Recent newspapers have prompted me to think it is time to review in detail the long sordid history of Fisherman’s Wharf and the city of Monterey’s mismanagement of our precious waterfront. You all no doubt take the Monterey Herald and will have noticed yet another inane letter (from a Pebble Beach woman who works on the wharf) bemoaning the policy change to shorter term leases for the wharf. By my count, that was at least the seventh letter on this point, plus the Hospitality Association propaganda piece published without any factual substantiation or basis in reality.
Those who also take the San Francisco Chronicle may also have noticed the semi-annual special travel section “Q” entitled and devoted entirely to Monterey County. I have studied this section for several years and note that this year represents the absolute nadir of our Fisherman’s Wharf as a tourist attraction. Be it photos, copy, paid ad or mention whatsoever, our local treasure known as the Fisherman’s Wharf got exactly ZERO mention in 18 pages. The previous low was in last fall’s edition, which contained exactly one mention of the wharf as a place to board a whale-watching trip. Those who have extolled the virtue of the wharf as a “local treasure” and a top revenue and visitor generator or who say “it ain’t broke” are living in the past and increasingly the distant past.
Fifty years of private greed and profiteering, combined with 50 years of ignorant, uninformed council policy and incompetent city staff work, have led us to this pass. Rent a kayak and row around and under the wharf to see the deplorable condition of the pilings, peeling paint, and grime that marks our neglected showcase. We are reaping what City Hall cronyism has sown, and it will continue to track downward unless this new enlightened City Council is able to succeed in turning around the culture of profiteering, entitlement, and monopoly that has encrusted the wharf in the past 50 years. There are many battles ahead to be won and at least one general election to win if the citizens of Monterey are to wrest control back from the entrenched, wealthy and politically powerful merchants on the wharf.
The former Gilbert’s restaurant has become the poster tenant for those who argue that merchants can’t afford to make improvements to wharf properties without leases considerably longer than 10 years
TIDELANDS BELONG TO THE CITY
The relevant history actually starts in the 1880s, when the California Constitution (Article 10, ℥ 3) and Legislature granted the Monterey Bay tidelands to the City of Monterey “in trust” for the citizens of Monterey, in perpetuity. The city cannot sell or give away this land (to the median high tide) EVER, and by statute cannot lease it for less than fair market value or for longer than 66 years. It is known as “tidelands trust” property, status that places fiduciary restrictions on its use over and above any other city- or public-owned property. Prior to the installation of the present City Council, those fiduciary responsibilities have been observed far more in the breach than in service.
As best I have been able to determine, a private shipping company built the first Wharf I in the late 1880s under lease from the city. The city claims to have no records of ownership or interest in the wharf until the 1930s, when the city acquired possession and ownership of the wharf and everything on it that was nailed or bolted down, which at that time included sardine and fish processing, commercial fishing activities, and a few restaurants. By 1939, most of those commercial activities other than the sardine cannery (located on what is now Heritage Harbor) were owned by ethnic Japanese citizens and immigrants.
Tourists won’t learn much about Monterey at the wharf but they can find out who has the creamiest chowder
In 1939, Monterey passed into law its first Master Plan (and the only one until 2005). It presents a laudable vision of preservation of our historic character as a “waterfront town.” It is not that long, has some very interesting photos, and is well worth a read for those who like to ponder “what might have been.” Relevant to this historical account are the following excerpts:
“That portion of the Bay of Monterey which is owned or held in trust by the city is now being used, almost entirely, by private commercial interests. This situation has developed within the past thirty years. The development has been gradual, and it is only recently that it has been realized the best interests of the city have not been thus served. It has come to the point where the people of this city have practically lost control of their own property – the land and waters of Monterey Harbor.” ……….. “No one spot in our city is in more critical need of cleanup and a reinstatement of original scenic conditions than the area around the Old Custom House.” ……. “It is obvious that conditions must be bettered on every side of this structure before it can be seen and enjoyed to advantage by our citizens and all visitors. No parking of cars, no concessions, and no intrusive recreational facilities aside from an appropriate bathhouse, should be permitted anywhere along the shoreward side of the Southern Pacific Railroad tracks.”
The plan goes on to describe…..”In order to reestablish an approximation of a pristine shoreline aspect and insure it the noble setting it deserves, the following changes will be necessary”….. (including) …… “Fishermen’s Wharf is to be removed.” ….. “Booth’s Cannery, to the northwest of the Custom House Reservation, is to be removed entirely; and it is suggested that this site might offer a very interesting spot for seafood restaurants under proper architectural control and municipal ownership.” ….. (and) …… “Finally, we recommend that no concessions, except those provided for above, should be permitted in the Harbor of Monterey east of the breakwater.”
WHARF BUSINESSES DECIDE WHO CAN JOIN THEM
Interesting, eh? That City Council and Planning Commission, all of whose members individually signed the plan, clearly knew about the value of preserving our civic history and character, perhaps ahead of their time. That master plan was never changed in any significant way and was the law until superseded by a new Master Plan in 2005.
So what happened to that farsighted plan and its noble vision of a pristine waterfront town unlike any other in California? Some would say politics, but others might offer perfidy, cronyism, backroom sweetheart deals, and greed as the causative factors.
We all know what happened to the Japanese citizens and immigrants in 1941. When they returned from internment in 1945, none of their business interests on the wharf remained intact. That is no doubt an interesting and tragic story, but one that I don’t know. What we do know is that the 1940s became the heyday of commercial fishing and the sardine cannery, polluting the Monterey Bay almost beyond repair, and then the sardines went away in the 1950s. By 1955, the wharf was occupied by another ethnic group, Sicilian-Americans. And presumably the city was suffering an economic downturn post sardines.
It was 1958 when the city took its first official action to subsidize Fishermen’s Wharf private business – the enactment of the infamous Resolution 9000. This wharf ordinance, incredibly still in effect today, had the effect of freezing out competition from any business not already on the wharf. It limited who could have restaurants, who could have boats and of what size, and who could sell what and when. It even regulated who could sell chewing gum and gumdrops, and how many. Really! It’s a document that makes John D. Rockefeller and Standard Oil seem like pikers and must set T.R. to rolling in his grave.
It is available on the city website and reading it is worth a laugh or two. Unfortunately, the smirk subsides when you see that Res 9000 was used in 2008 in an attempt by the powerful Arcoleo family on the wharf, Harbor Master Steve Scheiblauer, and Rick Marvin, the city’s property manager, to squeeze out Monterey Bay Sailing, a sub-tenant to Tony Rappa, who owns the master lease at concession #21. (As an aside, Rappa has controlled that concession since 1985, despite never having paid anything for the control and has never conducted any economic activity there. He has never paid any gross percentage rent there but will continue to control it until 2041, long beyond his life expectancy).
Apparently Arcoleo did not appreciate the competition that Dutch Meyer’s small sailing school presented to his large whale-watching sub-tenant, not to mention that Dutch was an interloper to the closed wharf vendor community. The city went to a lot of trouble to get Dutch out by imposing impossible conditions on his small business, the only new economic activity and water dependent use on the wharf in 50 years. At one point, Scheiblauer imposed the Transient Occupancy Tax, also known as the hotel tax, on Monterey Bay Sailing because out-of-town sailing students who slept over on Dutch’s sailboats. He was prevented from investing in his business and expanding, but he is still there despite a city order to leave. The city is not doing anything to enforce his eviction; I suspect because city officials know it is a losing court case. The city has no power to regulate business in the manner of Resolution 9000 or to commit outrageous discrimination.
But I digress.
The next step by the city to formalize disenfranchisement of the public was the issuance in 1964 of 25-year ground leases to all existing tenants on Wharf I. The city claims that no real estate records exist from real estate dealings prior to 1964. I have read all of the leases, but very few exist even from 1964. I can only deduce from these leases and subsequent leases that recite October 1964 as the start of any contractual arrangement that all 1964 tenants were sitting on month to month leases in September 1964.
NEED FOR SUBSIDY ENDED DECADES AGO
This leads to one inescapable conclusion – the public then owned all buildings and improvements on the wharf and sitting on our tidelands. That is the well-established law since the days of the Magna Carta and confirmed by the California Supreme Court as early as 1905 when it ruled that tidelands owner City of Oakland obtained full ownership of wharf improvements following expiration of a ground lease. In Monterey, the existing 1964 occupants may or may not have built the buildings they occupied (no one has come forward with any substantiating records), but it is indisputable that those improvements had reverted to full ownership by the public by 1964.
So why did the city give away ground leases which charged rent only for the land, while giving away occupancy of our buildings for free? Among other things, this gift was unconstitutional (under Article 16, ℥ 6) which prohibits gifts or transfers of public assets without consideration. We don’t know. This was before the first Brown Act requiring transparency in public government decisions. Could have been strictly a back-room deal, or closed session, depriving the public of notice and opportunity to be heard.
In any event, this was the beginning of the sweetheart deal for wharf merchants. Perhaps there were cogent reasons to subsidize the wharf (declining economy post-sardines?) but I doubt the public was informed about the cost/benefit of subsidizing one isolated segment of the private business community. But by initiating leases that falsely recited that the tenants had built all the billings, the myth that the tenants owned the buildings began. It wasn’t true then, and it isn’t true now. None of those tenants who claim ownership can show you, now or ever, a deed or bill of sale.
These ground leases were for 25 years (through Sept 1989). They charged rent at $.10 to $.14 per square foot, ground floor only. Second-story space cost the tenants nothing. They required the tenant to maintain the premises and pilings underneath; and contained no options to extend the length of the leases.
It is in the nature of legitimate ground leases that they never include options to extend. Ground leases are, in the real world of arms-length commercial development, just a financing device whereby the landlord and the tenant allocate the responsibility for investing capital to a development. The landlord provides undeveloped land to a tenant who provides the capital to build the buildings. The consideration for the deal is that the tenant pays only a much reduced rent for bare land while using the building he has built for free. At the end of the term, usually 25 to 35 years (tied to the useful depreciated life of the improvement), the tenant leaves and the landlord gets full possession and control of the property, as built. If the tenant wants to stay, he negotiates a regular building lease and pays full market rent for the property as improved. It is a bit like a reverse mortgage in that the landlord pays off the cost of the building over the term of the ground lease through accepting greatly reduced rent, and then owns the property free and clear of any mortgage or ground lease. I hate to be so esoteric, but understanding the nature of a ground lease is essential to understanding the perfidy of the city as time goes along.
CITY NEGOTIATED WITH MAYOR’S LAW PARTNER
Sometime between 1964 and 1976, the Fishermen’s Wharf Association was formed by the wharf interests, chief among them restaurateur Angelo DiGirolamo, a councilman from 1963 to 1967. That created a “closed shop” environment on the wharf and completed the transfer of control of our waterfront from the public to commercial interests, as feared and foreseen by the 1939 City Council. City Hall was only too happy to cooperate in this transfer, abandoning its fiduciary duty as a trustee of our tidelands from then until the recent City Council began changing leasing policy this spring. It was during this time frame that the waterfront was paved over into a parking lot to facilitate the profits of private vendors on the wharf. No record exists of the public dialog about this, the worst land-use decision in the history of Monterey, and the city staff cannot tell me who and how the decision was made to ignore the master plan. In the recorded history of Monterey, it is simply a “fait accompli.” But it is a development that is emblematic of commercial control over our waterfront. Joni Mitchell wrote a song about it.
In 1976, the tenant association initiated negotiations with the city to amend and extend their blanket ground leases. No adult commercial landlord in her right mind would ever negotiate leases with a tenants’ union, but the city’s response was “how can we help you?” The issues and debate are set forth in a lengthy transcript from a 1976 council meeting. The association, represented by the law partner of then-Mayor Peter Coniglio, argued that its members needed more time to finance the repair/replacement of their pilings (there were then 13 years left on their ground leases) and asked for a blanket option to extend their existing ground leases by 25 years if they were to repair the piling before 1989. (Sound familiar?) In return, the association offered to revise the rent to pay 2.5% of gross sales, if greater than the $.14 per square foot they were then paying as minimum rent. At that time, market rent in Monterey was around $1 per square foot and 6 to 10 % of gross sales for similar retail and restaurant activities.
During the considerable discussion of the proposal, then-City Manager John Nail favored the tenants’ proposal and pointed out that the staff considered the wharf merchants to be “family.” Charlie Page, a prominent attorney and City Council member at the time, pointed out that it was not in the public’s interest to extend a ground lease. He was outvoted 3–1, and all leases were amended.
One would think that all the 32 or so tenant/concessionaires would have then jumped to take advantage of this additional gift of 25 years by doing what the old lease already required them to do – repair/replace their dilapidated pilings. Not so. Only three tenants (the “2014 three”) did so, in return for which their ground leases were extended to 2014. The others could not be bothered, in an apparent belief that the city would do whatever was requested of it by the Family on the Wharf. They were right.
The 1964 ground leases, other than the 2014 three, expired in September 1989. By the terms of those leases, and by law, the possession and control of the wharf buildings reverted to the public on that date, even assuming the fraudulent recitals about who built the buildings were true. The tenants had no option or right to “roll over” the 1964 ground leases, which should have been replaced by commercial building leases offered to the public at large in competitive bidding. And according to ℥ 6.4 of the Monterey Charter, new leases should have been at fair market rent based upon sound appraisal practices. Please note that space on the wharf has not been offered to the public or competitive bidding since 1964 – or maybe forever.
CITY ATTORNEY ESSENTIALLY SLEPT THROUGH TALKS
None of this happened. Instead, then-City Attorney Bill Connors (not a real estate expert), city Property Manager Bob Humel, and the tenant association attorney, former Mayor Coniglio, entered into private meetings to “hammer out” the terms of a new blanket ground lease covering all expired leases on the wharf. In a staff report dated Nov. 21, 1991, those terms were revealed to be minimum rent at $.35 per square foot, counting ground floor space only; gross percentage rent at 3% of gross sales; a new term of 30 years; rent adjustment every 15 years based upon agreement or arbitration; no tenant contribution to common area maintenance expenses, which would continue to be borne by the city’s General Fund; and tenant responsibility for maintaining only their own premises and pilings (which responsibilities had been mostly in default since 1964). To complete this transaction in which the tenants’ attorney essentially dictated terms, that attorney was allowed to draft the leases, which looked suspiciously like the 1964 leases, a form that was about 25 years out of date.
During a statement before the City Council in March 2011, Connors, by then a former city attorney, said he did not recall these negotiations, but that he “probably sat there making paper airplanes to throw out the window” while Coniglio and Humel went over the terms. In a 2012 letter in support of Surside/Balesteri’s attempt to cajole the council into extending the outrageous Sapporo ground lease beyond 2018, Connors claimed to be an expert in “municipal law” and said: “Public agencies don’t make profits, we’re not in ‘business’ to do so, and while under Prop 26 cities are free to charge market rates for leased lands, it does not do so to recover a profit …” Really? He signed his name to that. Connors did not opine on how a city was to determine which private persons were to benefit from profits thus declined.
The staff report offered as justification for this giveaway of millions of dollars of public money “the longstanding policy” of the council in favor of long-term leases. I’m guessing that the report was referring to the 1964 one-time “policy” of giving away 25-year ground leases. Under the mandatory report heading of “Alternatives Considered?” the staff reports “NONE.” (Really!). The council resolution approving the “new” blanket ground leases was approved unanimously, probably as part of the consent calendar, but I have been unable to find a record of the meeting approving the blanket ground leases. None of the current council members were on the council at that time, and Fred Meurer was the newly appointed city manager. It is difficult to blame this travesty on the council, which received atrocious support and recommendations from staff.
But the staff wasn’t done! Peter Coniglio, in his capacity as lawyer for the tenants, complained that Bill Connors had verbally promised to grant 20-year extensions to the 30-year 1991 leases if the tenants complied with their obligations under the new lease for the next five years. Yes, you read that correctly – if the tenants did what they were already required to do under the 30-year lease for five years, they got a thank you bonus of an additional 20 years. Recognizing that such a verbal promise was not enforceable unless the council approved it, Coniglio asked for such acknowledgment. A Dec. 21, 1991, staff report by the community director recommended approval, again probably “on consent” and, under the mandatory heading of “Fiscal Implications?” he reported that there were “NONE.”
CITY HALL APPARENTLY IS FLUSH
I have been unable to determine whether any significant oral report or discussion occurred before the public. And thus did the tenants on the wharf become overnight millionaires, with a feudal estate for 50 years during which they only had to pay about a third of fair market rent, while siphoning the other two thirds from the public treasury.
About 16 of the 1991 lessees took advantage of this gift by repairing or replacing their pilings by 1996 (what they should have done in the early 1980s). Their ground leases now run through 2041 – an eternity in the retail world. Several other leases, due to reasons that include deaths and estate confusion, expire in 2021. Those include leases held by the Shake family at Fishermen’s Grotto (highest grossing restaurant on the wharf) and by Mary Alice Fettus-Cerrito for the space formerly known as Gilbert’s restaurant. Both have been energetic about seeking extensions in the past year, with the specter of losing their place at the public trough looming in six years. As it stands, Fettus-Cerrito receives a stipend of $284,000 a year, according to city records, for controlling premises she can’t use and may have paid nothing for. Thankfully, the new leasing policies being put in place by the council majority will prevent a continuation of these profiteering outrages.
So what can we conclude, with some factual certainty, with regard to the 1991 leases?
1. THEY ARE ILLEGAL AS HELL! There is no arguing with the fact the city failed to obey its own charter requiring appraisal information and individual negotiation. City officials glossed over the legality issue by shuttering discussion of that topic in closed session in May 2011 and then saying only that the council had, on a 3-2 vote, decided not to engage in litigation over the issue. They thanked me for bringing this problem to their attention and then signed off by politely telling me to shut up. Two months later a motion was made to kick me off the Planning Commission (while I was on European vacation). The motion failed on a 2 – 3 vote.
With the help of my friend and ally the late Barbara Bass Evans, we got the Sierra Club interested in suing to void the leases for this blatant violation of the law. But after conferring with several of the Sierra Club’s high-powered Northern California lawyers, I had to reluctantly agree that it was then probably too late to win a lawsuit. The legal principle or doctrine of laches (latin for “don’t sit on your rights”) probably required a dismissal as 20 years had passed since the illegality. Too much water under the damn to put Humpty back on the wall, if I may mix metaphors.
2. UNCONSTITUTIONAL, ILLEGAL GIFT OF PUBLIC PROPERTY TO PRIVATE PERSONS FOR PROFIT. Here we return to the “who owns the buildings” conundrum, and proof that if you tell a lie often and long enough, people won’t accept the truth.
The law and economics of a ground lease cannot be disputed. The landowner owns his land and everything on it at the end of a ground lease, no if, and, or but. It is a reasonable supposition that the public already owned the buildings in 1964 when the city chose to use a ground lease as a vehicle to subsidize private business on the wharf, but I don’t have the evidence to prove it. But in 1989, no additional evidence is required – the buildings automatically reverted to the public at the end of the 1964 leases. End of story!
It is possible that city staff didn’t know what a ground lease was in 1989 – 1991, but I doubt that very much, for reasons I will not go into here. But I think it certain that key staff intended to cut a sweetheart deal for the backroom boys on the wharf. The effect of redoing another ground lease was to give those favored sons and cronies full use of the public’s buildings rent free. As I will show below, this unlawful decision has cost the Monterey taxpayers about $3 million a year since 1991, or $70 million and counting. The sum of lost revenue will be well over $100 million by 2041, the equivalent of the annual budget for Monterey. Of course, this revenue is not exactly lost – it lines the pockets of the wealthy merchants on the wharf.
That’s a lot of money, but the enormity of the deception practiced upon the public is best illustrated if I may return to the mortgage analogy. Making the false assumption that the wharf tenants all built their premises with their own money in 1964, they in effect lent the cost of construction to the public, which paid it off in full over 25 years through greatly reduced rent payments for prime real estate. After 25 years of timely mortgage payments, the bank says thank you very much and delivers to you the mortgage instrument, marked paid in full. Similarly, the ground tenant turns over possession of the building he built because he has received the benefit of his bargain, free use of those premises for 25 years. If he wants to stay, he asks for a commercial building lease at fair market rent and the parties go forward with the relative relationship they bargained for.
LEASES ARE WAAAAY BLOW MARKET RATE
But instead of that bargained-for outcome, the city in effect said in 1991 “we enjoyed paying that mortgage every month so much that we want to pay it off again, in this case twice more (until 2041, 50 years). No more money was lent; no more construction or improvement was given by the tenants. So the public is now about to pay off what is now a phantom mortgage in full a second time (2016) and can look forward to paying off a third phantom mortgage during the period 2016 to 2041. Imagine the uproar from the public if these consequences of rolling over ground leases were disclosed in the staff report and non-consent hearing in 1991. What would you do if your bank refused to cancel you mortgage after you paid it off and, instead, insisted that you pay it off again? You’d take it straight to the cops and the DA – there is a pretty obvious crime in there.
If, after this explanation, you still believe that the wharf tenants own their premises, then I give up. You are a lifetime member of the Flat Earth Society and are doomed to spend you life making snarky comments about the Emperor of the Wharf’s non-existant new clothes. Or you are one of the profiteers on the wharf.
3. THE 1991 LEASES ARE WAY BELOW MARKET. The market for minimum rent in downtown Monterey in 1991 was $1.50 to $2.00 per square foot, not the city’s figure of 35 cents. The market for percentage rent on gross sales for those activities usually employing that rent structure (restaurants) was 6 to 7 % statewide, not 3.0%. For prime property, like Cannery Row and the wharf, the market was (and is) in the range 10 to 12 %. These percentages don’t go up or down from year to year with inflation or deflation. They have been the same for 40 years, according to California Bar specialty books. And by 1991, commercial landlords were universally charging absolute net expense to the tenants – meaning the landlord was reimbursed by each tenant their proportionate share of absolutely every expense incurred in operating the property. Instead, the City spends about $600,000 per year for common areas, pilings and utilities, none of which is reimbursed by the tenants. The tenants pay for maintaining their premises and pilings which, even a most cursory inspection will disclose they do about as good a job of now as in 1964. If even just the cost of tenant pilings were collected by the city from the tenants, the city could control the appearance of the dilapidated wharf with timely repairs. But that is a lot of work for our public servants in the property management department.
The most glaring examples of a market lease are those entered into at the Sapporo building between Surfside (Ted Balestreri) and the two sub-tenants there. They pay top dollar, as they should for waterfront property, which is about 11 to 12 % of gross sales plus absolute net. Every tenant on the wharf should be paying a similar rent structure. Assuming that the city evicted the many wharf tenants who are so mediocre that they don’t pay percentage rent, it is a simple calculus to see that annual revenue from the wharf ($1.2 million in 2013) should be $3.6 million to $4.8 million, net.
4. LONG LEASES HAVE ENSURED PROFITEERING. I have previously debunked the notion that there is any reality to retail/restaurant tenants needing or getting long-term financing to improve their premises. Doesn’t happen. An easy example here would be the London Bridge Pub in the ground floor of the Sapporo building. Mr. Eales, the sub-tenant of Surfside/Balesteri, entered into a three-year lease around 2008, with additional options, to start. He made significant investment in tenant improvements. He was obviously able to depreciate those improvements over three years, and didn’t require secured bank financing. His gamble paid off as his business did well, and he is still there through 2018 by exercising options.
The real reason, and only reason, the wharf denizens want longer leases is to sub-lease or sell the lease as a capital asset. The huge profits enjoyed by sub-lessors are already demonstrated by my last post – Mary-Alice gets $22,000/month while the city’s share is $6,600/month. Most businesses on the wharf are on some kind of sub-lease at market rent, with the master lessor collecting somewhere between 50% to 75 % of that market rent.
Sales of the master lease are a different calculation. It is essentially a mathematical formula to determine how much you would be willing to pay in cash today for the right to receive an income stream for a specific time period. In its simplest form, consider much you would pay to receive $10,000 cash for one year, with your original investment returned to you at the end of the year. If banks were paying 5% on savings deposits, you might be willing to pay $200,000. Other variables come into play, but that is the essence of it.
On the wharf, the income stream is the difference between the paltry rent paid to the City and market rent. Using Mary-Alice again as an example, and assuming she had been able to extend her lease to 2041 as most of the others did, the question is how much would you pay to receive $284,000 per year for 25 years, in return for doing nothing? A simplistic answer in a climate where passbook savings account at most pay 2% interest, would be $14,200,000.
Some actual examples:
(a) Tony Rappa closed his restaurant at the end of the wharf in 2013 because of poor sales and his retirement. He listed it for sale after it was dark, but could only get an offer from fellow wharf tenant Jim Gilbert. The restaurant itself was of little value, but Gilbert was willing to pay $2 million for the lease rights through 2041. Although Gilbert and his agent said repeatedly that over $2 million extra would be invested in a new restaurant operation, Gilbert essentially changed the name and reopened the doors, enjoying his cheap rent ever since. Without 28 years remaining on his below market lease, Rappa would have received little or nothing from the sale, and the city would have been able to re-lease the property at market.
(b) The Sandbar Grill (on Wharf II) was held by Cereus Inc. and Anderson on one of the 1964 cheap ground leases which expired in 1989. Neither the city nor the Andersons made any effort to negotiate a new lease, which continued on a month to month basis for 12 years, until February 2001. I am informed that the Andersons were uncommitted about closing or selling so they did not initiate discussions. They were content to pay cheap rent while they made up their mind. Apparently the city property manager could not be bothered to manage this lease for 12 years. Then, the Andersons decided to sell and asked for a new lease. The property manager was only too happy to cooperate. He gave them another ground lease at about a third of market value for 24 years, whereupon they turned around in a year to sell what had been a low-value business for $2 million. The figure mostly reflected the value of the lease.
(c) In late 2010, Monterey Sport Fishing and Whale Watching, a long time subtenant on the wharf, was offered for sale at $250,000. The “Master Lease” was also offered for sale for $750,000 with the fillip “this is the First Master Lease Offered in Many Years Rare Opportunity.” That is a pretty good thumbnail – the below market lease is worth about three times as much as the business sold. And that particular lease had only four years left on it,
NO COMPETITIVE BIDDING FOR WHARF SPACE
There are other examples but you can see that these sweetheart leases created enormous value for private vendors, who paid nothing for the public gift. The amount of the windfall is the public’s money, but for incompetent management. A properly structured lease has no capital value for the tenant.
The only remarkable event with this history after 1991 until the past couple of years was the lengthly and expensive arbitration between the city and the Wharf Association in 2006 in which the city attempted to raise rents. We essentially lost that arbitration because our appraisers were hamstrung by the label at the top of the lease (Ground Lease). Even though they acknowledged that there seemed to be no rationality to a ground lease, they were stuck with appraising as though it were a righteous ground lease. The city obtained the magnanimous increase of percentage rent from 3% to 3.5%, when real market for a building lease was 10 – 12 %. One silver lining to that debacle was that our appraisers obtained accurate rent information from the Cannery Row Company (usually highly confidential) demonstrating just how low our rents on the wharf were.
I will not go into the additional subsidies given to wharf merchants for free county-resident parking, but it is about $500,000 per year additional.
The wharf businesses have an enormous competitive edge over downtown restaurants, which pay two to three times as much rent for premises not located over the water. That has compounded the difficulty of revitalizing our downtown, and that is not likely to change soon.
Well, this has become too long so I will quit. It is a luxury to have no limit of 250 words or 20 minutes to develop the facts and conclusions. This is the history as I understand it, after having read over 2,000 pages of lease and related documents, but it is not without a caveat. There are definite limits to what a private citizen can discover, even with diligent investigation. That is especially true when the city of Monterey devotes so much time and effort to hiding the ball from the public. The city claims all reports of rent and sales from leases on publicly owned property are confidential to protect the alleged privacy of the vendor, who in my view has no right or expectation of privacy when contracting with the public. And this city has a penchant for pulling anything into “closed sessions” without accountable minutes that would permit the public to evaluate the performance of city employees on matters of significant public interest. So my investigation is limited to what the city gives me for public records requests, which have on occasion been inadvertently incomplete.
Who am I and why am I doing this? I am a West Point graduate and decorated combat veteran who is now permanently 100% disabled due to exposure to Agent Orange in Vietnam. I have a transplanted heart and a myriad of associated maladies that keep me in regular attendance at Stanford or the VA hospital in Palo Alto. I practiced law, mostly as a sole practitioner, for 38 years, specializing in real estate. I have negotiated leases for dozens of tenants and landlords, as well as many other transitions and litigation. I am now retired for medical reasons, listed as suspended from the Bar, ineligible because of my inability to keep up with continuing education requirements. I do not expect to ever be able to re-qualify or resume practice at my age.
I have no economic interest in any activity on the waterfront and, other than Monterey Bay Sailing, have never represented anyone there. And I have no axe to grind or thing to gain by exposing this unfortunate matter. I do this because I am very disturbed and pissed off to see the public abused and deceived, especially from behind closed doors, by those who would profiteer at the expense of the public. While I have at times felt like a man alone in the wilderness, five years of effort by me and the likes of Nelson Vega are finally bearing fruit in the chambers of City Hall. Please join us in watching the waterfront carefully to the end that the public may finally regain control over our precious assets.
PROPRIETOR’S NOTE: Disagree with Willard McCrone? Tell us about it. Leave a comment below or write your own piece.