MEMORANDUM March 22, 2006 TO: FROM: SUBJECT: MEMBERS, PORT COMMISSION Hon. Ann Lazarus, President Hon. Kimberly Brandon, Vice President Hon. Sue Bierman, Commissioner Hon. Michael Hardeman, Commissioner Hon. Wilfred Hsu, Commissioner Monique Moyer Executive Director Request approval of the terms and conditions in the standard form of lease for Pier 45 fish processing facilities in Sheds B and D DIRECTOR'S RECOMMENDATION: Approve the Updated Pier 45 Fish Processor Lease This item was presented for informational purposes on December 13, 2005 and February 28, 2006 and has returned for approval. BACKGROUND On September 8, 1993, the Port Commission by Resolution No. 93-127, as amended by Resolution No. 93-135 ("1993 Resolution") delegated authority to the Executive Director to approve and execute leases on behalf of the Port provided that the terms of said leases meet certain business parameters. The adopted business parameters formally established rental rates for different types of facilities, an approved boilerplate lease, and set a maximum lease term of five (5) years. In 1994 following the Pier 45 Earthquake Repair Project for the restoration of the fish processing facilities at Pier 45 Sheds B and D, the San Francisco Port Commission, pursuant to Resolution 94-112 dated August 9, 1994, amended the 1993 Resolution to allow the Executive Director to approve and execute leases with terms not to exceed ten (10) years for the Pier 45 fish processors. This Print Covers Calendar Item No. 4A
On August 23, 2005 the Port Commission by Resolution No. 05-57 established minimum rental rates for the office space, shed space and 2 nd floor warehouse space for the Pier 45 fish processing facilities. The current lease rates reflect tenant s initial occupancy of unimproved shell space. The newly adopted rates capture the value of tenant improvements constructed under the current leases and amortized over the 10-year lease terms. Since early 2005, eight of the thirteen Pier 45 fish processor leases executed after completion of the Pier 45 Earthquake Repair Project have expired and are now leased on a month-to-month basis. Port staff, working with legal counsel, initiated a process to update the original form of lease for the Pier 45 fish processing center instituted following the Pier 45 Earthquake Repair Project. Throughout this review period, staff pursued lease revisions to ensure the updated document reflects new City requirements and Port business practices and policies enacted subsequent to the execution of the now-expiring or expired leases. As part of this review, staff has sought both general feedback from the Fisherman s Wharf Waterfront Advisory Group (FWWAG) and specific feedback from the existing fish processing tenants at Pier 45. The end product of the extensive review process described above is the updated fish processing lease form before you today for your approval. The updated boilerplate will be used as the foundation for negotiating new business terms and executing new leases with fish processors for available premises at Pier 45. The major changes include the following: 1. The addition of current City requirements relating to the leasing of real property, including the First Source Hiring Program, Healthcare Accountability Ordinance, Sunshine Ordinance, Prevailing Wages, and Limitation on Contributions, among others. These requirements are not included in the current Pier 45 Fish Processor leases because they did not exist when these leases were originally executed. 2. The addition of current Port business practices and policies including: o Fixed annual rent increases not to exceed 5% per annum replacing the Port s current practice of annually determining the percentage change in the Consumer Price Index ("CPI"). Calculating the effect any increase in the CPI had on rent and security deposit, preparing a formal letter to notify each tenant of the rent and deposit increases, and updating Port s database to reflect these changes to ensure proper billing has proved burdensome to Port staff, confusing to Port tenants and a drain on Port resources. Additionally annual CPI adjustments have not been able to capture increases in the commercial real estate market. o For the entire lease term, the cash security deposit shall be fixed to equal twice the minimum monthly rent in the final year of the lease. As mentioned above, the security deposit is currently adjusted on an annual basis. Accordingly, when the time required to notify each tenant of the increase in rent and security deposit and the time it takes for the tenants to provide the Port with the increased amount is calculated, then for at least a few months of every year, the security held by the Port is insufficient to cover two months' of the then current monthly rent. By requiring the security deposit to equal twice the minimum monthly rent in the final year of the lease, not only is there increased efficiency for Port staff, but the Port minimizes its risk that there will be a deficit in the security it holds when compared to the then current -2-
base rent. Note that the Port is not required to pay interest on security deposits under State law. Port staff recommends that the Commission delegate to the Executive Director or her designee on an individual basis the ability for tenants to provide a Letter of Credit in lieu of cash to fulfill the security deposit requirement of a lease. o With Port consent, holdover rent shall increase by a minimum of 150% (not applicable if Port and Tenant are unable to execute a new lease after expiration of the lease term solely due to Port delays); without Port consent the increase shall be 200%. This is a new business practice for the Port intended to encourage tenants to renegotiate their leases in advance of their natural termination date and to maximize the Port s ability to renew leases to current market rates in a timely fashion. 3. The addition of other site-specific measures to reflect unique aspects of the fish processing industry including: o Delegation to the Executive Director the ability to consent to subleases pursuant to her review and approval of the proposed terms of the sublease and review and approval of the form of sublease by the City Attorney. o Upon receipt of tenant s request to sublease greater than 50% of tenant s leased premises, Port shall have the option to recapture the proposed sublease premises. This provision allows Port to maintain direct relationships with the fish processors and tenants utilizing Port property. o Additional insurance for apron cranes to ensure the Port minimizes risk from the use of this industrial equipment. o Delete the ability of tenants to obtain leasehold financing from the boilerplate; provided, however, Port staff recommends that the Commission delegate to the Executive Director the ability of tenants to encumber the leasehold on an individual basis after reviewing the terms proposed by the tenant and approved lender should such financing be a critical requirement of a proposed tenant. Please note that while the updated lease is specifically for the Pier 45 fish processors, the approval of this lease will establish business policies more representative of commercial leasing practices. These policies are anticipated to be incorporated into other boilerplate leases at Port facilities such as The Pier 50 Administrative Building at 401 Terry Francois Blvd., Building 11 at Pier 70, the Agriculture Building, and the Pier 80 Administrative Building at 501 Cesar Chavez Street. The updated boilerplate leases for these facilities will separately be brought before you for approval. RECOMMENDATION Port staff recommends that the Port Commission approve the updated Pier 45 Fish Processor Lease and authorize the Port s Executive Director or her designee to execute such leases with terms substantially similar to the provisions of this staff report in a form approved by the City Attorney Prepared by: Phil Williamson, Senior Property Manager For: Mirian Saez, Deputy Director of Real Estate -3-
PORT COMMISSION CITY AND COUNTY OF SAN FRANCISCO RESOLUTION NO. 06-23 Charter Section B3.581 empowers the Port Commission with the power and duty to use, conduct, operate, maintain, manage, regulate and control the Port area of the City and County of San Francisco; and By Resolution No. 93-127, adopted September 8, 1993, as amended by Resolution 93-135, by Resolution No. 94-112, and by Resolution No. 05-57, this Commission authorized the Executive Director to approve and execute leases that conform to all of the Leasing Parameters set forth in Resolutions No. 93-127, 93-135, 94-112, and 05-57; and The existing form of lease for the Pier 45 fish processors was formulated more than ten years ago and does not contain many of the current City Requirements and does not reflect current Port business practices and policies; and The form of lease for the Pier 45 fish processors has now been updated to incorporate current City Requirements including, among others, the First Source Hiring Program, Healthcare Accountability Ordinance, Sunshine Ordinance, Domestic Partners Ordinance, Prevailing Wages, and Limitation on Contributions; and The form of lease for the Pier 45 fish processors has now been updated to incorporate current Port business practices and policies including, among others, the calculation of security deposits, rental rate increases, holdover rent, Port s option to recapture the premises upon tenant s request to sublease greater than fifty percent (50%) of the leased premises, authority of the Port's Executive Director to consent to subleases without obtaining separate Port Commission approval in each instance, elimination of the tenant's ability to encumber its leasehold interest with a leasehold deed of trust (except in limited circumstances), and authority of the Port's Executive Director to accept a letter of credit in form acceptable to the Executive Director, in lieu of a cash security deposit, on a case by case basis; and In connection with the update of the form of lease for the Pier 45 fish processors, Port staff has sought and received both general feedback from the Fisherman s Wharf Waterfront Advisory Group (FWWAG) and specific feedback from the existing fish processing tenants at Pier 45; and Based on the foregoing updates, the terms outlined in the accompanying -4-
Agenda Summary for this Item, and discussions with FWWAG and existing fish processing tenants at Pier 45, Port staff recommends that the Port Commission authorize Port staff to use the updated form of lease for the Pier 45 fish processors, a copy of which is on file with the Commission Secretary, as a basis for negotiating and executing lease agreements at Pier 45 Shed B and Pier 45 Shed D; now therefore be it That the Port Commission hereby approves and adopts the updated form of lease for the Pier 45 fish processors outlined in the staff report dated March 22, 2006 and authorizes the Port s Executive Director or her designee to execute new leases with the fish processing tenants at Pier 45 using the updated form of lease for the Pier 45 fish processors, in a form approved by the City Attorney, and on terms substantially similar to the provisions described in said staff report; and be it further That the Port Commission delegates to the Executive Director of the Port, or her designee, the authority to consent to subleases on terms acceptable to the Executive Director, or her designee, without separately presenting the terms of such sublease to the Port Commission for approval; and be it further That the Port Commission delegates to the Executive Director, or her designee, the authority to consent to the encumbrance of a leasehold deed of trust against an individual tenant's leasehold interest at Pier 45 Sheds B or D, on a case by case basis, upon approval of the lender and the terms and conditions of such leasehold deed of trust; and be it further That the Port Commission delegates to the Executive Director, or her designee, the authority to accept a letter of credit in form acceptable to the Executive Director, in lieu of a cash security deposit, on a case by case basis, from any of the fish processing tenants at Pier 45; and be it further That the Port Commission delegates to the Executive Director, or her designee, the authority to make non-material changes or modifications (including, but not limited to, any updates to City requirements) to the updated form of lease for the Pier 45 fish processors approved this day, as she deems necessary or appropriate, in consultation with the City Attorney, to consummate the transactions contemplated hereby or to otherwise effectuate the purpose and intent of this Resolution, such determination to be conclusively evidenced by the execution and delivery by the Executive Director, or her designee, of any such document. I hereby certify that the foregoing resolution was adopted by the Port Commission at its meeting of March 28, 2006-5-
-6- Secretary