MEMORANDUM 08-39

 

TO:              Mayor Hornaday and Homer City Council

 

FROM:        Walt Wrede

 

DATE:         March 10, 2008

 

SUBJECT:   Harbor Leasing LLC Lease / Kevin Hogan

 

 

Attached is a completed lease for Harbor Leasing LLC. I believe that this lease is consistent with the code and the City Lease Policies.

 

The attached lease is based upon the City’s base ground lease. We have agreed to some changes as part of the negotiation process. All of the modifications to the base lease are underlined so that you can see what they are.

 

In addition to the modifications I have agreed to which already appear in the lease, Kevin is asking for an additional incentive. I told Kevin that I do not have the ability to grant an incentive like this administratively because it is not consistent with existing City policy and because it was not part of his original proposal. I told Kevin that if we agreed to everything else in the lease, I would be happy to bring it to the Council and let it make a decision about the incentive.

 

Kevin has stated that this incentive is essential to his business and is a “make or break” issue for him. He basically wants the same type of break on crane fees that the City provided for Icicle back when Icicle built the plant. The proposed wording for the incentive is as follows:

 

TENANT SHALL PAY AN ANNUAL CRANE FEE OF $31,000 IN 12 MONTH INSTALLMANTS FOR UP TO 1300 HOURS OF ANNUAL CRANE USE, INCLUDING WHARFAGE, CALCULATED ON ACTUAL USAGE. CRANE USAGE IN EXCESS OF 1300 HOURS SHALL BE BILLED AT THE RATE OF $15 PER HOUR. THE PARTIES AGREE THAT THE TERMS OF THIS CLAUSE ARE INCENTIVES BASED UPON THE TENANT’S PERFORMANCE. THIS CAUSE SHALL NOT TAKE EFFECT UNTIL TENANT HAS COMMENCED FISH PROCESSING OPERATIONS WHICH RESULT IN RAW FISH TAX SHARING FOR THE CITY AND BOROUGH UNDER THE LAWS OF THE STATE OF ALASKA THAT ARE IN EFFECT AT THE TIME OF THIS AGREEMENT. IN ANY YEAR OF THIS AGREEMENT THAT THE TENANT DOES NOT OPERATE A PRIMARY FISH PROCESSOR ON THE PROPERTY, THE PROVISIONS OF THIS CLAUSE SHALL NOT APPLY.

 

 

 

RECOMMENDATION:

 

The City Administration strongly recommends that the Council either;

 

  1. Reject this incentive outright or
  2. Reject this incentive and ask that the applicant bring it back after he is up and running and is actually generating fish taxes so that the City can have some measuring stick by which to measure the payback. This might also be referred to the Port and Harbor Commission to evaluate incentives across the board for all fish processors. At a minimum, the language needs to be tightened up and that was not possible at the last minute.

 

Some things to consider:

 

    • This incentive would cost the enterprise fund $80,000 in crane fees ( for the period up to 1300 hours) and much more than that after 1300 hours. The enterprise fund fees are $80 per hour and are based upon fixed operating and maintenance costs.
    • This incentive eliminates wharfage fees, another hit to the fund
    • There is no clear definition of what constitutes fish processing. The State has three different definitions. In other words, Harbor Leasing, under this proposal, could theoretically get the incentive without doing any value added processing.
    • There is no upper or lower threshold for fish processed.
    • There is no definition of who this break applies to. Does it apply to anyone who uses Kevin’s crane card? Does it apply to just Kevin’s customers? It might apply to the whole fleet.
    • The incentive as described is so broad that Harbor Leasing could have a huge competitive advantage over its competitors.
    • The incentive is so broad that Harbor Leasing could wind up as a crane broker who reaps the profits but has no responsibility for the overhead, maintenance and upkeep. The crane could actually become a profit center in its own right.