City Council
Report
City Council Meeting: September 27, 2022
Agenda Item: 5.A
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To: Mayor and City Council
From: David Martin, Director, Administration
Subject: Approval of Amended and Restated Lease with Pacific Park at 380 Santa Monica Pier
Recommended Action
Staff recommends that the City Council:
1. Make a determination that the actions to execute a new Amended and Restated Lease Agreement and waive Pier Leasing Guideline’s competitive procurement requirement as set forth in recommended actions #2 and #3 are exempt under CEQA guideline 15061(b)(3) and 15302.
2. Authorize the City Manager to negotiate and execute a new Amended and Restated Lease Agreement with EPR Parks, LLC (Tenant) with respect to Pacific Park to extend the term of the lease, provide an additional two 10-year extension options to extend the term up to May 25, 2070, allow alcohol service subject to regulatory approvals, and incorporate additional new business terms as outlined in a Draft Term Sheet negotiated by the parties; and
3. Waive the Pier Leasing Guidelines competitive procurement requirement in granting the extension of lease term.
Summary
Pacific Park is a two-acre family friendly amusement park located at 380 Santa Monica Pier and is owned by EPR Parks LLC and operated by Premier Parks. When Pacific Park opened in 1996, it was the first full-fledged amusement park to operate on the Pier in over 65 years. Featuring 12 rides including an 85-foot solar powered Ferris Wheel, a collection of midway game booths, and a variety of retail and food outlets, Pacific Park is among the City’s top sales tax producers and one of the City’s largest employers.
Tourism and economic impact studies have shown the Pier and Pacific Park are major contributors to the Santa Monica and regional economy. The updated lease would 2 of 8
extend the current agreement through 2050, with two 10-year extension options, ending the lease in 2070 and modifying other terms agreeable to both parties.
The proposed amended and restated lease would significantly enhance the value of Pacific Park’s operation and allow them to get favorable financing to maintain the Park as a top-level attraction. As a result of the enhanced value of the Park, the City’s revenue share would be increased as well.
Discussion
Pacific Park’s initial lease term expires in 2026 with two 10-year options remaining. If both options are exercised, the lease would terminate in 2046. Pacific Park (Tenant) submitted a proposal to the City (Landlord) on August 28, 2020, which sought to modify certain provisions of its existing lease, commit significant and on-going capital investment, and resolve a dispute between the Parties regarding substructure and decking improvements. The Parties commenced good faith negotiations to structure mutually acceptable terms and conditions for Council’s consideration (Attachment A.
Term Sheet). The following summarizes the major key business terms and conditions agreed to in concept by the Parties to be incorporated into a new Amended and Restated Lease, subject to Council approval.
Term: Initial term of the lease to be extended by four years and will expire on May 25, 2030. The Current Lease provides for two ten-year extension options which would terminate in 2050. The new lease would grant Tenant two additional ten-year options to the Current Lease thereby potentially extending the term until May 25, 2070.
Waiver of Rent Reset: The Current Lease provides Landlord the opportunity to reset the rental rate to reflect fair market rent during option periods. Based on a recent evaluation of fair market rent for comparable amusement parks, Landlord has opted to maintain the current rent structure as it has been determined to reflect fair market value. Percentage rent will continue at ten percent (10%) of gross receipts in excess of $11,000,000 per calendar year. Base Rent (the minimum rent due under a lease) and Common Area Maintenance (CAM) Charges will continue to be adjusted annually by increases in the Consumer Price Index. An analysis of competitive amusement park lease rates 3 of 8
prepared by the Tenant and scrutinized by the City’s consultant suggests that current lease rates are among the highest in the industry which in turn would suggest that a near term reset of rents would not yield an increase in rent.
Modify definition of Gross Sales: Certain provisions in the Current Lease will be amended to eliminate exclusions from the definition of Tenant’s Gross Receipts. These modifications will result in the increase in the Tenant’s Gross Receipts for the purpose of calculating the amount of Percentage Rent due to the City and represents an effective rent increase.
Elimination of Rent Credit: Tenant is responsible for the costs of certain public safety services described in a Settlement Agreement and Release dated March 27, 2000, however the annual rent credit provided to the Tenant in the current Lease will be eliminated. Elimination of rent credit represents an effective rent increase.
Sale of Alcohol: Sale of alcoholic beverages as part of the Tenant’s food operations will be permitted, subject to regulatory approvals and conditions that may be required as part of the State and local alcohol permit approval process. Lease will acknowledge that operation of a restaurant on the Premises is a permitted use.
Substructure and Decking: To resolve the ongoing dispute between Landlord and Tenant with respect to responsibility for maintenance, repair and replacement of the improvements underlying the Pier and necessity of these improvements for supporting Tenant’s rides and maintenance of decking within the premises, Tenant will be solely responsible for the maintenance, repair and replacement of all improvements which support Tenant’s rides and decking within its premises, except in the event of a Pier Casualty (damage or destruction of the Pier caused by a casualty event such as fire which renders the Pier wholly or partially unsound). Landlord will continue to be responsible for all maintenance, repair and replacement of all other improvements supporting the Pier, subject to CIP budget appropriation. 4 of 8
Future Capital Investment: Tenant will spend a minimum of $10 million in capital improvements/capital repairs during the five-year period commencing in the calendar year after Tenant’s annual revenue returns to pre-pandemic levels which based on revenue trends could occur within this or the following calendar year. Thereafter, Tenant will commit to capital improvements/repairs of a minimum of $5 million during each succeeding five-year periods including the extension periods. The $5 million requirement will be adjusted by increases in the Construction Cost Index. Each year the Tenant would be required to provide Landlord with a report documenting the expenditures on capital improvements and capital repairs performed during the previous year.
The Park’s total capital improvement commitment would be a minimum of $55 million in today’s dollars, comprised of $14 million for long term maintenance of the decking and substructure, and a minimum of $40 million on future capital improvements. Actual capital requirements will be indexed to keep up with construction costs.
Other proposed terms: Additional terms include: (a) Tenant’s waiver of a $1.5 million reimbursement claim for past substructure and decking work; (b) elimination of a requirement on the City to maintain $8 million cash on hand reserve in the event of a Casualty; (c) upon a future sale of the lease, the City would receive a Transfer Fee of
0.25% of net sale proceeds (d) addition of a Refinance Liquidity Test (120% debt coverage ratio); and (e) addition of financial requirements prior to end of lease regarding improvements. There is also an agreement to clean up inconsistent language in the existing lease, including the provisions governing virtual reality games and devices.
Deviation from Pier Leasing Guidelines
Under the Council-approved Pier Leasing Guidelines (Appendix B. Guidelines), the Pier Corporation is delegated the authority to recommend to the City Manager the execution of leases which conform to said Guidelines. Both Pier Corporation recommendation and Council approval of Pier leases are required when a proposed lease diverges from the Guidelines or for lease terms that are more than 25 years. 5 of 8
The Guidelines provide the framework for fair and consistent leasing and licensing of City-owned property on the Santa Monica Pier. The Guidelines provide parameters and general policy on mix of uses, standards and terms, and tenant recruitment and selection. When substantive terms or process deviate from the Guidelines, Council has the authority to grant exceptions.
The proposal deviates from the Guideline’s requirement for a competitive public process as lease renewals or extensions are not automatically offered to tenants.
Section 6. subsection I. and subsection II. state:
I. “The Santa Monica Pier is public property; therefore all leases and licenses will be subject to an open and competitive public process.” and
II. “Lease renewals will not be automatically offered to tenants. As vacancies arise either by lease expiration or earlier termination, recruitment for occupancy will be conducted in accordance with the Leasing Guidelines” The Guidelines do support extended lease terms when correlated to a substantial level of capital investment, use and size, and allowing longer lease terms for leases with larger footprints when furthering the Pier’s goals and objectives outlined in the Guidelines.
Section 7.2. regarding Term states:
“Rental lease terms for commercial space on the Pier shall be negotiated based on the level of capital investment, use, size of the space (leases for larger footprints are normally for longer terms) and complementary character of the operation with the Pier Leasing Goals and Objectives. These factors also will be balanced against the City’s policy of ensuring that public sites periodically do become available for a public competitive process.” Staff concluded that waiving the competitive procurement process by extending the lease would not have a negative fiscal impact on the City as the proposed lease 6 of 8
modifications would provide the City with significantly more benefit than might have resulted from a full RFP process seeking competing amusement park proposals.
Furthermore, the Tenant conveyed that if the City were to have pursued a competitive process in considering the extended term, they would have withdrawn their request and instead would continue to operate under the remaining term granted in the current lease.
Financial Analysis
Staff engaged economic and real estate consultant Allan D Kotin & Associates (ADK&A) to provide economic and financial analysis of the proposed amended and restated lease. Work performed by ADK&A included an analysis and valuation of the addition of alcohol sales into future concession operations, additional lease extension options, elimination of exclusions to gross sales, amusement park fair market rent comparisons, past and estimated future costs of maintaining, repairing, and replacing deck boards and substructure, as well as other economic items discussed during negotiations. In performance of this evaluation ADK&A was given access to proprietary financial documents and financial projections. Increase in rent to the City under the proposed lease versus the current lease is illustrated in Exhibit D.
ADK&A found that the proposal presented in the Term Sheet is economically feasible, mutually beneficial to the Tenant and City, and conveys roughly equal value to the parties. The proposed amended and restated lease requires substantial and continuing capital investment in the Pier and leasehold by the Tenant, provide an exceptional return to the City and enable the Tenant to maintain its competitive position with respect to other amusement parks and attractions. Furthermore, it ensures performance of key obligations by future leasehold owners in inflated dollars by contractually obligating indexed investment and maintenance obligations.
Commission Action
At the Pier Corporation board meeting on May 16, 2022, the Board supported the proposed amendments and approved forwarding to Council a recommendation for approval.
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Environmental Analysis
CEQA applies only to projects that have the potential for causing a significant effect on the environment. A project is not subject to CEQA under CEQA Guidelines Section 15061(b)(3) “where it can be seen with certainty that there is no possibility that the activity in question may have a significant effect on the environment.” The proposed extension of the lease for Pacific Park would not result in a physical environmental effect on the environment.
In addition, Section 15302 exempts Class 1 projects from CEQA, which include the “operation, repair, maintenance, permitting, leasing, licensing, or minor alteration of existing public or private structures [or] facilities, including streets, sidewalks, bicycle and pedestrian trails, and similar facilities. The project consists of the extension of the Pacific Park lease. This lease extension would allow for continued operation of Pacific Park and would not necessitate the construction of new buildings or facilities that would result in a physical impact. Therefore, the project qualifies as a Class 1 exemption.
Past Council Actions
Meeting Date Description
12/14/2010 Assignment of Santa Monica Amusements LLC Lease Financial Impacts and Budget Actions
There is no immediate financial impact or budget action necessary as a result of the recommended actions for FY 2022/23. However, it is anticipated that the proposed modifications to the lease terms will result in an increase in lease revenues in future years. Staff will adjust revenue budgets accordingly as part of the FY2023-25 biennial budget process. Revenues will be deposited into account number 53700001.409840. 8 of 8
Prepared By: Elana Buegoff, Pier Administrator
Approved Forwarded to Council
Attachments:
A. Term Sheet
B. Pier Leasing Guidelines
C. 12/14/2010 Staff Report
D. Rent Projection