ACTION REQUESTED:
Title
Communication from the City Manager with a Request to Approve the SECOND AMENDMENT to the LEASE AGREEMENT for the ROCK ISLAND DEPOT located at 212 SW Water Street (1st District).
Body
BACKGROUND: A Master Lease has governed the occupancy of the Rock Island Depot, City owned property at 212 SW Water Street, since August 1979. The original lessee, River Station Square Company, was succeeded by Mathers Company. In 1998, the lease was amended for the first time. In 2000, with the consent of the City, the lease was assigned to River Station LLC, a local entity managed by Kert Huber. The lease has a 20-year term plus three, 10-year options that are executable exclusively by the Lessee. The original term ended in 1999; the first two options have been executed and the lease currently runs through 2019. If executed, the final option would take the lease through 2029.
Article II of the lease outlines how the City is to be paid for the use of its property. Under the current agreement, the Lessee pays the City the equivalent of 2% of gross sales made within the building, minus certain expenses. This is paid by the tenants (sub-lessees) in addition to their rent to Mr. Huber. Over the past decade, this 2% arrangement has been a considerable barrier to attracting and keeping tenants within the building as well as a complicated process for City staff. Presently, the only tenant is Martini's, a bar located in the northeast corner of the building. The remainder of the building, which is generally divided into two separate restaurant spaces plus a banquet/meeting room, have been vacant since February 2009. According to Mr. Huber, a variety of potential businesses have investigated the building but have declined occupancy because of the 2% provision. By way of example, a fair standard rent for the 2000 square foot restaurant space in the northwest portion of the building would be $12/square foot ($24,000 per year). If a business rented that space and did $500,000 in gross sales each year, the additional 2% rent payment would be $10,000 per year. That raises the effective rent to $17/square foot. The restaurant business already has very thin margins; taking an additional 2% puts most start-up projects at significant risk.
Recently, Mr. Huber has been working with a local entrepreneur who would like to open a restaurant in the northwest portion of the building (across the Water Street entrance from Martini's). The prospective tenant has indicated to both Mr. Huber and the City that the 2% City rent would prevent him from leasing the space. In recognition of this immediate opportunity, and the longer history of difficulty in renting the property, Mr. Huber and the City have discussed a change to the rent provisions. Rather than 2% of gross sales, the City instead would receive $2.25 per square foot that Mr. Huber rents. This would not include any common areas or vacant space. The Second Amendment to the Lease Agreement (attached) codifies this change. Mr. Huber would factor this cost to him into his rental agreements. A tenant like Martini's would no longer pay the additional 2% rent.
FINANCIAL IMPACT: Over the past four years, with only one tenant (Martini's) the City has received an average of about $8,000 in revenue based on the current rent structure. Under the new terms of the Master Lease, the City would receive $12,370.50 in annual rent from the leases to Martini's and the the potential new restaurant. This would be an increase of over $4,000 from the current revenue. With those two spaces rented, 12,196 square feet of leasable space would still be vacant. If rented, the City would receive an additional $27,441 in rent (a total of $39,811.50 if the entire building is leased). The City would be foregoing any additional rent from 2% of gross sales from tenants, either existing or new. However, it is clear that the current rent structure makes the property unattractive and those future revenues might never materialize. In addition, restaurants generate sales tax and restaurant taxes, though some of that revenue is likely shift from other Peoria restaurants. Greater occupancy might also lead to high property value assessments (currently, Mr. Huber pays about $25,000 in annual property taxes). Further, additional businesses will create more jobs. As an example, the owner of the potential new restaurant plans to employ up to 20 people (15 full time equivalents).
It should also be noted that the City bears no cost in owning this building. Per the Master Lease, Mr. Huber is responsible for all costs within the building, including the payment of property taxes. When Mr. Huber's firm assumed the lease in 2000, the building was in terrible condition. They spent approximately $750,000 to repair the roof, install skylights, update the electrical and HVAC systems, and renovate the interior. They are also responsible for defending against and cleaning up after floods. In 2013, they spent $90,000 to do so, though were reimbursed two-thirds of that cost from FEMA. Among the improvements for this new restaurant, Mr. Huber will be returning windows to the Water Street side of the building which will greatly improve the aesthetics of the property.
NEIGHBORHOOD CONCERNS: Not applicable.
IMPACT IF APPROVED: The lease will be amended, changing the rent as outlined above. This will make the building more marketable to potential tenants. At least one new potential restaurant is interested in the building and is negotiating with Mr. Huber.
IMPACT IF DENIED: The lease will remain as is. It is very unlikely that the current opportunity for a new restaurant will sign a lease and the building will continue to be hard to market.
ALTERNATIVES: The City Council could suggest a different rent structure than proposed.
EEO CERTIFICATION NUMBER: Not applicable.
WHICH OF THE GOALS IDENTIFIED IN THE COUNCIL'S 2014 - 2029 STRATEGIC PLAN DOES THIS RECOMMENDATION ADVANCE?
1. Vibrant Downtown: Riverfront/ Central Business District/ Warehouse District
2. Grow Peoria: Businesses, Jobs, and Population
WHICH CRITICAL SUCCESS FACTOR(S) FROM THE COMPREHENSIVE PLAN DOES THIS RECOMMENDATION IMPLEMENT?
1. Grow employers and jobs.
DEPARTMENT: City Manager's Office