DATE: December 10, 2019
SUBJECT:
Title
ORDINANCES APPROVING:
A) AGREEMENT FOR AMENDMENT OF LEASE AMENDMENT NO. 1 TO THE LEASE WITH THE BRIGANTINE, INC. DBA PORTSIDE PIER AT 1360 NORTH HARBOR DRIVE IN THE CITY OF SAN DIEGO TO: RETROACTIVELY MODIFY MINIMUM ANNUAL RENT FROM $733,333 TO $550,000 FOR LEASE YEAR 2 FROM MAY 1, 2019 THROUGH APRIL 30, 2020, MODIFY MINIMUM ANNUAL RENT FROM $1,100,000 TO $1,130,000 FOR LEASE YEARS 3 TO 10 FROM MAY 1, 2020 TO APRIL 30, 2029, EXTEND THE CONSTRUCTION COMPLETION DEADLINE FROM DECEMBER 31, 2019 TO AUGUST 31, 2020; AND TENANT TO PAY FOR THE REMOVAL OR RELOCATION OF UTILITY IMPROVEMENTS; AND
B) AN APPROXIMATELY THIRTY-EIGHT (38) YEAR EASEMENT FOR UTILITY PURPOSES TO SAN DIEGO GAS & ELECTRIC COMPANY FOR ELECTRICAL AND NATURAL GAS FACILITIES TO BE LOCATED NEAR HARBOR DRIVE AND ASH STREET IN THE CITY OF SAN DIEGO, CALIFORNIA COMMENCING JANUARY 11, 2020 AND ENDING ON APRIL 30, 2058
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EXECUTIVE SUMMARY:
On April 27, 2018, the District entered into a 40-year lease1 with The Brigantine Inc., a California corporation, dba Portside Pier (Brigantine), for property located at 1360 North Harbor Drive in the City of San Diego (Attachment A - Location Map). On May 1, 2018, Brigantine began construction on its pilings and platform substructure and two-story overwater restaurant structure which will include four dining concepts, a public viewing deck, and an expanded dock and dine facility (Portside Pier). The lease requires that Brigantine complete construction by December 31, 2019, and while Brigantine has been making a good faith effort to complete construction on schedule, there have been circumstances outside of their control that have delayed the expected completion until mid-2020. R.E. Staite, Brigantine’s pilings and platform substructure contractor, experienced unforeseeable challenges due to: (1) limited availability of specialized, in-water work equipment, (2) limited construction days due to conflicts with the cruise season, and (3) an unexpected number of rainy days, inhibiting consistent concrete cure due to temperature and moisture levels. R.E. Staite completed the pilings and platform work in May 2019. Since then the construction project has transitioned to Brigantine’s general contractor, Pacific Building Group (PBG), to complete construction of the two-story overwater restaurant structure, an expanded dock and dine facility, and the adjacent public promenade improvements and is expected to stay on schedule and be completed by mid-2020.
The original rent structure was negotiated to account for fair market value rent during construction based on anticipated completion by December 2019. Since construction completion is anticipated to be delayed by six months due to the challenges related to the pilings and platform construction, Brigantine has requested an adjustment in rent for Lease Year 2 to align with the restaurant opening in mid-2020. The rent schedule in the lease currently has minimum annual rent of $733,333 in Lease Year 2, and $1,100,000 in Lease Years 3 to 10. Staff recommends the adjusted rent structure, which is above fair market rent, where the District would receive an additional $56,666 in guaranteed rent over the first ten years of the lease by setting rent at $550,000 in Lease Year 2 to account for the above described construction delay and longer construction rent period and increasing the annual operating period rent to $1,130,000 in Lease Years 3 to 10. The current lease requires that construction completion occur by December 31, 2019. Given that Brigantine has made good faith efforts to expeditiously construct Portside Pier, staff recommends an amendment to the lease that would extend the construction completion deadline to August 31, 2020 (Portside Pier Lease Amendment No. 1) (Attachment B).
As part of constructing Portside Pier, adequate electrical and natural gas utilities are necessary to operate the kitchen equipment, lighting, and elevators. This will require that a utility facility be located outside of the leasehold and that the utility company, San Diego Gas and Electric (SDG&E), be granted a utility easement enabling access for installation, service, and maintenance of the facilities at all times. As part of the Portside Pier Lease Amendment No. 1, Brigantine would be responsible for the costs associated with any future relocation or removal of any utility improvements associated with this easement. The easement covers approximately 470 square feet of tideland area located adjacent to 1360 Harbor Drive in San Diego, California. The term of the easement is for approximately 38 years, commencing January 11, 2020 and terminating April 30, 2058 to be coterminous with the Lease (SDG&E Utility Easement) (Attachment C).
Based on the construction progress to date on Portside Pier, staff recommends the Board of Port Commissioners (Board) approve the Portside Pier Lease Amendment No. 1 with the Brigantine to retroactively modify annual rent for Lease Years 2 through 10, extend the construction completion deadline to August 31, 2020, and obligate Brigantine to pay for any future removal or relocation of utility improvements related to the SDG&E Utility Easement. If the Board approves the Portside Pier Lease Amendment No. 1, staff also recommends the Board approve the SDG&E Utility Easement to SDG&E for the installation, service, and maintenance of the utility improvements serving Portside Pier.
RECOMMENDATION:
Recommendation
Adopt Ordinances approving:
A) Portside Pier Lease Amendment No. 1 to the lease with Brigantine at 1360 North Harbor Drive in the City of San Diego to: retroactively modify minimum annual rent from $733,333 to $550,000 for Lease Year 2 from May 1, 2019 through April 31, 2020, modify minimum annual rent from $1,100,000 to $1,130,000 for Lease Years 3 to 10 from May 1, 2020 through April 30, 2029, extend the construction completion deadline from December 31, 2019 to August 31, 2020, and pay for the future removal or relocation of utility improvements; and
B) SDG&E Utility Easement commencing January 11, 2020 and terminating April 30, 2058, for electrical and natural gas facilities located near Harbor Drive and Ash Street in the City of San Diego, California.
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FISCAL IMPACT:
This Board action will result in $183,333 less rent to the District for Lease Year 2 from May 1, 2019 through April 30, 2020 and $240,000 more rent to the District for the combined eight lease years beginning May 1, 2020 through April 30, 2029 (Lease Years 3-10). The change to the rent schedule will result in an increase of $2,634 in Net Present Value (NPV) to the District.
This agenda item is subject to Board of Port Commissioners Policy 106-Cost Recovery User Fee Policy.
Compass Strategic Goals:
This agenda item supports the following Strategic Goal(s).
• A vibrant waterfront destination where residents and visitors converge.
• A financially sustainable Port that drives job creation and regional economic vitality.
DISCUSSION:
Background
On April 27, 2018, the District entered into a 40-year lease with the Brigantine for property located at 1360 North Harbor Drive in the North Embarcadero. The lease requires Brigantine to commence and diligently proceed to complete construction of a $13,000,000 restaurant redevelopment project. The Brigantine expects construction of Portside Pier to cost $20,000,000 to create an enhanced dining establishment including enhanced public improvements. The redevelopment will include a two-story restaurant structure, new pilings and platform, an expanded dock and dine facility and promenade improvements. The Brigantine project will include four unique restaurant concepts at Portside Pier. There will be three features open to the public during business hours including: 1) a second level viewing deck; 2) a second level perimeter walkway; and 3) an expanded dock and dine. All three public features will be maintained solely by Brigantine at no cost to the District.
Project Update
The lease requires construction of the project to be completed by December 31, 2019. Brigantine has made a good-faith effort to complete the construction of Portside Pier. However, R.E. Staite could not complete the pilings and platform substructure within the timeframe they had originally expected primarily due to three factors: (1) the lack of in-water work equipment; (2) blackout dates during the cruise season; and (3) an excess of rainy days that negatively impacted the concrete curing process. Since the completion of the pilings and platform in June 2019, PBG has been able to stay on track with a 12-month schedule for the restaurant to open in mid-2020. The exterior of the two-story restaurant structure is expected to be complete by late 2019 and PBG expects to complete the project by July 2020. The remaining work for 2020 will be the interior restaurant finish and kitchen, the expanded dock and dine, and the adjacent public improvements to enhance the waterfront promenade and public parking area.
The original rent structure was negotiated to account for fair market value rent during construction based on anticipated completion by December 2019. Given construction completion is anticipated to be extended by six months out to mid-2020 for the reasons noted, Brigantine has requested an adjustment in rent for Lease Year 2. The lease currently has construction annual rent of $366,666 for the first year, $733,333 for the second year and $1,100,000 starting in the third year based on the restaurant opening in early 2020. District staff negotiated the following rent schedule in guaranteed minimum annual rent for the first ten years, which provides an increase of $2,634 in NPV to the District. The revised rent structure, like the original rent structure, is an above fair market rent deal.
The Brigantine has made a good faith effort to work expeditiously to complete construction, and due to unforeseen delays, staff recommends updating the lease to change the required construction completion date from December 31, 2019 to August 31, 2020.
SDG&E Easement
Consistent with the parties’ intentions when executing the lease , in order to supply the necessary electrical and natural gas utilities to the project, SDG&E will require a utility easement enabling access for the installation, service, and maintenance of its facilities throughout the term of the Brigantine’s lease. The easement covers approximately 470 square feet of tideland area located adjacent to 1360 Harbor Drive in San Diego, California. The term of the easement is approximately 38 years commencing January 11, 2020 and terminating April 30, 2058 to be coterminous with the Lease. If the Board approves the Portside Pier Lease Amendment, Brigantine would be responsible for the costs associated with any future relocation or removal of the utility improvements installed as part of the easement.
Recommendation
Staff recommends the Board approve the Portside Pier Lease Amendment to retroactively modify minimum annual rent in the amount of $550,000 in Lease Year 2 and $1,130,000 in Lease Years 3 to 10, extend the construction deadline to August 31, 2020, and incorporate an obligation that Brigantine pays for any future removal or relocation of utility improvements .
If the Board approves the Portside Pier Lease Amendment, staff also recommends the Board approve the SDG&E Utility Easement for the installation, maintenance, and servicing of utility improvements contemplated for the Portside Pier project.
General Counsel’s Comments:
The Office of the General Counsel has reviewed this agenda sheet, Attachment B (Portside Pier Lease Amendment No. 1), and Attachment C (SDG&E Utility Easement) as presented to it and approves them as to form and legality.
Environmental Review:
The proposed Board action, including without limitation, an ordinance amending the lease with the Brigantine, Inc. DBA Portside Pier to modify the rent, extending the construction completion deadline, and to pay for the removal or relocation of utility facilities, and an ordinance granting a utility easement to SDG&E to service Portside Pier, was adequately covered in the Mitigated Negative Declaration (MND) for the Portside Pier Restaurant Redevelopment Project (2016081007; UPD #MND-2016-91, Clerk Document No. 66702), certified by the District on December 13, 2016 (Resolution No. 2016-202). The proposed Board action is not a separate “project” for CEQA purposes but is a subsequent discretionary approval related to a previously approved project. (CEQA Guidelines § 15378(c); Van de Kamps Coalition v. Board of Trustees of Los Angeles Comm. College Dist. (2012) 206 Cal.App.4th 1036.) Additionally, pursuant to CEQA Guidelines Sections 15162 and 15163, and based on the review of the entire record, including without limitation, the MND, the District finds and recommends that the proposed Board action does not require further environmental review as: 1) no substantial changes are proposed to the project and no substantial changes have occurred that require major revisions to the MND due to the involvement of new significant environmental effects or an increase in severity of previously identified significant effects; and 2) no new information of substantial importance has come to light that (a) shows the project will have one or more significant effects not discussed in the MND, (b) identifies significant impacts would not be more severe than those analyzed in the MND, (c) shows that mitigation measures or alternatives are now feasible that were identified as infeasible and those mitigation measures or alternatives would reduce significant impacts, and (d) no changes to mitigation measures or alternatives have been identified or are required. Pursuant to CEQA Guidelines §15162(b), the District finds and recommends that no further analysis or environmental documentation is necessary. Accordingly, the proposed Board action is merely a step in furtherance of the original project for which environmental review was performed and no supplemental or subsequent CEQA has been triggered, and no further environmental review is required.
The proposed project complies with sections 21, 35, and 87 of the Port Act, which allow for the Board to pass ordinances, to do all acts necessary and convenient for the exercise of its powers, and for the use of tidelands for all visitor-serving commercial and industrial uses and purposes, and the construction, reconstruction, repair, and maintenance of commercial and industrial buildings, plants, and facilities, and for the construction, reconstruction, repair, and maintenance of highways, streets, roadways, bridges, belt line railroads, parking facilities, power, telephone, telegraph or cable lines or landings, water and gas pipelines, and all other transportation and utility facilities or betterments incidental, necessary, or convenient for the promotion and accommodation of any of the uses set forth in this section. The Port Act was enacted by the California Legislature and is consistent with the Public Trust Doctrine. Consequently, the proposed project is consistent with the Public Trust Doctrine.
In accordance with the California Coastal Act, on July 11, 2017, the Board authorized issuance of an appealable Coastal Development Permit (CDP) (Clerk’s Document No. 67076) to allow for the restaurant redevelopment project. The District’s position continues to be that the development is Non-Appealable under Section 30715 of the California Coastal Act. However, to move the development forward in a timely manner, the Board authorized issuance of the Portside Pier CDP as an “Appealable” CDP. In doing so, the District did not and continues to not waive any claims that the development is excluded from the scope of Section 30715 and the CDP is not and continues to not constitute precedential evidence for future permits or an admission that restaurants are within the scope of Section 30715. In other words, the District issued the permit as “Appealable” under protest and continues to take that position with its subsequent approvals. District staff has reviewed the proposed project and found it to be consistent with the CDP. No additional action under the District’s CDP Regulations is required.
Equal Opportunity Program:
Not applicable.
PREPARED BY:
Wendy Siao
Program Manager, Real Estate
Bill Metcalfe
Asset Manager, Real Estate
Attachment A: Location Map
Attachment B: Portside Pier Lease Amendment No. 1
Attachment C: SDG&E Utility Easement
1 Lease with San Diego Unified Port District and The Brigantine Inc. dba Portside Pier on file in the Office of the District Clerk as Document No. 67501 filed on May 7, 2018.