The following was written by Willard McCrone, the Monterey lawyer and city planning commissioner, whose research on the leases at the city’s Fisherman’s Wharf set off the current effort by council members Alan Haffa, Libby Downey and Timothy Barrett to reform the city’s leasing policies. Among other things, the leaseholders maintain that the city is insisting on leases no longer than 10 years, when in fact the city has said repeatedly that it is willing to grant options beyond that.
At the heart of the debate, though, is the amount the city charges. Most of the leases were awarded in the 1960s while the city was attempting to build up the wharf. Those leases were for 50 years. In most instances, the original leaseholders have subleased the property to other ventures, continuing to pay discounted rates to the city while charging market rates to the new tenants.
The Partisan welcomes responses to McCrone’s posting and is particularly interested in responses from Mayor Clyde Roberson and Councilman Ed Smith, the dissenting votes on the discussions thus far.
McCrone’s response follows:
I have been out of the loop with some hospital time the past three days and can’t tell you how elated I am to see this post in my inbox upon return. Somebody is finally paying attention! Thank you, Royal.
You are correct that this is a long and complicated history dating back to 1939, and most of that history has been covered up in the back room of crony politics. I will leave most of that history to another post, but wanted to supplement several points made by Royal in this post:
(1) Minimum rents on the Wharf (most of which runs to 2041) are $.61/square foot, not $1.60/sf. FACT. Comparable rents of retail space in downtown Monterey, using the Trader Joe’s complex as a model for a professional landlord, is $3.00 to $3.50/sf.
FACT. Most restaurants on Cannery Row and Balestreri’s Sapporo Building pay gross rents in the range of 10% to 12% of gross sales.
FACT. All businesses except fish markets on Wharf I (Fisherman’s Wharf) pay 3.5% of gross sales as gross rent.
FACT. Anything I highlight as “FACT” means that you can look it up in city records, which I have reviewed. It is thus gainsaid that the city’s current earnings of annual rent from the wharf ($1.2 million) is one third to one quarter of what fair market rent would produce. It does not take much extrapolation to arrive at the sum of more than $3 million the city should be receiving from the wharf, plus absolute net CAM charges of another $1 million. Even in supposedly wealthy Monterey, $3 million is almost 3% of our annual budget. How many roads could we repair with that sum coming into our coffers every year? How many homeless shelters? And what have these favored tenants done to earn a subsidy of $3 million per year from the public?
(2) Financing impediments allegedly presented by 10-year leases are utterly irrelevant to our wharf. The repeated claims by the hospitality shills and uninformed letter writers from out of town that the new city policy will prevent tenants from investing in their premises are nonsense. The 32 or so tenants on the wharf all date their possession to leases entered into in 1964, 51 years ago. In those 51 years, how many of those tenants do you think financed improvements or upgrades to their premises? ZERO!!!! That’s right – exactly ZERO.
FACT. The only financing that appears among city records is around 2009, when the Shakes purchased the Lucido leases at space 31 and 32; tore down the buildings; and rebuilt the building with bank financing made available because those concessions had 32 years left on their terms. Claiming that ten-year terms will prevent investment is a little like claiming that global warming will eventually prevent Santa Claus from making all his rounds on Christmas Eve. That might be a true statement if Santa Claus indeed made rounds.
There are two reasons tenants on the wharf don’t finance improvements. Firstly, banks do not make long term loans to restaurants or retail unless they own the real property or there are other assets beside the restaurant to secure repayment of the loan. Restaurants are far too risky to make hard loans for 10 years or 20 or 30. Banks make short term loans secured by FF&E (furniture, fixtures and equipment) to these retail activities. For the numbskull who thought these tenants needed 30 years to amortize or write-off their investments – FF&E gets written off over 3 to 7 years, the usual length of a bank loan, well within the ten-year term of a lease.
Secondly, the failed business model on the wharf does not encourage tenant investment. The hereditary tenants don’t perceive any benefit accruing to them to invest when they can simply sit there collecting exorbitant sub-lease rents and letting their sub-tenants spend unsecured money to tailor premises to current needs. It is the same reason that those tenants don’t take care of their pilings – why should they? They sit on a gold mine of location, and still get top dollar sub-rent regardless of investment.
From a landlord’s point of view, ten years is an ideal term because it allows her to adjust to changing times. Who knew that internet cafe’s or specialty coffees would become dominant new market players in 1990? And small business owners become tired and complacent over time if they are not growing into other locations. They retire and die. A vibrant commercial center must be agile to accommodate new trends. New blood injects new energy and competition to the center, which is good for everybody. Look around the Peninsula. Cannery Row looks very different today than it did in 1994. Same thing for the Del Monte Center. None of those tenants in well managed commercial properties has longer than ten year leases unless they are anchor tenants or ones who built their own buildings. But a snapshot of Fisherman’s Wharf today looks the same as in 2000, 1990, or 1980. Why go back? There has been nothing new for forty years – all Italian seafood restaurants and tacky gift shops. I can’t imagine ever going to the wharf unless it was to rent a sailboat, which happens to be the only new activity in the past twelve years.
It is always disappointing to see the hospitality/business associations, to include the property owners association, abdicate their responsibility to the public by being sycophants for the wharf tenants. Instead of giving the public, who pay so much to these associations to promote tourism, thoughtful advice on subjects within their expertise, they merely ask “how high?” when the wharf or Ted Balesteri say “jump.” After years of blatant and outrageous profiteering off the public, it cannot be said “if it ain’t broke, don’t fix it.” The reality is that the wharf business model is so broken that it can’t be fixed. The city and its honest councilmen interested in serving the public have finally started a do-over that will take years to fix – until 2041.
(3) The Partisan left out one other “chain restaurant” on Cannery Row – the Charthouse. And are the Shake’s a chain restaurant? They control over 40% of the restaurant space on the wharf, plus the Fish Hopper on Cannery Row (the second highest grossing restaurant in the county), and a restaurant in Hawaii. Add to that,Gilbert, who is negotiating for control of another restaurant to take him over 40% of restaurant space on the wharf, plus his restaurant on Lovers Point. Is he a “chain?” Somehow, I am not able to follow the reasoning that allows two families to control over 85% (FACT) of the Wharf restaurant space, as good for the public. Wouldn’t you really rather have a Beni-Hana’s, a Starbucks, one of a dozen regional steakhouses, and a Chinese restaurant on the wharf to mix with the other identical Italian seafood restaurants? It certainly would add excitement and choice to a visit to Fisherman’s Wharf.
(4) And finally, I would add The Herald to the list of dissemblers hiding the facts from the public on wharf issues. I presume editor Don Miller allowed the dishonest commentary by Chris Shake to be published last month, personally attacking me and failing to offer any fact whatsoever in support of his self-interested propaganda piece. Yet Miller refused to publish my response submitted by email the same day. I offer it for your consideration:
The Monterey Herald
Re: Chris Shake Commentary
Chris Shake is perhaps not the best spokesman for the Fisherman’s Wharf rent propaganda, being as he is the poster child for profiteering off the public. The factual evidence is irrefutable.
The rents currently paid on the wharf are the product of 1991 leases approved by the City in violation of its Charter §6.4 requiring appraisals and fair market rent. No attempt was made by city staff to comply with §6.4, assuming they were aware of it. Consequently, these leases were illegal. All the city did was rollover 1964 leases that had expired in 1989, automatically vesting the city with absolute ownership of the buildings on the wharf. By 1991, these leases were at one-third of fair market rent, with no CAM charge.
In 2011, Fisherman’s Grotto paid $330,756 in rent — $190,346 to the city and $140,412 to Chris Shake. The total approaches fair market value, FMR, but the public only got 57%. This year, Shake agreed to sublet formerly “Gilbert’s” from Mary Alice Cerrito-Fettis, who has never done anything but squat on her inherited master lease, by paying her $22,000/month, in addition to $6,610/month to the city. Again, the total is fair market value, but the public only gets 23% of it.
Profiteering? You decide.
Willard P. McCrone