SR-308-002 (7)
Council Meeting: July 22, 2003 Santa Monica, California
TO: Mayor and City Council
FROM: City Staff
SUBJECT: Proposed Minimum Rental Structure and Lease Term for Beach
Concession Stands and Cafe for State Legislative Approval
Introduction
This report recommends that the City Council approve a proposed minimum rental
structure and lease term for beach concession stands and café for State Legislative
approval.
Background
Under an Operating Agreement with the State of California, the City has a concession
agreement with Chaos Enterprises, Inc. dba Perry’s Beach Cafe and Rentals to operate
four (4) concession stands on the State Beach. This concession agreement expires in
June 2005. The Operating Agreement with the State requires the City to submit a
proposed rental structure and lease term for beach concessions as a Budget Package
Request to the State Legislature in July 2003 for approval in July 2004. Once approved
by the State Legislature, staff will issue a Request for Proposals (RFP) in the fall of
2004 for the operation of four (4) beach concession stands and one café location at the
beach. The café location, 1100 PCH, was originally a concession stand but has not
been operational as such since 1993 due to its close proximity to the stand located at
1200 PCH. The RFP will include the minimum rent structure and lease term for both the
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four stands and the café. Proposers may bid on both the concession stands and café or
on either one. The RFP will encourage proposers to bid in excess of the minimum
rent.
The State Legislature will consider the rental structure and lease term as part of the
2004-2005 budget package. In 2004, staff will issue a Request for Proposals for the
concession stands and café. Staff will return to Council in early 2005 with a
recommended operator and request to negotiate an agreement.
Discussion
The last time the City submitted proposed rental terms for beach concessions to the
State was in 1996. At that time, the State concession guidelines required minimum
annual base rent versus a percentage of gross sales. The State Legislature set the
percentage at 20%. Since 1996, there have been changes in the State concession
guidelines which provide greater flexibility in establishing term and rental structure for
beach concessions.
In 1996, the City received only one proposal, from Chaos Enterprises, Inc. dba Perry’s
Beach Café and Rentals, in response to the RFP. Subsequently, staff learned from
prospective proposers that the 20% rent requirement was prohibitive because
businesses generally need a period of time paying lower rental amounts to establish
their operations. While 20% was at the high end of the rent scale, Perry’s had been
paying this amount since 1990. However, downturns in the economy coupled with the
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lingering effects of 9/11 have made it increasingly difficult for the current concessionaire
to meet the required payment schedule.
Minimum Rent - Concession Stands
Staff collected data from a number of other State, city and county beach concessions in
an effort to determine a rental structure for the beach stands that will generate
acceptable minimum revenue to the City as well as encourage prospective proposers to
elevate the quality and selection of food and services to beach visitors.
Most beach stand concession agreements on State beaches require percentage rent on
gross sales in the seven percent (7%) to fourteen percent (14%) range (Attachment
“A”). Tiered percentage rent is typically used with concession stands so that the lessor
participates in the concessionaire’s increased sales. It is important in the RFP process
to set the minimum rental structure low enough to attract an array of prospective
operators while making it clear that higher minimum base rent and percentage rent will
result in a more competitive proposal.
Staff recommends minimum base rent of $100,000 annually, or 14% of annual gross
sales, whichever is greater, for the four concession stands. This percentage rent is
within the range used by comparable beach concessions. The RFP will require that
proposers include tiered percentage rent based on gross sales thresholds. Proposals
that include higher tiered percentage rent on gross sales will be more competitive. The
competitive process is structured to yield an operator that will provide improved food
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quality, breadth of choices, upgraded facilities and enhanced marketing of the
concessions. The goal of setting the proposed minimum rent at a lower rate is to
encourage proposals from high quality operators. Although the proposed minimum
rental structure may be lower than the current agreement, it is anticipated that the
improved quality of the product and services will result in higher sales volumes and thus
higher revenue to the City through its percentage participation.
Minimum Rent - Cafe
Staff collected data from a number of other State, city and county beach restaurants in
an effort to determine a rental structure for the cafe that will generate acceptable
minimum revenue to the City as well as encourage prospective proposers to provide a
high quality operation to beach visitors.
Most restaurant or cafe agreements on State beaches require percentage rent on gross
sales in the six percent (6%) to twelve percent (12%) range (Attachment “B”). Tiered
percentage rent is used with restaurants so that tenants that are required to make a
substantial capital investment in the facility bear less of an immediate burden from
rental payments. As sales volumes increase, the lessor shares in the benefit.
The 1,500 square foot café location has not been operational since 1993 and will
require a significant capital investment in its facilities to make it functional.
Staff recommends minimum base rent of $60,000 annually, or 8% of annual gross
sales, whichever is greater, for the café. The percentage rent is within the range used
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by comparable beach cafes. The RFP will require that proposers include tiered
percentage rent based on gross sales thresholds. Proposals that include higher tiered
percentage rent on gross sales will be more competitive.
Length of Term - Concession Stands
Lease terms for concession stands are generally three to five years. Some State beach
stand concession agreements include an option to extend for a second three to five
year period. The proposed term for the concession stand agreement is five (5) years
with one five (5) year extension option. This proposal is based on lease terms for
comparable beach concession agreements and standards for State Park and Beach
concession operations. A five year term gives a tenant sufficient time to amortize the
initial investment and to establish an effective marketing plan to promote the
concessions. If the operation is successful, both parties can agree to exercise a second
five year option.
Length of Term – Café
Lease terms for restaurants generally reflect the amount of capital investment required.
A longer lease term may be offered to facilitate securing financing and to allow sufficient
time for amortization of new capital investment in the premises. Café or restaurant
lease terms normally run for five years with one or two five-year extension options. The
proposed term for the café agreement is five (5) years with two (2) five year extension
options. This proposal is based on lease terms for comparable beach restaurant
agreements and standards for State Park and Beach restaurant operations.
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Budget/Financial Impact
Over the last three years, gross sales at the four beach concession stands have ranged
from a high of $1,009,904 in FY 99-00 to a low of $832,511 in FY 01-02 with a three-
year average of $893,558. Gross sales were influenced by several factors over the last
three years - weather, restricted access due to the reconstruction of the sewer line
along Pacific Coast Highway, the economic downturn and the effects of 9/11 on tourism.
Weather obviously has the most significant impact on sales and while the beach
experienced relatively good weather over the past three years, the other
abovementioned factors negatively impacted beach visitation and concession sales.
Based on the percentage rent provisions of the existing lease with the City, the four
beach concession stands generated $200,000 or approximately 4% of Beach Fund
revenues in FY 2003-03, compared to $4,518,621 or about 80% of annual Beach Fund
revenues generated by beach parking. Given the relatively small percentage of
revenue associated with the concessions, the emphasis for the beach concessions
should be to provide high quality food, service and facilities to beach goers.
The proposed rental structure being submitted to the State Legislature for approval is
the minimum amount acceptable to the City. As mentioned earlier, prospective
operators will be encouraged to propose base and percentage rent that exceed the
minimum rent. If the selected operator were only able to pay the minimum base rent for
the beach concession stands, it would result in $100,000 to the Beach Fund. In order to
generate the same revenue the City now receives, the stands would have to generate
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$1,211,884, the equivalent of 20% more than Perry’s highest gross sales, and include a
tiered rent structure so that the annual rental payment would equal $200,000.
As an example, if the minimum annual base rent is $100,000 and the tiered rent
structure is 14% of the first $500,000 in sales, 18% of the next $500,00 in sales, 20% of
the next $250,000 and up, the revenue to the City would be as follows:
$500,000 x 14% = $ 70,000
$500,000 at 18% = $ 90,000
$211,884 at 20% = $ 42,377
Total rent = $202,377
An experienced and quality operator should be able to generate higher sales volumes.
The higher sales volumes will result in the City realizing greater rental payments.
Since there is no café in operation, the minimum base rent from the café of $60,000
would be new revenue to the Beach Fund. The minimum rent is set low to attract a
greater response to the RFP. It is anticipated that proposals will include a minimum
annual base rent exceeding $60,000.
The new agreement will not go into effect until FY 2005-06. Therefore any impact will
be included in future years’ budgets.
Recommendation
Staff recommends that the City Council approve the following basic lease terms for
submittal to the State Legislature: 1) concession stands: a minimum base rent of
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$100,000 annually, or 14% of annual gross sales, whichever is greater; a tiered
percentage rent based on gross sales thresholds; and a proposed term of five (5) years
with one five (5) year option; and 2) café: a minimum base rent of $60,000 annually, or
8% of annual gross sales, whichever is greater; a tiered percentage rent based on gross
sales thresholds; and a proposed term of five (5) years with two (2) five year options.
Prepared by: Barbara Stinchfield, Director, Community and Cultural Services
Elaine Polachek, Open Space Manager
Attachment A
Attachment B
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Attachment “A”
Lease Rates at Selected Beach Stands
Name Percentage Rent
Imperial Beach 8%
Oceanside 10%
San Clemente 13%
Manhattan Beach 7%
Huntington Beach 10.5 – 14.5% *
* Huntington Beach percentage rent based on tiered sales volumes
Attachment “B”
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Lease Rates at Selected Beach Restaurants/Cafes
Name Annual Base Rent Percentage Rent
Ruby’s- Oceanside Pier $65,000 6% of first $1.5 million
7% of next $250,000
8% of next $250,000
9% and up
Fisherman’s – San Clemente Pier none 6%
Ruby’s – Huntington Beach Pier $100,000 7% of first $800,000
8% of next $500,000
10% of next $700,000
12% and up
Duke’s – Huntington Beach Pier ground lease 4% of first $1 million
5% of next $3 million
6% and up
Ruby’s – Seal Beach Pier $38,000 6%
Surf View Café – S.M Pier $15,457 10%
Mariasol – S.M Pier $50,400 5.25%
Pier Seafood – S.M. Pier $19,782 8%
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