PG&E Oakland headquarters agreement carries $892 million all-in cost

By Caroline Salls

Pittsburgh, June 10 – PG&E Corp. requested court approval of a lease and purchase option agreement with TMG Bay Area Investments II, LLC that would allow the utility to move its headquarters to Oakland, Calif., according to a motion filed Tuesday with the U.S. Bankruptcy Court for the Northern District of California.

PG&E said it plans to move forward with a lease and option to acquire an existing building that will enable it to consolidate various Bay Area locations into one Bay Area headquarters “that is considerably less expensive, more productive and ultimately would replace its current, less efficient San Francisco general office headquarters complex.”

The company said the Oakland lease and purchase option begins the implementation of a two-stage real estate strategy designed to provide significant benefits to debtor Pacific Gas and Electric Co. and its key stakeholders, including significant long-term cost savings for its customers and a more productive, collaborative workspace for employees that brings them together across the Bay Area.

Under the agreement, the landlord will grant the utility the right to use and occupy the Oakland building after redevelopment, subject to the rights of the existing tenants and existing leases, as well as grant the option to purchase and acquire title to the building.

PG&E said the utility will occupy portions of the building as the redevelopment is completed and floors become available for use. The lease rate is $57 per share foot, with the company said it below market rates.

Additionally, the utility negotiated for TMG to provide the entire cost of the renovations, including seismic and other custom tenant improvements without any upfront cost by the PG&E debtors. Instead, the estimated building improvement costs are built into the purchase option, the motion said.

PG&E said the all-in cost will be $892 million, including a $420 million acquisition cost, $141 million in required code improvement and base building improvement costs, allowances of $160 million, representing $230 per rentable square foot, for the utility’s specific improvements for information technology, security, floor arrangements and seismic work and $171 million for development fees, carry costs and transaction fees and costs.

If the utility spends less than the $160 million allocated for tenant improvements, the $892 million purchase price will be reduced on a dollar-for-dollar basis.

Upon execution of the lease and option agreement, PG&E said the utility will be required to issue two $75 million letters of credit in favor of the landlord, including an option payment and security deposit.

If the utility chooses not to exercise the purchase option but has an investment grade rating at that time, the option payment letter of credit will be reduced to $50 million, and the security deposit letter of credit will be returned. If the utility is not investment grade at that time, the landlord may draw on the letters of credit in full.

If the option is not exercised as a result of a subdivision not occurring by Jan. 31, 2025, a major casualty or condemnation or a landlord covenant breach that impacts the value of the property, the landlord will not be able to draw on either letter of credit and the payments will be returned under specified circumstances related to Pacific Gas and Electric’s investment-grade status.

Also, if the utility chooses not to exercise the option, the cost of seismic improvement in excess of $8 million will be amortized into ongoing rent.

A hearing is scheduled for June 30.

The electric and natural gas utility is based in San Francisco. The company filed bankruptcy on Jan. 29, 2019 under Chapter 11 case number 19-30088.

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