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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." -2- p 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 �.._ n 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 -5- l 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. -2- 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 Q r I' 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." -2- 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 %. - 3 - 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. - 6 - 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.