BACKGROUND

The Lease for Bob’s Trophy Charters (Tract 1-B, Fishing Hole Subdivision No. 2 - .14 acres) expired on August 30, 2007. All options have been exercised. The Lease for Sportsman’s Supply (Tract 1-C, Fishing Hole Subdivision No. 2 - .18 acres) expires on February 28, 2008. All options on this lease have also been exercised. Both of these businesses are located at the corner of Spit Road and Freight Dock Road.

Both of the current lessees wish to enter into new leases with the City. Both have properly notified the City regarding their desire and have submitted formal lease applications / proposals pursuant to Section 11.2 (F) of the Lease Policies. Both indicated that they were interested in expanding their businesses if possible but were limited by the size of the parcels they were leasing. Both proposed a continuation of current uses and operations.

The Lease Committee had two separate meetings to review the relevant policies and evaluate the proposals using the criteria outlined in Section 11.2 ( F) of the Policies. The Committee heard feedback from the staff who indicated that both businesses owners were current on all taxes, rents, and other fees. The staff also indicated that both businesses were consistent with the zoning regulations and that they conducted business harmoniously with general harbor operations. The Committee also heard comments from the Port and Harbor Commission which discussed these leases at its regular meeting on August 22.

As you know, the overarching policy contained both in the City Code and the Lease Policies (see Chapter 4 and Section 11.2 E of the Policies) is for the City to issue a new request for proposals for all lands upon which leases have expired. The purpose for this is to provide equal access to all interested parties to lease City land and to provide an indicator of what the market value and highest / best uses of the land might be. In short, it has been City policy to maximize the value and productivity of these parcels, which are important public assets.

The Policies do provide the City Council with the option of not requiring a competitive bidding process and entering directly into a new lease agreement with the current leaseholder if it finds, after receiving a report from the Lease Committee, that doing so is in the public interest (11.2 F). This section of the Policies was intended to give the Council some flexibility if the current lessee is operating a business that the Council finds would be in the City’s best interest if it were to continue at that location. The Council must weigh the normal criteria used for all proposals including, but not limited to capital investment, jobs, taxes, economic spin-off impacts, lessee’s performance under the expiring lease etc.

COMMITTEE PROPOSAL

After reviewing the proposals, policies, and special circumstances surrounding these two leases, the Committee recommended an approach that has not been utilized by the City before to the best of our knowledge.

The Committee suggested that the City issue a request for lease proposals (RFP) for these two lots. The RFP would be a qualified one in that it would specifically give the current lessee the chance to match the lease rental rate proposed by another applicant assuming all other things are equal. In other words, if someone proposes the exact same use for the property but is willing to pay a higher lease rate (higher than the baseline, appraised market rent) the current lessee would be given the option to match that rate and negotiate a new lease. If an applicant proposes an entirely new use that is deemed to be more in the interest of the City, the City retains the right to negotiate a lease with that party.

The Committee believes that this approach has merit and that it would be advantageous to the City for a number of reasons. First of all, it is consistent with the primary policy of going through the competitive bidding process and providing equal access to City leased land. This approach will enable the City to test the market for these two particular lots and see what the market rental value and demand for different types of uses might be. The City might receive proposals that are more appealing to it in terms of overall public benefit. Second, this approach does not automatically run off good tenants who have performed well under the existing leases. These lessees are provided with an opportunity to enter into new lease agreements. The Committee found that these two tenants, based upon the seven criteria contained in Section 11.2 F, would be eligible for renewal.

The staff and the City Attorney have reviewed this proposed approach and have concluded that there are no known legal impediments. There are some potential practical problems that will have to be carefully addressed when the documents are being drafted.

The Committee also recommends that the Council, as landlord, consider having the City do its own research regarding markets rents and establish its own floor, or baseline rent. This suggestion is based upon the almost universally held belief that the current appraisal process does not work well.

RECOMMENDATION:

Authorize the City Manager to order an appraisal and issue a Request for Proposals to lease City land for Lots 1-B and 1-C with the qualifications and stipulations described herein.