YHOO) ended down the day 10% to $23.63, roughly 30-40% less than where a deal with Microsoft could have been struck a few months ago.

As for the real estate plans of both companies, Google recently signed a deal with NASA for a ground lease to build a campus, and Yahoo owns some 50 acres in Santa Clara that is available to it to construct a campus if need be. As of now, Yahoo is mainly spread out between its Sunnyvale and Santa Clara campuses, with much of the Santa Clara campuses and buildings owned by Sobrato.

It’s been rumoured in the past that Google was nibbling at taking down space at Jay Paul’s Moffet Towers Project. In what could be construed as less than favorable news for Moffett Towers, insofar as Google is concerned, NASA announced today that it has inked a deal with Google for 42 acres of land at the NASA Ames Research Center in Mountain View for the purpose of developing a high-tech campus for Google. Under the terms of the 40-year lease, Google will lease 42 acres to construct up to 1.2 Million square feet of an office and R&D campus. Google will pay NASA an initial base rent of $3.66 million per year. NASA will use the proceeds to cover the full cost of the lease and the balance may be used for capital revitalization and improvements of the real property assets at Ames.

Construction of the project will be in three phases, with the first planned to begin by the end of September 2013, the second phase by 2018, and the third by 2022. Google also intends on constructing company housing and dining, sports, fitness, child care, conference amenities.

In the late nineties, Sobrato signed a ground lease for the construction of its Mission Valley College office campus in Santa Clara. That was a 26-acre piece that they used to develop 685,000 SF of office on. That lease represented about $.147 per SF, per month on the dirt, and $.243 per buildable SF. In contrast, the Google/NASA deal has Google paying about $.164 per SF, per month on the dirt, and ultimately when the 1.2M SF is built out, $.254 per buildable SF.