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SR-410-001-03 (2) RMD: MR: AJ: F\RESOURCE\SHARE\STAFFREPORTS\REVISED BAYSIDE LEASING GUIDELINES REPORT FY’ 03rev52203.DOC Council Meeting: July 8, 2003 Santa Monica, California To: Mayor and City Council From: City Staff Subject: Proposed Revised Guidelines for Leasehold Management of City-Owned Properties in the Bayside District Introduction This report recommends that Council approve the proposed revised guidelines for leasehold management of City-owned property located in the Bayside District. Background The City of Santa Monica owns various parcels and sites of commercial real estate not currently needed or in use for municipal purposes. These properties become periodically available for leasehold occupancy and are currently in use for a variety of commercial and community-serving purposes. Economic Development Division staff has been delegated to act on behalf of the City to solicit interest in prospective commercial leasing and licensing opportunities for these public properties in the Bayside District, which include City-owned rights-of-way in use pursuant to outdoor dining licenses and vending cart concessions, kiosks on Third Street Promenade, and commercial spaces within Parking Structures #5 and 6. Staff had generally utilized leasing guidelines established in 1986 to solicit and manage tenancies and licenses in the downtown area for purposes that provide community- based services to residents and visitors that may otherwise be absent from the Bayside 1 District due to high commercial rental rates. Examples of these service occupancies are Emeritus College, Willie & Gloria’s salon, Dance Doctor, and Pete the Barber. At the direction of Council, staff prepared Bayside District Leasing Guidelines setting forth the standards and methodologies governing preferred uses, advertising, marketing and tenant selection for the City’s limited real estate assets in the downtown area. Leasing Guideline objectives approved by Council in December 2000 are threefold: ? To maintain the compatibility of use of City-owned properties and public rights- of-way for purposes which contribute to pedestrian orientation, outdoor dining and neighborhood services ? To establish and implement procedures for managing and preserving the preferred uses of City-owned properties ? To assure access and use of these properties by the general public for the preferred uses through a leasing and licensing program that promotes orderly and periodic changes in tenancies In an effort to counterbalance the decline in restaurants and the conversion of Third Street Promenade frontage into retail uses that may impair the character of the Promenade and weaken its desirability as a commercial destination, Council established a Promenade Uses Task Force to consider the relevant issues and make recommendations on strategies to preserve an appropriate mix of uses on the Promenade. The Task Force concluded its work in March 2003. It recommends that the City place an emphasis on the leasing and licensing of its properties and rights-of- way to non-formula commercial operations, restaurants and cafes that would provide 2 diverse, affordable dining opportunities and community-serving retail activities along the Promenade and elsewhere in the downtown area. Discussion This report recommends certain modifications and additions to the existing Bayside Leasing Guidelines. The revised Leasing Guidelines were reviewed with the Bayside District Corporation Land & Asset Committee on June 10, 2003, and approved by the Board of Directors at its meeting held June 26, 2003. Significant proposed modifications from the guidelines previously approved by Council are summarized as follows: ? Preferred Uses: To compensate for the decline in the number of restaurants and the loss of outdoor dining along the Promenade, the Guidelines will reflect a change in preferred use for the Promenade kiosks from retail/community-serving uses to restaurant and café uses with outdoor dining; provided, however, that the current retail kiosk tenant be prospectively accommodated in mutually acceptable lease premises at commercially reasonable terms and conditions. Additional preferences for food uses will be extended to non-formula restaurants or cafes that will cumulatively provide for diverse food and beverage offerings, price points, hours of operation, aesthetic ambiance and any other factors deemed to enhance the character and pedestrian orientation of the Promenade. The Vending Cart Program will be expanded to include new vending locations along the Transit Mall and other feasible downtown sites subject to further Council action, and will emphasize accommodation of incidental food and 3 beverage vending that minimizes duplication of existing restaurant offerings, handmade arts and craft carts, and incidental goods and services. The Third Street Promenade Vending Cart Program will be modified to specify that products and merchandise offered shall be dedicated to unique and genuine handmade arts and crafts that reflect creativity, a local or regional identity and/or cultural diversity and are not otherwise available on the Promenade. The Preferred Uses will be phased in as the current leases and licenses expire. ? Local Preference: The leasing and licensing of all City-owned properties and rights-of-way within Bayside District will be subject to a preference for local independent, non-formula businesses and community services that are financially and operationally capable of providing the preferred uses. Such preference will be reflected in bonus ratings for responses received from non- formula independent businesses as part of the public tenant recruitment process. A formula business is defined as a business headquartered outside the City of Santa Monica that requires by contractual or other arrangement the maintenance of standardized service, décor, uniforms, facility design and format substantially identical to another operation. ? Renewal Options: Outdoor Dining license renewals or re-issuance will be extended to existing restaurants and cafes in good standing. Good standing shall mean the licensee has operated the premises in accordance with its license agreement and in a manner that encourages its use by pedestrians consistent 4 with the Bayside Specific Plan, including but not limited to all zoning, design and operational standards established for the Bayside District. ? Labor Peace: Because the City has a financial or proprietary interest in the businesses operating from its leaseholds, some of which are in industries that have a history of labor/management conflict, the risk of interruption of rental revenue received by the City would be minimized if such businesses were assured of labor peace. An appropriate labor peace provision for businesses engaged in visitor-serving commercial activities would minimize the City’s exposure to revenue interruption and disruption of public enjoyment of the Promenade and Bayside District. New or substantially amended agreements for leasehold operation shall provide that the tenant will not engage in practices that impede employees’ ability to organize and contract with a labor organization for the purpose of collective bargaining. Such prohibited practices include harassment, intimidation, “captive audience” anti-union meetings or illegal terminations of workers in retaliation for organizing. A substantial amendment is defined as a change of use of the property, an increase in seating or square footage of more than 25%, or an extension of lease duration. Tenant engagement in prohibited practices shall constitute an event of default under the terms of lease. Affected leases would be those businesses having five or more full or part-time employees and engage in restaurant or visitor-serving activities. 5 Budget/Financial Impact Anticipated revenue from leases and licenses of City-owned properties within the Bayside District based upon the proposed Leasing Guidelines is a part of the fiscal year 2003-04 budget. Approval of the proposed revised Leasing Guidelines will not affect the budgeted amount. Recommendation Staff recommends that City Council approve the revised Bayside District Leasing Guidelines, and that the City Manager be authorized to implement the Leasing Guidelines as approved. Prepared by: Jeff Mathieu, Director of Resource Management Mark Richter, Economic Development Manager Elana Buegoff, Senior Administrative Analyst Attachment A: Bayside District Leasing Guidelines (June 2003) 6 BAYSIDE DISTRICT LEASING GUIDELINES (June 2003) GUIDELINE OBJECTIVES Maintain the compatibility of use of City-owned properties and public right-of–ways located within the Bayside District for purposes which contribute to pedestrian orientation, outdoor dining, and neighborhood residential services; establish and implement procedures for managing and preserving the Preferred Uses of City-owned properties and rights-of-way; and assure access and use of these public properties by the general public for the Preferred Uses through a leasing and licensing program that promotes orderly and periodic changes in tenancy at fair market rates. PREFERRED USES Current uses of City-owned structures and right-of-ways in the Bayside District are diverse, and have been intended to enhance the open-air casual dining experience on Third Street Promenade and support those purposes that serve broader neighborhood community interests and needs in the Bayside District. Diversity is maintained through outdoor dining licensing agreements, commercial activities providing services that may otherwise not be offered to the neighborhood residents in the Bayside District, and educational and recreational access for otherwise underserved segments of the community. City-owned structures and public right-of-ways in the Bayside District that are and will be available for lease or license and associated Preferred Uses are as follows: 7 ? 24 Outdoor Dining Licenses located within the public right-of-way adjacent to restaurants on Third Street Promenade, Arizona Avenue, Santa Monica Boulevard, Broadway, Second Street – currently totaling 6,870 square feet and 507 outdoor dining seats Term: 5-year license Preferred Uses: Restaurant/cafes that will appeal to and serve both the residential community and area visitors and cumulatively provide for diverse food and beverage offerings, price points, hours of operation, aesthetic ambiance and any other factors deemed to enhance the character and pedestrian orientation of the Promenade and Bayside District. ? Three (3) Center Courts, one court located mid-block on each block of the Promenade totaling 1,875 square feet (625 square feet each) Current Operation: Street performer area and programmed special event space (i.e. holiday decorations) Preferred Use: Ancillary outdoor dining area for existing Promenade restaurants and programmed special event space 8 ? Two (2) Kiosks located in the center median of the Third Street Promenade – 1,575 square feet Current Operation: Visitor-serving commercial/retail, food service uses and police substation Term: 5-year lease Preferred Use: Restaurant/cafe use with outdoor seating without alcohol service that will appeal to and serve both the residential community and area visitors and cumulatively provide for diverse food and beverage offerings, price points, hours of operation, aesthetic ambiance and any other factors deemed to enhance the character and pedestrian orientation of the Promenade and Bayside District. However, mutually acceptable retail lease space will be made available to the current retail kiosk tenant at commercially reasonable terms and conditions. ? Seven (7) Parking Structure Leased Premises totaling 10,627 square feet. Current Operation: Neighborhood and community oriented commercial, educational, and recreational services. Term: Five-year lease 9 Preferred Use: Neighborhood and community oriented commercial services that may otherwise not be offered to residents in the Bayside District. ? Vending Cart License – Operation of a retail and food vending cart program from designated public right-of-way locations. Current Operation: Master Cart Licensee Program provides minimum of 15 and a maximum of 24 individual cart operators subject to sublicense agreements. Vending carts operate solely along Third Street Promenade, and are predominately general merchandise carts. Preferred Use: Expansion of Vending Cart Program to include designated Transit Mall locations and those locations identified in Municipal Code Section 6.36.090 subject to further Council approval. Cart program will emphasize accommodation of incidental food and beverage vending that minimizes duplication of existing restaurant offerings, handmade arts and craft carts, and incidental goods and services. The Third Street Promenade Vending Cart Program shall specify that products and merchandise offered will be a variety of unique and genuine hand made arts and crafts that reflect creativity, a local or regional identity and/or cultural diversity and are not otherwise available on the Promenade. LOCAL PREFERENCE The leasing and licensing of all City-owned properties and rights-of-way within Bayside District will be subject to a preference for local independent, non-formula businesses 10 and community services that are financially and operationally capable of providing the Preferred Uses. Such preference will be reflected in bonus ratings for responses received from locally owned independent businesses as part of a public Tenant Recruitment process. A formula business is defined as a business having three or more sites outside the City of Santa Monica that requires by contractual or other arrangement the maintenance of standardized service, decor, uniforms, facility design and format substantially identical to another operation. LEASE TERMS, OPTIONS AND RENEWALS As vacancies arise either by lease expiration or earlier termination, available space will be offered for Preferred Uses for non-renewable lease terms up to five years if substantial new capital investment in structures, structural improvements or equipment is not warranted. If a tenant is required to make substantial new capital investment in structures, structural improvements or equipment to implement the Preferred Use consistent with intended purposes of the premises, one to three five-year lease options may be offered varying with amortization and financial requirements of the new capital investment. Lease renewals or options to extend the terms of occupancy will not be automatically offered to existing tenants upon expiration of agreements. As vacancies arise either by natural expiration or earlier termination, recruitment for each opportunity site will be conducted in accordance with these Leasing Guidelines. Current operators who are financially and operationally capable of providing the Preferred Uses may respond to the public Tenant Recruitment process in the same manner as any prospective new 11 operator. It is recognized, however, that reliability and continuity of quality commercial services are valuable assets to the public experience of the Promenade and Bayside District. In order to support and encourage businesses within the Bayside District to operate and maintain their premises in an exemplary manner, such businesses will be subject to a renewal preference reflected in bonus ratings for responses received as part of a public Tenant Recruitment process. Outdoor Dining Licenses will be issued for five-year terms, and will be extended or renewed for existing restaurants and cafes operating in good standing. Good standing shall mean that the licensee has operated the License Area in accordance with its license in a manner that encourages its use by pedestrians and consistent with the Bayside Specific Plan, including but not limited to all zoning, design and operational standards established for the Bayside Commercial District. EXPANSION OF LEASEHOLDS In order to provide access to diverse tenants capable of providing Preferred Use on City-owned properties, the physical expansion of existing and new leasehold occupancies, other than for restaurants, will not be accommodated. DIVERSITY OF TENANCIES In order to promote operator diversity in the development and use of leasehold opportunity sites, the prospective grant of multiple leasehold areas to an individual tenant or operator will not be permitted. 12 LABOR PEACE Because the City has a financial or proprietary interest in the businesses operating from its leaseholds, some of which are in industries that have a history of labor/management conflict, the risk of interruption of rental revenue received by the City would be minimized if such businesses were assured of labor peace. An appropriate labor peace provision for businesses engaged in visitor-serving commercial activities would minimize the City’s exposure to revenue interruption and disruption of public enjoyment of the Promenade and Bayside District. New or substantially amended agreements for leasehold operation shall provide that the tenant will not engage in practices that impede employees’ ability to organize and contract with a labor organization for the purpose of collective bargaining. Such prohibited practices include harassment, intimidation, “captive audience” anti-union meetings or illegal terminations of workers in retaliation for organizing. A substantial amendment is defined as a change of use of the property, an increase in seating or square footage of more than 25%, or an extension of lease duration. Tenant engagement in prohibited practices shall constitute an event of default under the terms of lease. Affected leases would be those businesses having five or more full or part-time employees and engage in restaurant or visitor-serving activities. PERIODIC REVIEW OF RENTAL RATES Lease rental rates will be established at independently appraised fair market rates or in accordance with responses received to a public Request for Proposal process. 13 Responses received for lease and license opportunities may exceed the minimum and percentage rents set forth in the Requests. Lease rates are considered secondary to establishing or retaining a Preferred Use, and pricing may be adjusted as necessary to maintain the preferred use of the leaseholds. Annual CPI adjustments will be made for the term of any new property lease or license. FACILITY CONDITION REVIEW All City-owned structures will be inspected prior to new leasehold occupancy and brought by the City or new tenant to a decent, safe and sanitary condition appropriate for the Preferred Use. If tenants must make improvements to the structure to implement the Preferred Uses as a mutually agreed condition of a lease, the City will first review and approve the proposed scope of work and improvement design. All necessary building permits must be obtained, and the work inspected for compliance with applicable codes. Appropriate rental credits for the approved work performed would be negotiated as part of the lease. TENANCY RELATIONSHIPS All City-owned property within the Bayside District appropriate and suitable for leasing or licensing by the City to individual occupants for the Preferred Uses will be in accordance with agreements prepared by the City. Each tenant or licensee would be responsible at its expense for interior maintenance and repair and utility consumption, and the City would retain responsibility for maintenance and repair of roofs and building 14 exteriors. Subletting of space is explicitly prohibited, with the exception of vending cart agreements to individual cart operators issued by the licensee. TENANT RECRUITMENT All City-owned property within the Bayside District appropriate and suitable for leasing or licensing will be subject to a public marketing and solicitation process to identify prospective tenants and licensees with financial and experience qualifications for the Preferred Use of the available space. Vacancies will be the subject of public Requests for Qualifications and/or Requests for Proposals publicized utilizing: ? Media advertising, including general circulation newspapers or local/limited circulation publications ? Direct mail to waiting list and/or other targeted individuals having expressed previous interest in leasehold occupancy or license operation for the available Preferred Use ? Posting notice on the Bayside District Corporation’s, City’s and Resource Management Department’s internet web site As appropriate, vacancies may also be publicized utilizing: ? Direct contact or outreach to prospective tenants ? Dissemination by fax, e-mail or telephone to local commercial real estate brokers ? Press releases and other direct marketing performed by the Bayside District Corporation 15 The Request for Qualifications and/or Request for Proposals will set forth the Preferred Uses of the available space, proposed terms and conditions for the leasehold or license opportunity, and criteria for reviewing and rating responses. All respondents and prospective tenants will file a Lease Application. Information contained in the Lease Application will be utilized for confirmation that the proposed tenancy is a Preferred Use for the available space, and verification of experience, references and financial capability to perform leasehold obligations. Responses will also state preliminary terms and conditions for the proposed lease or license. Responses to Request for Qualifications and/or Request for Proposals will be analyzed and rated by a review team comprised of City staff and the Executive Director of the Bayside District Corporation. Representatives of City Engineering Division and/or Planning and Community Development may be included as appropriate. The review team will provide its analysis and recommendation as to a preferred respondent, inclusive of appropriate bonus ratings for local independent business respondents and complying tenant renewal proposals. The recommendation may be to reject all responses, solicit additional information from one or more respondent, or to enter exclusive lease or license negotiations with a preferred respondent. The City will neither pay nor receive commissions for leasing of City-owned property. Staff will cooperate with commercial real estate brokers who are authorized to negotiate leases and licenses on behalf of prospective tenants. 16 DELEGATION OF AUTHORITY The City Manager will negotiate and execute leases and licenses of City-owned property in accordance with these Leasing Guidelines on the basis of written agreements prepared and approved as to form by the City Attorney. Leases and licenses for terms of occupancy greater than five years will be referred to City Council for its approval. All proposed leases and licenses shall be reviewed and discussed with the Bayside District Corporation Board of Directors, and staff will consider the suggestions and/or recommendations of the board in its preparation of agreements. 17