6g Memo Mad Anthony's Lease Amendment
COMMISSION AGENDA MEMORANDUM Item No. 6g ACTION ITEM Date of Meeting June 23, 2020 DATE: June 5, 2020 TO: Stephen P. Metruck, Executive Director FROM: Melinda Miller. Director, Portfolio & Asset Management Dave McFadden, Managing Director, Economic Development Division SUBJECT: First Amendment to Lease with Mad Anthony's, Inc. at Pier 66 Amount of this request: $0 Total estimated project cost: $0 ACTION REQUESTED Request Commission authorization for the Executive Director to execute the first amendment to the lease with Mad Anthony's, Inc., substantially similar to the attached draft amendment and on the following terms, effective June 1, 2020: 1) remove Minimum Rent requirement for two years; 2) increase percentage rent from 6% to 6-1/2% for two years; 3) effective June 1, 2022, increase percentage rent permanently from 6% to 6-1/4% for the remainder of the lease term. EXECUTIVE SUMMARY Due to the significant economic impact of COVID-19 on the restaurant industry in general and Anthony's at Pier 66 specifically, staff is proposing to amend this lease. The lease adjustments being proposed for Anthony's are consistent with relief offered across the Port during this public health crisis. The intent is to provide this tenant with the flexibility to respond to ongoing economic uncertainty due to COVID-19 and help them weather the crisis. We propose to temporarily remove the Minimum Rent (similar to the Minimum Annual Guarantee (MAG) at the airport) and have them pay percentage rent only for two years. During this period, the percentage rent amount will increase from 6% to 6-1/2%, effective June 1, 2020. After two years, effective June 1, 2022, the terms will revert to current lease terms and Anthony's will again pay Minimum Rent against 6-1/4% percentage rent, whichever is greater. This is an increase of 1/4% in percentage rent through the remainder of the lease term. The lease expires in December 2041. JUSTIFICATION Economic Development and Maritime Division landside tenants have been affected in some manner by the ongoing Covid-19 pandemic, the broader economic crisis, and the mandates from various regulatory agencies including the Governor, Mayor, and most recently, the Seattle City Template revised January 10, 2019. COMMISSION AGENDA Action Item No. 6g Page 2 of 5 Meeting Date: June 23, 2020 Council. Some sectors, particularly the restaurant and hospitality sector, have been severely affected through direct closure, starting on March 23, 2020. Following on the Commission's policy direction and the Executive Director's guidance, the Port offered a deferred payment plan to all tenants who were directly affected by the various mandates made by the Governor, Mayor, and Seattle City Council. Rent and other charges are being deferred for four months (April through July) without finance charges and re-payment plans begin on October 1, 2020, in most cases. Most agreements give the tenant twelve months to repay the deferred rent. This payment plan does not change the terms and conditions of the lease. Out of 190+ tenants, 74 tenants were deemed to be directly affected and invited to apply. 59 tenants applied for the program and 45 agreements have been executed to date. During this period, the Commission also authorized lease adjustments to Aviation Dining and Retail tenants that included waiving the Minimum Annual Guarantee and providing lease extensions. Anthony's is a family-owned, local company that was established in 1969 and currently operates restaurants in nineteen locations in Washington, Oregon and Idaho, including Chinook's Restaurant at Fishermen's Terminal. Alloperations were shut-down by the Governor's first mandate in March. This week, King County now allows partial re -opening for restaurants with many operating constraints including occupancy limits between 25-50% of permitted occupancy. Recent polls, as reported in the LA Times article of May 23, have stated that "much of the country remains unlikely to venture out to bars, restaurants, theaters, or gyms anytime soon, despite state and local officialsallowing businesses to reopen" It is widely held that the recovery for the restaurant industry will be long and shallow. The Port of Seattle and Anthony's have both made significant investments in the building and operations of the restaurant at Pier 66. As an anchor tenant, Anthony's banked on the development of the cruise business at Pier 66 and depends on the seasonal influx of cruise passengers and visitors to support the financial success of this large, multi-floor restaurant. The closing of the 2020 cruise season and uncertainty of the 2021 season are additional blows to their survival. Should Anthony's at Pier 66 fail, the Port would be saddled with a very large and virtually unleasable facility in the current restaurant market. Diversity in Contracting Staff have contacted the Diversity in Contracting Department to discuss this request and found no opportunity for WMBE participation as it is an amendment to an existing lease. Template revised June 27, 2019 (Diversity in Contracting). COMMISSION AGENDA Action Item No. 6g Page 3 of 5 Meeting Date: June 23, 2020 DETAILS Staff proposes to amend the following terms: CURRENT PROPOSED 22,000+ SF, three restaurants Built by Port Same as current lease 1995, Lease expires 2041 Minimum Rent: Greater of No Minimum Rent, Two years $31K+/month rent or 6-1/2% of gross sales only 6% of gross sales After two years through expiration: Greater of Minimum Rent or 6-1/4% gross sales Note: They have regularly paid percentage rent annually over the last ten years. ALTERNATIVES AND IMPLICATIONS CONSIDERED Anthony's management approached the Port with a proposal to help them survive the effects of the first Governor's mandate that closed all their restaurants and the uncertain dining market. Staff discussed the proposal at length and proposed a revised structure which Anthony's has accepted, contingent on Commission authorization. Alternative 1 Reject Anthony's proposal for lease amendment Cost Implications: None, unless tenant abandons the lease Pros: (1) If tenant remains, continues monthly revenue. (2) Maintains continuity of lease terms Cons: (1) Exposes tenant to significant financial risk from COVID-19 economic impact (2) Tenant may abandon lease thus provoking legal action (3) Exposes Port to costly legal action, lost revenue, and renovation expenses This is not the recommended alternative. Alternative 2 Agree to terms as initially proposed by Anthony's Cost Implications: Three years waiver of Minimum Rent, increase percentage Rent from 6% to 6- 1/2%, after three years return to lease terms Pros: (1) Accepts tenant's proposal thus strengthening relationship (2) Provides revenue to Port in an uncertain economy (3) Gives tenant flexibility to weather impact of Public health crisis Template revised June 27, 2019 (Diversity in Contracting). COMMISSION AGENDA Action Item No. 6g Page 4 of 5 Meeting Date: June 23, 2020 Cons: (1) Reduced revenue during two years of Minimum Rent waiver (2) Excessive term of Minimum Rent waiver (3) Less likely to recover waived rent over three years This is not the recommended alternative. Alternative 3 Accept negotiated terms proposed by staff Cost Implications: Two years waiver of Minimum Rent, increase percentage Rent from 6% to 6- 1/2%, after two years return to lease terms but increase percentage from 6% to 6-1/4% for remaining term. Lease expires in December 2041. Pros: (1) Provides reasonable term to tenant and revenue to Port in an uncertain economy (2) Gives tenant significant flexibility to weather impacts of Public health crisis (3) More likely to recover Minimum rent deferred during waiver period, with possible upside if economy recovers faster than projected Cons: (1) Reduced revenue during two years of Minimum Rent waiver (2) If economy does not improve, may not recover all waived Minimum Rent This is the recommended alternative. Financial Analysis and Summary Project cost for analysis No incremental costs to the Port for this request Business Unit (BU) Portfolio Management Effect on business performance This amended lease agreement will generate the Total (NOI after depreciation) Cash Flow of $11,110,597 for the remainder of the lease term until December 31, 2041. IRR/NPV (if relevant) Total Effective Rent: $11,110,597, an increase of $75K as compared to the current lease agreement Discounted Effective Rent at 4.5%: $6,775,770, a marginal NPV of ($81K) as compared to the current lease agreement CPE Impact N/A Future Revenues and Expenses (Total cost of ownership) Future revenues will be generated based on lease rates and terms stated above in the amendment. ATTACHMENTS TO THIS MEMO (1) Presentation slides Template revised June 27, 2019 (Diversity in Contracting). COMMISSION AGENDA Action Item No. 6g Page 5 of 5 Meeting Date: June 23, 2020 (2) Draft Lease Amendment PREVIOUS COMMISSION ACTIONS OR BRIEFINGS February 14, 1995 Commission approved the lease. January 12, 2016 The Commission authorized reimbursement of costs related to the installation of heating and hot water systems necessitated by the termination of Seattle Steam service to the facility. Template revised June 27, 2019 (Diversity in Contracting).
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