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161ccd73a48f7d274937e3f79228a2a6Regretfully, after nearly a year of negotiations between the city of Monterey and  Sam Balesteri, who has had a master lease for the Wharf Gift Shop, Coffee Shop, and Paluca’s Trattoria for 50 years, it has become clear that an agreement cannot be reached. This was heartbreaking to me.  I know and like Mr. Balesteri’s sons, and the last thing I wanted was this outcome for these wharf businesses.

But my responsibility is to do what is best for the city. The City Council has great respect for the history and heritage of the wharf, and much of that history and heritage is a direct contribution of the tenants. Because of this respect, the city chose to negotiate first with existing tenants rather than market the property competitively.

Second, we offered terms that gradually ramped up rents to move the lease terms toward market rate over a period of years, making it easier for the businesses to make adjustments.  The city also made other concessions to try to find a way to extend the Baluster lease. But the council has a responsibility to manage our resources wisely, to treat everyone fairly, and to ensure taxpayers are not subsidizing businesses.

People need to know that the decision to evict these businesses was not a careless one; it came after 11 months of fair negotiations and after several hours of discussion by council and staff. On several occasions the city made concessions during negotiations and on several occasions we thought Mr. Balesteri was ready to sign a lease renewal. Each time he came back seeking more concessions from the public. In the end it became apparent that he wanted a deal similar to the 50-year ground lease that expired two years ago.

I am not permitted to tell you what he has been paying the city for monthly rent—only he can—because it would let competitors know his revenue, which is considered “proprietary” information. Before people decide if the city is being unfair they should ask to see what monthly rent is being paid and then look into what other businesses pay. What I can say is that the proposed terms were still below market rent as compared to what other businesses in town pay. Moreover, the city offered terms of more than ten years so the rumors you may be hearing to the contrary are simply not true.

If you think the city was asking for something unreasonable, then why would Mr. Balesteri’s sub-tenant, who owns and runs the restaurant, Paluca Trattoria, sign a lease directly with the city on terms comparable to what was offered Mr. Balesteri?  He has been able to run a successful business for years paying Mr. Balesteri market rent; why is it a hardship for Mr. Balesteri, who has enjoyed favorable terms for 50 years, to pay rent comparable to other businesses?

The city took so much time and was willing to compromise so much because we truly wanted to keep Mr. Balesteri there on the wharf. We appreciate who he is and what he has done. The city’s approach is to negotiate first with current tenants and seek market rate terms as their leases expire.  If that fails, then we will market the properties and again give first priority to local and independently owned businesses. False claims from wharf business owners that the city has plans to replace local businesses with national chains like Hooters, McDonalds, and Red Lobster are false and misleading.  I personally inserted a motion into our leasing policy that expressly allows the council to give preference in leasing to local business and that is what we have been doing.

My core principles tell me that the public should not be subsidizing private business, however nice the owner of the private business may be. Due to the limitations of the leases negotiated decades ago, the city has used some General Fund money to pay for maintenance and improvements in our Tidelands area, which should be funded by Tideland’s commercial leases. Additional revenue from the commercial leases will enable the city to make the wharves more attractive, clean, safe and enjoyable.

EDITOR’S NOTE: Libby Downey contributed to this article. She and Haffa are members of the Monterey City Council and have been leaders of the effort to reform the city’s leasing practices.  Some of the Monterey wharf tenants, led by restaurant owner Chris Shake, have been conducting a vigorous disinformation campaign via petitions and social media in an attempt maintain deeply discounted rental rates by putting political pressure on the City Council. The group contends, with zero evidence, that the city wants to drive out local operators in favor of chains and, contrary to reality, that the city won’t allow new leases beyond 10 years.

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161ccd73a48f7d274937e3f79228a2a6CORRECTION PENDING: Based on information from the city, I reported in this post that the average lease rate at the wharf properties is about $1.65 per square foot. I have since been informed that the rate actually is about 65 cents. In his comment below, Willard McCrone states that the “minimum” lease figure is 61 cents. I have not yet been able to fully to determine which of those figures is better for comparison purposes.  In the meantime, anyone with actual numbers is invited to share them in the comment section below. Please attribute.

Gramps didn’t say a lot but what he did say was worth hearing. For instance, he offered fairly often that whenever someone tells you how honest they are, you should make sure they haven’t already lifted your wallet.

When we’d ask why he was so quiet most of the time, he’d answer, “When you don’t know what you’re talking about, stop talking.” Good advice, and I am reminded of it because of how much is being said these days by those who don’t understand the issues in the heated debate over the city of Monterey’s leasing practices at Fisherman’s Wharf.

The topic is much more complicated than you might expect, but to hear the wharf tenants and their pals tell it, it’s simply that the city wants to gouge local businesses without regard to reality or ramifications. The thrust of their argument is that the city is making it up when it says the wharf tenants are paying less than market value rent, but the reality is that the city has ample facts and figures to support its position. In other words, the tenants are attempting the age-old technique of repeating the same fiction over and over until the repetition causes people to start believing it. The key is to keep contending it’s the other side that’s lying. It works in politics, after all, and this debate is all about power politics.

Unfortunately, the facts here are open to fairly easy distortion because the individual leases and sub-leases have been negotiated at various times over the decades and because the wharf isn’t your typical bricks and mortar building on dry land. And because the city owns the property below the wharf and not the structures themselves, the tenants want us to believe the city is trying to extract gold from plain, old mud when, in fact, the city’s watery real estate is about as prime as it gets.

Also complicating matters, the tenants in some cases built the structures that house their businesses. In some cases, the leaseholders long ago sub-leased the property to other tenants, creating a situation in which the leaseholder is making a pretty profit while the city is receiving a relative pittance. Apples to apples comparisons become difficult but that does not mean that the city can’t support its position. The city has obtained expert opinion from some of the region’s most knowledgeable specialists in commercial real estate and applicable law.

Notice that the tenants aren’t broadcasting any numbers, actual figures about how much they’re paying, or not paying. Instead, they keep accusing the city of ignoring facts and numbers. Say it often enough and people will believe it.

TENANTS HAVE PLENTY OF OTHERS TO DO THEIR BIDDING

Many of the current leases that the city wants to rewrite as they expire were negotiated and renewed at less than arms’ length by past councils populated by friends and associates of the tenants. As a result, the rent being paid by many of the businesses is well below market rate, no matter what you are being told by those who don’t really know.

Among those pretending to know is KSBW-TV, which maintained in a recent editorial that the City Council “has started down a short-sighted, ‘never-mind the facts’ path, aimed at changing leases for long-time wharf businesses.”

You’ll notice that the editorial has little to say about the facts that the city supposedly is ignoring. It doesn’t mention that the average monthly lease rate of around $1.65 per square foot is 50 cents to $1 below prevailing rates on the Peninsula.

The tenants argue that the city must allow long-term leases, longer than 10 years, so they can finance improvements to the properties. KSBW simply accepts their assertion that the city won’t allow longer leases even though newly adopted city policies say options beyond 10 years are available. When? When contemplated improvements could not be financed if the business was limited to a 10-year ease.

(At least two City Council members contacted KSBW to quarrel with its version of the “facts” and to ask for an opportunity to rebut the editorial. They were told that they could post a response on the station’s website but couldn’t meet with the KSBW editorial board or have their objections aired. Though the station’s editorials end with “KSBW welcomes responsible replies to this editorial,” that doesn’t amount to an offer of air time and doesn’t imply those responses will be shared with anyone, according to News Director Lawton Dodd.)

The editorial makes the argument, which others are repeating with limp evidence, that the new lease procedures could drive local businesses off the wharf, potentially leading to an invasion by better-financed national chains. Never mind that the city is well aware of the great value of local tenants. The specter of chain restaurants was also raised in a recent Monterey Herald commentary by the Monterey Hospitality Association and the Chamber of Commerce, which were enlisted by the leaseholders to lobby for the lucrative status quo.

Operators of Sapporo and the London Bridge Pub in this building don’t rent their space from the city but from another leaseholder who rents from the city. If the city was receiving the market rate, the restaurant owners would be paying above market rate. How likely is that?

It deserves mention that among those fighting to keep the current lease structure intact is chamber and Hospitality Association stalwart Ted Balestreri of the Cannery Row Company, one of the city’s biggest landlords and holder of the master lease on the property that houses Sapporo Steak & Sushi and the London Bridge Pub at the foot of the commercial wharf. Though that property isn’t on Fisherman’s Wharf, it is subject to the revised leasing practices. While Balestreri’s supporters use the prospect of national chains as a scare tactic, it should be noted that tenants of some of the Cannery Row Company’s best real estate are the Bubba Gump Shrimp Co., and El Torito, both part of large national chains. (By the way, Balestrieri has said that the Bubba Gump operation on Cannery Row was pulling in more sales per square foot than any other restaurant in the country.)

COUNCIL MEMBERS GETTING HAMMERED FOR DOING THE RIGHT THING

After considerable discussion and consultation with their real estate experts, the City Council, by a 3-2 vote, has approved some 20 new leasing policies and soon will take up two more that would directly impact the wharf. We can expect the leaseholders to fight mightily over the coming months to roll back some the 20 measures and to fight hard against the two current proposals.

The first would require the wharf businesses to cover the expenses assigned to common areas and facilities such as a commercial trash compactor. Unfair, say the businesses. But ask why the city should be required to continue subsidizing these enterprises and the answer is likely to veer into politics rather than business practices.

The second proposal would set a limit on the square footage that could be leased by any one entity. The concern, of course, is that some of the wharf’s most successful entrepreneurs, such as the Shake family, could dominate the wharf property. The Shakes are accomplished restaurateurs but the city rightly fears that having one tenant with the majority of the leased space could put the city at a great disadvantage: Reduce the rent or we’ll pull out.

In another Herald commentary, Chris Shake took issue with the views of Planning Commissioner Willard McCrone, whose research of the leases played a large part in the current reform effort.

Shake wrote, “Commissioner McCrone has no facts or evidence to prove his assumptions that the wharf tenants are paying below-market rent; his assumptions are completely false and have no basis.”

Did Shake then provide facts and figures to disprove McCrone’s assertions? Nope. Nothing at all. He publicly labeled McCrone a liar without a hint of evidence

The fact is, and this is an actual fact, that debate over the wharf leases has turned into a hardball case of politics that has supplanted what should be a professional negotiation. Another fact is that the tenants amount to a politically powerful lot, flexing muscles they have built through decades of political and charitable contributions, family ties and associations with other political and commercial powers.

MESS WITH THE LEASEHOLDERS AND EXPECT TO GET ZAPPED

Often in a debate such as this, taxpayers’ groups would step up to support the government’s position because below-market rental rates essentially require taxpayers to subsidize the enterprises. But the most active taxpayer group on the Peninsula is the Monterey Peninsula Taxpayers Association, which is closely allied with the Hospitality Association, which has taken up the tenants’ cause.

The council members pushing this effort should be congratulated. Instead, they have found themselves under heavy attack. For many years, well into this century, the city’s real estate matters were overseen by a fellow who had virtually no previous experience with real estate. At one point lasting more than a year, the city forgot it owned a condo intended to provide affordable housing, so it sat vacant. This is not a fact, only a theory, but some suspect that city officials made a conscious decision to let themselves be outmatched in negotiations with the wharf tenants. It was simply easier thatr way.

Going forward, support for professionalizing the leases comes from council members Libby Downey, Alan Haffa and Timothy Barrett. Mayor Clyde Roberson has gone the other way. Whether that has anything to do with his previous service on the council, between 1981 and 2006, isn’t clear one way or the other. Also going the other way, Ed Smith, who has championed the tenants’ case at every opportunity.

When I came to the Peninsula as city editor of the Herald in 2000, I asked assistant city editor Calvin Demmon, a wise adviser, about the Cannery Row Company.

“Cannery Row?” he said. “That’s the third rail of Peninsula politics.” For those you too young to get the reference, it comes from electric trains. The third rail is the one that carries the juice. It’s the rail that one doesn’t mess with.

Those are some of the facts. There are others that we’re not prepared to discuss because we haven’t studied them well enough. To some degree, then, we’re following grandpa’s advice, and we’re hoping that others who haven’t studied the issues will follow along for now.

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