DATE: November 17, 2015
SUBJECT:
Title
ORDINANCE GRANTING 12-YEAR, 13-DAY(S) LEASE WITH ONE, 5-YEAR OPTION AND ONE, 4-YEAR OPTION TO EXTEND EXPIRING ON DECEMBER 31, 2036 TO SAN DIEGO REFRIGERATED SERVICES, INC. FOR REFRIGERATED AND WAREHOUSE SERVICES AT THE TENTH AVENUE MARINE TERMINAL
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EXECUTIVE SUMMARY:
In July 2000, the Board granted San Diego Refrigerated Services, Inc. (SDRS) a lease with the District to operate a cold storage facility at the Tenth Avenue Marine Terminal (TAMT), providing on-terminal cold storage service to the District’s refrigerated cargo customers. The current lease has been amended four times, including extending the original lease term, eliminating a requirement for additional capital investment, and reducing the Minimum Annual Guarantee (MAG). The current lease term expires on June 30, 2025.
In 2007, SDRS had reductions in their break-bulk operations which reduced the throughput based on metric tonnage of goods imported through SDRS. At the same time, SDRS began to handle more of the Dole container cargo in the refrigerated storage facility. The District and SDRS disputed the applicability of Dole cargo as it relates to SDRS’s MAG obligation under the lease. This dispute in the MAG led to several years of litigation and eventual mediation between the District and SDRS.
In 2010, the District and SDRS filed suit against one another. In July 2012, the District engaged in formal mediation with SDRS through the Judicial Arbitration and Mediation Services (JAMS). Mediations took place on June 29, 2012 and July 2, 2012 before mediator Mr. Alexander Polsky. Settlement terms were reached and the parties executed a Stipulation for Settlement Agreement (Stipulation) approved by the Board.
Pursuant to the Stipulation, the District negotiated a new lease with SDRS (see Attachment A for proposed lease), including:
• Increased flat land rent starting in year two of $475,000 annually with Consumer Price Index (CPI) adjustments every three years. CPI adjustments have no minimum and maximum; however, the rent shall never be less than $475,000 annually. SDRS’ flat land rent under its current lease is $300,000 annually. This is an increase in revenue to the District of a minimum of $175,000 annually.
• MAG requirement is removed, eliminating the ambiguity of throughput ownership.
• Maritime cargo 80/20 majority ratio requirement, guaranteeing that 80% of SDRS’ cargo is by waterborne vessel.
• SDRS receives revenue sharing from the District (50/50) for all wharfage that the District collects on cargo that passes through SDRS’ leasehold.
• The term of the proposed lease has been extended to 2027 with one, five-year (5) option and one, four-year (4) option through 2036.
• The District receives a new guaranty.
As discussed more fully below, SDRS has agreed to all terms of the proposed lease. Therefore, staff recommends that the Board grant a 12-year lease with one, five-year option and one, four-year option to SDRS.
RECOMMENDATION:
Recommendation
Adopt an Ordinance granting a 12-year, 1-month lease with one, 5-year option and one, 4-year option to extend expiring on December 31, 2036 to San Diego Refrigerated Services, Inc. for refrigerated and warehouse services at the Tenth Avenue Marine Terminal in San Diego, California.
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FISCAL IMPACT:
The terms of the new lease with SDRS guarantee an increased flat rent to the District for the duration of the term through December 31, 2036. The rent for the first year shall be $300,000 annually, adjusting up to $475,000 during the second lease year, subject to CPI adjustments every three years. The CPI adjustments have no minimum and maximum requirement; however, the annual rent shall never be less than $475,000. By year two of the lease, the annual revenue to the District will increase by a minimum of $175,000. The table below summarizes the annual rent for the proposed lease.
Compass Strategic Goals:
This agenda item supports the following Strategic Goal(s).
• A Port that the public understands and trusts.
• A thriving and modern maritime seaport.
• A financially sustainable Port that drives job creation and regional economic vitality.
DISCUSSION:
Lease History
In July 2000, the Board granted SDRS a lease with the District to operate a cold storage on-terminal facility at the TAMT. By providing on-terminal cold storage service to the District’s refrigerated cargo customers, SDRS plays an important role in the District’s ability to attract refrigerated cargos at TAMT and remain competitive in the market. The lease has been amended four times: May 2001, May 2002, December 2004, and March 2007, which included revised terms as follows:
• Lease Term-The original lease term was extended from 2010 to June 30, 2025.
• Capital Investment-SDRS was not required to make any further capital investment for the lease term extension.
• MAG-The MAG was reduced from 125,000-200,000 metric tons (MT) in years 3-10 of the original 2000 lease to 50,000 MT per year for the remainder of the lease term through 2025. The MAG was reduced to an amount more realistic with SDRS’ business; however, the rate increased to the then current rate of $3.00 per MT from $2.25-2.75 per MT.
The current amended lease’s rent component is structured with base rent, plus a MAG for throughput at the cold storage facility. In 2007, SDRS had reductions in their break-bulk operations which reduced the throughput based on metric tonnage of goods imported by SDRS. At the same time, SDRS began to handle more of the Dole container cargo in the refrigerated storage facility. SDRS maintained that Dole cargo, which went through the refrigerated storage facility, counted towards SDRS’s MAG. This initiated a dispute in the MAG and led to several years of litigation and mediation between the District and SDRS.
MAG Dispute
The District and SDRS have been disputing the applicability of the MAG since approximately 2003. The main issue is that the District imports refrigerated cargo that passes through SDRS. The District’s believed that Dole’s cargo did not count towards the SDRS MAG as Dole pays the District directly for its wharfage and dockage and SDRS is not the importer of Dole cargo. At the end of fiscal year 2008, the District determined that SDRS had a shortfall in its MAG. SDRS, however, always asserted that the Dole cargo counted towards its MAG and therefore, SDRS concluded that it had always exceeded its MAG requirements. In an effort to resolve the difference of opinion as to applicability of the MAG, the District first entered into informal mediation settlement discussions with SDRS in 2008. This included both Commissioners and District staff. SDRS paid some of the MAG in arrears (approximately $34,000) under protest subsequent to those informal discussions.
The following summarizes the disputed MAG shortfall payments owed to the District for fiscal years 2008 through 2012 at the then-current rate of $6.09 per MT:
• FY 2008-$122,593 (based on shortfall of 20,130 MT)
• FY 2009 through FY 2012-$304,500 per year, totaling $1,218,000 (based on shortfall of 50,000 MT per year)
At the time of formal mediation with JAMS on July 1, 2012, the cumulative total disputed shortfall in MAG payments was approximately $1,340,593.
Litigation and Settlement
In June 2010, the District filed suit against SDRS claiming breach of contract and breach of good faith. In September 2010, SDRS filed a cross complaint, including breach of contract, fraud, breach of good faith, intentional interference with prospective new business, trespass, interference with quiet enjoyment, and declaratory relief. Since 2010, both the District and SDRS engaged in numerous settlement discussions to resolve the dispute.
In July 2012, the District engaged in formal mediation with SDRS through the JAMS. On June 29, 2012 and July 2, 2012, the District and SDRS reached settlement terms and the parties executed a Stipulation for Settlement Agreement, pursuant to California Code of Civil Procedure Section 664.6. The Stipulation, as approved by the Board, increased SDRS’s base rent and eliminated the MAG, among other things.
Throughout the remainder of 2012 and into 2013, staff had numerous working sessions with SDRS to facilitate agreement to the terms for a new lease which would clarify the obligations of each party. By the fall of 2013, there continued to be outstanding issues where the parties could not reach agreement.
The parties returned to Mr. Polsky on February 17 and 21, 2014 for further mediation and a final decision by Mr. Polsky of all unresolved lease issues. The outstanding lease items were resolved. Mr. Polsky ordered that the Lease be finalized by the parties on March 3, 2014. After the final order by Mr. Polsky, the District initiated the mandated California Environmental Quality Act (CEQA) review.
During the CEQA process, SDRS determined that it no longer needed the preferential berth as contemplated in the Stipulation. The District agreed and released SDRS from any capital improvement requirement for the new lease. In removing the preferential berthing provision, the District regains an important asset and greatly enhances Tenth Avenue Marine Terminal’s marketability to current and future tenants. The parties agreed to modify and further amend the Stipulation to reflect these new terms. The District finalized lease negotiations with SDRS in good faith and agreed on all lease terms as detailed below.
Proposed Lease Terms
Pursuant to the Stipulation, the District negotiated a new lease with SDRS that provides the District with the following benefits:
• Increased flat land rent starting in year two of $475,000 annually with Consumer Price Index (CPI) adjustments every three years. CPI adjustments have no minimum and maximum; however, the rent shall never be less than $475,000 annually. SDRS’ flat land rent under its current lease is $300,000 annually ($175,000 annual revenue increase to the District).
• Removed MAG requirement, eliminating ambiguity of throughput ownership.
• Maritime cargo 80/20 majority ratio requirement, guaranteeing that 80% of SDRS’ cargo is by waterborne vessel.
• SDRS receives revenue sharing from the District (50/50) for all wharfage that the District collects on cargo that passes through SDRS’ leasehold.
• The term of the proposed lease has been extended to 2027 with one, five (5) year option and one, four (4) year option through 2036.
• District receives a new two-party guaranty.
Additionally, the lease provides SDRS the following terms:
• SDRS has been granted a use that includes non-perishable general cargo and non-strategic military cargo to reflect existing conditions.
• No additional capital investment is required of SDRS.
Additional information pertaining to the current and proposed lease is included in Attachment B “Current and Proposed Lease Information Summary.” Staff believes the proposed lease benefits the District in many ways including an increase of $175,000 in annual revenue, CPI adjustments every three years with no minimum and maximum, and removal of the MAG requirement which will eliminate ambiguity of throughput ownership. Additionally, maintaining the maritime cargo 80/20 majority ratio requirement and the revenue sharing will ensure that the majority of SDRS’ cargo is brought in by waterborne. Finally, having a two-party Guaranty provides the District with a financially secure asset.
Conclusion
After several years of mediation and negotiations, the District and SDRS have agreed to all terms of the proposed lease; therefore, staff is recommending that the Board grant a 12-year, 1-month lease with one, 5-year option and one, 4-year option to extend expiring on December 31, 2036 to San Diego Refrigerated Services, Inc. for refrigerated and warehouse services at the Tenth Avenue Marine Terminal in San Diego, California.
General Counsel’s Comments:
The Office of the General Counsel has reviewed and approved the proposed lease as to form and legality.
Environmental Review:
The proposed Board action to grant a new lease to SDRS for refrigerated and warehouse services at the TAMT is Categorically Exempt pursuant to California Environmental Quality Act (CEQA) Guidelines Section 15301 (Class 1 - Existing Facilities) and Section 3.a of the District’s Guidelines for compliance with CEQA because the proposed lease (i.e., project) will involve no expansion of use beyond that previously existing. Rather, the proposed lease updates the rental structure, other administrative terms, and clarifies the uses currently occurring on the project site. No further action under CEQA is required.
In addition, the proposed Board action is considered an “excluded development” pursuant to Section 8.a (Existing Facilities) of the District’s Coastal Development Permit Regulations; therefore, issuance of a Coastal Development Permit is not required.
Equal Opportunity Program:
Not applicable.
PREPARED BY:
Amber Jensen
Assistant Asset Manager
Kristine A. Zortman
Manager, Commercial Assets Maritime
Attachment(s):
Attachment A: Property Map
Attachment B: Current and Proposed Lease Information Summary
Attachment C: Proposed Lease