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HomeMy WebLinkAbout01 - Rental Rates for Commercial Marinas Over City-Manager TidelandsSEW PpQr CITY OF NEWPORT BEACH City Council Staff Report Agenda Item No. 1 September 12, 2012 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: City Manager's Office Dave Kiff, City Manager 949 - 644 -3001, dkiff @newportbeachca.gov PREPARED BY: Rob Houston — Assistant to the City Manager APPROVED: TITLE: Rental Rates for Commercial Marinas over City- Managed Tidelands ABSTRACT: The Council Ad Hoc Committee on Harbor Charges ( "Committee ") has met and is recommending a new rental rate for commercial marinas. Rent is generally based on fair market value, as determined by a variety of things including appraisals. This agenda item is specific to commercial marinas. The Committee also recommends moving those entities that are on year -to -year permits to longer term leases. Staff is working on a lease template to bring back to the Council at a later date. RECOMMENDATION: 1. Direct that the fair market rent charged to commercial marina uses be the greater of $1.45 /square foot of tidelands rented (on an annual basis) or 20% of gross revenue from slip rentals. 2. Direct that the fair market rental increases be phased -in through 2015, as outlined in the staff report. FUNDING REQUIREMENTS: The current budget allows for the resources needed to implement the increase commercial marina rent charges. The City of Newport Beach's ( "City ") income properties administration position as well as the City Attorney and City Manager's office will handle lease implementation. Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 2 DISCUSSION: A majority of the waterways in Newport Harbor are tidelands, owned by the State of California ( "State "). The 1978 "Beacon Bay Bill ", as amended, granted the City trusteeship of most of the tidelands within Newport Harbor (the County of Orange also has some). The City, now serving as "landlord" on behalf of the State, is mandated under law to charge a fair market rental price for the private use of tidelands' public assets. These tideland uses include moorings, commercial marinas, yacht clubs, rental boats, charter boats, restaurants, home owner associations, and fuel docks, among others. The requirement to charge a fair market rental price obligates the City to charge appropriate and non - discriminatory rates for the use of tidelands, without conferring a benefit to private individuals for the use of public property in violation of the California Constitution's prohibition on gifts of public funds. There is risk that the State will intervene and take control of the rent - setting process if the City does not properly and promptly discharge its responsibilities. On July 27, 2010, the City Council formed the Committee and charged the Committee with the task of reviewing harbor charges, including, but not limited to: • Fees based on the cost of providing a service; • Mooring rates — onshore and offshore; • Balboa Yacht Basin charges — slips, garages, and apartments; and • Rental rates for commercial pier permit holders. The Committee analyzed fee -based charges in September and October 2010, brought a proposal to the City Council on November 9, 2010 to adopt updated charges and Council approved the proposal. This proposal recommended updating harbor fees charges to ensure compliance with Newport Beach Municipal Code Section 3.36.030(A) that requires there be a 100% cost recovery for City services associated with harbor related activities. The Committee's next task was to address charges based on private use of public tidelands, including the slips, garages, and apartments at the Balboa Yacht Basin and Newport Harbor's onshore and offshore moorings. The Committee, assisted byCity staff performed extensive research in order to determine the fair market rent for these uses. Public outreach was also conducted to allow stakeholders to hear testimony and Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 3 discuss the issue of rent level for slips and moorings in the harbor. The Committee then presented their recommendation at the November 23, 2010 City Council meeting. The recommendation presented to the City Council proposed increasing mooring rates from 5% up to 14% of an average of low to moderately priced marinas' berthing rates in Newport Harbor. This increase was proposed to be phased over a five year term in order to moderate the impacts of this increase. The rates charged for the Balboa Yacht Basin were next reviewed to determine a fair market rental charge for this use of tidelands. Meetings were held with stakeholders and comparative research prepared to produce an increased rental rate recommendation that went to the City Council. The measure to increase rates at the Balboa Yacht Basin over a phased three -year period passed on December 6, 2010. COMMERCIAL USE OF TIDELANDS IN NEWPORT HARBOR Nearly a year ago, the Committee began to address the fair market rental value for commercial pier permittees. Newport Harbor contains a wide assortment of commercial enterprises ranging from marinas, yacht clubs, and charter /rental boat operations, to shipyards, gas docks, and restaurants. Some of the major commercial uses in the harbor are on leases, but many have a commercial pier permit that is issued by the City annually and gives the commercial pier operator the ability to use the tidelands area for that one -year time period. There are currently about 65 commercial pier permit holders in the harbor. The rental rates charged for these commercial pier permits is well below the market rate due to a lack of regular rate increases. For example, the City currently charges commercial permit holders $0.36 for every square foot of tidelands rented per year. That amount has gone up about 24% since 2001 (roughly a little less than general inflation). However, during that same period, some marina slip rates went up approximately 67% -150 %. Another example is taken from two comparable commercial marinas located within Newport Harbor but residing on County Tidelands (Newport Marina and Bayshores Marina). These two marinas both pay 20% of gross slip receipts. For the amount of tidelands under lease, the amount paid by Newport Marina (depending on when calculated, $1.44/SF) and Bayshores Marina (also depending on when calculated, $3.10 /SF) is three to seven and a half times greater than the current rate charged by the City ($0.36/SF). Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 4 The Committee first hired a leasing consultant (Alan J. Kotin) and special counsel (Michael Houston of the law firm Cummins & White) to help determine what practices are common in tidelands leasing. The City's two consultants suggested leases which would contain: • Term: 5 years - 50 years — (lease term linked to slip /pier useable life). • Option to Renewal Term(s): One or more renewals authorized (total must be less than 50 years), with an Option Fee paid to the City. • Rent: Set at a percentage of gross with a minimum per square foot base rent. • Rent Adjustments: Every 5 years, adjustments are made to Base Rent. • Participation Rent would be due to the CitV upon sale or refinance • Capital Improvement and Maintenance Expectation: Lessees must invest minimum of: 0 2% of gross revenue in Capital improvements; and show o The investment of 4% of gross revenue in maintenance. After two meetings and further discussions with commercial harbor permit holders, several of these proposed terms were changed or removed (see the underlined ones, above). But what remains today includes: • Moving to a lease from annual permits (as required by the Beacon Bay Bill and the City's Municipal Code). • Leases of between 10 and 25 years. • Rent based on a percentage of gross, with a minimum base rent based on SF — and increases phased in over 3 years. • Rent Adjustments: Every 5 years, adjustments are made to Base Rent. DETERMINATION OF COMMERCIAL MARINA FAIR MARKET RENT The City's Municipal Code and Council Policy Manual gives guidance in regards to rent for commercial piers as follows: NBMC §17.60.020(E) Commercial Uses. Commercial uses of public tidelands shall be subject to rental or lease charges reflective of fair market value related to such use as established by appraisal. Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 5 NBMC §17.60.060(D) Revenue. Rent under this section shall be based upon fair market value, as determined by the City Council. Such determination shall be based upon the findings of a City - selected appraiser. Council Policy F -7(A) Whenever a lease .... regarding income property is considered by the City, an analysis shall be conducted to determine the maximum or open market value of the property. This analysis shall be conducted using appraisals or other techniques to determine the highest and best use of the property and the highest value of the property. Generally, then, City's Municipal Code and Council Policies direct that fair market rent is required and appropriate for commercial pier uses, and that this value can be set by the City Council at any amount provided the amount is based on (emphasis added) an appraisal and other techniques and is reflective of fair market value. The Committee determined that fair market rental prices for the wide range of commercial uses in the harbor would require a review of the surrounding harbors to find current rental rates. The Committee conducted its own review, and in addition, the City hired two independent appraisers to conduct separate extensive appraisals of the Commercial tidelands marketplace, one of the appraisers was recommended by a group of current pier permittees. These two appraisers were charged with the task of researching all relevant market data from similar harbor uses in Newport Harbor and surrounding harbors and developing a recommendation as to the fair market rental rate for each type of commercial use. It is important to reiterate that the City Council is not required to set rental rates equal to the appraisal results; rather, the City Council may consider all the relevant data and select the rate it believes is most reflective of fair market value. The appraisers also took part in two marina stakeholder meetings and received comments and concerns from the stakeholder groups to help them further their research. The appraisers also visited a number of marinas and met individually with either the owners or marina managers. The appraisers separated out their report into sections focusing first on commercial marina use, to be followed at a later date by the remaining commercial uses. Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 6 COMMERCIAL MARINA APPRAISAL FINDINGS Netzer Appraisal Report - The appraisal received from James Netter concluded that commercial marinas, both large and small, in Newport Harbor should have a minimum fair market rent of $1.45 per square foot of tidelands against 20.0% of the gross revenue from slip rental fees if the tidelands were not joined (same ownership) with uplands. If the uplands and tidelands were joined, the amount should be 25% of gross slip revenue. Rasmuson Appraisal report - The appraisal received from Gary Rasmuson concluded that large commercial marinas in Newport Harbor should have a minimum fair market rent of $1.50 per square foot of tidelands against 17.0% of the gross revenue from slip rental fees if the tidelands were not joined to uplands under the same ownership. If the uplands and tidelands were joined, the amount should be 25% of gross slip revenue. This appraisal also concluded that small commercial marinas in Newport Harbor should have a minimum fair market rent of $1.40 per square foot of tidelands against 17.0% of the gross revenue from slip rental fees. It should be noted that there are many existing lease agreements in place within Newport Harbor where a percentage of gross revenue is the basis for tidelands rental revenue (e.g., Balboa Bay Club, County tidelands leases, etc.). The Committee considered existing percentage leases within Newport Harbor as well as other relevant information. The table below provides a sample of local marinas and their rental percentage rate for both City and County tidelands locations, as well as a variety of current and prior appraisals. Newport Harbor Marina Rental Comparison, Appraisals Marina Rent % of Gross Revenue American Legion — tidelands joined to uplands 40% Arches Marina (Harbor Towers) — tidelands joined to uplands 35% Balboa Bay Club — tidelands joined to uplands 31% Newport Dunes (County Lease) —tidelands joined to uplands 25% Netzer 2006 Appraisal — tidelands joined to uplands 27% Netzer 2012 Appraisal — tidelands joined to uplands 25% Netzer 2006 Appraisal — tidelands separate from uplands 22% Netzer 2012 Appraisal — tidelands separate from uplands 20% Bayshores Marina (County Lease) — tidelands separate from uplands 20% Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 7 Newport Marina (County Lease) — tidelands separate from uplands 20 %(equiv) Rasmuson 2012 Appraisal — tidelands joined to uplands 25% Rasmuson 2012 Appraisal — tidelands separate from uplands 17% Bahia Corinthian Yacht Club— tidelands separate from uplands 9% BACK TO THE AD HOC COMMITTEE The Committee held a series of meetings with commercial pier permit stakeholder groups to discuss rental rates, what might be in a lease, and other relevant issues. In addition, communication materials were posted on the City's website and mailed to residents. The table below outlines some of the City's public outreach effort. In addition to the meetings noted below, there were numerous informal discussions with marina operators and other harbor users at which input and recommendations were received. PUBLIC OUTREACH EFFORT DATE Stakeholder Meetings with Council Committee Initial Stakeholder meeting with Commercial Marina Owners 23- Feb -12 2nd Stakeholder meeting with Commercial Marina Owners 5- Apr -12 Initial Stakeholders meeting with Appraisers 13- Jun -12 2nd Stakeholders meeting with Appraisers 1- Aug -12 Committee Members' public speaking events Newport Harbor Chamber of Commerce's Marine Committee (Henn) 10- April -12 Newport Harbor Chamber's Gov't Affairs Committee (Rosansky) 5- April -12 Communication Material Distribution Posted Commercial Marina Appraisals on City website and notified all interested parties via email 22- Aug -12 FAQ for Harbor Charges posted to website 22- Aug -12 Posted ad hoc Committee's draft rental recommendation on web page 29- Aug -12 Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 8 Council Meeting Presentations Study session outline of Ad -Hoc Council Committee on Workplan for Harbor Charges 13- Mar -12 Commercial Marina Rental Rate proposal for Council review 12- Sep -12 After listening to the stakeholders and others, and in reviewing the two appraisal reports, other rents at area commercial marinas, and other information relevant to the issue, the Committee made two key recommendations: (1) to change how commercial tidelands are offered for private use; and (2) to change the manner in which the rent levels are set. COMMITTEE RECOMMENDATIONS The Committee's first recommendation is that future tideland usage be offered in the form of long term leases with a minimum term of 5 years and a maximum term of up to 25 years in length in order to (1) meet the terms of the Beacon Bay Bill, which provides, in part, the City "...may lease the lands, or any part thereof, for terms not exceeding 50 years for purposes consistent with this trust..." and (2) to allow commercial marina users a property right to remain in their current location for an extended period of time; a right which does not exist in the current one -year pier permit agreements. The Committee's second recommendation proposes changing the form of calculation and rate of rent for commercial marina tidelands to follow the industry standards for marinas in the rest of the State. The proposal is to set rent at a percentage of gross revenue. This percentage of revenue model is currently used in marina leases throughout southern California, including Newport Harbor. The total rate of rent is also proposed to be raised over a three year phase -in process from the current $0.36 per square foot ( "SF") to a minimum of $1.45 per SF or 20% of gross revenue, whichever is higher. The list and table below lays out the specific rental rate details of the Committee's proposed recommendation for commercial marinas: 1. Rent to be based on percentage of gross slip rental revenue ( "percentage rent "), with a minimum "base rent" square footage rent. If percentage rent is higher than base rent, percentage rent is what is owed. 2. Phase -in the changes between now and 2015. Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 9 3. Adopt a template lease document to serve as the template for similarly- situated commercial marinas. 4. Recommend that the City Council adopt the below schedule for rents for commercial marinas (for those on permits today, not marinas currently on leases). PHASING OF COMMITTEE RECOMMENDATION STAKEHOLDER CONCERNS As the Committee has conducted its work, it continues to speak with commercial permit holders about various issues and proposals. The following is a summary of key concerns noted by the stakeholders: 1 — Rent based on percentage of gross "interferes" in our business. It is not uncommon for the City or other government agency renting out public space to a private venture to ask lessees to report gross revenues. The Balboa Bay Club, the Bahia Corinthian Yacht Club, the two piers' concessions, the CdM Beach concession, the Newport Dunes marina and resort, the American Legion, the Newport Harbor Towers Marina, the Newport Marina, and the Bayshores Marina all show gross revenue to the City or to the County. After receiving it, the City keeps this information proprietary to the extent allowable by law. This is quite similar to how the City charges Transient Occupancy Tax ( "TOT" or hotel bed tax) to all hotels in our City and how private commercial landlords routinely charge rent to retail tenants. 2012 current 2013 2014 2015 Base Rent (An amount $0.36/SF $0.75 /SF $1.15/SF $1.45/SF per SF of tidelands/ ear Percentage N/A 10% of gross 15% of gross 20% of gross Rent slip rental slip rental slip rental revenue revenue revenue STAKEHOLDER CONCERNS As the Committee has conducted its work, it continues to speak with commercial permit holders about various issues and proposals. The following is a summary of key concerns noted by the stakeholders: 1 — Rent based on percentage of gross "interferes" in our business. It is not uncommon for the City or other government agency renting out public space to a private venture to ask lessees to report gross revenues. The Balboa Bay Club, the Bahia Corinthian Yacht Club, the two piers' concessions, the CdM Beach concession, the Newport Dunes marina and resort, the American Legion, the Newport Harbor Towers Marina, the Newport Marina, and the Bayshores Marina all show gross revenue to the City or to the County. After receiving it, the City keeps this information proprietary to the extent allowable by law. This is quite similar to how the City charges Transient Occupancy Tax ( "TOT" or hotel bed tax) to all hotels in our City and how private commercial landlords routinely charge rent to retail tenants. Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 10 2 — Auditing our books to determine gross revenue gets into our business. It is also common for the City or the County to have provisions allowing for audits of funds. The City's hotels all report room rental data — including numbers of rooms rented and the corresponding rates — on a regular basis as a part of the hotels' obligation to pay TOT. The same marinas and concessions noted above have auditing provisions to allow the City to verify reported gross income. If the City Council adopts lease rates based on gross revenue, it is likely that the City will ask lessees to self - report gross revenue each year and certify that the reported number is true and correct. Audits will likely be conducted on a random basis from time to time, or for specific marinas where discrepancies are noted. 3 — The rent is too high. There are errors in the appraisals. The rent proposed is based on a variety of things, including two independent appraisals, performed by persons without ties to any permittee in the Harbor. One appraiser (Mr. Rasmuson) was recommended to the City by commercial harbor permittees. All appraisals are subject to a variety of assumptions, estimates and methodologies that are subject to a difference of opinion. The Committee believes that the City's two appraisals were reasonable in scope and outcome. In addition; however, the two appraisals constitute data points to be considered among a variety of data points that were considered by the Committee in arriving at its recommendation. The City has, however, asked the two appraisers to review and respond to criticisms of their appraisals and responses are expected soon. 4 — The City's calculations for its Tidelands Fund are inappropriate. There has been significant discussion in the community, especially the Harbor community, about uses of and accounting for the "Tidelands Fund." The City is required to segregate (1) revenue from the tidelands and (2) expenditures on the Tidelands in a separate fund called the Tidelands Fund. The Tidelands Fund is audited once a year by an outside auditor as a part of the City's annual Financial Audit along with all of the City's funds. Because the tidelands include the ocean beaches, the City allocates expenses relating to the ocean beaches as tidelands expenses — these include some police calls, some fire calls, some emergency medical calls, and lifeguarding expenses. While some in the community may disagree with this allocation (specifically the inclusion of ocean beach Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 11 revenue and ocean beach expenses), the ocean beaches are part of the City's tidelands. Further, this process has been consistent over the years and has been consistently recognized as appropriate by the State Lands Commission (the State agency charged with supervising tidelands throughout the State). Importantly, a balance or deficit in the City's Tidelands Fund does not negate the legal obligation of the City to charge rents based on fair market value. This obligation, as noted, is set forth in the Beacon Bay Bill as well as the California Constitution, and is a mandate separate and apart from balances in the Tidelands Fund. The net balance of revenues and expenses in the Tidelands Fund is therefore fundamentally irrelevant to the City's mandate to charge fair market rent for private use of the tidelands. 5 — The City declined to allow an audit to be done of its Tidelands Fund. No. The City's Tidelands Fund is audited annually as a major City fund. The Comprehensive Annual Financial Reports (CAFRs) and related audit opinions are public records and available to the public on the City's website. Instead, when asked by a coalition of commercial marina permit holders, the City declined to pay for half of a second audit of the Tidelands Fund, believing a second audit to be redundant and a waste of taxpayer funds. 6 — The Committee rejected a compromise proposal put forth by a group of commercial permittees. The commercial permittees' proposal was to base rent solely on square footage — coming up to $1.20 per SF by 2015. After 2015, the proposal suggested that the City would prepare and review a marina slip rate "index" (similar to that used for the Bahia Corinthian Yacht Club's lease) and adjust the $1.20 /SF by the increase or decrease in that index. So if slip rates in the index went up by 4% between 2015 and 2016, then the 2016 per SF rental rate would go from $1.20 /SF to $1.25/SF (amount rounded). The commercial permittee's proposal was understood by the Committee to be similar through 2015 but then, in 2016, the $1.20 1SF would be adjusted up (or down) to a square footage price equivalent to 20% of Gross Slip Revenue for a similar marina index. If the proposal were the latter, the Committee believed it had merit. However, communication being imperfect, the commercial permittees did not intend to propose a 20% of Gross Equivalent Index, and intended instead to use the Bahia Index' increase. Rental Rates for Commercial Marinas over City- Managed Tidelands September 12, 2012 Page 12 Since that time, the commercial permittees have proposed two other alternatives, one of which reflects the Committee's minimum SF amounts, but not its percentage of gross goal. The permittees' two proposals were offered Friday, September 7, 2012 and are: Permittees' Proposals — September 7, 2012 After reviewing the proposals, the Committee remains of the belief that any rent should ultimately be reset and based on percentage of gross, and that the percentage should be 20 %. ENVIRONMENTAL REVIEW: Staff recommends the City Council find this action is not subject to the California Environmental Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly. NOTICING: In addition to the stakeholder input noted above, this agenda item has been noticed according to the Brown Act (at least 24 hours in advance of the special meeting at which the City Council considers the item). Submitted by Rob Houston Assistant to the City Manager 2012 2013 2014 2015 2016 2017 Proposal Price per SF $ 0.36 $ 0.75 $ 1.00 $ 1.25 1.So Adjust by Bahia Index A %of Gross Slip Revenue N/A N/A N/A N/A N/A N/A Proposal Price per SF $ 0.36 $ 0.75 $ 1.15 $ 1.45 Adjustby Bahia Index Adjust by Bahia Index e %of Gross Slip Revenue N/A N/A N/A N/A N/A N/A After reviewing the proposals, the Committee remains of the belief that any rent should ultimately be reset and based on percentage of gross, and that the percentage should be 20 %. ENVIRONMENTAL REVIEW: Staff recommends the City Council find this action is not subject to the California Environmental Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly. NOTICING: In addition to the stakeholder input noted above, this agenda item has been noticed according to the Brown Act (at least 24 hours in advance of the special meeting at which the City Council considers the item). Submitted by Rob Houston Assistant to the City Manager