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Bill McCrone has a question for the folks at City Hall, and it’s a simple one: What’s the hurry?

Specifically, why are city officials renegotiating lease terms with Chris Shake for the Fisherman’s Grotto on Fisherman’s Wharf, where the city lease doesn’t expire until 2021. And why are they renegotiating lease terms with the Surfside entity for the London Bridge Pub property at the foot of the wharf, where the current lease still has 20 months to run.

Those renegotiations are the topic of a closed-door meeting of the council tonight.

McCrone is a former planning commissioner and longtime critic of the city’s leasing practices at the wharf, which he has researched extensively. In a letter to the city, he notes that the City Charter requires the city to collect fair market value on its properties. He asks how the city can calculate fair market value so far in advance.

“The California Constitution and numerous other state and federal laws prohibit government officials, elected or appointed or employed, from giving away public property for less than adequate compensation to the public.  If you extend these two outrageous ‘ground’ leases or enter into new leases at less than FMR (market value), you will be defrauding the public and giving public property to private persons for free,” McCrone wrote.

McCrone, a retired lawyer, also argues that Surfside holds the master lease on the pub property and profits handsomely by subleasing the property, performing little or no service of value in the process. He says that’s a violation of city regulations.

Surfside, headed by the Cannery Row Co.’s Ted Balestreri,  “is doing nothing more than managing a well seasoned property but receives 60% to 70% of the rent for management.  Five % to 10% is the market rate for commercial property management.  No matter how you paper it, extending Surfside’s management for more than 10% of gross rents is a fraud on the public,” McCrone wrote.

“The good ole boys are at it again.  The dust has hardly settled on the recent election before they have once again forced their noses under the tent to reap enormous public subsidy for their commercial operations.  The reasons to refuse this premature negotiation are now more numerous than they have been the past two or three times the Council has refused their requests.”

The Partisan emailed various city officials this morning to ask why the city would consider renegotiating the leases early. City Manager Mike McCarthy replied only that that was something under consideration. The Partisan could not determine late Tuesday what if any action the council had taken.

The City Council two years ago began efforts to reform leasing practices at the city-owned wharf, largely because several longtime leaseholders were operating at sweetheart rates bestowed on them decades ago. In some cases, those leaseholders are profiting handsomely by subleasing the properties, with none of the profit going to the city.

Wharf tenants responded with a public relations campaign accusing City Hall of seeing to out local businesses and replacing them with chain operations able to pay more. The businesses also complained that the city was seeking the shorten the length of the leases, making it difficult for the tenants to obtain financing. A handful of leases have expired during the debate and the city is negotiating with Bay Area firms to fill a couple of the spaces, but city officials maintain they recognize the value of unique, local operations.

The merchants’ resistance to various reform measures was fortified in November when longtime Councilmember Libby Downey, a leader of the reform effort, lost her re-election bid. She was ousted by Dan Albert Jr., the former school official who received considerable financial support from wharf interests. For practical purposes, the wharf interest generally enjoy support from a council majority.

In his letter, McCrone argues that any council member who has received more than $500 from wharf interests should recuse themselves.

“You ought to pass an ordinance to limit campaign contributions,” McCrone wrote. “Your self-serving failure to do so has initiated a strong sentiment among citizens to take this issue to the polls with a charter amendment.”

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The case for campaign contribution reform grows with each passing election.

Take the city of Monterey, for instance, where a reform-minded city councilwoman, Libby Downey, was knocked out of office in November by an opponent who raised nearly six times as much money, much of it from a segment of the business community that Downey had tangled with.

The successful candidate was Dan Albert Jr., son of the longtime Monterey mayor. In a three-candidate race for two seats on the council, he pulled in $53,365 compared to $9,411 for Downey and $8,549 for Alan Haffa, who retained his seat.

Downey and Haffa have led the city’s efforts to reform leasing practices at city-owned Fisherman’s Wharf, where some longtime tenants who negotiated sweetheart lease deals with the city decades ago are allowed to sublease the space to other businesses at greatly increased rates without the city receiving any share of the additional income.

The effort to change that and other practices has been met with furious resistance from wharf tenants, who have repeatedly  accused city officials of attempting to turn the wharf over to chain restaurants at the expense of local, family-owned operations. With Downey’s departure, the city has softened its approach to negotiating more taxpayer-friendly leases at the wharf. The city’s resolve weakened further when Councilman Timothy Barrett, previously in the Haffa-Downey camp on the issue, was somehow persuaded to switch sides. Haffa is now expected to be outvoted 4-1 on wharf matters, so the established wharf interests appear to have regained their grip on  city leasing policy.

Albert’s contributors listed in the most recent campaign spending reports include the Monterey Commercial Property Owners Association, $2,500; and two closely related entities, the Monterey Bay Action Committee and the Monterey Hospitality Association, $5,000 apiece. The $5,000 contributions came after the election and were presumably intended to help Albert build his treasury for a re-election effort. He also took in contributions from Monterey Fish Co., Randy’s Fishing Trips, the Cannery Row Co., Portola Hotel, Marriott Hotel and lawyer Tony Lombardo, who represents the Shake family interests on the wharf.

Incidentally, or not, in his previous role as associate superintendent of the Monterey Peninsula Unified School District, Albert was an active participant in the pay-to-play system of awarding school bond contracts to companies that provide most of the financing for school bond measure campaigns.

The Monterey district was not alone, of course. School districts throughout California and beyond traditionally financed bond campaigns with contributions from bond underwriters and construction companies that would directly benefit from the resulting school construction contracts. In California, the state Treasurer’s Office only last year enacted regulations that prohibit contracts from being awarded to the firms that financed the corresponding bond measures. Bonding companies can still contribute to bond measure campaigns but they cannot then recover their investment directly by receiving contracts in the same communities.

No one has accused Albert of any illegal or unethical activities. The connection between school bond campaign financing and subsequent contracts has been so clear for so long that the built-in conflicts of interests were widely viewed as a necessary cost of getting schools built or repaired.

While Albert was the local school district’s chief business officer, his wife, Sharon, ran the successful Measure P campaign that raised more than $100 million in 2010, and she received considerable and justifiable praise for her efforts. With district officials barred from direct involvement in bond campaigns, companies that went on to receive sizable construction or finance contracts contributed the bulk of the money needed to persuade voters to approve the MPUSD bond program. A sizable share of the resulting construction work went to campaign contributor Harris Construction of Fresno, now under investigation for a bid-rigging scheme in Fresno. Others contributing to Measure P and then benefiting from the construction program included the Piper Jaffray and Stone & Youngberg bond firms, Keygent Advisers, a San Francisco bond counsel and a Fresno architecture firm.

Efforts to limit campaign contributions locally have surfaced from time to time but most have sputtered as local political action committees such as the Monterey Bay Action Committee and the Salinas Valley Leadership Group have stepped up to support the most commerce-friendly candidates. At the moment, however, momentum appears to be growing for new, tougher rules that would affect candidates for the Monterey County Board of Supervisors.

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161ccd73a48f7d274937e3f79228a2a6People like controversy but only if the issues are straightforward and the arguments not too hard to follow. Unfortunately, that has not been the case with the long-running debate over the city of Monterey’s leasing policies at city-owned Fishermans Wharf, also known as the wharf or Wharf 1.

The problem is that while the property is public, the lease terms are not, primarily because the formula for determining the rents is based on the gross income of the various restaurants and other businesses. The business owners consider those figures proprietary and the city allows the numbers to remain confidential. That helps to create a debate long on talk and bluster and short on facts and details. Now that City Hall has ended its decades of rewarding friends with sweetheart deals at the wharf, reform-minded council members Libby Downey and Alan Haffa are leading an extremely difficult campaign to bring the rents up to market terms. The folks enjoying the benefits of the old deflated rents have responded by making the city out to be a villain on an inexplicable mission to drive out local tenants and bring in the chains. It makes no sense, but that’s what they’re left with as long as they don’t want to acknowledge the cheap rates they’ve been paying.

Now, here, for Partisan readers and their friends everywhere, is, finally, a simple account of how things work. It was put together by Haffa, one of the two City Council members who has been standing up to the moneyed interests at the wharf .

Haffa writes: “Businesses on the wharf pay a percentage of their gross revenue or a minimum rent per square foot, both of which are below market compared to commercial building leases. For example, wharf leaseholders pay 3 to 3.5% gross whereas other businesses in town pay 6 to 8% gross percentage rent; and wharf leaseholders pay 20 cents to 60 cents per square foot whereas typical commercial rents in town are $1.50 to $3.50 sq/ft.

“There are businesses on the Wharf that have paid as little as $400 to $680/month rent, which is far below market rent. In fact, the city recently signed three leases off the Wharf to local businesses for $3.00 to $3.50 sq/ft—or approximately five to ten times the sq/ft rent of businesses on the Wharf. And the city signed one lease on the Wharf with a local business at market rate and the new lease is a win-win for business and public alike.”

There is more to the issue, of course. Wharf business owners also contend, with only slight validity, that the city wants to sign leases that are too short to allow them to obtain the long-term financing that some of them need to finance improvements to their business. That may have been true initially but city officials agreed to grant longer terms, more than 10 years, for tenants who could make a case for them.

The wharf interests for the past year have engaged in a crafty public relations campaign that, like many crafty public relations campaigns, obfuscates the issues by creating a non-existent controversy. In this case, they argue via Facebook and other means that the city wants to drive out the existing mom-and-pop operations and bring in chain restaurants and maybe even a Hooters. City officials may be a lot of things but they’re not stupid. They know that tourists are turned off by the chains that have proliferated on Cannery Row and are far more interested in unique, local offerings. Don’t buy this nonsense.

Another thing Haffa and Downey are attempting to change on the wharf is the longstanding practice of long-term tenants subleasing their space for remarkable profits that don’t benefit the city. In other words, Tenant A pays X a month to the city to rent restaurant space under a lease signed 30 or 40 years ago. But Tenant A closed his/her restaurant years ago and now rents the space to Tenant B for X plus X plus X plus X. It’s a good thing for Tenant A, not such a good thing for the city or for you, unless you happen to be Tenant A.

By the way, at one point Haffa and Downey were on the winning side of the debate by virtue of the seeming alliance with Councilman Timothy Barrett. But Barrett has now drifted to the side of what one city critic has dubbed the Wharflords. He put out a position paper recently that takes the side of the tenants, going so far as to grossly overstate the amount of sales taxes generated by the wharf.

So what caused Barrett’s change of heart?

It’s not a mystery.

City campaign finance records show that Barrett received $4,000 in campaign contributions in 2014 from the Shake family, the largest single operator on the wharf. Restaurants and whale watching boats.

That amounted to nearly a third of his total campaign treasury.

Am I saying he sold his vote? I’d have to be a mind reader to make that allegation. But I do feel comfortable opining that he should disqualify himself from future discussions and votes on the subject. I raised that idea with him in an email but he hasn’t responded.

By the way, for the Jon Chowns and Chris Shakes and Tony Lombardos of the world, if you disagree with Haffa’s numbers, let’s see some facts, some numbers. No more of that “the city’s being mean to the tenants” stuff. And for Jerry Duncan, the former Fresno city councilman who has been part of the anti-city PR campaign. Please keep sharing your opinion but only after disclosing who’s signing your checks. Thanks.

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IMG_0690Monterey City Councilman Timothy Barrett frequently aligns with colleagues Libby Downey and Alan Haffa but has taken a sharp turn to oppose their effort to reform the city’s archaic leasing policies for the city-owned Fisherman’s Wharf.

Barrett has distributed what he is calling an “information paper” to argue essentially that the city treats commercial tenants at the wharf unfairly even though several are operating under below-market rental agreements negotiated decades ago.

Unfortunately for Barrett and others who have taken up the tenants’ cause, he sabotages his argument with erroneous information, including a huge exaggeration of the taxes generated by the wharf merchants.

Early in his paper, Barrett features a list of “incontrovertible facts.” One is that the city is spending some of the wharf income on impermissible expenses. He writes that state law requires all income derived from tideland properties to be expended in the tideland zone but he cites no examples of money improperly spent. The implication is that wharf income must be reinvested in the wharf, though state law and city policy clearly allow for the money to be used for other tideland purposes such as harbor dredging.

The heart of his case that the city is impermissibly profiting from the wharf and not reinvesting all the rental income into the wharf for maintenance, improvements or other expenses. He argues that the wharf enterprises are subsidizing the city and suggests it should be the other way around.

What’s wrong with his argument is simply this. If all the income from rental property had to be plowed back into the property, what would be the point of owning the property? Would any commercial landlords intentionally adopt a break-even business plan? The city could operate the wharf as a non-profit venture by offering discounted rental rates, but it would need to offer leasing opportunities to all comers and require them to provide a public service component beyond the catch of the day.

Which brings up another of Barrett’s “incontrovertible facts.”

Without much thought, apparently, Barrett writes this: “Incontrovertible Fact: Wharf 1 generates approximately 25% of the City of Monterey sales tax revenues. Sales tax revenues accrue to the General Fund where they support City services such as fire and police, services which benefit the entire community.”

The problem here is that the wharf generates only 4 percent of the city’s sales tax revenue, according to City Manager Mike McCarthy in a memo to the council last week. Not 25 percent. Not 10 percent. Four percent.

Barrett must not have thought about the scale of the wharf operations – a dozen or so restaurants, some gift shops, some fishing and cruising operations – and compare it to the scale of the rest of the sales tax-generating businesses in the city. Such as Del Monte Center, downtown, the Fremont and Lighthouse business corridors and, of course, Cannery Row.

You may have seen Barrett’s 25 percent figure repeated in a letter to the editor of the Herald the other day. That doesn’t mean it’s right.

Finally, Barrett falls for a big piece of the PR campaign being waged by the wharf merchants in support of the status quo. They have argued, without evidence, that the city’s effort to modernize the leasing structure would bring in chain restaurants and eliminate some of the unique and local operations there.

Barrett writes, “On multiple occasions during comments delivered to the Monterey City Council, proponents of the City’s Leasing Policies / Guidelines have indicated a desire to see corporate chains on Wharf 1 where locally owned and headquartered businesses now exist.”

I emailed Barrett over the weekend and again Monday to ask him if he could cite specifics. I haven’t heard back from him. Downey said Monday that she has not heard any city representatives say anything of the sort. She and Haffa, the chief proponents of reforming the lease policies, have made it clear repeatedly that they want the city to maintain the local character of the wharf.

The council takes up the issue of wharf leases again Tuesday night. With Barrett’s defection from the reform camp, it seems likely that the wharf interests will continue to chip away at the reform measures and that people who signed wharf leases years ago will continue subleasing the properties to others for multiples of what they are paying the city. It amounts to profiteering at the expense of taxpayers.

There’s a lot of tradition in a place like Monterey, the good kind and the not so good.

Here’s Barrett’s white paper and the city manager’s response.

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IMG_0686It is encouraging to see the number of interested parties responding to the accurate piece by Alan Haffa and Libby Down about the Monterey City Council’s action to finally re-exert control over Fisherman’s Wharf for the benefit of the public after 60-plus years of heavy subsidy for the good ole boys on the wharf. Some of the responses, however,  show the persistence of a great deal of misinformation foisted on the public by the Wharf Lords who are now seeing the end of the free lunch they have enjoyed at the public’s expense for 60 years.

Keep in mind that many of the existing terrible ground leases on the wharf will continue for another 25 years (until 2041) due to the incompetence of city staff and council in 1991 when they agreed to extend the leases for 50 years without any rent increase since 1977.

I will not repeat the long essays that I have posted in the past two years, which set forth the facts, rents, and accurate history of the wharf, but refer you to the Partisan’s archives (see Archive box on right side of page) where a search under my name will reveal the articles. Several items discussed above require further edification here:
(1) SAFEWAY LEASE. My recollection is that Safeway was paying about $12,000 per year in ground lease rent when its ground lease expired. The city had leased bare ground to Safeway in the 60s and Safeway developed the land, building and lot at its sole expense. That is the way a ground lease is supposed to work – the developer/tenant pays all cost of improvement and operation, in return for which the tenant pays the landowner a reduced rent to reflect that all the capital comes from the tenant. Into the bargain is the reversion of the property, with all improvements, to the landowner at the end of the lease term, when each party gets the full benefit of her bargain. The Safeway deal was a “Righteous Ground Lease,” good for the public and good for Safeway.

The city initiated negotiations to continue a “building lease” with Safeway at fair market rent (including gross percent) for another 25 years. Negotiations were successful except for one point. Safeway insisted that it have the unfettered right to assign the lease to anyone it chose in the event Safeway elected to leave the premises. This, of course, was unacceptable to the city, which had every right to vet any proposed assignee tenant, and in particular a need to ensure that whoever occupied the premises be a retail food store. Safeway was unwilling to budge from its most unreasonable condition, and the negotiations ended.

Trader Joe’s (Foothill Partners) then stepped up to negotiate a 66-year ground lease reflecting a much higher rent, but still recognizing that the capital of Foothill would be razing the Safeway building and constructing a new retail center that would include retail food. Both the original Safeway lease and the Foothill lease were well within reasonable commercial parameters for landowners. Those leases literally have nothing to do with the wharf leases, and nothing in common. They are apples and oranges to each other, and as fruit and widgets to compare with the aquarium tidelands lease.

(2) ACTUAL RENTS. This discussion would be much more illuminating if the city would release the actual rent figures (master and sub-lease) for the wharf. The city attorney has an opinion that such figures are confidential, but that is just her opinion. When a merchant leases public tidelands trust property from the public, it has no right or expectation that its sales figures will be kept confidential to hide the facts from the public. Yet that would apparently be the purpose of this city policy. It is unfortunate that it will take a lawsuit to obtain the transparency that is required for the public to evaluate the horrendous job the city’s property management has done since 1977 on these sweetheart leases on the wharf. No doubt the thinking is that a lot of problems would be unnecessarily created by telling the public the truth.

There are ways to get rent figures without the city’s cooperation. Based upon a city-commissioned appraisal in 2008, and disclosure of the tax and rent rolls by the Monterey County Assessor’s Office in 2012, we can closely estimate that the Balesteri lease (for three discrete retail spaces), which has just been terminated, earned between $905,386 and $1,000,000 in annual gross sales last year. Balesteri paid the City 3% of gross sales per year – $22,635 in 2008; and $18,511.49 in 2010. Fair market value for those premises is 8 – 10% of gross sales. Thus Mr. Balesteri received a subsidy from the pubic (mostly in the form of sub-lease rent retained) at the high end of $77,000 per year. It is understandable that he wanted to continue that windfall, for which he never paid anything whatsoever.

Balesteri is a small operator compared to the Shakes and Mary Alice Cerrito. According to a written sublease available at the city, Chris Shake received sublease rent from Fisherman’s Grotto in the amount of $27,563 PER MONTH in 2010, over and above the rent he paid to the city. Cerrito proposed to sublease the old Gilbert’s restaurant for in excess of $20,000 per month in 2015. I do not have figures from her current sublease to the Shakes, but it is fair to estimate that they pay her in excess of $20,000 per month from their new restaurant. Most tenants on the wharf pay fair market rent, but they pay it to sub-landlords, not the public. That is an outrageous ripoff. The new City Council policy will require a provision in new building leases that all sublease rent be paid to the city and the public.

(3) OWNERSHIP/REMOVAL OF BUILDINGS. The ownership of the buildings on the wharf is misunderstood concept number 1, and it seems to be intractable. The public owns the tidelands by constitutional grant in perpetuity. Under the law, the landowner owns the land and everything on it, including buildings, nails, and roof tile. The Wharf Lords repeatedly claim they own the buildings, a claim utterly devoid of the truth. If you own a real estate interest, you have a deed to prove your interest and you pay real property tax to the county. If you own personal property, you have a bill of sale and a title document to prove your interest, and you pay personal property tax to the county. The wharf merchants have neither. It would seem that the old propaganda axiom pertains – if you tell a lie often enough, the people will believe the lie over the truth.

It would appear that the claim that the merchants can remove the buildings when they leave is another intractable lie that won’t go away. The ridiculous lease provision saying that the tenant can remove the buildings they built within 90 days of termination of the lease is, and for over a decade has been, void. A California Court of Appeals decision (County of Santa Barbara vs. Channel Islands Marina) has established conclusively that such provisions in a tidelands lease are void because Coastal Commission approval of a demolition could never be obtained within 90 days, as a matter of law. Moreover, the Coastal Commission would never approve a demolition without receiving a conjoined permit request to replace the building with a new structure. Finally, no merchant is going to spend the million dollars required to demolish, which would be an utter waste of money.

As Alan Haffa says, the buildings revert to the public upon expiration of the lease, which is the modest benefit of a poor bargain struck by the council many years ago. Nothing whatsoever is due the tenant, who has received the generous benefit of its one-sided bargain in the form of many years subsidy in rent.

The hard won gains for the public that were voted for by Alan and Libby are at risk in the the November election. The Wharf Lords will spend heavily to get another tool like Councilman Ed Smith elected to change the balance on the council and roll back the public gains so that the ripoff on the wharf can continue indefinitely. Vote to return Alan and Libby to their seats on the council and preserve our waterfront to be operated for the benefit of the public, not the private business profiteers on the wharf.

McCrone is a retired lawyer and former member of the Monterey Planning Commission and other bodies. He has written extensively on the wharf leases, which are the subject of a sophisticated and misleading public relations campaign on behalf of wharf tenants who are attempting to prevent reform measures from going into effect.

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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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pu161ccd73a48f7d274937e3f79228a2a6 2ON THE WATERFRONT! This just in! …stop… Monterey tries to slide two stinking wharf fish past the public on the consent agenda. …stop… Sweetheart deals still to be had for members of the private Wharf Club. …stop… The malodorous pile of bureaucratic offal on Fisherman’s Wharf continues to grow. …stop… Where is Father Karl Malden when we need him?

If you don’t bird-dog the meeting agendas of the Monterey City Council, you would have missed items #11 and #12 on the consent agenda last week. Both pertained to the extension of sweetheart deals for longtime vendors on the wharf, and both demonstrated the continuing familial relationship between the city’s property management office (PMO) and the feudal wharf lords who have taken control of our waterfront.

Despite the many council hearings to set enlightened leasing policies for management of the wharf, over the past few months, these two items amply demonstrate that the city of Monterey is still incapable of dealing with the good old boys on the wharf at arms-length.

My written request to remove these two items from the consent agenda resulted in nearly three hours of public hearing, and a decision by the council to continue this to a later date for more information, instead of the rubber stamp the PMO intended.

Item #11 pertained to a request by a sub-tenant of “Wharf I Wharf Theater/Art Gallery Concession #10 Lease” to amend the lease to allow a “Gourmet Shop as Described in Resolution 9000” as a permitted use. Seems innocuous enough, doesn’t it? The PMO report describes a request to convert a storage space (probably 1,000 square feet under the main deck, but not identified in the report) into a “tea shop,” a retail use not permitted by Resolution 9000, but closely akin to a “gourmet shop” listed as a permitted use in Resolution 9000. The report claims that there are no direct fiscal implications and that the lease is “performing” with an annual rent “in excess of $40,000.” It concludes with a staff recommendation that no consideration be sought in exchange for this amendment, because it is good for the sub-tenant, the master leaseholder (DiGirolamo Enterprises), and the city. In other words, the PMO did not ask for any additional rent or other change to the lease for the benefit of the taxpayer, while expressing contentment with the leaseholder’s increase in profiteering off the public. Apparently it is entirely satisfactory to the PMO that DiGirolamo receive an additional $24,000 or so in sub-lease rent from the tea shop tenant while the public receives nothing.

What the PMO report concealed from the public and the council are several damning points material to any decision by the Council:

  • The lease for concession #10 is among the worst, if not the worst, example of profiteering off the public. It covers three floors of a building, last renovated sometime around 1971, but the master tenant only pays rent for the ground floor. So out of 11,200 leasable square feet on the premises, DiGirolamo only pays $.55/square foot for 4,461 square feet, or $2,454 per month. Versus this rent paid to the city, the existing sub-tenant pays $8,800 to DiGirolamo, who makes at least $6,400 per month off the public by profiteering. DiGirolamo is required by a written Covenant of Continuous Operation to conduct a theater activity for profit upon the premises. Instead, and in breach of his lease, the theater has been mostly dark for more than a decade and DiGirolamo has not paid one dime in rent for exclusive use of the theater (or for the 2,000 square feet of leasable space below the deck).
  • The PMO asked for no minimum rent whatsoever for the improved space conducting a new retail activity.
  • As a big kicker, DiGirolamo Enterprises has recently listed the sweetheart master lease (through 2041) for sale with a local broker for $1,795,000. Of course that is our money, given away by a past City Council in 1991.
  • And, lest we forget the purpose for this silly exercise, under Resolution 9000 a “Gourmet Shop” is prohibited from selling tea. By the way, the conversion of storage space below the wharf deck also violates the Wharf Master Plan.

We have examined at length the nature of the illegal and unconstitutional giveaway of millions of public dollars by the uninformed backroom deals in 1991. But like the layers of an artichoke, the perfidy of improper use of ground leases peels away with each layer of the problem revealed. It was not enough that the 1991 leases charged a rent way below market value, and created instant millionaires of the wharf lords with the ridiculously long terms, but the city gave away almost half of the leasable square footage on the wharf (all upper and lower floors) for nothing at all – not one dime in rent for this exclusive use of the public’s tideland trust property. As one result, DiGirolamo suffers no loss or cost for keeping the theater dark.

The only “alternative” offered by the PMO in its report is denial of the requested change in use. But if the council can deny the requested change of use amendment to the horrible ground lease, then numerous alternatives present themselves, none of which is disclosed by the PMO.

First and foremost, the city could extract conditions for its consent, such as: (a) charge fair market rent for the newly utilized retail space – maybe $2,000/month; (b) direct that all or 90% of sub-lease rent charged by the master tenant be paid to the city; (c) require that all leasable space in the building pay minimum rent; (d) require that the master tenant give up the 20-year option that extends the ridiculous lease from 2021 to 2041; or, finally, (e) require that the entire lease be upgraded to a building lease consistent with the new council leasing policies.

Any one or more of those alternatives, and any variation thereof, would improve the plight of the public/taxpayer and mitigate the losses of past management giveaways. If the City Council is firmly committed to rectifying the abuses of sweetheart deals in the past, why would the PMO miss an opportunity to leverage a quid pro quo to mitigate the losses of past malfeasance? Why do we not have a PMO that is committed to going after these sweetheart leases like a junkyard dog would go after a juicy bone that was mistakenly given away for nothing?

Why indeed? Is it because the PMO still regards the good ole boys on the wharf as family whose ill-gotten gains are to be honored and confirmed? And that is where the ubiquitous Resolution 9000 rears its ugly head. The PMO intended to avoid all these questions by making this application all about Resolution 9000, instead of the economic consequences of amending the Concession #10 lease. The PMO has an entrenched habit of wheeling out 9000 whenever it suits a purpose to maintain the status quo on the wharf.

So let’s examine Resolution 9000, which was enacted in 1957. It is accessible at the City Planning Department web page – under Waterfront Master Plan. You might want to read it in your spare time – it’s a hoot. It is almost incoherent as presented on the web page – portions typewritten from 1957 intermixed with uses added in later years through 2003 and taped together in no particular order. It is reminiscent of a set of private clubhouse membership rules scrawled by the neighborhood boys on a cardboard wall in their tree house – no gurls, how much soda pop Spanky must bring to the Monday meeting, etc. I think of them as the Tree House Rules.

The Tree House Rules set forth, by my count, 25 approved uses on the wharf, from “retail fish markets” to “handcrafted artifact shops” and include “Acquariums,” (sic) “Theatre,” and “Wharf Theater,” which, in addition to theatrical productions is only allowed to show “documentary films related to the fishing industry.” Those uses do not include shoe stores, dress boutiques, Internet cafés, or jewelry stores.  You would no doubt not be surprised that the list of approved uses included only those uses already existent on the Wharf.

Without any preamble or recitation whatsoever as to claim of governmental power or necessity, Resolution 9000 goes on to describe in detail the products and activities that each permitted use is allowed. “Restaurants” are permitted to sell all manner of food or drink and “patented medicines.” Of all the shops, only “tackle shops” are permitted to sell “bandaids,” “Kleenix” or combs. “Gift Shops” are permitted to sell “appropriate items for gifts,” no food or drink except “candy…(and)… soda pop dispensed by coin-operated machines” and “no other items to be sold or served except those expressly above permitted.” Among the items “Candy Shops” are permitted to sell are “surprise grab gifts (includes combs, nail clippers, etc.),” but no soda pop.

You get the idea of the nonsense that is contained within the four corners of Resolution 9000. Any citizen of Monterey would be embarrassed to have a stranger or prospective tenant read this sloppy mess with its 60-year old typos. And if any prospective tenant were told that the Tree House Rules governed all leases, she would look at you like your hair was on fire and run the other way.

Yet the PMO treats this mess as though it was carved in two stone tablets and has used it to assist any wharf lord who wants special treatment. “Retail Fish Markets” and “fish stands” can sell tea, but not gourmet shops. The PMO has used it as a bludgeon to prevent the successful initiation of a highly desirable “Monterey Bay Sailing” sub-tenant for over nine years (this is the subject of Agenda item #12).

Where did Resolution 9000 come from in 1957? Nobody is around to tell us, but it is a pretty fair deduction that it was the product of squabbles between the wharf merchants who wanted to minimize competition on the wharf.   Chewing gum must have been a big money maker in 1957, hence it is on several restricted lists, but not on others. Same thing “soda pop.” And there must have been continuing disputes between “Wholesale Fish Markets” and “Retail Fish Markets,” the latter required to have “a dedicated cash register” and “product identification” and “price marking tags.”

So the folks on the wharf must have persuaded City Hall to enact legislation to limit competition and squabbles on the wharf. You can just see the good ole boys sitting around with staffers and whining about the price of soda pop. The fact that the city had no power to do so must not have occurred within the family that was the wharf merchants and the City Council and staff. And by freezing uses and competition on the wharf, the merchants became feudal lords able to exclude anyone else from the opportunity to profit (and profiteer) off the public land. That continues to this day.

In effect, the Tree House Rules created a private members-only club of white vendors, and their heirs, with control over the public’s Tidelands Trust property, seemingly in perpetuity.  You can’t try your hand at running a business on the wharf unless it is already there. The wharf became a “closed shop,” fortified by an officious city only too happy to codify the entitlements of favorite sons. Why bother to erect signs saying “no African-Americans and no Hispanics” when you can get the government to legislate de facto segregation?

Anyone who has any sense of the proper role and powers of government has only to read Resolution 9000 to realize that it is illegal as hell. Do you really think your city government has the power to tell a private retailer whether or not she can sell chewing gum? Or that no other store but a tackle shop can sell bandaids and kleenix? And do you think that government can turn over public property to a private association that excludes minorities?

Other than violating the Fourteenth Amendment and the Ninth Amendment, which reserves to our citizens the right to be left alone from unwarranted interference by government, Resolution 9000 clearly purports to interfere with interstate commerce, which is the exclusive province of the federal government. Beginning around 1957, the United States took exclusive control under its constitutional power to regulate interstate commerce, in aid of its commitment to extend civil rights to all citizens, regardless of race or color. It is a foregone conclusion that the Feds can regulate seating arrangements in a café in Biloxi, Mississippi because some part of the donuts sold there came across state lines. Same for chewing gum, the regulation of which is preempted by federal law absent proof of a compelling state interest.

There are many state and federal laws that prevent unfair competitive practices and restraint of trade, and none would allow a government to enact the Tree House Rules. And then of course, there is the fundamental axiom that municipal government cannot do things that are ultra vires of its powers.  Charter cities are not in the business of regulating internal affairs of a private business by telling them who has to have a “dedicated cash register” and a hundred other restrictions that are set forth in Resolution 9000.

So we have established that Resolution 9000 is illegal, unconstitutional, unenforceable, and silly nonsense. It should have been stricken from the books decades ago. The longer it remains in the PMO tool chest, the longer it will be before we can begin running the public’s wharf on an arm’s-length basis. And the longer it will take to locate new, energetic tenants to take up residence at our Fisherman’s Wharf.

No reputable retailer would touch a place controlled by Resolution 9000 with a 10-foot pole. That is one reason that Anthony Rappa couldn’t find an outside buyer for his master lease in 2013. And, unless it is promptly repealed (together with the Wharf Master Plan), that is one reason that DiGirolamo will have trouble selling its master lease for $1.795 million. The result is that the Shakes or James Gilbert will try to buy it, and thus push their stake in the wharf to over 50%.

I certainly have no sympathy for DiGirolamo, but if the lease is to be sold, let it be to an outlier who will bring some variety and energy to the wharf. Imagine what a boon the Wharf Theater could have been if DiGirolamo had the slightest incentive to bring customers down to an active theater venue.

Agenda item #12, concerning the hammer side of the Tree House Rules, used to hourly micromanage Monterey Bay Sailing and squeeze it out of business entirely, will have to wait for another investigative report. Similarly needed examination is the city’s refuge behind a private contract clause to circumvent the Public Records Act and deprive the public of full disclosure of the state of our wharf leases by refusing to disclose rental income information.

The strong implication from the recommended treatment of these items is that the city’s property manager will continue business as usual over the past 60-plus years, ignoring the council’s direction that there are to be no more sweetheart deals on the wharf or anywhere else.

Apparently the culture of concealment and backroom dealing to accommodate city favorites over the public interest will take years to overcome and constant vigilance by concerned citizens. Unless we citizens make known our dissatisfaction with the culture of conspiracy and nondisclosure fostered by the Tree House Rules and the PMO, we will have to continue to scrabble to stay ahead of the latest sweetheart deal. And unless the City Council begins to insist that it and the public receive full and accurate disclosure and intelligent debate of real property management matters, we will all continue to exist as mushrooms – kept in the dark and fed horse manure.

Willard P. McCrone is a member of the Monterey Planning Commission  and has twice served as chairman. He also has been a member of the Parks and Recreation Commission. He is a retired lawyer who lives in Monterey and he has written previously on wharf issues.

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Useful wharf info here

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Here are some links to information about wharf leases and related matters on the city of Monterey web site, thanks to an alert and helpful city staffer.

Direct links to the documents are:

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Solid wharf explainer in today’s Monterey Herald

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161ccd73a48f7d274937e3f79228a2a6I recommend that Partisan readers check out today’s Herald story about the controversy over the leases at Fisherman’s Wharf. It is not the end-all, be-all story but it does do a nice job of framing several of the issues and comparing the situation here to other communities with wharves.

I would have liked to have seen more numbers about what the leaseholders are paying and how much they are receiving from subleasors, but some of that is legitimately confidential.

If you haven’t seen it, scroll down and you’ll find several earlier Partisan stories about the wharf issue and much back and forth between those who believe the powerful business interests were handed the keys to the city treasury when they were gifted with wharf leases decades ago, those who think that analysis is flawed and those who don’t have a clue either way but who have been asked to weigh in by relatives and business associates.

I would like to see the city staff, perhaps working with a commercial realtor or property manager, provide a public primer and FAQ sheet on the leases and the lease issues but apparently not even a City Council majority has been able to get the staff to provide such a thing. My suspicion is that the folks doing most of the profiting off outdated lease policies believe that clarity is not their friend. Are the leaseholders more powerful than a council majority? Yes, it seems that way.

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Illustration depicting a large number of directional roadsigns in a chaotic arrangement. White  background.After careful contemplation and the expenditure of countless hours of staff time and other resources, I have come to the conclusion that the two biggest problems facing the Monterey Peninsula are quite closely related.

Problem No. 1, of course, is the declining water supply, which should have been addressed decades ago before we decided that strawberries and grapes were good choices for desert cultivation. The leading proposed solution at the moment involves a possible desalination plant near Marina and an assortment of smaller efforts involving conservation and recycling.

Problem No. 2, almost as obviously, is that just about every element of Problem No. 1 seems so complicated, complex and confounding that there are only a handful of people who understand any of it. On top of that, most of those who do understand it don’t care that you don’t. In fact, some are glad you don’t and there are even those who are being paid to make sure you don’t.

Why so complicated?

First, complexity makes things more expensive,  and when you’re on the receiving side of “cost plus,” there’s a lot to be said for expensive. Second, with all of that cost plus to be spread around, there are many players willing to participate in the search for solutions. Too many.

That starts with the misleadingly named California American Water Co., which has as much to do with California as the autobahn. It is supposed to be playing a lead role in solving Problem 1 but it spends most of its time wading around in the swamps of Problem 2, creating complications and looking for trouble. The company likes to portray itself as a helpful fellow in boots going out into the community, patching leaks and coaching Little League teams when the truth is that the bean counters in the home office depend on those very leaks in order to keep the bottom line above water. Way above water.

Then there’s the Public Utilities Commission, which technically is in charge of solving Problem No. 1 even though it has absolutely no experience in problem solving and even less in desalination. The Public Utilities Commission apparently was put in charge of this process because our state legislators wanted to keep it away from all aspects of gas pipeline safety. You might say that the PUC is Problem No. 3.

A key concern of those involved in the effort locally is that if the PUC ever approves a timeline and a production schedule, it might as a matter of routine order them confidential and put them under seal, effectively killing the venture.

Then there are the local agencies. For instance, the mayors’ authority, a quasi-government agency made up of the mayors of the Peninsula cities. It was set up because the first local agency given an oversight role, the Monterey County Board of Supervisors, couldn’t figure out how to convert desalination progress into campaign contributions. The supervisors are hoping to get involved again when construction seems imminent and quite a few construction contracts will need to be awarded.

The mayors’ committee was hoping to jumpstart the process because the hospitality industry pretty much decides who gets to be mayor in these parts and it needs water for hotel rooms occupied by tourists who won’t have to pay for the project. The mayors have gotten off to a slow start, however, because the Del Rey Oaks mayor is busy building ammunition bunkers throughout his community and the Sand City mayor is napping.

A water district in Marina has some role in all of this, but for now its leadership seems to be in a sort of bureaucratic penalty box and won’t be allowed back into the game until the second overtime period. It is a shame because some of the district’s leadership has demonstrated to interested members of the public that you don’t have to have a clue to get involved.

Part of the problem has to do with the news coverage but it isn’t what you might expect. In this age of shrinking newspapers, it hasn’t been a lack of coverage. Just the opposite. In the last decade, the Herald has published nearly 173,500 articles mentioning Cal Am, 62,600 articles containing acronyms for non-existent water agencies, the same number of articles in which Cal Am spokeswoman Catherine Steadman says, “We’ll get back to you about that,” and some 20,000 articles in which County Counsel Charles McKee says documents are being sealed in the interest of full disclosure.

Some of the confusion is, of course, the public’s owned damned fault. For instance, believe it or not, there are those in the community who can’t seem to grasp why   a desalination plant designed to take water from the ocean and convert it into drinkable fresh water needs to drill a series of inland wells in order to take already fresh water from Salinas farmers and, through a process invented by the Coastal Commission, convert it into cash to be used to pay consultants to declare the existing water supply more than adequate as an effective hedge against the 180-foot aquatard. Do the math, people. Sheesh.

Cal Am isn’t the only game in town, of course, which makes things that much more complicated.

Peninsula wheeler-dealer Nader Agha has the property and the plans to build a better and cheaper desalination plant in Moss Landing but Cal Am keeps telling people that Agha and former county Supervisor Marc del Piero are the same person, which violates a county ordinance requiring desalination operators to front only for seated supervisors.

Then there’s Deepwater Desal, a creation of Monterey PR man David Armanasco, who has been sidelined because his core clients have hired him to paint murals of wharf pilings to installed over the actual pilings at Fisherman’s Wharf.

And speaking of the wharf, let’s not forget the lawyers. Every lawyer in California who ever lived in a house with a low-flow shower has been declared a water expert for purposes of this feeding frenzy. For convenience and efficiency, each seems to have brought on Tony Lombardo as local counsel. Those who have been around a while will remember him. He wrote the previous general plan while representing most of the supervisors and many of the businesses at Fisherman’s Wharf, including the two warring fish houses that both claim to have invented cioppino Monterey, which consists of a handful of saltwater taffy, samples of five kinds of clam chowder, a couple of restaurant pagers, Sal Cerrito’s will, a half loaf of Armenian pita bread and a half pound of Bubba Gump shrimp but, alas, no sardines.

And let’s not forget the environmentalists, the “no-growthers” who, we are constantly told, are busily working against the interests of the community to reverse all the  progress on the desal front.

Next: Sheriff Bernal’s plan to patrol the waterfront.

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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.

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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.

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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.

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161ccd73a48f7d274937e3f79228a2a6The 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:

EDITOR
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
Monterey

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How could I forget to follow the money?

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161ccd73a48f7d274937e3f79228a2a6Gramps also told me to always check campaign contributions when writing about political issues but, doggone it, I forgot to do that before writing the piece about the smackdown attached to the leases at Fisherman’s Wharf in Monterey.

Sure enough, there were some contributions that may help explain why Councilman Ed Smith thinks the existing policies are just fine and why he hasn’t joined with  Alan Haffa, Libby Downey and Timothy Barrett in trying to put some business sense into the process.

I haven’t been able to find Ed’s campaign reports from his first attempt at a council seat, but when he ran last year he got the following contributions from folks who’d like to preserve the sweetheart arrangements at the wharf:

Chris’ Fishing Trips, $250.
Mercurio Brothers, $250.
Monterey Bay Boat Charters, $100.
Cafe Fina, $250.
Ben DiGirolamo, $100
Sam Balesteri, $1,000
Monterey Bay Silver, $250.
Coniglio Family Trust, $250.
Benji Shake, $200
Mary Alice Cerrito Fettis, $100.

The names of some people with wharf interests were conspicuously absent from Smith’s reports. I’m guessing, and it is only a guess, that some of them might have been behind a $2,000 contribution from something called the Monterey Bay Action Committee, with a Carmel address. The thing is, I don’t know what the Monterey Bay Action Committee is but something tells me it’s the Peninsula’s answer to contractor Don Chapin’s Salinas Valley Leadership Group. If you know, please chime in. If I’ve got it wrong, please chime in very loudly.

The fifth member of the City Council, Mayor Clyde Roberson, is also opposed to changing the wharf leasing policies. He ran unopposed for his seat and didn’t receive campaign contributions. So that’s not it. It would be great if he would give us his take on the topic.

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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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