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sr-022211-8cCity of Santa 01[oniica it until City Council Meeting: February 22, 2011 Agenda Item: ~ ° ~ To: Mayor and City Council From: Andy Agle, Director of Housing and Economic Development Subject: Outdoor Dining License Fees Recommended Action Staff recommends that the City Council: 1. Direct staff to prepare a resolution to implement adjustments to the Monthly License Fees charged to restaurants for Outdoor Dining on public sidewalks, as set forth in Table 1, as adjusted for the Corsumer Price Index, to go into effect during FY 2013-14; and 2. Direct staff to prepare necessary regulatory amendmehts to allow existing, legal non-conforming outdoor dining areas on Ocean Avenue to remain, provided there is no intensification or expansion of use. Executive Summary The license fees charged to restaurants operating outdoor dining on public sidewalks were set in 2005 and have been increased annually in accordance with the Consumer Price Index (CPI), per Resolution CCS 10046. Staff periodically reviews the fees to ensure that they are in line with the fair market value for outdoor dining on public sidewalks. The latest appraisal has been completed, showing that most outdoor dining license fees are below market rates. In light of the current recession, staff recommends that the existirig rates, as adjusted by the CPI; be continued until FY 13-14. At that time, staff recommends that fees as shown in Table 1 and adjusted by the CPI, should be implemented for renewals of existing licenses and establishment of new licenses. Table 1 Location Proposed Monthly Rate Fully Enclosed' partially Enclosed With BarrieG without Barrier 3rtl St Promenade Not allowed $3.13 $2.20 Transit Mall Not allowed $3.13 $2.20 Ocean Avenue $5.83 (see report) $2.92 $2.05 Montana Nat allowed $2.50 $1.82 Wilshire Blvd Not allowed $2.50 $1.75 Main Street Natallawed $2.50 $1.75 Ocean Park Blvd Not allowed $2.50 $1.75 Pico Blvd Nofallowed $2.50 $1.75 Other Streets Not allowed $2.50 $1.75 In addition, three restaurants have permanently enclosed portions of the public sidewalk in order to create additional dining space for their customers, pursuant to agreements that have expired or will soon expire. These permanent enclosures do not comply with local law. Staff recommends that Council direct staff to prepare necessary regulatory amendments to allow these existing, legal non-conforming permanent enclosures on Ocean Avenue to remain, provided there is no intensification or expansion of use and the dining area has not been out of operation for more than six months. Background The City encourages restaurants to offer outdoor dining on public sidewalks as a way to enhance the vitality and ambiance of Santa Monica's commercial districts. To that end, the City adopted special design guidelines for outdoor dining on the Third Street Promenade, Transit Mall, and Ocean Avenue and adopted ordinances to facilitate the establishment of outdoor dining. License fees for Outdoor Dining were most recently approved as part of the FY 2005-06 Budget on June 21, 2005, when the City Council adopted CCS 10046, "Establishing License Charges for Outdoor Dining", shown as Attachment D-3 to that staff report. The Resolution sets forth rates that were based on an appraisal and were subject to annual adjustments in accordance with the CPL On July 27, 2010. during Council's discussion of design standards for enclosures on Ocean Avenue, staff indicated that an updated appraisal of license fees was in progress. This report presents the most recent findings. Discussion The appraisal prepared in 2003, which provides the basis for the existing outdoor dining license fees, determined license fees based on the value of vacant land. The appraiser provided specific monthly license fees for nine different areas throughout the City. An updated appraisal was completed in June 2010. Staff instructed the appraiser to develop rates for outdoor dining for different areas of the City, as appropriate, and to consider whether the rates should vary for outdoor dining that is fully enclosed with windscreens, partially enclosed with only a barrier, or free from any barriers. For the assignment, the appraiser determined that the best way to value outdoor dining on the public sidewalk was to base it on interior rental rates of similar restaurant properties. Because businesses are reluctant to reveal their lease rates, and many 2 leases were executed at a time when rents were higher, the appraiser surveyed listings and made adjustments to account for the difference between the asking rents and contract rent. The appraiser then surveyed 24 restaurants in various cities similar to Santa Monica, including Huntington Beach, Pacific Palisades, Pasadena, Long Beach and Universal City, to learn whether the rent charged for outdoor dining space differs depending upon whether it is fully enclosed, partially enclosed with a barrier, or free from barriers. Based on the results of this survey, the appraiser determined that the more the outdoor dining space is enclosed, the closer the value, and therefore the rent, of the outdoor space to that of the interior space. The factors the appraiser recommended for fair market rent for outdoor dining fees, relative to indoor rents, were: • Fully enclosed 100% • Enclosed with barrier 90% • Without barrier 50% Staff shared the results of this analysis with the Bayside District Board's District Issues Committee (Committee) on September 14, 2010. The Committee expressed dismay at the prospect of any outdoor dining rate increase given the recent recession and the slow growth of the economy. The Committee noted that some restaurants are continuing to have a difficult time staying solvent and that a rate increase at this time would exacerbate already tenuous solvencies, which might cause some restaurants to either close or reduce other expenses, such as staff, to cover the increased fees. Therefore, the Committee recommended that outdoor dining license fees remain at their current level. In consideration of the Committee's comments and that the use of outdoor dining areas may be limited by weather conditions, staff reviewed the appraisal and presented a revised recommendation to the Committee on December 14, 2010, as follows: • Fully enclosed 100% • Enclosed with barrier 50% • Without barrier 30% After reviewing staff's revised proposal, the Committee still believed that the proposed rate increases were too high and unanimously approved a motion that current outdoor dining fees be reduced or remain the same. 3 Charging fees that are lower than market rates could reflect community recognition that outdoor dining provides public benefits and the provision of outdoor dining on public property is more than. a simple market transaction. For example, outdoor dining enlivens sidewalks, provides additional sets of eyes and activity to make commercial areas feel safe, and promotes visual interest within a district. While it may be difficult to quantify the financial benefits of outdoor dining, the qualitative benefits are real and could be reflected in dining fees that are below market rates. One reason that staff recommends that the full market cost be paid by fully enclosed outdoor dining is that such dining areas do not provide the same qualitative benefits to the sidewalk and the district. Table 2 below provides a comparative summary of current per-square-foot monthly rates, rates recommended by the appraiser, and those recommended by staff. PROPOSED MONTHLY OUTDOOR DINING RATES (Per Square Foot) Table 2 Location Current Rates Appraiser's Proposed Monthly Rate Staff s Proposed Monthly Rate dh or Without Barrier Fully Enclosed (full indoor restaurant : rate) (100%) Pafially ' Enclosed --. With Barrier (90°!°) ithout Barrier (50%) ully Enclosed (10©%} Partially Enclosed With Barrier (50%) ithout -: Barrier (30°!) 3`d St Promenade $1.90 $6.25 $5.67 $3.17 Not allowed $3.13 $2.20 Transit Mall $1.90 $6.25 $5.67 $3.17:' Nat allowed $3.13 $2.20 Ocean Avenue $1.90 $5.83 $5.25 $2.92 $5,83'* $2.92 $2.05 Montana $1.82 $5 $4.50 $2.50-: Nat allowed $2.50 $L82* Wilshire Blvd - $1.10 $5 $4.50 $2.50 Not allowed $2.50 $1.75 Main Street $1.10 $5 $4.50 $2.50; Not allowed $2.50 .$1.75 Ocean Park Blvd $0.87 $5 $4.50 $2.50 Not allowed $2.50 $1.75 Pico Blvd $0.87 $5 $4.50 $2.50 Not allowed $2.50 $1.75 Other Streets $0.79 $5 $4.50 $2.50 Not allowed $2.50 $1.75 "Staffs formula, applied to Montana Avenue would have resulted in crate slightly lower than existing; therefore, staffs proposed rate for Montana is the same as the existing rate. ""Staff recommendsa rate of 35.83 should Council approve legalizing existing, non-conforming permanent enclosures on Ocean Ave. To estimate how these higher rates would increase restaurant costs, staff examined existing outdoor dining licenses and found that on average, the proposed rates would increase restaurant costs from a low of $63 per month to a high of $2,794 per month for 4 fully enclosed restaurants on Ocean Avenue. Excluding Ocean Avenue fully enclosed, the average rate increase would be approximately $314 per month with a barrier and $82 per month without a barrier, as depicted in Table 3. PROPOSED RATE INCREASE FOR OUTDOOR DINING LICENSES Table 3 Proposed Aug. Aug. Proposed Avg. Monthly Monthly Avg. Current Avg. Monthly Rent Rent outdoor Avg. Monthly Rent Increase !Increase' Dining Monthly Rent (with (without (with ' (without Area Area SF Rent barrier) barrier) barrier) ?barrier) Third Street Promenade 316' $ '.600.40 : $ 998.56 $ 695.20 $ 398.16 : $ 94.80 i Transit Mall 207 $ 393.30 $ 647.91 $ 455.40 $ :254.61 ; $ 62.10 OceanAuenue 711 $1;350.90 ..$2,076.12 $1,457.55 $ `725.22 ;$106.65 Ocean Avenue 711 $1,350.90 $4,145.13 -- $2,794.23 -- fully enclosed Montana 87 $ :158.34 ;$ 217.50 $ 158 34 $ ; 59.16 ?$ 0 WilshirelMain 97 $ 106.70 $ 242.50 $ 169.75 $ ' 135.80 $ 63.05 Streets , In consideration of the current state of the economy, as well as the resultant economic hardships that many restaurants face, staff recommends that the new rates go into effect in Fiscal Year 2013-2014. For restaurants whose licenses expire during Fiscal Years 2011-2012 or 2012-2013, the licenses would be subject to CPI increases during the intervening years and would increase to the new rates in 2013-2014. Restaurants that open in 2013-2014 or later would be subject to the new rates once a new license agreement is executed. Alternatives to Proposed Outdoor Dinino Rate Adjustments Of the existing outdoor dining licenses, 13 expire in FY 2011-12, 10 expire in FY 2012- 13 and 11 expire in FY 2013-14. Should Council wish to consider alternatives to staff's recommended rate increase for FY 2013-14, Council may direct staff to: 1. Retain current outdoor dining license fees and continue to make adjustments in accordance with the CPI. as set forth in Resolution CCS 10046. 2. Direct staff to include the proposed rate increases set forth in Table 1 in FY 2011-12 or FY 2012-13. 5 3. Direct staff to include the appraiser's full recommended rate increases in FY 2011-12. 4. Direct staff to analyze alternative bases for establishing fees for outdoor dining. Alternatives to Non-Conforming Ocean Avenue Outdoor Dining Establishments There are three restaurants that, pursuant to easement and license agreements, operate permanently enclosed portions of the public sidewalk in order to create additional dining space for their customers. One twenty-year easement expired on June 30, 2010, while the other two easements (15 years and 21 years respectively), expired in 2003, and those restaurants now operate their outdoor dining under licenses that expire in 2013. These permanent enclosures do not conform to current local law as their barriers are too high, are permanently installed, have walls, roofs or windows, or are placed on a raised platform. The two restaurants that are now operating under licenses were allowed to maintain their non-conforming improvements when the easements were converted to licenses in 2003. The operators of these restaurants have indicated that they would-like to retain their dining areas in existing conditions with permanent enclosures on the public sidewalk as the areas contribute to the restaurants' operations and amenities. In addition, these fully enclosed areas give the restaurants a competitive advantage, as other restaurants on Ocean Avenue and elsewhere in the City do not have permanent enclosures. Staff recommends amendments to the Ocean Avenue Outdoor Dining Guidelines and zoning code to allow existing, non-conforming, permanently enclosed dining areas of restaurants on Ocean Avenue that were subject to easements and license agreements to continue, so long as such dining area is not intensified or expanded and has not been out of operation for more than six months. The recommendation is consistent with how the zoning ordinance addresses many other non-conforming uses that preceded current standards. In addition, the recommendation is made in tandem with the recommendation that the three, fully enclosed dining areas pay full market rent for the public space. An alternative the Council may wish to consider is requiring the dining establishments to come into compliance with current standards at the time the relevant easement or license expires. Council could also condition the non-conforming rights to expire upon transfer of ownership of any of the restaurants. Under either alternative, the restaurants 6 would need to demolish the existing dining areas and secure permits and approvals for the replacement dining area or reconfigured restaurant fagade. Public Outreach As noted above, staff met with the Bayside District Corporation's District Issues Committee on September 14, 2010, and December 14, 2010.. The Bayside members opposed rate increases at this time because they were concerned about the impacts of the rate increase on the continued viability of restaurant operations given the recent recessionary climate. The outdoor dining rate information was presented to the .Boards of the Pico Improvement Organization (PIO), the Montana Avenue Merchants Association (MAMA), and the Main Street Business Improvement Association (MSBIA) on January 5, 18t" and 20t", 2011, respectively. The PIO's comments were limited because outdoor dining on Pico Avenue is constrained due to the narrow sidewalk. The MSBIA indicated plans to distribute the outdoor dining information to its members for feedback to be conveyed to staff through the Executive Chair of MSBIA. The MAMA comments were consistent with the feedback received from the Bayside District members. Financial Impacts & Budget Actions The City has 48 Outdoor Dining Licenses, which generate approximately $318,000 in license fees per year. If the proposed rates set forth in Table 1 are applied to existing and new licenses in FY 2013-14, staff projects additional revenue of approximately $200,000. Prepared by: Donna Rickman, Senior Administrative Analyst Approved: AndyAgle; Director Housing and Economic Development Forwarded to Council: Rod Gould City Manager 7