3 Summary of Timelines and Formal Requests
I. Overview
Greg Morena (hereinafter, “Greg”) presents the below proposal regarding Rusty’s on the Pier (“Rusty’s”). The following discussion provides a summary of the current status of the management and operations of Rusty’s under that certain Amended and Restated Lease Agreement by and between the City of Santa Monica (hereinafter, the “City”) and Hospitality Industry Management Group, LLC, d.b.a. Rusty’s Surf Ranch (hereinafter, “HIMG”) dated October 11, 2013 (the “Lease”). On September 28, 2018, Greg and HIMG entered into a Management Agreement pursuant to which Greg agreed to operate and manage the restaurant (the “Management Agreement”). For the past nearly four years, Greg has managed the operations of Rusty’s through his solely owned entity, EST 1977 Group LLC d.b.a. Rusty’s.
II. History of Management of Rusty’s by Morena
The following bullet points provide a high-level summary of many of the critical facts and communications relating to Greg’s management of Rusty’s and items needing to be addressed under the Lease:
• October 9, 2018 – Greg and HIMG provided the City with written notice of the Management Agreement, paragraph 17 of which provided for automatic termination if the City objected to the agreement. In the transmittal correspondence, Greg and HIMG informed the City that they would have to choose between reopening the restaurant by March 4, 2019 or completing the remaining physical requirements of the Phase II Improvements under the lease which would require an additional 90 days (beyond March 4, 2019) to reopen.
• October 31, 2018 – Jason Harris responded on behalf of the City in a written letter and informed Greg and Russell Barnard (hereinafter, “Russell”) that the City “remains committed to ensuring the reopening of Rusty’s to the general public for continuous service as soon as feasibly possible, but no later than March 4, 2019.” In the same letter, Mr. Harris wrote, “It is well recognized that Greg has a stellar record operating the Albright lease” and asked questions regarding the contemplated management of the restaurant by Greg.
• November 8, 2018 – Greg and Russell met in person with Jason Harris, Eriko Matsumoto and Elana Buegoff to address, in part, Mr. Harris’ questions regarding the Management Agreement.
4 • November 30, 2018 – Mr. Harris confirmed in writing that, the following items with respect to Rusty’s were affirmed in the November 8, 2019 meeting: (i) “Greg, or his assignee pursuant to the Management Agreement will work to reopen [Rusty’s] as soon as practicable, but no later than March 4, 2019”; and (ii) “so long as Rusty’s complies with the terms set forth in its lease, the option(s) to extend the lease will remain in effect.”
• January 2019 to March 4, 2019 – Greg began making leasehold improvement expenditures and reopened Rusty’s before March 4, 2019. • April 19, 2019 – The FPPC provided Advisory Opinion A-18-275 in response to Greg’s request for advice, which was submitted to the FPPC by Greg’s counsel on or about December 17, 2018. In the Advisory Opinion, the FPPC confirmed that The Albright and Rusty’s may continue with their pre-existing leases with the City but that it was unable to determine whether certain approvals required under the Lease would create a conflict of interest without knowing the details of the approvals being sought. • May 10, 2019 – Greg sent an email to the City Attorney requesting that the City and Greg set up a process for the parties to address the following items in accordance with Rusty’s Lease and the Advisory Opinion: (i) Option to purchase, (ii) Name change, (iii) Rent credits, if any, and (iv) Lease extension.
• July 17, 2019 – Greg’s counsel sends the City Attorney a summary of facts and questions in connection with a contemplated informal FPPC request regarding the items Greg identified in his May 10, 2019 email. The questions in connection with Rusty’s were as follows: (i) May Morena exercise the Purchase Option Agreement?; (ii) May Morena seek Landlord approval to change the name of RSR pursuant to the terms of the existing Lease?; (iii) May Morena seek Landlord review and approval for determination of whether rent credits are due pursuant to the terms of the existing lease?; (iv) May Morena seek Landlord review and approval for determination of whether the conditions for the 5- year extension option have been met?; and (v) May Landlord and Morena execute nondiscretionary lease amendments to reflect the above acts (i.e., to reflect tenant name change, to reflect RSR name change, to document rent credit, to document extended term)?
• July 28, 2019 – The City Attorney provides comments to the summary of facts in an email to Greg’s counsel and requests a call to discuss the same. • August 6, 2019 – Greg’s counsel has a call with the City Attorney, Eriko Matsumoto and Jason Harris to discuss the Rusty’s facts, and the City Attorney agreed to draft facts for the informal FPPC request and send to Greg’s counsel.
5 • October 15, 2019 – The City Attorney sent Greg’s counsel a draft of facts regarding Rusty’s. In the draft facts, the City Attorney took the position that Rusty’s was still undergoing construction for tenant improvements under the lease, but did not materially change the questions outlined by Greg’s counsel on July 17, 2019 in connection with the contemplated informal FPPC request.
• February 21, 2020 – The City Attorney sent Greg’s counsel a letter which, in part, alleged that Rusty’s (i) had “not completed the Phase II improvements, which are a condition precedent to the rent credits set forth in Section 7.1.3 of the RSR Lease” and (ii) had “not met the conditions precedent to the granting of the five-year extension option set forth in Section 3.1.3 of the RSR Lease.” Notably, the City made these assertions without first requesting an expenditure detail from Greg, without any discussion or acknowledgement of the impact of the October 31, 2018 letter from Mr. Harris on the Scope of Work under Section 7.1 of the Lease (which Greg believes constituted a written approval of a change in the Scope of Work pursuant to the terms of the Lease), without regard to Section 7.1.3 of the Lease which bifurcates rent credits between Phase I and Phase II (the City alleged in the letter that only Phase II improvements were incomplete yet failed to acknowledge that $125,000 of Phase I rent credits were well overdue to Rusty’s), without regard to the Lease requirement in Section 7.1.3(d) that, for purposes of rent credit determination, “Completion” has the same meaning as set forth in Civil Code section 3086, and without regard to Section 7.1.3(f) of the Lease (which allows unreceived Phase I rent credits to be applied to Phase II improvements). These issues are addressed more fully in section III below.
• April 2020 – Covid Pandemic began and restaurants on the Pier were shuttered. Greg resigned from his City Council position on June 24, 2020 to deal with the effects of the pandemic with the family’s Pier businesses. The economic impact of Covid is significant. In September 2021, the City sends Greg and Russell a Repayment Agreement and Addendum to the Lease regarding the repayment of rent abated during the Covid shuttering.
• March 29, 2022 – Russell sent David Martin an email requesting that the City transfer the Lease to Greg and that the City provide clarity on its position regarding the status of the first extension option under the Lease. Russell informed the City that Greg desired to make additional leasehold improvements to Rusty’s.
• April 19, 2022 – Jennifer Tayler responded to Russell’s email and requested information on the progress of the completion of the Phase I and Phase II tenant improvements and evidence of the Rusty’s expenditure amounts on such improvements as required under Section 3.1.3(c) of the Lease.
• April 19, 2022 to Present – Greg continues to engage in communications with the City to address the very same issues he raised back on May 10, 2019, along with his desired 6 goals for Rusty’s. Disappointingly, the City continues to refuse to acknowledge pertinent terms of the Lease and comply with them in good faith.
To date, Greg has invested $78,097.82 in capital expenditures (i.e., not including FF&E or other non-capital expenditures). He has actively managed Rusty’s from September 28, 2018 to the present. Greg’s and HIMG’s combined capital expenditures related to leasehold improvements total approximately $516,095, the invoices and receipts for which have been submitted to the City for review. Further, none of the rent credits owed to Rusty’s pursuant to the terms of the Lease have been properly acknowledged and applied.
Greg recently proposed making additional capital expenditures to improvements of Rusty’s in the amount of at least $125,000 (discussed more fully below in Section IV hereof) but needs resolution on the items identified in Section III below, and approval of the items identified in Section IV below, before he is willing to undertake the additional expenditures. For the avoidance of doubt, Greg and HIMG believe the requested resolutions set forth in Section III hereof are supportable based on the current factual status and are not dependent on the proposed additional capital expenditures. Rather, Greg and HIMG believe such additional expenditures will offer additional economic benefits to all parties for the duration of the Lease.
III. Lease Matters Requiring Resolution
Based on recent correspondence with the City, the following items require timely resolution.
A. Grant of Extension Option
Sections 3.1.2 and 3.1.3 of the Lease grant HIMG a five (5) year extension option (“Extension Option”) subject to certain conditions being met. The parties have not reached a consensus as to whether the conditions under Sections 3.1.3(b) and 3.1.3(c) have been met.
Section 3.1.3(b) provides the condition that “Tenant has completed the Phase I Improvements and Phase II Improvements described in the Scope of Work set forth in Exhibit ‘7’ (‘Improvements’), as reasonably determined by the City Manager.” Further, Section 7.1 of the Lease provides that “Any changes in the Scope of Work shall be subject to written approval of Landlord, which shall not be unreasonably withheld.” (Emphasis added). As previously indicated to the City, all Phase I Improvements and the majority of the Phase II Improvements were completed prior to the reopening of the restaurant by March 4, 2019 as requested by Mr.
Harris in the City’s October 31, 2018 letter. Greg and HIMG believe that the City’s October 31, 2018 letter constitutes written approval of a change in the Scope of Work pursuant to Section 7.1 of the Lease.
Section 3.1.3(c) provides as follows:
7 “Tenant has expended no less than $500,000 in direct, out-ofpocket, third party costs, before rent credits, to complete the Phase I Improvements and the Phase II Improvements, as determined by City’s review of all third party invoices; provided, however, that such third party costs shall not include (i) furniture, fixtures and equipment (‘FF &E’) and/or (ii) non-capital goods (including, without limitation, small wares)” (Emphasis added).
Greg and HIMG have submitted invoices and receipts supporting their combined capital expenditures totaling approximately $516,095. Such expenditures satisfy the condition set forth in Section 3.1.3(c).
Based on the above, Rusty’s has achieved all the conditions required for the Extension Option to be granted, and Greg and HIMG request that the City confirm the same in writing.
B. Rusty’s Eligibility to Receive Rent Credits
Section 7.1.3 of the Lease provides that Rusty’s is eligible for a tenant improvement rent credit (“Rent Credit”) during the initial Lease Term. The Rent Credit is due to Rusty’s upon “Completion” of Phase I and Phase II Improvements. “Completion” is defined in Section
7.1.3(d) of the Lease to have the same meaning as set forth in Civil Code section 3086 (subsequently replaced by Civil Code section 8180). Under either Civil Code section, the improvements are considered completed upon “the occupation or use of a work of improvement by the owner, or his agent, accompanied by cessation of labor thereon.” At the City’s written request set forth in Mr. Harris’ October 31, 2018 letter, Greg and HIMG stopped work on the remaining Phase II improvements, reopened Rusty’s before March 4, 2019 and began using the work of improvements (i.e., all of the Phase I Improvements and a majority of the Phase II Improvements). The cessation of the labor and the subsequent use of the improvements made up to that point constitute “Completion” as defined in Section 7.1.3(d) of the Lease. Thus, Rusty’s is currently entitled to receive $258,047.50 in Rent Credit (equal to the lesser of (i) 50% of actual eligible costs listed in the construction budget (excluding FF&E or other non-capital goods) or (ii) $516,095. See Section 7.1.3(a) of the Lease.
C. Approval of Transfer of Lease to Rusty’s
The Management Agreement contains a Purchase Option that provides Greg with the ability to exercise his right to purchase from HIMG the restaurant assets, including but not limited to the Lease. Section 15.1 of the Lease provides that the Lease may be transferred upon the written consent of the City, which shall not be unreasonably withheld. Additionally, Section 15.1.1(iii) provides that HIMG shall have the right to transfer to an Affiliate. Greg and HIMG recently notified the City of their desire to exercise the Purchase Option and requested that the City approve of the transfer. In response, the City mentioned the need to revisit the merchant diversity goals under the Santa Monica Pier Leasing Guidelines yet failed to acknowledge any of 8 the aforementioned Lease terms applicable to the requested transfer. While the following discussion sets forth the exceptional community benefit continuously provided by Greg on the Pier (through his management of both The Albright and Rusty’s), Greg notes that the City did not object to the Management Agreement, (including the Purchase Option) pursuant to which Greg became the operator of Rusty’s in 2018. Furthermore, the City recently granted Greg a new lease via The Albright RFP process and presumably revisited the merchant diversity goals at that time, at the same time he was operating Rusty’s.
Furthermore, as attached there are currently 11 “brick & mortar” leases on the Pier with more than 400 sq ft of “rentable (non-patio) area.” The total rentable square feet of both Rusty’s and The Albright places Greg #7 & #8 out of 11 the leases. Currently there are 6 “sit-down” restaurants on the Pier. Considering the total rentable square feet of Rusty’s and The Albright, the two restaurants would be placed #4 & #5. Finally, Greg expects to continue operating Rusty’s for the duration of the Lease and its extensions, whether pursuant to the Management Agreement or the Purchase Option, and believes it would be unreasonable for the City to apply the merchant diversity standards differently under the two scenarios and in light of the total rentable square feet of all tenants on the Pier.
Greg’s continued operation of Rusty’s (including in the event the City approves of the below proposed path forward) will continue to provide exceptional community benefit to the Pier.
Greg is from Santa Monica, an alumni of Santa Monica public schools, a dedicated public servant and currently operates both Rusty’s and The Albright. Each restaurant is small (3035 and 2557 rentable square feet, respectively), they are unique and easily distinguishable from national corporate restaurant chains. Greg has managed various brands (fashion, skateboarding, restaurants, etc.) for more than 25 years and has the experience and wherewithal to successfully operate the two distinct restaurant brands. He employs socially responsible practices throughout the operations of both restaurants, including providing fully paid health benefits to employees, engaging in community and economic development (today via the Chamber of Commerce as Chairman) and is prepared to invest in and develop a housing strategy for staff. As discussed in section IV.B below Greg believes certain rent credits are due and available, and of these credit Greg will invest a minimum of $100,000 of the rent credit proceeds to a housing trust fund he intends to form for the benefit of, and in support of, housing needs of his staff (the EST1977 Group, “Housing Trust Fund"). Greg, an at-risk youth in Santa Monica, co-developed a micro entrepreneurial program with the Police Department’s Youth Diversion Group and, at its inaugural public event, dedicated outdoor dining space to the program as a sales venue – which was a huge success. He hosts community events at his restaurants Pier such as the SM Democratic Club ‘get out the vote’ letter writing campaign and Save the Pier play – for which he has also been a title partner since inception. Greg’s restaurant was the first green business on the Pier and helped lead best sustainable practices for all Pier restaurants. Today, he continues his focus on engaging in sustainable practices and developing sustainable tourism. Greg is a founding partner and sponsor in Heal the Bay’s AquaCulture program developing BlueTech workforce and sustainable food sources. Rusty’s is the party on the Pier and currently serves a specific demographic that yearns for DJ’s, and Karaoke, with plans to host young musicians 9 looking for their breakout public performance (live music entertainment takes time to development, another reason why length of lease in important). Greg is visionary and innovative and intends to remain engaged in policies that address Pier Governance, Use & Access, Balance Beach/Pier Finances and the ultimate restoration of Pier Culture.
In short, Greg is qualified as a transferee pursuant to Article XV of the Lease and refusing to consent to the transfer of the Lease would be unreasonable. Further, even though Greg does not believe that the “exceptional community benefit” requirement is applicable to the transfer of the Lease given that the concept is not addressed in the terms of the Lease and given that Greg has managed and operated Rusty’s since 2018, Greg’s management of both The Albright and Rusty’s has provided, and will continue to provide, exceptional community benefit to the Pier and to the City of Santa Monica.
IV. Proposed Path Forward
Upon mutually agreeable resolution of the above items, Greg requests that the City approve of the following items pursuant to the applicable sections of the Lease:
A. Additional Proposed Improvements
Greg proposes to initiate the following additional improvements during the remainder of the initial Term and complete them during the Extension Option:
(i) Rebrand as Pappy’s Bar & Grill – “Pappy’s” is the name of Popeye’s father and is a salty, seaworthy name that fits well within the Pier ethos. (fyi – Popeye the sailorman was created on the SM pier by Elize Segar).
(ii) Transition to a modern venue with a roaring 20’s era of speak-easy design that offers a unique ability to provide entertainment (DJ’s, live music, comedy, plays, etc), capturing a unique demographic and making it the go-to place for a party on the Pier. (iii) Connect 2nd floor outdoor dining all the way around The Albright and continue through Rusty’s. The visibility of 2nd floor seating at Rusty’s would certainly draw more guests.
More so, it will add more seating in a prime location. The additional customers and seating will provide the city with greater percentage rent revenue. Creating shared and efficient access to 2nd story dining avoids the dedication of valuable real estate to multiple and redundant stairways and elevators while maintaining the ability for the City to manage two separate leaseholds by way of covenants and easement. Usable space on the Pier is critical to access and demand, the more efficient use of space drives percentage rent sales which mutually benefits operator and landlord.
(iv) Extend “Green” efforts by adding solar panels and batteries to support our high energy demands.
10 Utilize the flat roof to locate planters for roof-top fruits and veggies and highlight these homegrown products on menus and marketing materials. Use the credibility gained from this effort as a marketing platform and become the first business in Santa Monica to grow on site the food it sells.
Greg expects that the above improvements will require capital expenditures in excess of $125,000. He expects that construction, not including planning and permitting, will take approximately 4 years, staggered over the winters. However, with current demands of City and state staff and commissions, the timelines could extend and there would need to be reasonable methods to resolve uncontrollable circumstances. The expected capital expenditures are exclusive of any contributions Greg makes to the Housing Trust Fund upon its formation.
B. Eligibility for Remaining Portion of Rent Credit
Greg requests that the above additional improvements, upon their Completion (as defined in the Lease), be eligible for the remaining Rent Credit under Section 7.1.3 of the Lease. For example, assuming the above requested Rent Credit of $258,047.50 is applied, then Rusty’s would be eligible for the remaining $41,952.50 in Rent Credit upon Completion of the additional Improvements. As provided above, Greg expects to contribute a minimum of the lesser of $100,000 or 50% of the Rent Credit he receives from the City to the Housing Trust Fund.
C. Eligibility for Second Extension Option Under November 28, 2017 Term Sheet HIMG and the City entered into that certain Term Sheet dated November 28, 2017 pursuant to which the City proposed terms and conditions for modifying the Lease to allow for a second five-year extension option (“Second Extension Option”) in order to amortize the estimated higher costs of the Phase II renovations. The Construction Budget set forth at Exbibit 9 of the Lease proposed a combined Phase I and Phase II expenditure budget range of $750,000 to $1,090,000, including leasehold improvements, FF&E, Small Wares, Signage and Contingency.
Greg and Russell are in the process of providing invoices for the non-capital/FF&E expenditures to date and, as indicated above, previously submitted invoices for capital expenditures totaling $516,095. Greg requests that the City modify the Lease to provide for the Second Extension Option in the event that, prior to the expiration of the First Extension Option, Rusty’s meets or exceeds the minimum threshold of $1,090,000 in total expenditures, such threshold to include all expenditures under the Lease, including capital expenditures, leasehold improvements, FF&E, small wares and any contributions to the Housing Trust Fund.