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SR-11-27-2012-3ECity Council Meeting: November 27, 2012 Agenda Item: To: Mayor and City Council From: Andy Agle, Director of Housing and Economic Development Subject: 256 Santa Monica Pier Leasehold Recommended Action Staff recommends that the City Council authorize the City Manager to negotiate and execute an Amended and Restated Lease Agreement with Hospitality Industry Management Group, LLC d.b.a. Rusty's Surf Ranch for 256 Santa Monica Pier. Executive Summary This report recommends that Council authorize the City Manager to negotiate and execute an Amended and Restated Lease Agreement with Hospitality Industry Management Group, LLC d.b.a. Rusty's Surf Ranch to continue operation of a casual restaurant/nightclub with live music on the Santa Monica Pier. The proposed lease terms obligate the tenant to make both physical and operational upgrades to the premises. Background In the fall of 2011, the City issued a Request for Proposals to lease a 4,309- square foot restaurant /nightclub located at 256 Santa Monica Pier. On August 14 2012, Council directed staff to enter into exclusive negotiations with Hospitality Industry Management Group, LLC d.b.a. Rusty's Surf Ranch. The property at 256 Santa Monica Pier is located within a multi- tenant building known as the Billiard's Building on the historic Santa Monica Pier. Rusty's Surf Ranch ( Rusty's), a surf - themed restaurant/bar with live entertainment and dancing, has operated from the space since 1994. The other tenants in the building include Santa Monica Pier Seafood and AI Mare, a new restaurant that is currently under construction and is scheduled to open in late 2012. 1 Rusty's original lease expires on September 30, 2014; however, the new lease, when executed, would supersede the terms of the original lease. In order to allow the tenant to commence its improvements to the premises expeditiously, the parties intend that the new lease be executed within three months from Council's authorization. Discussion The execution of the new lease would obligate Rusty's to implement improvements to the premises that would expand customer capacity, improve operations and enhance aesthetics as illustrated in Attachments A and B. Proposed improvements to the front of the restaurant include a new fagade, signage, and marque with a second -level dining balcony above the ground -floor patio. The rear patio would also include a second -floor dining deck to replace a large canvas awning, as well as a new patio enclosure, doors and windows. Rusty's may also explore the possibility of a rooftop patio in lieu of the rear, second -floor dining deck. All proposed fagade improvements would be subject to Landmarks Commission approval. Functional improvements include expanded cooking areas, restroom facilities, and HVAC systems, as well as remodeling of the entire interior space. Completion of the improvements would be done in two phases within the first two years of execution of the lease and in accordance with a detailed scope and performance schedule to be included in the lease. The lease would require Rusty's to make systematic efforts to improve quality of food offerings, including regular review of the menu for adjustments. The following is a summary of the recommended business terms • The proposed term of the lease would be an initial 10 -year term. The new term would commence upon execution of the lease and any unexpired portion of the original lease term would be added to the 10 years of the initial term. Provided that Rusty's is in full compliance with the lease, Rusty's may exercise one option to extend the term for an additional period of five years. ® The base rent schedule outlined in the original lease would be maintained from the execution of the lease through September 30, 2014 (the date Rusty's original lease is to expire). After September 30, 2014, the base rent would be no less than $200,000, subject to an annual rent adjustment based on CIP of no less than three percent and no greater than five percent. Percentage rent would be six percent of all gross sales commencing upon the execution of the lease. To 2 support the continued programing of live performances, gross revenues from ticket sales and cover charges would continue to be excluded from percentage rent. ® Rusty's would make a minimum capital improvement investment in the remodel of the premises of not less than $500,000. The City would provide rent credit of 50 percent of the tenant's construction cost not to exceed $250,000 against rents due, to offset demonstrated expenditures on agreed -upon improvements. In addition, the City would allow a performance -based rent abatement during construction not to exceed $50,000 and Rusty's would take responsibility for the expense and coordination of the roof repair in exchange for rent credit that would not to exceed $15,000. Financial Impacts & Budget Actions The base rent revenue for the FY 2012/13 budget for 256 Santa Monica Pier is $100,950 per year and would increase to $200,000 per year (adjusted by CPI) effective October 1, 2014 under the proposed Amended and Restated Lease. The base rent revenue would be reduced up to $315,000 over the next two years with the tenant's application of tenant improvement rent credits. Prepared by: Elana Buegoff, Sr. Development Analyst Andy Agle, Director(/ Housing and Economic Development Attachments: Forwarded to Council: Rod Gould City Manager A. Scope of Work /Schedule of Performance B. Tenant's Renderings 3 Attachment A. Rusty's Remodel Scope of Work — REVISED 10 -30 -12 Phase I construction Front fagade - Patio enclosure, including creation of dining balcony above (without access for dining until Phase II), marquee and signage, and new deck. Kitchen remodel - Expand hood; install 2 "d line position. HVAC— Install two new 5 -ton units; ducts to new mezzanine and rear; kitchen swamp cooler. Roof repair— Repairs as required on behalf of Landlord, as per Landlord's inspection report (to be determined). Phase 11 construction (Start date November 2013 at earliest — January 2014 target date.) Restroom remodel - Relocate and remodel; add one toilet and one sink to women's and one urinal and one sink to men's. (Low -flow urinals, hands -free lights, faucets and soap, air dry hand driers.) Kitchen remodel — relocate ice machine, create keg cooler, install new equipment, expand food pass - through window. Create floor manager office on ground floor - including secondary safe for cash check -outs. Relocate stage - Remove partial wall at ground floor, open ceiling to rafters above new stage location, rewire sound and lighting, R &M dining wall treatment, relocate sound booth. Relocate management offices from above stage- Demo and relocate existing office; create secondary kitchen /storage area /kitchen office at 2 "d floor. Create mezzanine - Build out office and dining areas, add unisex toilet, and relocate sound booth, lighting and stage storage. Rebuild bar - Demo existing to install columns and stairs. Misc. - Roof vents for new /expanded kitchen exhaust; wall unit in office; fire bowls in columns; and new fireplaces; wall and floor surface treatments; internal A/V system. Back Patio — R &R back patio enclosure and cover, with covered dining terrace above. R &R doors and windows at front and rear facade — All new wood doors and windows to match Landmark's recent approval of Al Mare. Attachment A. Rusty's Remodel Preliminary Timeline — REVISED 10-30-12 Lease Agreement Business terms agreed Council approval November 1, 2012 November 27, 2012 Design and Engineering Design and engineering of both Phases has been underway since August 15, 2012. Submittals Phase I Landmarks Coastal Health Phase II CUP Coastal Health /ABC Landmarks Construction Start Phase I Completion Phase I Start Phase II Completion Phase 11 December 1, 2012 December 1, 2012 December 15, 2012 March 1, 2013 March 1, 2013 August 1, 2013 August 1, 2013 January 14, 2013 March 15, 2013 (Easter Sunday is March 31) October 1, 2013 April 1, 2014 (Easter Sunday is April 20) Attachment A. Rusty's Remodel Preliminary Construction Budget* — REVISED 10 -30 -12 7alTm- Design, engineering and permits Leasehold improvements FF &E, Small wares, Signage Contingency $ 50,000 $ 150 — 250,000 $ 100,000 — 150,000 $ 20,000 RUSTY'S EXPENDITURES, Phase I $ 320,000- 470,000 TI Allowance {$ 160,000 - 235,0001 Phase II Design, engineering and permits $ 50,000 - 75,000 Leasehold improvements $ 300,000- 400,000 FF &E, Small wares, Signage $ 50,000 — 75,000 Contingency $ 50,000 RUSTY'S EXPENDITURES, Phase II $ 450,000 - 600,000 TI Allowance 1$90,000 - 15,000} Total Rusty's expenditures Phase I and 11 $ 770,000 - 1,070,000 Tenant credits due Rent abatement $50,000 TI allowance $250,000 *Note: Figures shown do not include roof repairs to be undertaken by Tenant on Landlord's behalf. J / ,l ATTACHMENT B d U C rna nE td Wm W o I N I F S3 I I I I ° y-.f RA Reference Agreement No. 9667 (CCS).