SR-08-14-1979-6Dt.. 1,
Santa Monica, California, July 31, 1979
TO: Mayor and City Council ai(i7 nAUG 1 4 1979 ) ylf
FROM: City Staff
SUBJECT: S.M. Pier Leases - Beachcomber Gift Shop and Surf View Cafe
Introduction
This report concerns the Beachcomber Gift Shop and Surf View
Cafe lease addendums, and covers City Council's request for a more
thorough investigation, and the endorsement of the City Attorney.
It acknowledges a change in Pier leasing policy, includes
discussion of both the Beachcomber Gift Shop, and.the Surf View
Cafe lease addendums, recommends Council approve the lease addendums
and direct the City Manager to execute the appropriate documents.
Background
On April 10, 1979, the lease addendum for the Beachcomber Gift
Shop was referred back to staff for clarification, consent of the
City Attorney, more thorough investigation, and a report back to
Council.
Among questions raised by Council were:
I. DID LESSEE RELY ON CITY STAFF ASSURANCES
IN COMPLETING CONSTRUCTION BEFORE RECEIVING
COUNCIL APPROVAL?
During discussions with Mr. John Hemer of the City staff and
the then City Manager concerning an assignment of the Beachcomber
Gift Shop lease from Charles Kocher to Mr. Gordon, and an extension
of lease for Mrs. Lillian Camden dba Surf View Cafe, verbal encourage-
ment was given to Mr. Gordon and Mrs. Camden and staff stated that
they would favorably recommend a lease extension to the City Council.
There was, however,no discussion of specific lease provisions. Also
Mr. Gordon received approval by the Landmark's Commission and
Architectural Review Board, and believed this constituted notice
to the Council, as both Boards have Council members as liason. The
same circumstances are true of Mrs. Camden dba Surf View Cafe.
AUG 1 4 1979
II,WERE ANY OTHER PIER LESSEES ALLOWED TO CONSTRUCT
BEFORE RECEIVING PIER LEASE EXTENSIONS?
Yes. In two previous cases, Council has approved lease
addendums after construction was completed, the Boathouse
Restaurant and the Playland Arcade.
On January 24, 1978, the Boathouse Restaurant received a lease
addendum that allowed for capital recovery for previous construction.
In the staff report that accompanied that lease addendum, specific
mention was made:
"Encouraged by these increases, the Lessee approached the City
with plans to expand the facilities. Although several meetings
were held during the plan review period, no specific agreements
were reached regarding an amended lease. However, it was generally
understood that an extended lease period and some method which would
allow the Lessee to recapture a substantial portion of his capital
expense would be necessary in order to make the expansion economi-
cally feasible."
"Following the City and Coastal Commission plan approvals,
the Lessee determined to proceed with the construction: even
in the absence of a specific agreement. He expressed confidence
that a mutually acceptable lease amendment would be negotiated
with the City, and he was anxious to complete the expansion before
the beginning of the summer season."
"Subsequent to the completion of the expanded facilities
and the original estimates of potential gross sales were substan-
tiated, the attached amendment to the original lease was negotiated
with the Lessee."
On September 26, 1978, the Playland Arcade received a lease
addendum that allowed for capital recovery for previous construction.
In the staff report that accompanied that lease addendum, it said:
"This report covers the request for Mr. George Gordon dba
Playland Arcade to extend his lease in return for his investment
in up- grading the building housing the Playland Arcade."
"Mr. George Gordon recently added approximately 1000 square
feet to the building housing the Playland Arcade at a cost of
$30,151.95."
"The recent expansion and anticipated renovation to the Arcade
and Mr. Gordon's record as a responsible Pier businessman indicate
that these terms should be extended ten years beyond June 30, 1981."
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III, IF THE CONSTRUCTION WERE PAST CONSIDERATION,
AND SINCE PAST CONSIDERATION IS NO
CONSIDERATION, WHAT SHOULD COUNCIL ACCEPT
AS VALID CONSIDERATION?
(See City Attorney Analysis, Exhibit "A ")
IV, HAS STAFF VERIFIED ACTUAL COSTS FOR BEACHCOMBER'S
GIFT SHOP CONSTRUCTION?
Yes. Copies of all invoices are on hand in the City
files, and total $81,541.60.
V IS THE BEACHCOMBER'S GIFT SHOP LEASE A TRUE
12% LEASE, OR IS IT DISCOUNTED, BASED UPON
THE VALUE OF THE IMPROVEMENT?
After the first five years it is a'true 12% lease.
It is discounted for the first five years to an average of
11.9678 %, as follows:
Lease Actual
Addendum Effective Rate
Rate Discount
1 st Year 12% 12%
2 nd Year 12% 12%
3 rd Year 12% 11.9833% $ 1,748 = .0176
104,106
4 th Year 12% 11.9479% 8,092 = .0521
155,082.
5 th Year 12% 11.9078% 20,043 = .0922
217,273
Average: 11.9678°%
During these first two years, with the sales as estimated,
there will be no recapture by Mr. Gordon. Therefore the effect.
will be a 12% lease;
During the third year, if sales increase as projected, Mr.
Gordon will receive a recapture of $1,748. This amount is .0176
of the estimated rent paid up to that time. ($104,106.) By sub-
tracting .0176 from 12 %, the discounted percentage is 11.9833 %.
By the end of the fourth year, Mr. Gordon is projected to have
recaptured $8,092. This is .0521 of the total rental paid - ($155,082)
by the end of the fourth year. By subtracting .0521 from 12 %, the
discounted percentage is 11.9479.
Similarly, by the end of the fifth year, Mr. Gordon's actual
percentage is 11.9078 %. These three years average 11.9678 %. The
lease is very close to a 12% lease.
Change in City Pier Leasing Policy
Following the precedent set on January 24, 1978 and on Sep-
tember 26, 1978 by the Council in approving the lease addendums
for the Boathouse Restaurant and the Playland Arcade,
City staff negotiated to allow a recapture of some of the capital
investment by the lessee on the Pier after the construction has
taken place. Henceforth, a.policy will be followed by Staff to
insure that all future construction and possible recapture provisions be
approved in advance by Council before construction begins.
In the case of the Boathouse Restaurant, the standard Pier
lease was consumated September 23, 1976. Subsequently, over
$150,000 was invested by the lessee, improving and expanding the
property of the City. Council later, on January 24, 1978, approved
the addendum which allowed the lessee to recapture a portion of
that investment over a ten year period.
Following this precedent, staff negotiated a similar addendum
with the Playland Arcade lease, however setting a limit of five
years and.one half the invested amount, up to $35,000.
In general, this policy of recapture, within a a limited time
frame, and within a set amount, is beneficial to the City
R
It releases Federal funds of.the Community Block Grant program to
be used elsewhere; and does not place additional burdens on the
taxpayers of the City to subsidize the Pier.
However, staff will in the future obtain approval by Council
of all leases or addendums to leases negotiated by staff prior to
authorization for construction.
Exceptions to the Leasing Policy Change
The suggested exceptions to this change of policy are the
Beachcomber Gift Shop lease addendum and the Surf View Cafe lease
addendum.
Beachcomber Gift Shop
On June 29, 1978, Mr. George Gordon started construction of a
2762 square foot addition, and on January 4, 1979, came to the
City staff with a request for a lease extension. Staff negotiated
a substantially better arrangement for the City, namely, a shorter
term of ten years rather than twenty (following the Playland Arcade
addendum) and a minimum of $33,288 rather then $13,008. Also, the
City is estimated to receive $186,483 over this five year term, and
Mr. Gordon $20,043 toward recapture of his invested $81,541.60.
Surf View Cafe
Mrs. Lilliam Camden, dba Surf View Cafe, and her mother rebuilt
their premises between March 1, 1977, and May 3, 1978. Excessive
disruptions by their contractor however delayed the opening far
beyond normal limits. During this protracted time staff negotiated and
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a
Council approved a series of leases allowing for recapture of a
portion of investment, as related to the building, but not trade
fixtures.
In good faith Mrs.Camden and her mother have now requested from
the City equal treatment as other tenants.
In its policy of maintaining small proprietors on the Pier,
staff has negotiated a lease addendum with Mrs. Camden to allow
for some recapture, based on a estimated, projected sales
and rental, comparable with other operating low cost fast food
operations.
Term (Surf View Cafe)
Five years with one 5 year option, beginning June 1, 1979
running through June 30, 1991.
Rental (Surf View Cafe)
Ten percent, with one half of the additional percentage
rental allowed for recovery of investment, up to maximum of five
years, beginning June 1, 1979 running through May 30, 1984.
Therefore,5% of all sales after the minimum is paid would be
allowed for capital recovery, and 5% would be paid to the City.
Recapture (Surf View Cafe)
The recapture is estimated at 76% of the $48,340.84 invested,
an estimated $37,048. This to be in the form of a rental
reduction of the additional percentage rental, one-half the rental
rate of 10 %, or 5 %, but only after the annual minimum is paid.
Alternatives
1. Council can reject these two exceptions, stating the City
owns the improvements since the issuing of the certificate of occu-
pancy, and make no changes in the lease as presently in force.
(See Exhibit "A')
2. Council can direct staff to negotiate alternative terms,
such as higher or lower rental percentage; longer or shorter lease
terms; or a different basis of recapture.
3. Council can approve these two exceptions as negotiated,
and direct staff to submit for approval all future lease addendums
before construction begins.
Recommendation
It is the recommendation of staff that Council approve the
lease addendums as negotiated for Mr. George Gordon dba Beachcomber
Gift Shop and Mrs. Lillian Camden dba Surf View Cafe and direct the
City Manager to execute the appropriate documents.
Exhibit "A" City Attorney's Analysis
"B" Lease Addendum, Beachcomber Gift Shop
"C" Lease Addendum, Surf View Cafe
Prepared by: Gary Ferguson
Peter Kipp
K
Exhibit "A"
CITY OF SANTA MONICA
DATE:' July 11, 1979
TO: Mayor and City Council
FROM: City Attorney
SUBJECT: In regard to leases and lease addendums between the City
and lessees on the Santa Monica Pier.
This report concerns the endorsement by the City Attorney of City
Council's pending ratification of lease addendums negotiated
with lessees George Gordon of Beachcomber Enterprises, Inc. and
Helen Camden of the Surfview Cafe.
Council may approve the addendums without the delivery of addition-
al consideration on the part of the lessees. The construction
by the lessees and the ratification of the addendums by City Coun-
cil represent full performance of earlier oral agreements between
City staff and the lessees. Such "executed oral agreements" are
fully enforceable by either party without furnishing additional con-
sideration. The Beachcomber Enterprises lease addendum is also
supported by the new consideration of an increased minumum year-
ly rental. It is not recommended that nominal consideration be
furnished by the lessees. This offer is unnecessary and contracts_
supported by such consideration cannot be specifically enforced.
Council may alternatively reject the addendums. The City is not
bound by actions of its staff to offer an extension or modification
of the existing leases. The assurances to lessees are not enforce-
able under any theory of promissory estoppel, implied contract, or
executed oral agreement as the City officials were not empowered
under the Municipal Code to enter into contracts without Council
approval.
However, the City officials involved in discussions with the lessees
were empowered to execute and enforce the original leases. Their
actions may be viewed as requesting the construction performed by
the lessees. Thus, in re'ecting the addendums, the City may be
vulnerable to claims of lessees that their construction has un-
justly enriched the City. Present leases expire in 1981 at which
time the City will take possession of the rental property, includ-
ing all improvements. Under a theory of restitution, the lessees
could recover the enhancement of the market value of the land by
reason of the improvement at the time the City takes possession.
It is recommended therefore that the Council either approve the
proposed negotiated lease addendums, or direct officials to
negotiate alternative terms which allow lessees an opportunity
to recapture their investment.
ADDENDUM NO. 1
This addendum shall be attached to and become an
integral part of Contract Number 2250 (City Council Series)
being the lease and agreement entered into between the City
of Santa Monica and Lorene J. and Charles A. Kocher, June 22,
1976, and assigned to Mr. George Gordon dba Beachcomber Enter-
prises, approved by City Council April 12, 1977. Addendum is
made with reference to the following facts:
A. On April 12, 1977, the City of Santa.Monica, a
municipal corporation; (hereinafter the "City ") entered into
a lease and agreement with Mr. George Gordon dba George
Gordon Enterprises, Inc., a California corporation (herein-
after "Lessee ") whereby -the City leased certain property
located within the corporate boundaries of the City of
Santa Monica to Lessee for the operation of a gift shop. This
lease expires on June 30, 1981.
B. In January, 1979, Mr. Gordon invested approximately
$70,000 in the expansion of the building housing the gift
shop and requests an extension of his lease. This addendum
therefore sets forth the terms and conditions for the
modification of the Lease..
THE PARTIES HERETO AGREE AS FOLLOWS:
1. Paragraph 1 is hereby amended and as amended shall
read as follows:
1. TERM
The term of this lease, hereinafter referred to
as the "]Lease Term ", shall be extended ten (10) years; commencing
0
July 1, 1981, and expiring June 30, 1991, unless sooner
terminated as provided below.
2. Paragraph 2.1 is hereby amended as follows:
"Thirteen thousand eight" is deleted, and "Thirty -three
thousand and two hundred eighty - eight" is substituted in lieu
of the deleted amount.
3. Paragraph 2,2 is hereby amended and as amended shall
read as follows:
2..2' ADDITTIONAL PERCENTAGE' RENTAL
In addition to the minimum monthly rental, during the
Lease Term, Lessee shall pay to Lessor percentage rental due
and payable on or before the tenth. (10th) day of the month_
immediately following the month in which the cumulative gross
sales, during the Lease Year covering said month, exceeds the
minimum annual sales. Said minimum annual sales-shall be
determined by dividing the minimum annual rental by'the
percentage established below. Said percentage rental shall
be in the amount of twelve percent (120) of said cumulative
gross sales in excess of said minimum annual sales..
During the first five_years: of the amended lease,
between September 1, 1979, and August 31, 1984, Lessee shall
pay one -half the percentage rental, or six percent (6 %),
to the Lessor, each month subsequent to the month in which the
minimum annual sales is reached, until one -half the total
building renovation investment is recaptured, but no more than
$35,0.(10:..00, or until August 31, 1984, whichever comes first._
L
Thereafter, during each and every month of the Lease
Year, Lessee shall pay to Lessor percentage rental in the
amount of twelve percent (12 %) of the gross sales made during
each month. Said percentage rental shall be due and payable
on or before the tenth. (_10th.), day of the month immediately
following said month.
For purposes of this Article 2.2, said cumulative.gross
sales shall only be accumulated during each -and every Lease
Year of the Lease Term and not from Lease Year to Lease.Year.
Lessee agrees that City Engineer or his representative.
shall be the sole determining authority as-to what the actual
costs are for the purposes of determining rental offset, when
the work has been done to the satisfaction of the City and all
other matters regarding such repairs.
4. Paragraph. 2.8 (.a) (2) is hereby amended as follows:
2.8 (_a) (.2) ADJUSTMENT OF MINIMUM ANNUAL RENTAL
The minimum annual rental shall be increased pursuant
to the.percentage increase, if any,.in the Consumer Price
Index (C.P.I.) as determined by the following calculation:
The base of computing the adjustment is the index figure for
the month of July, 1979, as shown in the Consumer Price Index
(all items) Los Angeles - Long Beach, based on the period
1967 -100. The adjustment date shall be the month of July,
1982, and said index published for that month shall be computed
as a percentage of the base figure. For example, assuming the
index figure on the base date is 110 and the index figure
on the adjustment date is 121, the percentage to be applied
is 121/110 = 1.10 = 110 percent. That percentage shall be
aoolied. to the minimum annual rent for the leas-
September, 1982.
(b) Thereafter at the commencement of each sub-
sequent year of the Lease Term, Lessor and Lessee agree to
the adjustment of the minimum annual rental computed pursuant
to the Consumer Price Index as follows: The base of computing
the adjustment is the index figure for the month which is
fourteen months prior to the commencement of subject Lease
Year, as shown in the C.P.I. (all items), Los Angeles -
Long Beach. The adjustment date shall be the month which is
two months prior to the commencement of subject Lease Year,
and the index published for that month shall be computed as
a percentage of the base figure., for example, assuming the
index figure on the base date is 110 and the index figure
on the adjustment date is 121, the percentage to be applied
is 121/110 =1.10 = 110 percent. That percentage shall be
applied to the minimum annual rent for the subject Lease
Year.
If the index is calculated from a base different from
the base period 1967 = 100 used for the base figure above, the
base figure used for calculating the adjustment percentage shall
first be converted under a formula supplied by the U. S.
Bureau of Labor Statistics.
(c) The aforementioned Consumer Index figures shall
hereafter be ascertained from the revised Consumer Price Index
(all items) for Los Angeles -Long Beach, California, compiled,
published and issued monthly by the United States Department
of Labor, Bureau of Labor Statistics. If the aforementioned
Consumer Price Index (all items) for Los. Angeles - Long
Beach, California, as now constituted, compiled, published and
I
issued monthly by the United States Department of Labor,
Bureau of Labor Statistics, shall cease to be compiled and
made public and shall have another index substituted in its
place, said substituted index shall be used for the purpose
of calculating the increase or decrease, if any, in the afore-
mentioned minimum annual rental. If a new Consumer Price Index
should be devised by the Department of Labor, Bureau of Labor
Statistics, so as to apply and include more specifically Lessor's
City and the premises located therein, said devised index shall
be substituted and used for the purpose of calculating the
increase or decrease, if any, in the aforementioned minimum
annual rental.
5. Paragraph 12.5 is hereby amended and as amended
shall read as follows:
12.5 PUBLIC LIABILITY AND PROPERTY DAMAGE INSURANCE
Additionally to and independently of all other revisions
of this Lease, Lessee shall, at its own cost and expense,
contemporaneously with the execution hereof, procure a
policy or policies of Comprehensive General Liability,
Bodily Injury, and Property Damage insurance with Contractual,
Liability, Products, and Completed Operations coverage to be
in effect as of the date of this signing. Such policy or
policies shall be issued with per occurence limits of not less
than One Million Dollars ($1,000,000) Combined Single Limit,
issued by insurers either approved in writing by Lessor or
rated in Best's as "Triple A" or better, whereof Lessor shall
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be named or additionally named insured. Coverage limits are
subject to review and revision by Lessor, for purposes of
increasing per occurence limits, after half the designated
Lease Term has expired. The terms of said policies may
be for such period as shall be designated by Lessee; provided,
however, that within two (2) months prior to the expiration
of such insurance terms, Lessee shall procure other policies
of said insurance so that between the execution of this Lease
and the commencement of the Lease Term, and throughout the entire
Lease Term or any renewal thereof, or until the sooner termination
hereof, Lessor shall always be a named additional insured under
the policies of Comprehensive Public Liability and Property
Damage insurance in accordance with the foregoing. Certificate
of said insurance, together with the receipts for the payment
of premiums for the terms thereof, shall be delivered to Lessor
within ten (10) days after the execution of this Lease, and,
thereafter within thirty (30) days prior to the expiration of
the term of each such policy. Said policies shall contain a
non - cancellation- without- notice clause and shall provide that
copies of all cancellation notices shall be sent to Lessor.
DATED:
CITY OF SANTA MONICA,
a municipal corporation
APPROVED AS TO FORM:
G By. CHARLES KENT MCCLAIN
RICHARD City Manager
City Attorney Lessor
ay,.
GEORGE GQRDON
Lessee.
Q
ADDENDUM NO. 1
This addendum shall be attached to and become an
integral part of Contract Number 2303 (City Council Series)
being the lease and agreement entered into between the
City of Santa Monica and Mrs. Lillian Camden dba Surf View
Cafe, Inc., commencing on July 1, 1976. Addendum is made
with reference to the following facts:
A. On May 3, 1977, the City of Santa Monica, a municipal
corporation, (hereinafter the "City ") entered into a lease
and agreement with Mrs.Lilian Camden dba Surf View Cafe, Inc.,
a California corporation (hereinafter "lessee ") whereby the
City leased certain property located within the corporate
boundaries of the City of Santa Monica to Lessee for the
operation of a restaurant. This lease expires on June 30,
1981.
1977
B. Between March /and May, 1978, Mrs. Camden totally
rebuilt the restaurant premises and requests extension of
the lease and allowances for capital recapture through
rental off -sets. This addendum sets forth the terms and
conditions for the modification of the Lease.
THE PARTIES HERETO AGREE AS FOLLOWS:
1. Paragraph 1 is hereby amended and as amended shall
read as follows:
1. TERM
The term of this lease, hereinafter referred to
as the "Lease Term ", shall be extended five (5) years;
commencing July 1, 1981 and expiring June 30, 1986 unless
sooner terminated as provided below.
2. Paragraph 1.1 hereby .supplements the Term
provision and shall read as follows.
1.1 OPTION FOR RENEWAL
At the expiration of this lease, the Lessee may
elect, if not at the time in default, to extend the term of
this lease for one (1) additional period of five (5)
years from the expiration date hereof, upon the same terms,
covenants and conditions herein contained. Lessee must
exercise said option on or before the sixtieth (60th) day
preceeding the expiration of this lease or of any subsequent
option period, and must give written notice of the exercise
of such option as provided in Article 25 of its lease.
3. Paragraph 2.2 is hereby amended and as amended
shall read as follows:
2.2 ADDITIONAL PERCENTAGE RENTAL
In addition to the .minimum monthly rental, during the
Lease Term, Lessee shall pay to Lessor percentage rental
due and payable on or before the tenth (10th) day of the
month immediately following the month in which the cumulative
gross sales, during the Lease Year covering said month, exceeds
the minimum annual sales. Said minimum annual sales shall
be determined by dividing the minimum annual rental by
the percentage established below. Said percentage rental
shall be in the amount of ten percent (10%) of said
cumulative gross sales in excess of said minimum annual
sales.
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During the first five years of the amended lease,
between September 1, 1979, and August 31, 1984, Lessee shall
pay one -half the percentage rental, or five percent (5 %),
to the Lessor, each month subsequent to the month in which
the minimum annual sales is. reached, until the total building
renovation investment is recaptured, or until August 31, 1984,
whichever comes first.
Thereafter, during each and every month of the Lease
Year, Lessee shall pay to Lessor percentage.rental in the
amount of ten percent (10 %) of the gross sales made during
each month. Said percentage rental shall be due and payable
on or before the tenth (10th) day of the month immediately
following said month.
For purposes of this Article 2.2, said cumulative gross
sales shall only be accumulated during each and every Lease
Year of the Lease Term and not from Lease Year to Lease Year.
Lessee agrees that City Engineer or his representative
shall be the sole determining authority as to what the actual
costs are for the purposes of determining rental offset, when
the work has been done to the satisfaction of the City and
all other matters regarding such repairs.
4. Paragraph 2.8 (a) (2) is hereby amended as follows:
2.8 (a) (2) ADJUSTMENT OF MINIMUM ANNUAL RENTAL
The minimum annual rental shall be increased pursuant
to the percentage increase, if any, in the Consumer Price
Index (C.P.I.) as determined by the following calculation:
the base of computing the adjustment is the index figure
-3-
for the month of July, 1979, as shown in the Consumer Price
Index (all items) Los Angeles - Long Beach, based on the
period 1967 -100. The adjustment date shall be the month
of July, 1982, and said index published for that month
shall be computed as a percentage of the base figure. For
example, assuming the index figure on the base date is
110 and the index figure on the adjustment date is 121, the
percentage to be applied is 121/110 = 1.10 = 110 percent.
That percentage shall be applied to the minimum annual rent
for the lease year commencing September, 1, 1982.
(b) Thereafter at the commencement of each
subsequent year of the Lease Term, Lessor and Lessee agree
to the adjustment of the minimum annual rental computed
pursuant to the Consumer Price Index as follows: The
base of computing the adjustment is the index figure for the
month which is fourteen months prior to the commencement of
subject Lease Year, as shown in the C.P.I. (all items), Los
Angeles -Long Beach. The adjustment date shall be the month
which is two months prior to the commencement of subject
Lease Year, and the index published for that month shall be
computed as a percentage of the base figure. For example,
assuming the index figure on the base date is 110 and the
index figure on the adjustment date 121, the percentage
to be applied is 121/110 = 1.10 = 110 percent. That
percentage shall be applied to the minimum annual rent for
the subject Lease Year.
If the index is calculated from a base different from
from the base period 1967 = 100 used for the base figure
percentage shall first be converted under a formula supplied
by the U. S. Bureau of Labor Statistics.
(c) The aforementioned Consumer Index figures
shall hereafter be ascertained from the revised Consumer
Price Index (all items) for Los Angeles - Long Beach, California,
compiled, published and issued monthly by the United States
Department of Labor, Bureau of Labor Statistics. If the
aforementioned Consumer Price Index (all items) for Los
Angeles - Long Beach, California, as now constituted, compiled,
published and issued monthly by the United States Department
of Labor, Bureau of Labor Statistics, shall cease to be
compiled and made public and shall have another index sub-
stituted in its place, said substituted index shall be used
for the purpose of calculating the increase. or decrease, if
any, in the aforementioned minimum annual rental, if a
new Consumer Price Index should be devised by the Department
of Labor, Bureau of Labor Statistics, so as to apply and
include more specifically Lessor's.City and the Premises
located therein, said devised index shall Lie - substituted and
used for the purpose of calculating the increase or decrease,
if any, in the aforementioned minimum annual rental.
5. Paragraph 12.5 is hereby amended and as amended
shall read as follows:
12.5 PUBLIC LIABILIITY AND PROPERTY DAMAGE INSURANCE
Additionally to and independently. of all other revisions
of this Lease, Lessee shall, at its.own cost and expense,
contemporaneously with the execution hereof, procure a
policy or policies of Comprehensive General Liability,
i
Bodily Injury, and Property Damage insurance with Contractual,
Liability, Products, and Completed Operations coverage to be
in effect as of the date of this signing. Such policy or
policies shall be issued with per occurence limits of not less
than One Million Dollars ($1,000,000) Combined Single Limit,
issued by insurers either approved in writing by Lessor or
rated in Best's as "Triple A" or better, whereof Lessor shall
be named or additionally named insured. Coverage limits are
subject to review and revision by Lessor, for purposes of
increasing per occurence limits, after half the designated
Lease Term has expired. The terms of said policies may
be for such period as shall be designated by Lessee; provided,
however, that within two (2) months prior to the expiration
of such insurance terms, Lessee shall procure other policies
of said insurance so that between the execution of this Lease
and the commencement of the Lease Term, and throughout the entire
Lease Term or any renewal thereof, or until the sooner termination
hereof, Lessor shall always be a named additional insured under
the policies of Comprehensive Public Liability and Property
Damage insurance in accordance with the foregoing. Certificate
of said insurance, together with the receipts for the payment
of premiums for the terms thereof, shall be delivered to Lessor
within ten (10) days after the execution of this Lease, and,
thereafter within thirty (30) days prior to the expiration of
the term of each such policy. Said policies shall contain a
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non - cancellation- without - notice clause and shall provide that
copies of all cancellation notices shall be sent to Lessor.
DATED:
APPROVED AS TO FORM:
n
RICHARD L. KNICKERBOCKER
City Attorney
CITY OF SANTA MONICA,
a municipal corporation
By:
WE
CHARLES KENT. MCCLAIN
City Manager
Lessor
LILLIAN CAMDEN
Lessee
TO:
Santa Monica, California, July 31, 1979
Mayor and City Council
FROM: City Staff
AUG 1 4 1979
SUBJECT: S.M. Pier Leases — Beachcomber Gift Shop and Surf View Cafe
Introduction
This report concerns the Beachcomber Gift Shop and Surf View
Cafe lease addendums, and covers City Council's request for a more
thorough investigation, and the endorsement of the City Attorney.
It acknowledges a change in Pier leasing policy, includes
discussion of both the Beachcomber Gift Shop, and the Surf View
Cafe lease addendums, recommends Council approve the lease addendums
and direct the City Manager to execute the appropriate documents.
Background
On April 10, 1979, the lease addendum for the Beachcomber Gift
Shop was referred back to staff for clarification, consent of the
City Attorney, more thorough investigation, and a report back to
Council.
Among questions raised by Council were:
I, DID LESSEE RELY ON CITY STAFF ASSURANCES
IN COMPLETING CONSTRUCTION BEFORE RECEIVING
COUNCIL APPROVAL?
During discussions with Mr. John Heme-r of the City staff and
the then City Manager concerning an assignment of the Beachcomber
Gift Shop lease from Charles Kocher to Mr. Gordon, and an extension
of lease for Mrs. Lillian Camden dba Surf View Cafe, verbal encourage-
ment was given to Mr. Gordon and Mrs. Camden and staff stated that
they would favorably recommend a lease extension to the City Council.
There was, however,no discussion of specific lease provisions. Also
Mr. Gordon received approval by the Landmark's Commission and
Architectural Review Board, and believed this constituted notice
to the Council, as both Boards have Council members as liason. The
same circumstances are true of Mrs. Camden dba Surf View Cafe.
AUG 1 4 1979
II ,WERE ANY OTHER PIER LESSEES ALLOWED TO CONSTRUCT
BEFORE RECEIVING PIER LEASE EXTENSIONS?
Yes. In two previous cases, Council has approved lease
addendums after construction was completed, the Boathouse
Restaurant and the Playland Arcade.
On January 24, 1978, the Boathouse Restaurant received a lease
addendum that allowed for capital recovery for previous construction.
In the staff report that accompanied that lease addendum, specific
mention was made:
"Encouraged by these increases, the Lessee approached the City
with plans to expand the facilities. Although several meetings
were held during the plan review period, no specific agreements
were reached regarding an amended lease. However, it was generally -
understood that an extended lease period and some method which would
allow the Lessee to recapture a substantial portion of his capital
expense would be necessary in order to make the expansion economi-
cally feasible."
"Following the City and Coastal Commission plan approvals,
the Lessee determined to proceed with the construction: even
in the absence of a specific agreement. He expressed confidence
that a mutually acceptable lease amendment would be negotiated
with the City, and he was anxious to complete the expansion before
the beginning of the summer season."
"Subsequent to the completion of the expanded facilities
and the original estimates of potential gross sales were substan-
tiated, the attached amendment to the original lease was negotiated
with the Lessee."
On September 26, 1978, the Playland Arcade received a lease
addendum that allowed for capital recovery for previous construction.
In the staff report that accompanied that lease addendum, it said:
"This report covers the request for Mr. George Gordon dba
Playland Arcade to extend his lease in return for his investment
in up- grading the building housing the Playland Arcade."
"Mr. George Gordon recently added approximately 1000 square
feet to the building housing the Playland Arcade at a cost of
$30,151.95."
"The recent expansion and anticipated renovation to the Arcade
and Mr. Gordon's record as a responsible Pier businessman indicate
that these terms should be extended ten years beyond June 30, 1981."
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III, IF THE CONSTRUCTION WERE PAST CONSIDERATION,
AND SINCE PAST CONSIDERATION IS NO
CONSIDERATION, WHAT SHOULD COUNCIL ACCEPT
AS VALID CONSIDERATION?
(See City Attorney Analysis, Exhibit "A ")
IV, HAS STAFF VERIFIED ACTUAL COSTS FOR BEACHCOMBER'S
GIFT SHOP CONSTRUCTION?
Yes. Copies of all invoices are on hand in the City
files, and total $81,541.60.
V. IS THE BEACHCOMBER'S GIFT SHOP LEASE A TRUE
12% LEASE, OR IS IT DISCOUNTED, BASED UPON
THE VALUE OF THE IMPROVEMENT?
After the first five years it is a'true 12% lease.
It is discounted for the first five years to an average of
11.9678 %, as follows:
Lease
Addendum
Rate ;
1 st Year 12%
2 nd Year 12%
3 rd Year 12%
4 th Year 12%
5 th Year 12%
Average: 11.9678%
Actual
Effective Rate
Discount
12%
12%
11.9833% $ 1,748 = .0176
104,106
11.9479% 8,092 = .0521
155,082.
11.9078% 20,043 = ,0922
217,273
During these first two years, with the sales as estimated,
there will be no recapture by Mr. Gordon. Therefore the effect,
will be a 12% lease.
During the third year, if sales increase as projected, Mr.
Gordon will receive a recapture of $1,748. This amount is .0176
of the estimated rent paid up to that time. ($104,106.) By sub-
tracting .0176 from 12 %, the discounted percentage is 11.9833 %.
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By the end of the fourth year, Mr. Gordon is projected to have
recaptured $8,092. This is .0521 of the total rental paid - ($155,082)
by the end of the fourth year. By subtracting .0521 from 12 %, the
discounted percentage is 11.9479.
Similarly, by the end of the fifth year, Mr. Gordon's actual
percentage is 11.9078 %. These three years average 11.9678 %. The
lease is very close to a 12% lease.
Change in City Pier Leasing Policy
Following the precedent set on January 24, 1978 and on Sep-
tember 26, 1978 by the Council in approving the lease addendums
for the Boathouse Restaurant and the Playland Arcade,
City staff negotiated to allow a recapture of some of the capital
investment by the lessee on the Pier after the construction has
taken place. Henceforth, a.policy will be followed by Staff to
insure that all future construction and possible recapture provisions be
approved in advance by Council before construction begins.
In the case of the Boathouse Restaurant, the standard Pier
lease was consumated September 23, 1976. Subsequently, over
$150,000 was invested by the lessee, improving and expanding the
property of the City. Council later, on January 24, 1978, approved
the addendum which allowed the lessee to recapture a portion of
that investment over a ten year period.
Following this precedent, staff negotiated a similar addendum
with the Playland Arcade lease, however setting a limit of five
years and.one half the invested amount, up to $35,000.
In general, this policy of recapture, within a a limited time
frame, and within a set amount, is beneficial to the City
and its long range goal of improvement of the Pier.
- 4 -
It releases Federal funds of.the Community Block Grant program to
be used elsewhere; and does not place additional burdens on the
taxpayers of the City to subsidize the Pier.
However, staff will in the future obtain approval by Council
of all leases or addendums to leases negotiated by staff prior to
authorization for construction.
Exceptions to'the Leasing Policy Change
The suggested exceptions to this change of policy are the
Beachcomber Gift Shop lease addendum and the Surf View Cafe lease
addendum.
Beachcomber Gift Shop
On June 29, 1978, Mr. George Gordon started construction of a
2762 square foot addition, and on January 4, 1979, came to the
City staff with a request for a lease extension. Staff negotiated
a substantially better arrangement for the City, namely, a shorter
term of ten years rather than twenty (following the Playland Arcade
addendum) and a minimum of $33,288 rather then $13,008. Also, the
City is estimated to receive $186,483 over this five year term, and
Mr. Gordon $20,043 toward recapture of his invested $81,541.60.
Surf View Cafe
Mrs. Lilliam Camden, dba Surf View Cafe, and her mother rebuilt
their premises between March 1, 1977, and May 3, 1978. Excessive
disruptions by their contractor however delayed the opening far
beyond normal limits. During this protracted time staff negotiated and
- 5 -
Council approved a series of leases allowing for recapture of a
portion of investment, as related to the building, but not trade
fixtures.
In good faith Mrs.Camden and her mother have now requested from
the City equal treatment as other tenants.
In its policy of maintaining small proprietors on the Pier,
staff has negotiated a lease addendum with Mrs. Camden to allow
for some recapture, based on a estimated, projected sales
and rental, comparable with other operating low cost fast food
operations.
Term (Surf View Cafe)
Five years
with
one
5 year option,
beginning June 1, 1979
running through
June
30,
1991.
Rental (Surf View Cafe)
Ten percent, with one half of the additional percentage
rental allowed for recovery of investment, up to maximum of five
years, beginning June 1, 1979 running through May 30, 1984.
Therefore,5% of all sales after the minimum is paid would be
allowed for capital recovery, and 5% would be paid to the City.
Recapture (Surf View Cafe)
The recapture is estimated at 76% of the $48,340. ,94 invested,
an estimated $37,048. This to be in the form of a rental
reduction of the additional percentage rental, one -half the rental
rate of 10 %, or 5 %, but only after the annual minimum is paid.
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Alternatives
1. Council can reject these two exceptions, stating the City
owns the improvements since the issuing of the certificate of occu-
pancy, and make no changes in the lease as presently in force.
(See Exhibit "A')
2. Council can direct staff to negotiate alternative terms,
such as higher or lower rental percentage; longer or shorter lease
terms; or a different basis of recapture.
3. Council can approve these two exceptions'as negotiated,
and direct staff to submit for approval all future lease addendums
before construction begins.
Recommendation
It is the recommendation of staff that Council approve the
lease addendums as negotiated for Mr. George Gordon dba Beachcomber
Gift Shop and Mrs. Lillian Camden dba Surf View Cafe and direct the
City Manager to execute the appropriate documents.
Exhibit "A" City Attorney's Analysis
"B Lease Addendum, Beachcomber Gift Shop
"C" Lease Addendum, Surf View Cafe
Prepared by: Gary Ferguson
Peter Kipp
7 -
Exhibit "A"
CITY OF SANTA MONICA
DATE:, July 11, x.979
TO: Mayor and City Council
FROM: City Attorney
SUBJECT: In regard to leases and lease addendums between the City
and lessees on the Santa Monica Pier.
This report concerns the endorsement by the City Attorney of City
Council's pending ratification of lease addendums negotiated
with lessees George Gordon of Beachcomber Enterprises, Inc, and
Helen Camden of the Surfview Cafe.
Council may approve the addendums without the delivery of addition-
al consideration on the part of the lessees. The construction
by the lessees and the ratification of the addendums by City Coun-
cil represent full performance of earlier oral agreements between
City staff and the lessees. Such "executed oral agreements" are
fully enforceable by either party without furnishing additional con-
sideration. The Beachcomber Enterprises lease addendum is also
supported by the new consideration of an increased minumum year-
ly rental. It is not recommended that nominal consideration be
furnished by the lessees. This offer is unnecessary and contracts
supported by such consideration cannot be specifically enforced.
Council may alternatively reject the addendums. The City is not
bound by actions of its staff to offer an extension or modification
of the existing leases. The assurances to lessees are not enforce-
able under any theory of promissory estoppel, implied contract, or
executed oral agreement as the City officials were not empowered
under the Municipal Code to enter into contracts without Council
approval.
However, the City officials involved in discussions with the lessees
were empowered to execute and enforce the original leases. Their
actions may be viewed as requesting the construction performed by
the lessees. Thus, in rejecting the addendums, the City may be
vulnerable to claims of lessees that their construction has un-
justly enriched the City. Present leases expire in 1981 at which
time the City will take possession of the rental property, includ-
ing all improvements. Under a theory of restitution, the lessees
could recover the enhancement of the market value of the land by
reason of the improvement at the time the City takes possession.
It is recommended therefore that the Council either approve the
proposed negotiated lease addendums, or direct officials to
negotiate alternative terms which allow lessees an opportunity
to recapture their investment.