SR-031108-1B~_
~;tYOf City Council Report
Santa Monica
City Council Meeting: March 11, 2008
Agenda Item:
To: Mayor and City Council
From: Andy Agle, Director of Housing and Economic Development
Subject: Amendment to Lease Agreement for property located at 2640 Main Street
Recommended Action
Staff recommends that the City Council authorize the City Manager to execute an
Amendment to Lease No. CCS 2304, between the City and Ocean Park Restaurant
Corporation ("OPRC"), relating to property of 2640 Main Street ("Site"), regarding
percentage rent payments and Farmers' Market operations at the Site.
Executive Summary
The City Council authorized execution of a Lease with OPRC for property located at
2640 Main Street, fora 30-year term commencing May 15, 1978, with five five-year
options. OPRC has exercised the first option period which begins May 15, 2008. The
lease provides for the percentage rent to increase from five percent to seven percent of
gross revenues during the option periods. The proposed lease amendment would
maintain the rate of percentage rent during the option periods at five percent of gross
revenues during the time that the Farmers' Market operates on the Site. For revenues
above $3 million, as adjusted by the Consumer Price Index, seven percent of gross
revenues would be due to the City. In exchange for maintaining the current base rent,
OPRC would be required to give five-year's advance notice of the need for the Farmers'
Market to relocate from the Site, with a rent increase to seven percent of gross revenue
when the Farmers' Market relocates from the Site. Should the City initiate the
relocation, the rate of the percentage rent would increase to seven percent one year
after the Market relocates. The proposed lease amendment would delegate to the City
Manager or designee, the authority to approve administratively operational agreements
and reimbursement to OPRC for expenses it incurs on behalf of the Farmers' Market.
Background
The Lease with OPRC is for 50,418 sq. ft. of what is now referred to as "Heritage
Square", at 2640 Main Street, which allows for the relocation of the "Kyte House" from
1001 Ocean Avenue to the Site for renovation as a restaurant and for conducting liquor
and wine sales and storage, and for other purposes as approved by the City. The thirty-
year lease commenced May 15, 1978, and expires May 15, 2008. The Lease provides
for five five-year options, expiring May 15, 2033. OPRC has exercised its first five-year
option.
At the time that the City approved the lease with OPRC, it also leased to Santa Monica
Heritage Museum an adjacent 11,500 sq. ft. area for the purpose of allowing SMHM to
relocate the "First Roy Jones House" and renovate it for a historic museum. The term of
SMHM's lease is for 44 years, with successive 50-year period extensions.
OPRC and SMHM have operated cooperatively at Heritage Square for 30 years. A
requirement of the OPRC Lease is that OPRC provide a minimum of 25 parking spaces
to SMHM, free for one-hour with validation. The Lease allows OPRC to make
reasonable hourly charges after the one-hour and report those revenues to the City as
part of its gross receipts. OPRC stations an attendant at the parking lot when the facility
is open, and charges the public, exclusive of SMHM patrons, $5.00 to park.
Currently, OPRC's monthly rent is $3,000 plus 5% of gross receipts in excess of the
base. For the first option period, which begins May 15, 2008, the base rent is to
increase to the average of the previous five-year's monthly rent, plus 7% of gross
receipts in excess of the base.
Discussion
There have been several modifications to OPRC's operation over the previous 30 years.
• On September 19, 1990, the City consented to a sub-lease between OPRC and
Grand American, Inc. Both entities are controlled by Albert T. Ehringer. Grand
American no longer occupies the facility.
• On January 19, 1994, OPRC notified the City that it would be converting the
restaurant operation to casual dining and create a banquet facility.
• On September 9, 1994, the City consented to a proposal from OPRC to sponsor
a merchants market to be conducted at the same time the City was sponsoring
its Farmers' Market on the site. The Farmers' Market began as a three-month
pilot program on Monday afternoons.
2
• On February 3, 1999, the Planning Commission approved Conditional. Use
Permit 98-040 and Variance 98-050 to legalize a 490 sq. ft. restaurant expansion
and to provide five required parking spaces off-site.
• In 1997, the Planning Commission approved Conditional Use Permit 97-021 to
allow the City to operate the Sunday Farmers' Market.
Farmers' Market
The Sunday Farmers' Market operates between 7:30 am and 3:00 pm. About 35
farmers, 12 food vendors and 12 Main Street merchants set up on the parking lot, with
information booths, musicians and pony rides operating on the driveway and lawn
between The Victorian and the SMHM. A 2005 survey conducted by Maureen
Erbeznick & Associates estimated that 5,000 people visit the market each week with
72% of the shoppers staying one to two hours. Many people picnic on the lawn while
enjoying the food and entertainment.
The Victorian makes its restrooms available to farmers and customers during the
Market's hours of operation and allows the Market to store items on-site. The Market
reimburses OPRC for expenses incurred as a result of the Market operations. The
Market also removes trash and debris from the Site at the close of the market, cleans
the driveway and sidewalks arid periodically cleans the parking lot. The Market allows
OPRC to operate two food booths at the Market. The Market currently operates on the
site pursuant to a month-to-month agreement.
Lease Amendment Reouest
Staff recommends that the City approve OPRC's request to amend its Lease pertaining
to percentage rents and delegate to the City Manager authority to approve
administratively operational agreements and reimbursement to OPRC for expenses it
incurs on behalf of the Farmers' Market.
The proposed amendment to the Lease would set the percentage rent during the option
periods at five percent of gross revenues up to $3 million, as adjusted by the Consumer
3
Price Index, and seven percent of gross revenues over $3 million, during the time that
the Farmers' Market is located on the Site. The amendment would require OPRC to
give the City five year's advance notice of the need for the Farmers' Market to relocate
from the Site. The percentage rent would increase to seven percent after the Market
relocates. In the event the City initiates the relocation of the Farmers' Market, the rate of
percentage rent would increase to seven percent one year after the Market relocates.
The modification in percentage rent is to offset the revenue loss to OPRC as a result of
not being able to rent its facility for banquets and other events on Sunday mornings and
afternoons.
Staff estimates that by reducing the rate for percentage rent as OPRC has requested,
the City will forego approximately $44,000 per year at existing revenue levels, or up to
$60,000, should OPRC generate $3 million in gross receipts. However, by hosting the
Farmers' Market, OPRC is not able to rent its banquet facilities on Sundays, thus
foregoing potential profit estimated to be between $48,300 and $77,550 per year.
While Sectiori 10 of the Lease between the City and OPRC states that the City is liable
when the parking lot is operated in connection with non-restaurant uses under license to
the City, the only specific reference to the Farmers' Market between OPRC and the City
is a letter agreement dated September 9, 1994. Since that time, the Market has moved
to Sunday mornings, and the Main Street Business Improvement Association has
assumed responsibility for merchant booths, now referred to as "Little Main Street". As
the Market's popularity has grown and the number of shoppers has increased, OPRC
has cooperated with the City in making its facilities available to farmers and customers.
The proposed Amendment would include a section to specifically allow continued
operation of the Sunday Farmers' Market and to delegate to the City Manager or
designee, authority to approve administrative agreements between the City and OPRC
regarding issues including, but not limited to, use of restroom facilities, reimbursement
to OPRC for costs incurred serving Farmers' Market customers, standards for cleaning
4
the sidewalks and parking lot, permission to OPRC to operate two food booths at the
Market, providing certificates of insurance, and other matters.
Otherlssues
OPRC operates its banquet facility year-round and typically hosts over 125 events each
year. In addition, OPRC operates from the facility the Victorian Cafe and Bakery and
Duck Duck Mousse, a catering business. The business license for The Victorian allows
a restaurant with entertainment and for several years OPRC had been offering Jazz at
the Victorian on Thursday nights. This use was discontinued at the end of February.
OPRC has all necessary permits and approvals for these operations. The ATM, located
adjacent to the sidewalk on Main Street, will be relocated prior to the Amendment being
executed.
The lawn area between OPRC and SMHM is leased to SMHM. SMHM has supported
the Farmers' Market since its inception. Staff intends to return to Council at a later date
with amendments to the SMHM to address the Sunday Farmers' Market operation on its
leasehold.
Financial Impacts & Budget Actions
Reduction of the rate for percentage rents during the option periods from 7% to 5% for
gross revenues less than $3 million, subject to a CPI increase, and 7% of gross
revenues over $3 million, could cost the City in foregone rent approximately $44,000,
assuming existing gross revenues by OPRC, or as much as $60,000, should gross
revenues reach $3 million.
5
Prepared by:
Miriam Mack, Economic Development Manager
to Council:
AndyAgle, Director p P. montEv
Housin and Econo is evelo ment Ci Manager
6
Reference
amendment to
Contract No. 2304
(ccs)