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SR-11-10-2015-3E City Council Report City Council Regular Meeting: November 10, 2015 Agenda Item: 3.E 1 of 4 To: Mayor and City Council From: Karen Ginsberg, Director, Community & Cultural Services Subject: Recommendation to approve modifications to the two lease extensions with the Beach Club Recommended Action Staff recommends that the City Council authorize the City Manager to negotiate and execute two amendments to the Permit for Improvements and Lease Option Agreements with the Beach Club. This will result in two ten-year and one six-year options for the two beach parcels, each subject to Council approval, and receipt of an Option Fee, totaling up to $734,000 for the three approved option periods. Executive Summary The Beach Club, located at 201 Palisades Beach Road, leases two beach parcels, totaling about 74,000 square feet. The lease agreements expired on January 8, 2015, and the Club has exercised a ten year renewal option in each lease which extends the current lease term to December 31, 2024. The Council previously approved findings that there had been no material change in the need for the public use of the two beach parcels and authorized the City Manager to negotiate and execute two lease extensions for a total of fifteen years. As a result of discussions between the Beach Club and State officials, the Department of State Parks and Recreation has agreed to extend the lease agreements through 2050, which matches the term of the City’s Operating Agreement with the State for management of Santa Monica State Beach . This report recommends that Council approve two 10-year options and one 6-year option, each subject to City or State determination that the parcels are not needed for public use, and upon payment of an Option Payment of 5% of the total rental value of each option period as a public benefit for the longer lease term. The Option Payment is in addition to the Council approved annual rental of $409,822, adjusted by CPI every five years. Background The Beach Club, located at 201 Palisades Beach Road, leases two beach parcels adjacent to the club, totaling about 74,000 square feet. The leases expired on January 8, 2015, and the Club had exercised a ten year renewal option in each lease , which extends the current lease term to December 31, 2024. On July 22, 2014 (Attachment 2 of 4 A), the Council approved findings that there had been no material change in the need for public use of the two beach parcels currently leased to the Beach Club for private use. The Council also authorized the City Manager to negotiate and execute two lease extensions, each for an additional ten years with a five-year option, for the two beach parcels. The fifteen year extension is consistent with the term authorized by the State Department of Parks and Recreation (State Parks) for the leases with the homeowners along Palisades Beach Road. During negotiations, the Beach Club requested a longer lease term for the proposed $5.50 per square foot rental rate, and pursued independent discussions with State officials. State Parks has agreed to extend the permit agreements through December 31, 2050, subject to the City’s agreement, and has specified that there be two 10-year periods and one 6-year period, which would be granted upon determination by the City and State that the parcels are not needed for public use. The December 31, 2050 date matches the term of the City’s Operating Agreement with the State for management of Santa Monica State Beach. Discussion The original lease term for each parcel was 25 years, with an exclusive option to the Club to lease the parcels for an additional ten years subject to specified conditions, which are described in the July 22, 2014 staff report. The rent for both parcels was $1,500 per year for the first ten years and was adjusted to $.65 per square foot for the next five years ($48,433) and was $1.05 per square at the time of the lease expiration in January 2015, for a total of $78,239 per year. Council approved the rental rate of $5.50 per square foot, based on a 2012 appraisal for beach recreation, which yields a total rental of $409,822, an increase of $331,583 over the current lease payment. Staff has considered the State’s proposal and recommends an additional requirement for an option payment by the Beach Club as a public benefit for the longer lease term. The option payment recognizes the value provided to the Beach Club by extending the lease to 2050, and provides additional funds to the Beach Fund for capital 3 of 4 improvements on Santa Monica State Beach. Staff has negotiated the option payment to be 5% of the total rental value of each option period. For example, if the annual rental in 2024, adjusted by CPI, is $459,000, then the option payment would be 5% of the total value of the 10 year option, $4,590,000, or $229,500. Over the course of the three option periods, the Beach Fund could receive up to an additional $734,000 in revenues. In summary, the proposed terms of the amendment are the following: Two 10-year options and one 6-year option to extend to December 31, 2050 Options granted upon sole determination by the City or State that the parcels are not needed for public use Option payment of 5% of the total rental value of each option period upon determination by the City that the option may be granted  Option payment is calculated based on the rental rate for the year prior to the new option period Annual rent adjusted by CPI every five years, capped at 12%, beginning in 2020  Most Favored Nation Clause that provides an adjustment in the annual rental amount if another similarly-situated private membership club of at least 10,000 square feet of encroachment within the City of Santa Monica receives a lower rental rate in the future. Financial Impacts and Budget Actions There is no immediate financial impact or budget action necessary as a result of the recommended action. The long-term financial impacts will include three option payments totaling up to approximately $734,000 in revenues to the Beach Fund. The first payment will be received in July/August 2024 of up to $229,500; the second payment will be received in July/August 2034 of up to $287,885; and the third payment will be received in July/August 2044 of up to $216,674. Prepared By: Judith Meister, Beach Administrator Approved Forwarded to Council 4 of 4 Attachments: A. July 22, 2014 Staff Report (Web Link)     Reference:    Modified Agreement   No. 9941   (CCS)  &  Modified Agreement No. 9942   (CCS)