1 STAFF REPORT
DATE: November 15, 2022
TO: Justin Hess, City Manager
FROM: Patrick Prescott, Community Development Director By: Simone McFarland, Assistant Community Development Director
SUBJECT: Adoption of a Resolution Authorizing the Execution of Verdugo Restaurant Corporation (The Castaway) Lease Located at 1250 Harvard Road
RECOMMENDATION
Adopt A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK APPROVING
AN AMENDED AND RESTATED LEASE WITH THE VERDUGO RESTAURANT CORPORATION FOR THE CASTAWAY, LOCATED AT 1250 HARVARD ROAD.
BACKGROUND
The Castaway has been leased to Verdugo Restaurant Corporation (Verdugo) since 1960. The existing Castaway lease between the City of Burbank and Verdugo is due to expire in November of 2025 . Verdugo has one 10- year option to extend the lease until November of 2035. Below is a history of the previous leases leading up to this item.
Past Leases
In December 1960, the City entered a fifty-year lease agreement (“Lease”) with Verdugo to construct and operate a restaurant and banquet facility at The Castaway restaurant.
The Lease was amended several times to clarify elements of the Lease and to modify the scope of improvements and activities at The Castaway.
In October 2005, the City and Verdugo executed an Amended and Restated Lease that among other things extended the term to November 2025, with one 10- year option that extends the term to November 2035.
In June 2017, The Castaway announced its intentions to temporarily close the facility for a $9M major renovation. The restaurant closed in August 2017 and reopened in April 2018. During the renovation, the City of Burbank agreed to collect only the base rent.
COMMUNITY
DEVELOPMENT
2 After the reopening, Castaway approached the City requesting an additional 10- year option to extend the lease until 2045, along with the ability to charge for valet services.
Simultaneously, City staff was interested in revising the language contained in the existing lease and amendments along with the formula which was being used to calculate rent.
Due to the pandemic shutdown, City staff recommended to temporarily pause its efforts to address the requests. Additionally, The Castaway was forced to close during the first Covid-19 surge and then again during the 2020 h olidays. Millions of dollars in revenue were lost by the restaurant during this time; however, Castaway has paid all of the rent due for this time period and is current on their rent.
On June 15, 2021, Governor Newsom lifted the pandemic executive orders that required social distancing and capacity limits in restaurants. At that time, City staff recommend resuming negotiations of Castaway lease terms.
DISCUSSION
Lease Terms
The following are requests of the City Council during negotiations that were agreed to by the Tenant . They are reflected in the new lease and combines old obligations of the tenant, updated practices, and City Council requests (Attachment 2).
The hours of operation and the Luau ground restrictions have not changed; however, if The Castaway applies for a Conditional Use Permit (CUP) in the future, the CUP could take precedence. This would go through the City’s CUP permitting process. The primary changes included within the new lease are:
1) City will collect a new monthly rent amount based upon the higher of a minimum rent or percentage rent whichever is greater (7% to 9% of gross sales). This rental amount has been determined to meet or exceed fair market value using a comparable analysis provided by Keyser Marston Associates ( KMA) and comparable restaurants along with current and projected revenues for the restaurant.
2) City will conduct annual audits and inspections that would include penalty fees if the corrections were not made by Verdugo in a timely manner. 3) City may assess penalties for parking in the fire lane. 4) Verdugo may charge for valet parking that requires a new parking plan to be executed and the collection of Transit Parking Tax (TPT) to be remitted to the City. 5) Verdugo’s term would expire in 2045 instead of 2025 (or 2035 if Verdugo opts to extend the current lease).
6) Verdugo will be required to provide an inventory of Furniture, Fixtures & Equipment (FF&E) that includes what would remain at the end of the lease. 7) Other clarifying language to address ambiguities from the previous lease, including those addressing the existing security deposit to a City account, and permit or use requirements.
3 Surplus Land Act Analysis
The California Surplus Land Act (SLA) does not apply to the proposed lease for several reasons.
First, “surplus land” is defined as “ land owned in fee simple for which a local agency’s governing body takes formal action at a regular public meeting declaring land to be surplus and not necessary for a local agency’s use. ” (See Surplus Land Act Guideli nes (SLA Guidelines), § 102(x).) As discussed in further detail below, the site to be leased has not been declared surplus property because it continues to be used by the City to further open space and recreational purposes of the City. 1 Second, the land is exempt under the SLA. Under SLA Guidelines section 103(b)(3)(G) surplus land that is subject to valid legal restrictions not imposed by the local agency such as covenants, or other restrictions that are and that would make housing prohibited, unless there is a feasible method to satisfactorily mitigate or avoid the prohibition on the site.” This site qualifies for this exemption because on or about July 29, 1954, Joseph DeBell granted the parcel containing this site to the City with certain restrictions, including limitations to “golf course and facilities, clubhouse, park and recreation purposes.” And, on or about May 7, 1958, Joseph DeBell clarified that the use restrictions in the grant deed that limited the use of the parcel to “golf course and facilities, clubhouse, park and recreation purposes”, also included restaurant-type uses as one of the permissible uses for the site. The site has been used as a restaurant facility affiliated with and overlooking the DeBell Municipal Golf Course (“Castaway” or “Property”) to serve Burbank residents and members of the public in accordance with these grant deed restrictions, ever since.
While City staff believes this site is not subject to the SLA , City staff also believes that it qualifies for an exemption and recommends that the City Council declare the property as exempt from the SLA as part of the r esolution that approves the proposed lease (Attachment 1).
Environmental Review
Under the California Environmental Quality Act (CEQA) and the CEQA Guidelines, the leasing and operation of, and minor alterations to, existing structures, involving negligible or no expansion of existing use, are exempt from CEQA. (See 14 CCR § 15301.) Because this approval involves approval of a lease agreement without any change to its existing use, City staff recommends that the City Council find that this ac tivity is exempt from CEQA and that no further environmental review is necessary.
1 See also Burbank Municipal Code section 2-2-201, which applies to property which is determined by a majority of the Council to be unsuitable or impractical for continued City us e. This site has not been determined to be unsuitable or impractical for City use and will not trigger those standards. Nevertheless, it will meet the standards set forth in Section 2-2-201.A if the resolution is approved by 4/5th of the Council because the lease terms reflect the fair market value of the site as appraised by the director and use of this site in this manner continues to serve open space, park, clubhouse, and recreational purposes. 4 Staff recommends moving forward to approve the lease based on these negotiated deal points for the following reasons:
1) The new lease will clean up old text and reflect the current lease requirements. 2) Extending the term of the lease will enable the City to better calculate an estimated future return.
3) Verdugo has been a good partner in the past and has been willing to provide substantial improvements to the building at their expense that resulted in increased revenue for both Tenant and landlord.
4) Verdugo has shown good faith in paying rent accrued during the COVID-19 Pandemic and allowed under the City Council’s Eviction Ordinance. 5) A set minimum rent that increases each year will provide stability in a changing market and ensure that the City receives revenue each month. 6) Verdugo will still be required to mainta in the building using the existing Capital Improvement Reserve Account.
7) The new lease adds additional revenue to the existing lease and provides lease revenue for the City’s General Fund until 2045.
FISCAL IMPACT
This proposed lease will provide a source of revenue to the City through 2045. While the economy is expected to fluctuate during the next 20+ years, which will affect sales and the percentage of rent received, the lease revenue projections are as follows:
1) If the City Council approves this lease, total rent between now and 2045 would equal $55.8m.
2) The TPT for valet parking is estimated to be $2.9M from 2022-2045. 3) In total, approving this lease c ould bring $58.7M in General Fund lease revenue during the life of the lease, 2022-2045.
CONCLUSION
The new lease terms for The Castaway that City Council negotiated and memorialized within the lease are beneficial to the City. They provide a consistent revenue source, clarify and update previous language, and increase the rental revenue along with extending the lease term until 2045. Staff recommends Council approval of the lease.
ATTACHMENTS
Attachment 1 - Resolution
Attachment 2 - Castaway Lease 2023 – 2045