Switzer, Donna
From: Casanova, Kriss
Sent: Tuesday, March 1, 2022 1:49 PM
To: Switzer, Donna
Subject: FW: Item No. 23: Surf City Partners ENA Amendment Attachments: Cox Castle Letter to HBCC re 21 Main Street ENA Amendment.pdf Vig said to include as supplemental. Thanks!
From: Matsler, Sean <[email protected]>
Sent: Tuesday, March 1, 2022 9:37 AM
To: CITY COUNCIL <[email protected]>
Cc: Gates, Michael <[email protected]>; Luna-Reynosa, Ursula <[email protected]>; Casanova, Kriss <[email protected]>; Joe Micatrotto < [email protected]>; Joyce, Sean <[email protected]>
Subject: Item No. 23: Surf City Partners ENA Amendment
Mayor Delgleize and Honorable Members of the City Council:
This Firm represents Ruby's Hospitality Group, LLC with respect to the 21 Main Street Exclusive Negotiating Agreement (ENA). The City Council's prior decisions on this issue were marred by procedural and legal irregularities, as set forth in Ruby's September 27, 2021 objection letter, which I have re-attached for reference.
Tonight, Surf City Partners LLC is asking the City Council to amend the ENA in a way that exacerbates these irregularities. The attached March 1, 2022 letter from our Firm strongly cautions against such action, instead recommending that the City hit "reset" on this flawed process and circulate a new RFQ or RFP.
Thank you for your consideration and for your service.
Best,
Sean SUPPLEMENTAL
COMMUNICATION
Sean Matsler Meeting Date:.. 3/1/22
COX CASTL
Agenda item No.:... 23(22-141).
Cox, Castle & Nicholson LLP
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NICHOLSON
949.2004652
[email protected]
File No. 089675
March 1, 2022
VIA ELECTRONIC MAIL [[email protected]]
Mayor Barbara Delgleize and Honorable Members of the City Council City of Huntington Beach
2000 Main Street
Huntington Beach, CA 92648
Re: First Amendment to the Exclusive Negotiating Agreement for 21 Main Street Mayor Delgleize and Honorable Members of the City Council:
This Firm represents Ruby's Hospitality Group, LLC with respect to the 21 Main Street Exclusive Negotiating Agreement (ENA). As you know, Ruby's has a long-standing and cherished association with the City of Huntington Beach and its iconic pier. Ruby's proudly served locals and visitors alike from its diner at the end of the pier between 1996 and 2021.
Ruby's actively pursued the opportunity to develop and operate a restaurant at 21 Main Street pursuant to the City's May 2021 request for qualifications (RFQ). Unfortunately, despite its unanimous selection as the recommended operator by the City's Economic Development Committee and the City's independent consultant, the City Council elected to proceed with an ENA with Surf City Partners, LLC (Surf City) on September 7, 2021. Ruby's submitted the attached letter dated September 27, 2021 objecting to that outcome on multiple grounds and highlighting various procedural and legal questions surrounding the selection of Surf City. That letter is incorporated herein by reference and Ruby's concerns remain unresolved Tonight, the Council will consider whether to make its already-flawed decision worse by amending the Surf City ENA to further deviate from the original RFQ. As set forth in the attached September 7 letter, the City's direction in the original RFQ contemplated that the restaurant would fit within the existing 830-square foot "Let's Go Fishing" building. Surf City ignored that limitation, instead proposing the installation of 81 outdoor dining seats in an enclosed patio outside the building as well as the placement of two sales kiosks on the pier. The enclosed patio enabled Surf City to assume alcohol sales in its pro forma, making its revenue projections look more attractive by comparison to Ruby's and others who assumed that alcohol would not be allowed.
Neither Ruby's nor the other applicants were notified that the City Council would accept input and weigh factors outside of the RFQ.
www.coxcastle.com Los Angeles | Orange County | San Francisco March 1, 2022
Now Surf City desires to further expand the leasable property area beyond the pier concession building and its surrounding area to include the pier restroom building. Surf City's "scope creep" is best illustrated in the image below. Ruby's and other operators submitted proposals to the City for the area highlighted in yellow, which was consistent with the direction provided in the City's RFQ. Surf City originally submitted for the area in yellow plus the area in red. We objected to that in the attached September 7 letter. Tonight, Surf City proposes to add the area in blue to the areas in yellow and red. For all we know, Surf City may lay claim to the entire pier next...
Approximately 800 SF of indoor building space
Potential outdoor space adjacent to building
Restrooms and potential storage area
The City has a fiduciary obligation to maximize its limited public property for the greatest benefit of its citizens. No property in the City embodies the sanctity of this obligation more than the Huntington Beach Pier.
Tonight, Ruby's respectfully asks the City to hit the "reset" button on the 21 Main Street lease process. It can do so in three-steps. First, the Council should reject Surf City's proposed ENA Amendment as being wholly inconsistent with the original RFQ for all the reasons set forth in this letter and Ruby's attached September 7 letter. Second, staff should be directed to broadly restroom building-just as Surf City proposes to do. Third, the Council should weigh all the proposals on a true apples-to-apples basis and make an informed decision that best serves its constituents and the City's many visitors.
March 1, 2022
Our suggested approach carries no downside for the City. None. After comparing all proposals, the City may well decide that Surf City's concept is the most compelling. Or it may discover value in other proposals. Either way, this approach ensures that each applicant's complete vision, with real financial impacts, will be considered on a level playing field.
Ruby's looks forward to working with the City as part of a fair process that will be in the City's best interest.
Sincerely,
In
Sean Matsler
of COX, CASTLE & NICHOLSON LLP
Cc: Sean Joyce, City Manager
Michael Gates, City Attorney
Kriss Casanova, Economic Development Manager
rsula Luna-Reynosa, Director of Community Developme
be Micatrotto. Ruby's Hospitality Group, LL
089675\14577314v1
'By way of example, Surf City's RFQ response projected that 40% of sales revenue would be generated from alcohol, nearly double the average in the City according City staff. Ruby's assumed no alcohol revenue in light of its original walk-up restaurant concept. Given the opportunity to create a private dining patio suitable for alcohol sales, however, Ruby's sales would substantially increase as would its corresponding rent payment to the City. (RUBYS
EDINERE
September 27, 2021
VIA ELECTRONIC MAIL [[email protected]]
Mayor Kim Carr and Honorable Members of the City Council City of Huntington Beach
2000 Main Street
Huntington Beach, CA 92648
Re: Exclusive Negotiating Agreement for 21 Main Street
Mayor Carr and Honorable Members of the City Council:
As principals of Ruby's Hospitality Group, LLC and stewards of Ruby's long tradition in Southern California, we are deeply concerned about the City Council's September 7, 2021 decision with respect to the 21 Main Street Exclusive Negotiating Agreement (ENA). As discussed in this letter, we believe that the City Council would have reached a different conclusion had it followed the process established by its own professional staff and judged the RFQ responses from an 'apples-to-apples' perspective. We therefore respectfully request that this Council issue a Request for Proposals so each applicant's complete vision, with real financial impacts, can be considered on a level playing field. We believe this would allow the Council to make an informed decision about the best, most viable solution for the operation of 21 Main St.
1. Background
On May 26, 2021, the City released a request for qualifications (RFQ) for potential operators of the approximately 830 square foot building located at 21 Main Street. The RFQ was notably not a request for proposals or a request for projects. Rather, the RFQ simply requested, among other information, three years of tax returns and audited financial statements, a year-to- date income statement and balance sheet, and biographical information of ownership and management. It was understood that the applicant selected to proceed with an ENA would thereafter be asked to provide a detailed financial offer (e.g., guaranteed base rent and percentage rent). Ruby's followed the City's directions and submitted its response to the request for qualifications.
On July 16, 2021, City staff asked Ruby's to provide additional information, including a pro forma analysis of anticipated costs and sales projections for three years, a projected budget for improvements to the space, and a timeline to complete planned improvements. Again, the additional information requested did not call for proposals or projects. And again, Ruby's followed the City's directions and submitted the requested information.
Mayor Carr and Honorable Members of the City Council
September 27, 2021
On August 25, 2021, Ruby's was informed by the City that it was selected as the recommended operator by the City's Economic Development Committee (EDC) and the City's independent consultant, National Development Council (NDC). Ruby's later learned that the EDC's decision was unanimous. As you can imagine, we were elated to be one step closer to returning Ruby's to its longtime home on the Huntington Beach Pier.
2. September 7, 2021 City Council Meeting
What happened on September 7'h remains something of a mystery to us. The Council's hearing on this matter began as expected: City staff explained that the purpose of its initial RFQ and its follow up information request was to employ "a very objective process" producing data the City Council could "compare," such as financial statements and resumes. Having received responses from four parties, both City staff and EDC recommended that the City proceed with an ENA with Ruby's. The purpose of the ENA would be to explore the financial and other terms of a potential relationship with Ruby's at 21 Main Street.' To that end, Agenda Item No. 30 was titled:
"Authorize and direct the City Manager to execute an Exclusive Negotiating Agreement (ENA) with Ruby's Hospitality Group, LLC for 21 Main Street at the Huntington Beach Pier." To us (and our attorney), this sounded like a simple "up or down" vote on the Ruby's entity.
It was after staff's presentation that the Council took an unexpected turn. Rather than considering the four applicants' qualifications-as staff had intended the Council's focus turned to each applicant's assumed financial proposal and physical development project. The exact criteria the City Council considered on September 7 was unclear. For example, the City Council entertained the possible development of the concession site outside of the existing 830-square foot building area, which was not contemplated in the RFQ. The Council also considered the use of ancillary kiosks and existing City restrooms, neither of which were part of the RFQ. Questions about entitlement (including Coastal Commission) risk and project feasibility did not weigh heavily on the decisionmakers, nor did the unmistakable fact that the comparison between Ruby's $90,000 rent and Surf City's $180,000 rent was an 'apples-to-oranges' exercise (i.e. Ruby's plans contemplated only the announced 830 feet, no ancillary kiosks or existing City restrooms, and included a revenue-based rent making $90,000 a base number, not the holistic rent number the City should consider). To our team, it felt like the Council was "jumping ahead" by weighing financial and other terms that were well beyond the scope of the RFQ, thereby creating an uneven playing field for all RFQ respondents
The City Council's ultimate action to proceed with an ENA with Surf City raises significant procedural concerns. Neither Ruby's nor the other applicants were notified that the City Council would accept input and weigh factors outside of the RFQ (e.g., use of mobile retail kiosks and the privatization of approximately 1,500 square feet of existing public space, which allowed for alcohol sales). Had Ruby's been aware of these new factors, our response to the RFQ would have ' City staff specifically instructed Ruby's to omit rent figures and a lease term from the RFQ response on the basis that such matters were better suited for the ENA phase of the process.
Mayor Carr and Honorable Members of the City Council
September 27, 2021
been different. The City may also have received other proposals from full-service restaurant owners newly interested in the opportunity to operate a sit-down restaurant on the Pier.
Set forth below is a comparison of the Ruby's and Surf City RFQ responses as well as a list of questions/observations that show the decision by Council to move away from staff's and EDC's recommendation was made without a full appreciation of the opportunity to negotiate with Ruby's or another operator. As set forth in the conclusion of this letter, the only appropriate way for the City to proceed from here is to issue a new Request for Proposals.
Ruby's Surf City Unanswered Questions
Rent Ruby's followed City The NDC summary states City Economic staff's specific that rent would be Development Manager instructions not to submit $180,000 annually. Kriss Casanova and proposed base or several Councilmembers
percentage rent figures, commented that Surf
or to propose a defined City's proposal was
lease term in its RFO "high risk, high reward"
response. City staff - this begs the question,
indicated that such how big is the risk, and
matters were better suited how likely is the reward?
for the ENA phase of the For example, it is unclear
process. However, as a how much, if any, of Surf
placeholder, Ruby's pro City's $180,000 is
forma assumed a guaranteed base rent and
$90,000 annual rent with how much is percentage
the ultimate base and rent. As a threshold
percentage rent to be matter, the City has to
negotiated as part of the understand the base and
ENA. The $90,000 percentage rent from
figure represents an each applicant in order to
approximate eightfold fairly compare them tr
increase over the current
$950/month base rent. espect to risk, the City'
The City Council seems hird-party consultan
to have mistakenly (NDC) noted, Surf City's
assumed that $90,000 "Proforma sales revenues
was Ruby's total & growth assumptions
financial proposal to the ubmitted are aggressiv
City.
depending on final design
and the allowable
Mayor Carr and Honorable Members of the City Council
September 27, 2021
Ruby's Surf City Unanswered Questions
Alcohol None proposed in light of Projected that 40% of What if the Coastal the walk-up restaurant sales revenue would be Commission declines to concept. Given the generated from alcohol, approve Surf City's pportunity to create nearly double the average proposed privatization of ritate for alcohol sales in the City according City approximately 1,500 quare feet of existin
however, Ruby's annual ublic space and th
rent (as a percentage of attendant increase in
sales) would substantially parking? Not only would
increase. that eliminate 40% of the
alcohol sales revenue, it
would also eviscerate
Surf City's total food
sales assumptions.
Space Per the City's direction in Proposed to exceed the Surf City's proposal le RFQ, the restaurar 830 square feet building raises public access old fit within the area with installation of concerns that the Coastal existing 830-square foot 81 outdoor dining seats, Commission is likely to building. use of the adjacent fixate upon. First, the
restrooms, and placement Surf City proposal would
of two sales kiosks on the privatize approximately
pier. Total occupancy is 1,500 square feet of
projected at 130 patrons existing public space on
between 49 inside seats the Pier. It would also
require additional parking
Timing In order to expedite the Total project timeline is Given the coastal access entitlement process and issues implicated by the
commence operations months consisting of four Surf City proposal (e.g., Mayor Carr and Honorable Members of the City Council
Saptember 27, 2021
Ruby's
quickly, no modifications months for the permit
to the building's existing approval process and
footprint are proposed. three months for
Construction will
commence immediately
upon receiving proper
permits and constructior
s expected to be
complete within 12-14
weeks.
ability to begin
operations in month
eight.? The City's third-
party consultant (NDC)
recognized this fault in
the Surf City proposal,
concluding that:
"entitlement eligibility
for the designed use is
inclear and may need to
be significantly revised &
scaled back in order to
meet code requirements
and attain permit
approvals."
In light of the significant procedural and legal questions surrounding the Council's selection of Surf City on September 7, we respectfully request that the Council immediately take
1. Do not commence ENA negotiations with Surf City.
2. Direct City staff to issue a Request for Proposals that accounts for all the information considered by the City Council at the meeting. This would include rent projections for both base rent and percentage rent as well more detail on the use of the site, timing of development/operations and regulatory/entitlement strategy. 2 In a public statement following the September 7 hearing, Councilman Peterson stated plainly that "...there are many issues surrounding the proposal by [Surf City] that make this project unlikely to be approved by Coastal Commission and Building Department."
Mayor Carr and Honorable Members of the City Council
September 27, 2021
Only through this will the City Council be able to compare all proposals on an "apples-to-apples' basis.
3. Consistent with the RFQ, the City Council should either (a) reject submissions that exceed the scope of the defined project (e.g., that go beyond the 830 square foot building); or (b) direct staff to include such parameters in a new Request for Proposals.
At the September 7 hearing Mayor Carr stated "What we saw tonight was not what was (originally) presented. We were not told it was going to be two buildings." We agree. decision is too important for the City to make on a flawed premise. We look forward to working with the City as part of a fair process that will be in the City's best interest.
Sinceret
Todd Spector
CC: Oliver Chi, City Manager
Michael Gates, City Attorney
Kriss Casanova, Economic Development Manager
Ursula Luna-Reynosa, Director of Community Development
Sean Matsler, Esq., Cox, Castle & Nicholson LLP
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