MEMO – REVIEW OF NEW LEASE PRICING FOR BASIN #1 To: Lizeht Zepeda, Senior Business Assistance Officer, City of Richmond From: Bill Lee, Land Econ Group RE: Recommendations for New Lease Pricing of Basin #1 Date: February 3, 2023 _______________________________________________________________________________ Introduction In response to your request, Land Econ Group (LEG) is pleased to present the following analysis and opinion concerning the lease rate for a new lease being solicited for Basin #1. Basin #1 is the left most basin in Figure1 below, and the lease would not include the small cafeteria building and its associated parking area at the north end of the basin. Figure 1: Richmond Shipyard No. 3 Basins
2 These five basins were part of the Kaiser Shipyard built in 1940 and 1941 for ocean going cargo ships, the Liberty ships, which were vital in supplying the Allied forces in both the Atlantic and Pacific theaters during World War II. Basins #1 is approximately 585 feet in length as are Basins #3, #4 and #5. Basin #2 is longer and estimated at 700 feet in length. Each of the five basins are approximately 100 feet in width. The basins were designed for the construction and launch of individual ocean-going cargo ships. However, for smaller craft like those used by Alcatraz Tour in Basin #4, the linear footage available for berthing would be double the length of the basin because their ships are able to dock on either side. Table 1: Review of Current Leasing Rates Projected Inflation for the Next Five Years While we have had a recent period of exceptional inflation, the peak appears to have been reached during mid-year 2022; and a group of 71 private and public sector economists surveyed by the Wall Street Journal expect national inflation to ease to 3.1 percent by December 2023. The full year 2023 inflation rate will be around 5 percent. These same economists expect the inflation rate going forward to be below three percent after December 2023. LEG expects the San Francisco Bay Area inflation rate to be perhaps one-half percentage point higher than the consensus national forecast or slightly higher than 3.0 percent from December 2023 to December 2028 due to de-globalization, living wage legislation and emphasis on domestic production. Possible Competition We have been unable to locate any other ports in north part of San Francisco Bay that would offer a similar deep-water basin for lease. The Port of Oakland is dominated by container shipping, and the Port of Benicia primarily handles automobile shipping and storage. Neither has basins similar to that of Richmond’s. Mare Island in Vallejo has a former Navy base and shipyards that has four ship basins. There is also a dry dock area that a developer is investing to refurbish into a facility that can be used to repair and recondition naval ships. However, the City of Vallejo, the land owner after the Navy base was decommissioned, and Mare Island Co., the selected development group, are pursuing residential, commercial and industrial development for reuse of Mare Island. There does not appear to be much interest in port type uses because the land economics for the developer and fiscal incentive for the City favors the transition of this island to urban and suburban uses. We believe Richmond’s Basin #1 is offering a unique opportunity for companies in need of a deep-water basin within relatively easy access to the Pacific Ocean through the Golden Gate or to the tourist market centered in San Francisco.
Estimated
Lease EstimatedBerthing LengthRent per SurfaceRent per SF Basin Tenant ExpirationMonthly RentLength of BasinBoth Sides FTLinear FTArea in SFSurface Area 1Foss 2/28/2023$12,242 585 1,170 $10.46 58,500 $0.21 2Dutra Group 5/31/2022$10,400 700 1,400 $7.43 70,000 $0.15 3NRC Environmental9/30/2022$5,300 585 1,170 $4.53 58,500 $0.09 4Alcatraz Tours10/14/2026$15,000 585 1,170 $12.82 58,500 $0.26 5Red Oak Victory3/30/2026 $1 585 1,170 $0.00 58,500 $0.00 Recommended Rate for Basin #1$16,380 $14.00 $0.28
Source: City of Richmond and estimates by Land Econ Group
3 Conclusions and Recommendations The lack of competition in part reflects the limited demand for deep-water basins. Richmond’s negotiating position will be largely influenced by the amount of interest the City is able to generate for Basin #1 through its RFP process. If there are competing interest by qualified bidders, the City should be able to command a strong lease rate. If there is limited interest, then the City will need to be flexible on the downside. Based on an analysis of current rents in Shipyard 3 and a survey of possible competition, we recommend setting the target rent at between $16,000 and $17,000 per month, which is slightly above the rate for Basin #4 negotiated about one-and one-half years ago. If the competition is strong, the City may be able to include an annual escalation factor of four percent or higher with an adjustment to actual San Francisco Bay Area Consumer Price Index (CPI).