108-0332015-002 Agenda Item No. 5 (c) Meeting of September 1, 2015
MEMORANDUM
TO: Community Investment and Infrastructure Commissioners
FROM: Tiffany Bohee Executive Director
SUBJECT: Conditionally authorizing a first amendment to the commercial retail lease for the West Café in Yerba Buena Gardens with Samovar Tea Lounge Yerba Buena, LLC, a California limited liability company, to extend the term of the lease for ten years, with one five-year option to extend; former Yerba Buena Center Redevelopment Project Area
EXECUTIVE SUMMARY
The Office of Community Investment and Infrastructure, Successor Agency to the former Redevelopment Agency ("OCII"), owns and leases two small café spaces, the East Café and the West Café, on the upper terrace at Yerba Buena Gardens ("Gardens") above the Martin Luther King ("MLK") Memorial Fountain. In 2005, the former Redevelopment Agency of the City and County of San Francisco ("Former Agency") leased the West Café to Samovar Tea Lounge Yerba Buena, LLC, a California limited liability company ("Samovar") under a ten-year commercial retail lease (the "Lease"). 1 Samovar is currently operating the West Café as Samovar Tea Lounge.
OCII and Samovar have negotiated a proposed first amendment to the Lease ("First Amendment"). The City and County of San Francisco (the "City"), as the future Gardens property owner, has reviewed and recommended approval of the First Amendment, which will (1) provide the City with a stable asset upon transfer, (2) allow Samovar to amortize future capital improvements, and (3) secure the continuing revenue stream from the Lease, as a source of revenue for Gardens operation, maintenance, capital improvements and security.
The First Amendment includes a ten-year term, beginning on March 1, 2016, and an option to extend for one five-year period. As explained later in this Memorandum, a ten-year renewal term is justified due to the historic difficulty in finding a suitable, long term tenant for the West Café; the overall challenges associated with the location, access, and visibility of the space; the demonstrated commitment and track record of Samovar; and Samovar's planned investment in tenant improvements. Samovar will be required to invest a minimum of $50,000 in interior and exterior improvements ("Tenant Improvements"), which will be paid for with Samovar's own capital funds. In order to recognize this investment, Samovar's annual rent for the first year of the extended term will be reduced. The First Amendment will also increase existing fees for
The East Café was leased in 2006. An amendment to the East Café lease is the subject of a separate Commission Memorandum for the September 1, 2015 meeting. 108-0332015-002 Meeting of September 1, 2015 Page 2 of 6 landscaping and security services, update OCII' s insurance and indemnification provisions, clarify permitted uses, minimum operating days and hours, and make other minor amendments to the Lease.
Samovar has complied with the OCII's policies on nondiscrimination and equal benefits, minimum compensation, health care accountability, Small Business Enterprises ("SBE"), prevailing wages, and permanent employment hires. It agrees to comply with the OCII's SBE and prevailing wage requirements for upcoming interior and exterior Tenant Improvements.
Upon approval by the Commission, the First Amendment will be considered by the Oversight Board, and upon approval by the Oversight Board, the First Amendment will be forwarded to the State Department of Finance ("DOF") for its review.
Staff recommends conditionally authorizing the First Amendment to the Lease with Samovar for the West Café at the Gardens.
BACKGROUND
The West Café
OCII owns a small café retail space, known as the West Café, located on the upper terrace at the Gardens above the MLK Memorial Fountain. The West Cafe was constructed by the Former Agency in 1993 and was envisioned to be an integral part of the Gardens public open spaces.
Although the West Café provides expansive views of the surrounding cityscape and the Gardens, its upper floor location presents unique challenges, including lack of visibility and street level access, complicated way-finding, and low pedestrian foot traffic. Given these locational challenges, the café space is considered a "secondary space" in the retail rental market, compared to "primary spaces" that are typically street-level spaces with high volumes of foot traffic. Between 1993 and 2003, Starbucks Coffee, the former West Café tenant, failed to establish a profitable business model primarily due to the West Café's locational challenges. As explained later in this Memorandum, these challenges negatively affect the market value of the café space.
In October 2005, the Former Agency entered into a ten-year Lease with Samovar for the West Café space, which includes 1,954 leasable square feet within the structure, and exclusive access to approximately 570 square feet of continuous outside patio dining space. Since opening in early 2006, Samovar has operated the West Café as Samovar Tea Lounge, serving international food and organic tea pairings. Samovar's Lease expires on February 29, 2016. (See Attachment 1 for a location map and photos.)
Samovar's Evolving Business Model
In order to compensate for the low volume of pedestrian traffic and the resulting lack of walk-in business, Samovar has evolved its business model over the past ten years by capitalizing on the West Café's close proximity to the Moscone Convention Center and developing a regular event 108-0332015-002 Meeting of September 1, 2015 Page 3 of 6 clientele. Reliance on event revenue is not a typical business model for a small café, and, at Samovar Tea Lounge, occasionally requires a buy-out of the café. However, this business model has resulted in about 20 percent of Samovar's revenue being generated from event business, which in turn has helped the financial performance of Samovar Tea Lounge despite the many challenges of the space.
Property Disposition Requirements under Redevelopment Dissolution Law
The West Café property and Lease are subject to the property disposition requirements set forth in California Health and Safety Code § 34170 et seq. ("Redevelopment Dissolution Law"). Former redevelopment agencies, including OCII, must dispose of their assets under a Long- Range Property Management Plan ("PMP"). OCII' s PMP proposes a transfer of the Gardens, including the West Café and Samovar's Lease, to the City for a governmental purpose. OCII submitted its PMP to DOF in November 2013. At this time, DOF continues to review OCII's PMP. The Gardens, including the West Café and Samovar's Lease, cannot be transferred to the City until DOF approves the PMP.
Pending the approval of the PMP and subsequent transfer of the West Café to the City, OCII has a continuing obligation to preserve the assets of the former Agency and appropriately manage the West Café. The Lease for the West Café will expire on February 29, 2016, prior to the transfer to the City. As a function of prudent asset management, OCII is proposing this First Amendment to the Lease, as described later in this Memorandum, to continue West Café operations, avoid a potential vacancy of the space, and ensure uninterrupted Lease rental payments to OCII and to the City after the transfer.
DISCUSSION
Market Rate Rental Analysis
OCII retained AECOM, a San Francisco real estate economics firm, to undertake a retail leasing market study and recommend lease terms based on market data. AECOM evaluated market conditions for retail spaces in the Yerba Buena, South of Market, Financial District, and Market Street areas as well as in the San Francisco market as a whole. After reviewing 20 comparable leases and interviewing brokers active in the Yerba Buena area, AECOM made several key findings (See Attachment 2 for a copy of AECOM's YBG Retail Leasing Market Study):
• The average asking rent for a ground floor lease in the Yerba Buena area is approximately $58 per square foot per year.
• The asking rents for spaces in the best Yerba Buena locations—street-level with the highest foot traffic—are as high as $80 per square foot per year, as opposed to rents for the most challenging locations on the second or third levels with low foot traffic that are as low as $30 per square foot per year. 108-0332015-002 Meeting of September 1, 2015 Page 4 of 6
• The rent differential between spaces in desirable locations and those in the more challenging locations can be up to 50 percent.
• The West Café is in a less desirable second floor location, which negatively impacts the market rent for the space.
Given these conditions, AECOM concluded that the current (2015) rent for the West Café ($44 per square foot per year) is within market range, based on comparable existing retail leases for the area and the characteristics of the space.
AECOM also recommended key lease terms as follows:
• One ten-year term and one five-year renewal option. While industry standard renewal terms can be five or ten years depending on a large number of factors, AECOM recommended a ten-year renewal due to the historic difficulty in finding a suitable, long term tenant; the overall challenges associated with the location, access, and visibility of the space; the demonstrated commitment and track record of Samovar; and the investment in tenant improvements currently planned by Samovar. If the renewal option is exercised, rent for the first year of the renewal period will be adjusted to the market rate in existence at the time of the renewal.
In 2016, a new rent that is a three percent increase over the 2015 rent, with three percent increases in each succeeding year.
• A minimum expenditure on Tenant Improvements by Samovar as described below, and in recognition of the expenditure, a first year rent adjustment equivalent to four months free rent amortized over 12 months.
The Proposed First Amendment Terms OCII and Samovar have negotiated the proposed First Amendment. The City, as the future property owner, has reviewed and recommended approval of the proposed First Amendment, which will (1) provide the City with a stable asset upon transfer, (2) allow Samovar to amortize future capital improvements, and (3) and secure the continuing revenue stream from the Lease, as a source of revenue for Gardens operation, maintenance, capital improvements and security. (See Attachment 3, the proposed First Amendment.)
The proposed First Amendment contains the following key terms:
• Term and Option to Extend. The ten-year term of the First Amendment will begin on March 1, 2016 and will end on February 28, 2026. The City and Samovar may extend the term of the Lease for one additional five-year period, to February 28, 2031.
• Rent and Tenant Improvements. Samovar's annual rent for the first lease year of the extended term will be adjusted in order to reflect a credit for Samovar's investment of a 108-0332015-002 Meeting of September 1, 2015 Page 5 of 6
minimum of $50,000 in Tenant Improvements. These improvements include outdoor furniture, heaters and glass wind screens as well as interior renovations and will be paid with Samovar's own capital funds. The first year rent will be adjusted by $29,519, which is equivalent to four months free rent amortized over 12 months (adjusted to $59,036 from $88,555).
• Beginning in Lease Year 2, Samovar's rent will no longer be adjusted for the Tenant Improvements, and will be as follows (with three percent annual increases): Lease Year Lease Year Dates Monthly Rent Annual Rent 1 March 1, 2016 — February 28, 2017 $4,919.74 $59,036.85 2 March 1, 2017 — February 28, 2018 $7,600.99 $91,211.94 3 March 1, 2018 —February 28, 2019 $7,829.02 $93,948.30 4 March 1, 2019 — February 29, 2020 $8,063.90 $96,766.75 5 March 1, 2020 — February 28, 2021 $8,305.81 $99,669.75 6 March 1, 2021 — February 28, 2022 $8,554.99 $102,659.84 7 March 1, 2022 — February 28, 2023 $8,811.64 $105,739.64 8 March 1, 2023 — February 29, 2024 $9,075.99 $108,911.82 9 March 1, 2024 — February 28, 2025 $9,348.26 $112,179.18 10 March 1, 2025 — February 28, 2026 $9,628.71 $115,544.55
• Restriction on Lease Revenue. The revenue stream from the West Café, along with funds generated from other existing short- and long-term commercial and ground leases, operating leases, and development exactions/fees in the Gardens is considered Community Development Block Grant program income ("CDBG Program Income"), and is used for operation, maintenance (including capital improvements), and security of the Gardens, in accordance with federal restrictions on the use of CDBG Program Income.
• Other Miscellaneous Lease Terms. The proposed First Amendment increases existing fees for landscaping and security services, updates OCII's insurance and indemnification provisions, clarifies permitted uses and minimum operating days and hours, and makes other minor amendments to the Lease.
Compliance with OCII Policies
Pursuant to the Lease, Samovar has complied with OCII's policies on nondiscrimination and equal benefits, minimum compensation, health care accountability, SBE, prevailing wages, and permanent employment hires. Samovar offers Samovar Tea Lounge employees the required minimum compensation, health care, and equal benefits.
Currently, Samovar employs over 84 percent of its permanent workforce at the Gardens from San Francisco. This percentage exceeds OCII's permanent employment hire goal of 50 percent. Samovar reports that it employed over 120 full and part-time employees in 2014 and offers its employees room for advancement as well as educational opportunities for personal growth and 108-0332015-002 Meeting of September 1, 2015 Page 6 of 6 development. Samovar agrees to comply with OCII' s SBE policy and prevailing wage requirements for the upcoming Tenant Improvements at Samovar Tea Lounge.
California Environmental Quality Act
The proposed First Amendment to the Lease is categorically exempt from the California Environmental Quality Act ("CEQA") Guidelines § 15301, Existing Facilities, which permits leasing of a public structure or facility involving negligible or no expansion of use. Since the West Café is an existing facility and the proposed First Amendment will have no expansion of the use, the First Amendment is exempt from CEQA.
Next Steps
The Commission's approval of the First Amendment is conditioned on approval of the Oversight Board and DOF. The proposed First Amendment will be considered by the Oversight Board in September. Under Redevelopment Dissolution Law, DOF has five days to request a review of the Oversight Board's action. If DOF does not request a review, then the Oversight Board's action becomes final. If DOF requests a review, it has 100 days to review the matter.
(Originated by: Marie Munson, Senior Development Specialist and Denise Zermani, Senior Development Specialist, Real Estate and Development Services)
Tif la B hee Executive Director Attachment 1: West Café Location Map and Photographs Attachment 2: AECOM's YBG Retail Leasing Market Study Attachment 3: Proposed First Amendment
ATTACHMENT 1
West Café Location Map and Photographs
Attachment 1 West Café Location Map
East Café
West Café
Page 1 of 2 Photographs Samovar Tea Lounge-West Café
Page 2 of 2
ATTACHMENT 2
AECOM’s YBG Retail Leasing Market Study
\ AECOM 415.796.8100 tel 300 California Street 415.796.8200 fax th 5 Floor San Francisco, CA 94104
www.aecom.com/economics Memorandum Report
To Office of Community Investment and Infrastructure
Subject Yerba Buena Gardens Retail Leasing Market Study
From AECOM
Date June 2015 \
1 INTRODUCTION
The Office of Community Investment and Infrastructure (“OCII”) and the City and County of San Francisco (the “City”) utilize the services of real estate economics firms on an ongoing basis in connection with major development parcels and complex transactions throughout the City and in all existing and former redevelopment project areas. OCII retained AECOM to provide assistance with lease extension negotiations for two of OCII’s commercial retail tenants. The leases are located at Yerba Buena Gardens (“YBG”) in San Francisco for the tenants B Restaurant and Samovar Tea Lounge.
The two restaurant spaces located at YBG are part of a larger 78‐acre urban public‐private redevelopment project. The two retail spaces were envisioned to be an integrated part of the YBG public area, contributing to the public space financially through the rental leases and also contributing to the Yerba Buena community as an important stakeholder.
In the early years of the retail leases (1990s), the somewhat remote, upper floor location of the spaces away from street level and lack of visibility created challenges for tenants. The early retail tenants failed to establish a profitable business model due to these challenges. Ultimately, the turnover of multiple tenants led to the decision by the San Francisco Redevelopment Agency in 2004 to engage a real estate brokerage firm; Johnson Hoke Brokerage was retained to secure long‐term tenants for the site. Ultimately, Samovar Tea Lounge signed a lease dated October 18, 2005 and B Restaurant signed a lease dated January 17, 2006. Initial lease terms for both tenants were set at 10 years starting on the Date of Occupancy. The Samovar Lease is set to expire in March 1, 2016 and the B Restaurant Lease is set to expire in June 1, 2016. In consideration of the upcoming lease term expirations, AECOM was retained to facilitate the lease renewal negotiations by evaluating the current tenant situation and market data. This report is the result of that research. As part of this assignment, AECOM:
Evaluated existing rent structure, CAM terms, and financial performance of the two restaurants; Conducted market research and collection of recent market data on retail performance; Recommended lease terms for the two properties based on documented market data and the tenant improvement dollars being invested by each tenant; Prepared lease exhibits/rent schedules as requested by OCII; and Conducted meetings with OCII staff, restaurant owners, and other relevant stakeholders. AECOM reviews current lease terms and business performance for Samovar and B Restaurant in Section 2. In Section 3, we evaluate market conditions for retail spaces in the Yerba Buena Gardens area and in San Francisco. The final section provides a summary of our considerations, including investments in tenant improvements planned by the tenants in the form of glass wind guards and heaters, and ultimately our recommendation for lease renewal terms.
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2 CURRENT LEASE TERMS & PERFORMANCE
As part of this assignment, AECOM reviewed current lease terms, including rental terms and common area maintenance (CAM) charges. We also examined proprietary financial data for both businesses, including recent financial performance. Finally, we met with Yerba Buena Gardens management and both businesses to evaluate the qualitative aspects of the tenant leases.
SAMOVAR TEA LOUNGE Samovar Tea Lounge is a restaurant/lounge with an emphasis on tea and tea culture. The YBG location was Samovar Tea Lounge’s second location within San Francisco, and since opening operations at YBG, Samovar has opened another location. Samovar has become a destination food and beverage venue due to its specialized concept and limited competition of tea‐centered restaurants or lounges.
The location of Samovar within the YBG complex is shown in Figure 1 below.
Figure 1: Location of Samovar Tea Lounge within Yerba Buena Gardens
Samovar Tea Lounge
Source: Map, http://yerbabuenagardens.com/map/
As shown, the main entrance to Samovar is located along a limited pedestrian walkway that terminates to the northeast. The walkway is perpendicular to a pedestrian and bicycle‐only path connecting the dominant green space of the gardens, the Esplanade, to a pedestrian bridge across Howard Street, leading to the Children’s Creativity Museum, the ice skating rink, bowling alley, playground, and other attractions. The tenant is located
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above street level, roughly equivalent to a third story. The space faces to the northwest. Directly to the northwest of the indoor space is an outdoor patio operated by Samovar. Further to the north and northwest is a public area located on top of the Martin Luther King Jr. Memorial Fountain. Along the pedestrian sidewalk to the northeast is the similarly‐sized restaurant B Restaurant.
Existing Lease Terms
The Samovar lease began in Year 1 with a rent significantly below that of the Year 2 rent. A discounted Year 1 rent is typical for new tenants. Tenant improvement (TI) expenditures are investments made in the property itself and can be funded by the tenant or the landlord. In this case, the premises were leased in “as‐is” condition and Samovar funded the tenant improvements. Selected terms of the Samovar lease are outlined in Table 1.
Table 1: Samovar Lease Terms Lease Commencement Date March 1, 2006 Lease Term 10 years Square Footage 1,954 SF $17.00 per square foot (PSF) per year Year 1 Rent $1.42 PSF per month $44.00 PSF per year Year 10 Rent $3.67 PSF per month Year 2: $13 PSF/year Year 4: $2 PSF/year Rent Escalation Amounts Year 6: $6 PSF/year Year 8: $6 PSF/year Common Area Maintenance $5.34 PSF/year (CAM) Tenant Improvements (TI) Minimum $50,000 funded by Tenant Tenant Improvements (TI) N/A, premise leased in as‐is condition funded by Landlord
B RESTAURANT B Restaurant is a restaurant serving new American cuisine and is the sole B Restaurant in San Francisco (the owner also operates Boxed Foods in the city). B Restaurant recently signed a lease to open a family‐friendly food venue within the adjacent ice skating/bowling center.
The location of B Restaurant within the YBG complex is shown below in
Figure 2. As indicated, the main entrance to B Restaurant is located at the end of a limited pedestrian walkway that terminates directly to the northeast. The walkway is perpendicular to a pedestrian and bicycle‐only path connecting the dominant green space of the gardens, the Esplanade, to a pedestrian bridge across Howard Street, leading to the Children’s Creativity Museum, among other attractions. The tenant is located above street‐level, roughly equivalent to a second or third story. The space faces to the north‐west. Directly to the northwest of the indoor space is an outdoor patio operated by B Restaurant. Further to the northwest and west is a public area located on top of the Martin Luther King Jr. Memorial Fountain. Along the pedestrian sidewalk to the southwest is the similarly‐sized restaurant Samovar Tea Lounge.
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Figure 2: Location of B Restaurant within Yerba Buena Gardens
B Restaurant
Source: Map, http://yerbabuenagardens.com/map/
Visibility for B Restaurant is extremely poor from the existing access points, slightly inferior to that of Samovar which is adjacent to the pedestrian path and closer to the Metreon.
Existing Lease Terms
The B Restaurant Lease began in Year 1 with a rent significantly below that of the Year 3 rent. Rent that is initially discounted is typical for new tenants. Tenant improvement (TI) expenditures are investments made in the property itself and can be funded by the tenant or the landlord. In this case, the premises were leased in “as‐is” condition and Samovar funded the tenant improvements. Selected terms of the B Restaurant Lease are outlined in Table 2.
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Table 2: B Restaurant Lease Terms Lease Commencement Date June 1, 2006 Lease Term 10 years Square Footage 2,096 SF $17.00 per square foot (PSF) per year Year 1 Rent $1.42 PSF per month $42.00 PSF year year Year 10 Rent $3.50 PSF per month Year 3: $5 PSF/year Year 4: $10 PSF/year Rent Escalation Amounts Year 6: $4 PSF/year Year 8: $6 PSF/year Common Area Maintenance $5.34 PSF/year (CAM), Year 1 Tenant Improvements (TI) Minimum $75,000 funded by Tenant Tenant Improvements (TI) N/A, premise leased in as‐is condition funded by Landlord
CAM CHARGES Common Area Maintenance fees include expenses connected with operating, maintaining, repairing, and administering the common areas utilized by tenants. The costs to upkeep common area spaces are unique to each retail complex and are reimbursed by the tenants. In this case, CAM charges for both tenants are for landscaping and security services, and were set at $5.34 per square foot in year 1. No adjustments have been made during the initial lease term.
RECENT FINANCIAL PERFORMANCE We have reviewed both tenants’ historic and recent financial performance, as well as financial performance of nearby restaurants. While the information is proprietary and confidential, we have developed the following conclusions from our review:
Over the past 10 years, the financial performance of both restaurants has improved considerably. The businesses face many challenges in the spaces including lack of pedestrian traffic, difficult way finding, limited signage, limited access and visibility, and intermittent shutdowns from major events at Yerba Buena gardens and high volume conventions. Over the years, the businesses have both been very proactive and developed ways to take advantage of the unique location in the Yerba Buena Gardens and above Moscone Center, including active marketing to the Convention Center to develop a strong event business, the development of a happy hour following, utilization of the outdoor spaces with views of the gardens, and increased signage throughout YBG. However, both businesses rely on events for a significant part of their revenue, more than a typical restaurant business of this size. This relatively greater reliance on events as part of the core business model requires buy‐out of both locations. Furthermore, the wind and weather conditions in the outdoor seating areas, currently limit both tenants’ ability to take advantage of the unique garden setting as much as they could.
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The businesses currently perform moderately well, although it is clear that the achievable revenue in these two spaces is significantly lower than comparable spaces in ground floor locations in this neighborhood.
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3 MARKET LEASING CONDITIONS
Due to the unique nature of the location, visibility, and access of the two tenant spaces at YBG, no true comparable exists. However, an examination and summary of retail asking and market rents in the area informs the range of retail rents and terms achievable in the area.
SAN FRANCISCO MARKET CONDITIONS The inventory of retail in the Yerba Buena submarket is approximately 2.2 million square feet (SF). This inventory accounts for approximately 4.3% of inventory in San Francisco.
The San Francisco retail market is extremely strong right now, evidenced by declining vacancy rates and increasing rental rates (see Figure 3 below). Vacancy rates in the city as a whole have been below 5% for the past six years, indicating a very tight market. Retail leasing throughout the city has been strong, due to strong employment growth as well as limited recent supply. Restaurants and cafes are a particular strong point of the leasing market. Union Square continues to be a highly desirable location for luxury retailers, with rents as high as $600 PSF and 2 percent vacancy in the submarket. Major retail projects set to open in the next few years include 250,000 SF at 935 Market (between 5th and 6th Streets), 160,000 SF within the Transbay Transit Center, and 125,000 SF around the Warriors Arena in Mission Bay.
The vacancy rates in the Yerba Buena submarket are even lower – currently at zero percent, indicating there is virtually no vacant retail in the area. Rental rates for the San Francisco and Yerba Buena were similar between 2009 and 2013, however starting in 2014, the Yerba Buena submarket surpassed the average rental rate of the broader San Francisco market. Taken together, these two indicators demonstrate that the Yerba Buena submarket is outperforming the city.
Figure 3: Vacancy Rates and Rental Rates for Yerba Buena and City of San Francisco $60 10.0%
Yerba Buena $58.00 $44.48 $45 7.5% Rates $30 5.0% PSF/year San Francisco Vacancy Rent 1.9% $15 2.5%
0.0% $0 0.0% 2009 2Q 2010 2Q 2011 2Q 2012 2Q 2013 2Q 2014 2Q
Source: CoStar
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RETAIL ASKING RENTS The average asking rent in the Yerba Buena area is approximately $57.40 PSF/year NNN. The Yerba Buena area performs within the range of many other well‐known and successful retail districts and streets in San Francisco, as can be seen in Figure 4. Asking rents range within each submarket. For example, recent asking rents within the Hayes Valley area average approximately $51, with a range between $40 PSF/year (including for larger spaces) and $75 PSF/year (for smaller spaces).
Figure 4: Asking Rent by Submarket, NNN
$120
$100 $84 $80 $58 $60 $51
$40
$20
$0
Source: Terranomics
RECENT MARKET LEASES As part of this assignment, we reviewed approximately 20 comparable leases in the Yerba Buena, South of Market, Financial District, and Market Street areas and interviewed several retail brokers who are active in these areas. While much of the data provided to us is confidential, key conclusions are as follows:
Overall, rents can be differentiated between primary and secondary spaces. Primary spaces include typical, street‐level spaces. Within the “primary” category, spaces with high foot traffic see a premium in rents over street‐level spaces with standard volumes of foot traffic. Secondary spaces include those on second or third levels, or spaces which are atypical, which are located in low foot traffic areas. Generally speaking, the differential between a primary and secondary retail space in the same location can be up to 50 percent (e.g. ground floor versus second floor retail). Furthermore, smaller spaces support higher rent levels. Current retail lease rates in the Yerba Buena area range from $30 PSF/year up to $80 PSF/year, with an average for a typical ground floor space of $55 to $60 PSF/year. The average lease rate for the area for a ground floor lease in a primary location is $58 PSF/year.
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We also reviewed retail lease terms over a slightly larger geography. For the greater downtown area, current rents are higher, approximately $78 PSF/year with a range of rents starting at $60 PSF/year up to $96 PSF/year, with the highest performing retail spaces supporting rents up to $120 PSF/year. Rents are higher in the greater downtown area due to higher foot traffic, particularly from daytime employees in the Financial District. Furthermore, rent can be differentiated between desirable locations with high or regular foot traffic and those in secondary locations, which see low foot traffic by nature of their location. The above data points are for primary locations. Rent at secondary locations for similar sized spaces range between $30 and $40 PSF/year NNN. Based on our research, conclusions for market rent for the Yerba Buena area are displayed below in
Table 3.
Table 3: Yerba Buena Submarket Rents Type of Retail Foot Traffic Market Rent Primary High $55‐$80 Primary Standard $40‐$60 Secondary Low $30‐$45
Source: AECOM
Other Lease Characteristics
Typical lease terms for current leases in the market are as follows:
Current leases in the market typically include annual increases of 3 percent. The typical term for free rent for renewals is between two and four months, depending on the financial outlay for TIs required in the lease. Free rent can be amortized over the first year to maintain a smoother cash flow. Amortization over the first year preserves a steady cash flow, which is often desired by the landlord. Most retail leases have five to ten year terms. Renewal options are typically a five‐year term at market rate. Finally, it is typical for CAM charges to increase over the least term, capped at a negotiated amount, usually around 3 percent. It is important to keep in mind that non‐rent terms are highly specialized and decided during negotiations between tenant and landlord.
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4 RECOMMENDATIONS
The recommendations in this section take into consideration a variety of factors, including:
Financial performance of both tenants; Current market conditions; Existing retail lease rates and terms from “comparable” spaces in the Yerba Buena and surrounding neighborhoods; Future Moscone Center expansion plans; and The location, access, visibility, and other unique characteristics of the two retail spaces.
RENEWAL CONSIDERATIONS In addition to rental terms, the following are relevant considerations for the current lease renewal:
Based upon interviews with current management and the tenants, it is apparent that the tenants have demonstrated strong commitment to the Gardens and have been active, supportive tenants that participate widely in Yerba Buena Gardens initiatives and community building activities. The alternative to a renewal is securing a new tenant. New leases require new transaction costs and result in down time at the site, periods of vacancy, and lost revenue, as well as costs associated with activating, securing, and maintaining the space while it is vacant. Given the history of tenant turnover at these restaurants, the challenges associated with the retail locations, and the amount of business development both retail tenants have had to incur to develop a profitable business at the YBG location, any down time between tenants may be lengthy. There would likely be a resulting loss in revenue, and, furthermore, a “dark” tenant space at this location would negatively impact Yerba Buena Gardens as whole, as shown by previous experience. Typically upon renewal of retail spaces, the landlord requires the tenant to invest in TIs to maintain the space. Currently, both tenants have expressed desire to invest between $50,000 and $70,000 each in patio improvements, including the installation of outdoor heaters and glass patio partitions to block the wind, which comes through the area daily in the evening. Furthermore, both tenants have received the required permits and documentation to proceed with the investment. The majority, if not all, improvements to the outdoor area will become part of the property, which benefits the landlord in the long‐term. Furthermore, in addition to the in fixed improvements, the tenants are planning on investing in other aspect of their operations, including kitchen appliances, interior renovation, and new outdoor furniture. This level of commitment from the tenants indicates the desire of the tenants to re‐invest in the space. Finally, TIs such as these are likely to become part of the property and upon the tenant vacating, the improvements would belong to the landlord. Given these consideration, the recommendation is to seek renewals with Samovar and B Restaurant.
RECOMMENDATIONS The market rate for good quality, ground floor, high visibility retail spaces with pedestrian traffic and good access in the Yerba Buena Gardens area is $55 to $80 PSF/year. Comparatively, the market rate for more typical ground‐ floor spaces is around $40 to $60 PSF/year. Finally, average market rent for secondary spaces with low foot traffic ranges from $30 to $45 PSF/year.
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YBG Retail Spaces
It is AECOM’s judgment that the two retail sites under consideration are in between secondary and standard retail spaces. Considering only location, visibility, and access, these spaces would be considered secondary retail locations. However, the location within Yerba Buena Gardens, with a beautiful garden setting and near a critical mass of activities and attractions elevates the quality of the space. Given this, we believe that current rents are within market range.
Moscone Convention Center Expansion
The Moscone Convention Center expansion is currently underway with construction taking place through at least 2018. The construction schedule is intermittent and takes into consideration the convention schedule. Plans that affect the two tenants include:
1. Expansion of Moscone North, currently located on the levels directly below the restaurants. The expansion plans include expanding Moscone North, which will be approximately 10 feet higher than the current height of the restaurant. 2. Pedestrian bridges across Howard Street. In an effort to create contiguous space between Moscone North and Moscone South, located across from Howard Street, current plans call for the construction of two new pedestrian bridges. The current pedestrian bridge across Howard Street would be replaced with an open‐air, publically accessible bridge. The second bridge is planned to be located to the Northeast of B Restaurant. This bridge will be enclosed and used as a multi‐purpose space for conventioneers. It is also possible that construction in the short term may have an impact on the two restaurant operations. Location Challenges The result of the tenants’ above‐ground location is low pedestrian traffic. The majority of foot traffic is at street level, and a location at a second or third level is less convenient for passersby compared to other options. Nearby restaurants include those along 4th Street between Mission Street and Howard Street and tenants within the Metreon Food Court that are all easily accessible. Furthermore, both tenants are located along a pedestrian walkway that currently terminates near B Restaurant. Samovar has limited visibility for those walking between the Esplanade and the pedestrian bridge. B Restaurant is located further along the walkway and suffers from even less visibility. Furthermore, the tenants have limited signage, although this has improved recently. As a result, customers or potential customers have a difficult time finding the location of the restaurants. Low visibility also hampers way‐finding. Customers may have difficulty locating the cafes, even from within the Yerba Buena Gardens complex. The cafes have one sign within the gardens. The discreet sign blends into the environment, which maintains consistency with the aesthetic of the Gardens; however, a lack of attention‐grabbing signage is a disadvantage for the tenants. In order to compensate from the loss of walk‐in business, the tenants’ business model varies from typical restaurants. The two tenants generate a substantial amount of their income from events rather than regular business. While this takes advantage of the location above Moscone Center, reliance to this extent on event revenue is also risky for the tenants and is certainly not a typical business model for small cafes and restaurants. Events in smaller restaurants such as these require that the entire business be closed to regular clients.
The impact of the lack of foot traffic is evidenced in the breakdown of tenants’ events revenues compared to the typical restaurant. A typical small restaurant or café may receive a small or modest amount of revenue from
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special events, whereas these tenants must achieve significant events revenues to remain viable. B Restaurant in particular has aggressively marketed the restaurant to convention attendees to develop a feasible business model.
The location within the Yerba Buena Gardens complex provides advantages and challenges for the two retail spaces:
The unique garden location provides a respite from street conditions and the adjacent space open to the public is a unique amenity. YBG is a well‐known, major visitation destination for both residents and tourists with a number of attractions and activities that create an on‐site market and critical mass. However, events in the Gardens or very large conventions can limit access to and from the gardens, and often times potential customers find it extremely difficult to patronize these retail spaces. Therefore, the tenants sometimes close during events, which results in direct revenue losses and indirect revenue losses, through lower reliability for customers. Currently, there are on average approximately five major conventions that rent the large sections of the Gardens area during their week‐long conventions. Additionally, there is a small number of gardens events that impedes business to the tenants in a similar way. Furthermore, based on the tenants’ experience, extremely large conventions do not greatly positively impact business, as many times lunch is provided during the convention. Other Issues The following considerations may impact the remaining lease terms:
Limited signage on the site leads to low awareness and complex way‐finding. We would recommend that additional signage be allowed. The tenants’ location on top of a public assembly facility, the Moscone Center, is atypical for restaurant leases and requires additional steps to service maintenance issues within the cafes. Summary of Tenant Analysis The below SWOT tables summarizes the internal forces pertinent to the two tenants – strength and weaknesses – as well as the external forces facing the tenants – opportunities and threats.
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Table 4: Samovar Tea Lounge SWOT Analysis
Strengths Weaknesses
• Brand recognition as destination café • Niche product • Adjacent to pedestrian walkway – slightly better • Tea‐based product not oriented to capture large visibility convention clients, have had to adapt product • Outdoor space with future renovation • Low visibility • Unique beautiful garden setting • Confusing wayfinding • Location adjacent to Moscone Center, in Yerba • Location on top of Moscone Center requires Buena Gardens, and near critical mass of coordination for maintenance attractions • Closures during YBG events/festivals
Opportunities Threats
• Ability to capitalize on views/setting with • Convention business threatens core outdoor upgrades business/returning clientele • Increasing number of residents in the neighborhood
Table 5: B Restaurant SWOT Analysis
Strengths Weaknesses
• Full‐service restaurant with ability to host group • Near terminus of pedestrian walkway events • Very limited visibility • Relationships with event planners • Low brand recognition • Outdoor space with future renovation • Confusing wayfinding • Unique beautiful garden setting • Location on top of Moscone Center requires • Location adjacent to Moscone Center, in Yerba coordination for maintenance Buena Gardens, and near critical mass of • Closures during YBG events/festivals attractions
Opportunities Threats
• Ability to capitalize on views/setting with • Convention business threatens core outdoor upgrades business/returning clientele • Moscone North renovations will improve access • Increasing number of residents in the neighborhood
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KEY FINDINGS For the past 5 years, the retail market in San Francisco and Yerba Buena has been relatively stable, until 2014, when the market performance increased dramatically. Yerba Buena is performing better than the SF market as a whole with exceptionally high rents and rent increases in the last year and a virtually no vacant space available. Current market rate rents in Yerba Buena are $58 PSF/year, ranging from $35 PSF/year for lower‐ quality, secondary retail space to over $80 PSF/year for spaces in the best locations with the highest foot traffic. In the greater submarket, the differential between high‐quality premiere space and the secondary space is approximately 50%. We consider the subject sites to be in between secondary and standard retail spaces. Considering only location, visibility, and access, these spaces are secondary retail locations. However, the location within Yerba Buena Gardens near a critical mass of activities and attractions elevates the quality of the space. Given this, we believe that current rents are within market range. Historically, it has been challenging to maintain tenants in this location, as these spaces are not ideal for retail. The two tenants have been valuable contributing members of the YBG community and have been committed over a relatively long time to make their business work in this location. They are currently planning major investments, approximately $50,000 to $70,000 per tenant. The loss of these tenants would likely result in significant down time and possibly continued turnover and vacancies.
RECOMMENDED LEASE TERMS Based upon our research and analysis, we recommend the following lease terms:
Rate: o Renew at 3% increase to current rent, with discounted rent in the first year equivalent to four months free rent amortized over 12 months o Escalations: Annual 3% increases (Year 2 rent based off of unamortized free rent in Year 1) CAM: Escalate CAM according to increase in costs, with a cap of 3 percent annually Term: 10‐year term, 5‐year renewal at mark‐to‐market rate Tenant Improvements: Quantify the $50,000 to $70,000 per tenant investment in the new lease
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Table 6: Samovar Tea Lounge Proposed Lease Schedule
Lease Year Lease Year Dates Monthly Rent Annual Rent
1 March 1, 2016 – February 28, 2017 $4,919.74 $59,036.85 2 March 1, 2017 – February 28, 2018 $7,600.99 $91,211.94 3 March 1, 2018 – February 28, 2019 $7,829.02 $93,948.30 4 March 1, 2019 – February 29, 2020 $8,063.90 $96,766.75 5 March 1, 2020 – February 28, 2021 $8,305.81 $99,669.75 6 March 1, 2021 – February 28, 2022 $8,554.99 $102,659.84 7 March 1, 2022 – February 28, 2023 $8,811.64 $105,739.64 8 March 1, 2023 – February 29, 2024 $9,075.99 $108,911.82 9 March 1, 2024 – February 28, 2025 $9,348.26 $112,179.18 10 March 1, 2025 – February 28, 2026 $9,628.71 $115,544.55
Table 7: B Restaurant Proposed Lease Schedule
Lease Year Lease Year Dates Monthly Rent Annual Rent
1 June 1, 2016 – May 31, 2017 $5,037.39 $60,448.64 2 June 1, 2017 – May 31, 2018 $7,782.76 $93,393.15 3 June 1, 2018 – May 31, 2019 $8,016.25 $96,194.94 4 June 1, 2019 – May 31, 2020 $8,256.73 $99,080.79 5 June 1, 2020 – May 31, 2021 $8,504.43 $102,053.22 6 June 1, 2021 – May 31, 2022 $8,759.57 $105,114.81 7 June 1, 2022 – May 31, 2023 $9,022.35 $108,268.26 8 June 1, 2023 – May 31, 2024 $9,293.03 $111,516.30 9 June 1, 2024 – May 31, 2025 $9,571.82 $114,861.79 10 June 1, 2025 – May 31, 2026 $9,858.97 $118,307.65
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ATTACHMENT 3
Proposed First Amendment
OFFICE OF COMMUNITY INVESTMENT AND INFRASTRUCTURE (SUCCESSOR AGENCY TO THE SAN FRANCISCO REDEVELOPMENT AGENCY)
FIRST AMENDMENT TO COMMERCIAL RETAIL LEASE (Yerba Buena Gardens West Café)
This First Amendment to the Commercial Retail Lease (the “First Amendment”) dated for reference purposes only as of September ____, 2015 is by and between the Successor Agency to the Redevelopment Agency of the City and County of San Francisco, a public body organized and existing under the laws of the State of California, commonly knowns as the Office of Community Investment and Infrastructure, (“OCII,” “Successor Agency,” and/or the “Landlord”), and Samovar Tea Lounge Yerba Buena, LLC, a California limited liability company (“Tenant”).
RECITALS
This First Amendment is made with reference to the following facts and circumstances:
A. The Redevelopment Agency of the City and County of San Francisco, a public body, (the former “Agency”) was dissolved on February 1, 2012, pursuant to California Health and Safety Code Sections 34170 et seq. (the “Redevelopment Dissolution Law”).
B. Under Redevelopment Dissolution Law, the Successor Agency assumed all of the former Agency’s enforceable obligations, including ownership of the former Agency’s real property assets. As a result of these legislative acts the Successor Agency (1) became a separate legal entity, separate from the City and County of San Francisco (the “City”); and (2) owns certain real property commonly known as the Yerba Buena Gardens West Cafe (the “West Cafe”), which is located within the former Yerba Buena Center Redevelopment Project Area D- 1, which was duly adopted on April 24, 1966 in accordance with Community Redevelopment Law, and which expired by its own terms on January 1, 2011 (the “Former YBC Project Area”).
C. On October 18, 2005, the Agency entered into a 10-year Commercial Retail Lease for the West Café with PJR LLC, a California limited liability company, lessee, (the “Original Lease”), which defines the West Café as the “Premises”. On May 1, 2012, PJR LLC, as lessee, assigned all of its rights, title, and interest in the Original Lease to the Tenant, and the Tenant agreed to be bound by and perform the terms, covenants, and conditions of the Original Lease. Pursuant to Article 10.1 of the Original Lease, on May 17, 2013, the Successor Agency consented to the assignment of the Original Lease to Tenant. The term of the Original Lease expires on February 29, 2016. Together, the Original Lease and the First Amendment comprise the “Lease.”
D. Section 2.2 of the Original Lease provides that OCII and the Tenant may agree to extend the term and modify any other provisions of the Lease before March 1, 2016. Further, this section requires the Tenant to notify the Landlord in writing of Tenant’s desire to extend the term
First Amendment to Commercial Retail Lease (West Café) Page 1 of 13 of the lease. Accordingly, on September 2, 2014, OCII received the Tenant’s written notification of its wish to extend the term of the Original Lease.
E. Redevelopment Dissolution Law requires successor agencies to former redevelopment agencies, including OCII, to dispose of their real property assets under a Long- Range Property Management Plan (“PMP”) (California Health and Safety Code, Section 34191.5). OCII submitted its PMP to the State of California Department of Finance (“DOF”) in November 2013. The PMP is the disposition plan for all of OCII’s real property assets, including the West Cafe property, which is part of the Yerba Buena Gardens section of the PMP that proposes a transfer of Yerba Buena Gardens (“Gardens”) to the City for a governmental purpose. DOF must approve OCII’s PMP before the West Café, as a component of Yerba Buena Gardens, can be transferred to the City. At this time, DOF is reviewing OCII’s PMP.
F. Pending the approval of the PMP and subsequent transfer of the West Café to the City, OCII has a continuing obligation to preserve the assets of the former Agency and appropriately manage the West Café. The Lease for the West Café will expire on February 29, 2016, prior to the transfer to the City. As a function of prudent asset management, OCII is proposing this First Amendment to the Lease to continue West Café operations, avoid a potential vacancy of the space, and ensure uninterrupted Lease rental payments to OCII and to the City after the transfer.
G. The former Agency originally acquired the land on which the West Café is located with federal urban funds from the U.S. Department of Housing and Urban Development (“HUD”) provided through a Contract for Loan and Capital Grant dated December 2, 1966 (Contract No. Calif. R-59) and approved by HUD (the "HUD Contract"). Under the HUD Contract, the former Agency was required to use the federal funds to carry out redevelopment activities in accordance with the Redevelopment Plan for the Yerba Buena Center Approved Redevelopment Project Area D-1 (“Redevelopment Plan”) and the federal standards for urban renewal under Title I of the Housing Act of 1949. In 1983, the former Agency and the City executed, with HUD concurrence, the Yerba Buena Center Redevelopment Project Closeout Agreement ("YBC Closeout Agreement") whereby the Agency agreed to retain the Project Property (as defined in the YBC Closeout Agreement), including the West Café, for disposition, subject to applicable federal law and subject further to restrictions on the use of any proceeds received from the sale or lease of the West Café (refer to Sections 1(b) and 1(c) of the YBC Closeout Agreement). In approving the YBC Closeout Agreement, HUD emphasized that "all future proceeds from the sale or lease of Project Property must be treated as program income under the CDBG [Community Development Block Grant] program" (“CDBG Program Income”). The former Agency, and now OCII, have held the Project Property for the governmental purposes described in the YBC Closeout Agreement and the CDBG program (See 24 C.F.R. §§ 570.201 (completion of urban renewal projects under Title I of the Housing Act of 1949) and 24 C.F.R. § 570.800 (pre-1996 federal urban renewal regulations continue to apply to completion of urban renewal projects)) ("CDBG Program Requirements"). Therefore, the revenue stream from the Project Property, including the West Café, is considered CDBG Program Income and may be used for operation, maintenance (including capital improvements), and security of the Gardens.
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H. OCII deposits the West Café revenue, and funds from all Gardens sources, into a restricted, segregated account (the “Separate Account”) pursuant to an interlocking set of agreementsI with OCII’s long-term tenants and other Gardens stakeholders. These long-term agreements (ranging from 78 to 90 years) require the former Agency to operate, maintain, and program the open space, and fund cultural operations at the Gardens. Additionally, these governing documents define and restrict expenditures from the Separate Account according to a distinct order of priority (first, to fund Gardens maintenance, operations, security, and activation of the open space, and second, to fund cultural operations in Gardens, and so on). These governing documents, and thus the Gardens funding stream itself, are considered enforceable obligations under Redevelopment Dissolution Law.
I. The Lease will be assigned to the City upon DOF’s approval of the PMP. The City, through the Director of its Real Estate Division, has reviewed and recommends approval of this First Amendment, which will (1) provide the City with a stable asset upon transfer, (2) allow the Tenant to amortize future Tenant Improvements (as defined in Section 11 below), and (3) secure the continuing restricted revenue stream from rent and other fees to be used for the operation, maintenance (including capital improvements), and security of the Gardens.
J. OCII and the Tenant therefore seek to enter into this First Amendment upon the basis of the terms, covenants and conditions set forth below.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Landlord and the Tenant agree as follows:
1. Article 1 (a) is deleted in its entirety and the following is inserted in lieu thereof: “Agency and/or OCII is defined as the Successor Agency to the Redevelopment Agency of the City and County of San Francisco, a public body organized and existing under the laws of the State of California, commonly knowns as the Office of Community Investment and Infrastructure, and whenever this Lease allows or requires OCII to take an action or refrain from acting, the OCII’s Executive Director or designee shall be authorized to act or refrain from acting, unless the context indicates otherwise.”
2. Article 1 (c) is deleted in its entirety and the following is inserted in lieu thereof:: “Gardens Landscaping and Security Fees (“Gardens Fees”) is defined in Article 3.1 (c)”
I Documents defining the Separate Account include the (1) Central Block 2 Entertainment and Retail Lease dated May 9, 1997 between the Successor Agency and Yerba Buena Entertainment Center LLC, (2) Yerba Buena Gardens Amended and Restated Construction, Operation and Reciprocal Easement Agreement and Agreement Creating Liens dated March 31, 1998 between the Successor Agency and YBG Associates LLC, and (3) Central Block 1 Retail Lease dated March 31, 1998 between the Successor Agency and CB-1 Entertainment Partners LP. .
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3. Article 1 (e) is deleted in its entirety and the following is inserted in lieu thereof: “Date of Possession means December 23, 2005, the date that the Agency turned over possession of the Premises to the Tenant, as documented in a notice to the Tenant from the Agency.”
4. The following new Articles are added to the Lease immediately following Article 2.2:
“2.2 (a) Extended Term. Pursuant to Article 2.2, above, on September 2, 2014, Landlord received Tenant’s written notification of its wish to extend the term of the Lease. Landlord and Tenant have agreed, subject to the Oversight Board to the Successor Agency (“Oversight Board”) and DOF approval, to a 10-year extension of the Lease commencing March 1, 2016 (the “First Amendment Commencement Date”). The term of this First Amendment (the “First Extended Term”) shall begin on the First Amendment Commencement Date and shall end ten years after the First Amendment Commencement Date on February 28, 2026 (“First Amendment Termination Date”), unless terminated earlier in accordance with the terms of the Lease. Together, the Term and First Extended Term shall comprise the “Term.”
“2.2 (b) Option to Extend. At Tenant’s option, and subject to the provisions of this section, the Tenant may extend the First Extended Term of this Lease for one additional five-year period by giving written notice to Landlord of the exercise of the option (“Option Notice”) not earlier than 270 days and not later than 180 days prior to the First Amendment Termination Date (“Second Extended Term”). If an Event of Default, defined in Article 20.1 of this Lease, exists on the date the Second Extended Term is to commence, the Second Extended Term will not commence and this Lease will expire at the end of First Extended Term.”
5. Article 3.1, Minimum Rent, is deleted in its entirety and the following sections 3.1 (a), 3.1 (b), 3.1 (c), and 3.1 (d) are inserted in lieu thereof: “3.1 (a) Minimum Rent. The minimum rent (“Minimum Rent”) due for each Lease Year during the First Extended Term shall be as indicated in the following table. Tenant’s annual rent for the first Lease Year (March 1, 2016 to February 28, 2017) will be adjusted in order to reflect a credit for the Tenant’s investment of a minimum of $50,000 in Tenant Improvements, as set forth in Article 6.1 (c) of this First Amendment. If the Tenant fails to complete such Tenant Improvements by March 1, 2017, Tenant will reimburse Landlord an amount equal to the first Lease Year rent reduction.
Lease Year Lease Year Dates Monthly Rent Annual Rent 1 March 1, 2016 – February 28, 2017 $4,919.74 $59,036.85 2 March 1, 2017 – February 28, 2018 $7,600.99 $91,211.94 3 March 1, 2018 – February 28, 2019 $7,829.02 $93,948.30 4 March 1, 2019 – February 29, 2020 $8,063.90 $96,766.75 5 March 1, 2020 – February 28, 2021 $8,305.81 $99,669.75
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6 March 1, 2021 – February 28, 2022 $8,554.99 $102,659.84 7 March 1, 2022 – February 28, 2023 $8,811.64 $105,739.64 8 March 1, 2023 – February 29, 2024 $9,075.99 $108,911.82 9 March 1, 2024 – February 28, 2025 $9,348.26 $112,179.18 10 March 1, 2025 – February 28, 2026 $9,628.71 $115,544.55
3.1 (b) Minimum Rent for the Second Extended Term. The Minimum Rent due at the beginning of the Second Extended Term shall be negotiated after the Tenant submits its Option Notice to Landlord, and will be based on the current fair market rental value for the Premises (“Fair Market Rental Value”) at that time. The methodology to determine Fair Market Rental Value will be an analysis of market data on comparable leases in the market area conducted by the Landlord or an outside firm selected by the Landlord. In determining the methodology to determine Fair Market Rental Value the analysis may include other types of rent. The Landlord shall use reasonable efforts to notify Tenant of the Fair Market Rental Value determination within 90 days of receiving Tenant’s Option Notice. If the Tenant disputes the rental determination, then Landlord and Tenant shall negotiate in good faith for 30 days, or such other time period as mutually agreed upon by both parties, to try and arrive at a mutually agreed upon Fair Market Rental Value. In the event the parties cannot mutually agree on the Fair Market Rental Value after such agreed upon time period has elapsed, then the option for the Second Extended Term shall be rescinded and extinguished.
3.1 (c) Gardens Landscaping and Security Fees (“Gardens Fees”). The Tenant shall pay Gardens Fees in an amount commencing at $5.50 per leasable square feet (1,954 square feet) per year during the first year of the First Extended Term for Gardens landscaping and security services. The Gardens Fees will be increased at 3% per year for each year thereafter in accordance with the following schedule:
Lease Year Lease Year Dates Annual Gardens Fees 1 March 1, 2016 – February 28, 2017 $10,747.00 2 March 1, 2017 – February 28, 2018 $11,069.41 3 March 1, 2018 – February 28, 2019 $11,401.49 4 March 1, 2019 – February 29, 2020 $11,743.54 5 March 1, 2020 – February 28, 2021 $12,095.84 6 March 1, 2021 – February 28, 2022 $12,458.72 7 March 1, 2022 – February 28, 2023 $12,832.48 8 March 1, 2023 – February 29, 2024 $13,217.45 9 March 1, 2024 – February 28, 2025 $13,613.98 10 March 1, 2025 – February 28, 2026 $14,022.40
3.1 (d) Minimum Rent and Gardens Fees Revenue Restrictions. The revenue generated from Minimum Rent and Gardens Fees is considered restricted CDBG Program Income, which, according to the YBC Closeout Agreement, may be used for operation, maintenance (including capital improvements), and security of the Gardens, and is deposited into OCII’s
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Separate Account pursuant to an interlocking set of agreements with OCII’s long-term tenants and other Gardens stakeholders.”
6. Article 4.1, Organization of the Agency and Ownership of Premises, is deleted in its entirety and the following is inserted in lieu thereof:
“Article 4.1. Organization of the Agency and Ownership of Premises. The Successor Agency covenants that it is a public body duly created and validly existing in good standing under Redevelopment Dissolution Law (California Health and Safety Code Sections 34170 et seq.), that it owns the Premises, and that it has the conditional right, power and authority to enter into the First Amendment, subject to the review and approval of the Oversight Board and DOF.”
7. Article 5.1 (a), Days and Hours of Operation, is deleted in its entirety and the following is inserted in lieu thereof: “5.1 (a) Days and Hours of Operation. The Tenant shall be open for business Sunday through Saturday from not later than 9:00 am to not earlier than 8:00 pm ("Minimum Operating Days and Hours"), except as provided herein the Lease. Landlord acknowledges that the Tenant’s business model relies on private events for a significant portion of its revenue. Private events are events that close off either a portion Premises, or through a buy-out, the entire Premises., A buy-out of the Premises can result in the closure of the entire Premises and business operations to the public during the Minimum Operating Days and Hours. Closures for private events shall not be considered either an Event of Default under this Lease or a “special event” as described in Article 37. Closures of the entire Premises shall not exceed a total of thirty (30) calendar days per year, unless the Landlord gives written approval in advance of any closure in excess of the maximum allowed closures. Tenant shall provide notification of private events involving the closure of the entire Premises to the Gardens Manager and coordinate such entire closures with the Gardens Manager in accordance with the provisions of this Lease.”
8. Article 5.4, Conduct of Business, is deleted in its entirety and the following is inserted in lieu thereof: “5.4 (a) Tenant covenants and agrees that Tenant will use the Premises as set forth in the Lease and for no other purposes continuously and uninterruptedly from and after the initial opening of Tenant's business in the Premises. Tenant shall serve high quality food and beverages. Tenant's business in the Premises shall be conducted under the Tenant’s trade names Samovar Tea Lounge, Samovar, Samovar Tea, or Samovar Tea & Chai. Tenant shall not use any other trade name at the Premises without Landlord's prior written consent, which consent shall not be unreasonably held subject to the Permitted Uses of the Lease.” “5.4. (b) At all times the business to be conducted at, through and from the Premises and the kind and quality of merchandise and services to be offered in the conduct thereof will be consistent with the information and descriptions provided to Landlord prior to the execution of this First Amendment; and the sales methods employed in said business, as well as all other elements of merchandising, display and advertising, will be of a first-class nature,
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dignified and in conformity with the standards of practice maintained among stores, shops and concerns conducting business in the Gardens.”
“5.4. (c) Tenant shall carry on its business (for use by the general public and private events) diligently and continuously at the Premises throughout the Term of this Lease and shall keep the Premises open for and cause such business to be conducted thereon on all business days during the hours of operation specified in the Lease. Tenant shall notify the Landlord immediately, but in no event later than the next business day, whenever Tenant fails to open for business (for either the general public or private events) in the Premises on any day designated in the Minimum Operating Days and Hours. Unless such failure shall be for a business or operating emergency reasonably acceptable to the Landlord, including Force Majeure, it shall be treated as a material breach of this Lease. Two or more such failures during three consecutive months shall entitle the Landlord to declare an Event of Default and to exercise any and all of its remedies hereunder.”
9. Article 5.5 (a) (2) is deleted in its entirety and the following is inserted in lieu thereof: “5.5 (a) (2) Not discriminate against or segregate any person or group of persons on account of race, color, religion, creed, national origin or ancestry, sex, gender identity, age, marital or domestic partner status, sexual orientation or disability (including HIV or AIDS status) or any basis listed in Section 12940 of the California Government Code, as those bases are defined in Section 12926 and 12526.1, as amended from time to time, in the performance of this Lease. Such action shall include, but not be limited to the following: employment, upgrading, demotion, or transfer; recruitment or recruitment advertising; layoff or termination; rates of pay or other forms of compensation; selection for training, including apprenticeship; use or occupancy of vendors on the Premises, and provision of any services or accommodations to clients or the general public in the sublease, transfer, use, occupancy, tenure or enjoyment of the Premises or any improvements erected or to be erected thereon, or any part thereof.”
10. Section 5.10, Compliance With Access Requirements is deleted and the following is inserted in lieu thereof: “5.10 Compliance with Access Requirements. Tenant covenants to provide access to its services in full compliance with the Americans with Disabilities Act and State and local laws ensuring access to services for persons with disabilities.”
11. A new Article 6.1 (c) is added to the end of Article 6.1, General Requirements as follows: “6.1 (c) The Tenant, at its sole cost and expense, shall undertake and complete new Tenant Improvements, described below, related to the approval of this First Amendment. The Tenant agrees and covenants that it shall expend a minimum of $50,000 on the installation of the new Tenant Improvements, which include, but are not limited to, the following: outdoor furniture, glass wind screens and heaters, and interior renovation, kitchen upgrades, bathroom upgrades, and dining room upgrades. Tenant agrees to complete installation of the new Tenant Improvements to the satisfaction of the Landlord no later than March 1, 2017. At
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times reasonably requested by Landlord, Tenant shall furnish to Landlord sufficient documentation of the Tenant Improvements and their costs, in accordance with Article 8, Changes to the Premises. Sufficient documentation includes, but is not limited to, Tenant’s records of all estimates, invoices, receipts, and other reasonably detailed documentation sufficient to show the Tenant Improvement work undertaken and the actual costs paid by the Tenant. The requirements of Article 9 of the Lease shall apply to all new and future Tenant Improvements undertaken by the Tenant.”
12. Article 7.1, Permitted Uses, is deleted in its entirety and the following is inserted in lieu thereof: “7.1 Permitted Uses. The Premises shall be used primarily for a retail food service establishment open to the general public that serves hot and cold beverages with accompanying light fare that is suitable for breakfast, lunch, and dinner, as well as afternoon and evening snacks and desserts. Secondarily, the Premises may also be used for private events as set forth in Article 5.1 (a). Ancillary entertainment uses are permitted subject to all terms and conditions of this Lease.”
13. Article 8 (a) is deleted in its entirety and the following is inserted in lieu thereof: “8 (a) The City’s Planning Code, zoning requirements, applicable regulatory requirements, and this Lease control changes to the Premises and Permitted Uses.”
14. Article 12 (h) is added to the end of Article 12, Utilities and Services as follows: “12 (h) Tenant will be responsible for repairs as stated in Article 13, Maintenance and Repair. In the event that repairs must be made in a location beyond the Tenant’s Premises (such as within the premises of the Moscone Center, Metreon or Marriott Hotel), the Landlord must assist with providing the Tenant with access to the location. The Landlord’s assistance will begin immediately after Tenant has provided notification to the Landlord.”
15. Article 13 (a) is deleted in its entirety and the following is inserted in lieu thereof: “13 (a) The Landlord shall be responsible for all maintenance and repairs associated with the Café Structure (except for the ceiling, which is the Tenant’s responsibility), including the glass walls, which are structural components and bearing walls, and the Building except for the following Tenant responsibilities defined below.”
16. Article 13 (b) (ii) deleted in its entirety and the following is inserted in lieu thereof: “13 (b) (ii) Tenant shall make repairs and provide maintenance associated with all utilities and services within the Premises as well as all repairs and maintenance to Tenant's exterior and interior doors and all windows, Tenant's separate HVAC system, and repairs and maintenance of the hood and electrostatic precipitator, as well as any repairs required as a result of Tenant's Tenant Improvements, negligence or breach of the Lease.”
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17. Article 13 (b) (v) (1) is amended to add the following requirement to the end of the section: “13 (b) (v) (1) a dependable bonded grease trap service acceptable to Landlord for the purpose of cleaning and maintaining as follows: (a) not less frequently than once per month de-grease and treat with enzymes; (b) not less frequently than annually perform jetting service of main line; and (c) not less frequently than semi-annually evacuate the contents of kitchen hood vents, exhausts and blower systems, filters, flue stacks and related flow pipes, whether within or outside the Premises.. Tenant shall provide the Gardens Manager with quarterly reports, in a form acceptable to the Gardens Manager, on the maintenance and de- greasing services undertaken pursuant to the requirements of this section.”
18. Article 13 (b) (vii) is deleted in its entirety.
19. The following sentence is added to the end of Article 15 (a) as follows: “Agency expenditures for repair obligations will be subject to the approval of the Oversight Board and DOF, if necessary.”
20. Article 16, Indemnification, is deleted in its entirety and the following is inserted in lieu thereof: “16 Indemnification. To the fullest extent allowable by law, the Tenant shall hold harmless, defend at its own expense and indemnify the Landlord, and its respective commissioners, members, officers, agents and employees against any and all liability, claims, losses, damages or expenses, including reasonable attorney’s fees, arising directly or indirectly from (1) Tenant’s use of and operation on the Premises, the Cafe Structure and the Building, (2) its use of adjoining sidewalks and streets in the scope and course of its business on the Premises, and (3) any of its operations and activities connected thereto, excluding only claims, loss, damage, injury, actions, causes of action, and liability for injuries to persons or damages to property arising from the willful misconduct or gross negligence of the person or entity seeking to be defended, indemnified or held harmless. In addition to the Tenant’s obligation to indemnify the Landlord, the Tenant specifically acknowledges and agrees that it has an immediate and independent obligation to defend the Landlord from any claim which actually or potentially falls within this indemnification provision, even if the allegations are or may be groundless, false or fraudulent, which obligation arises at the time such claim is tendered to the Tenant by the Landlord and continues at all times thereafter.”
21. Article 17, Insurance, is deleted in its entirety and replaced in this First Amendment with Attachment I, Insurance Requirements, which is incorporated into the Lease as if fully set forth therein.
22. Article 30, Notices, is amended to reflect current addresses for OCII and the Tenant as follows: “The Office of Community Investment and Infrastructure One South Van Ness Avenue, 5th Floor San Francisco, CA 94103
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Attn: Executive Director
Samovar Tea Lounge Yerba Buena LLC P.O. Box 1741 Sebastopol, CA 95473 Attn: Jesse Jacobs, Managing Member”
23. Article 31 (b) is deleted in its entirety.
24. Article 37, Gardens Manager, is amended to add the following paragraph to the end of the section: “Tenant acknowledges that the Gardens Manager is an agent of the Landlord, and the Landlord, in its sole discretion and at any time during the Lease, may assign the role of the Gardens Manager as contemplated and described in this Lease, to another person or entity by providing written notice to Tenant.”
“Tenant, as part of its business model, is allowed to hold special events in addition to the private events described in Article 5.1 (a). Special events are events that close off areas of the Gardens beyond the Tenant’s Premises. The Gardens Manager must approve special event hours, and the Tenant must obtain permits from the Gardens Manager to hold special events. Additionally, the Tenant must comply with the following requirements including: (a) review and approval of exterior space branding by the Gardens Manager and payment of fees to the Gardens Manger related to space branding; (b) extra cleaning and maintenance costs incurred as a result of special events will be assessed by and paid to the Gardens Manager; and (c) the Tenant is not allowed to use flammable or explosive materials in the Premises during special events. The provisions of Article 59, Hazardous Substances, of the Lease also apply to special events.”
25. Article 39, List of Attachments, is amended to (a) modify Attachment F, Permanent Workforce, to authorize the City’s Office of Economic and Workforce Development to assume the obligations of the Agency under Attachment F; (b) delete from the Lease Attachment G, Tenant Menu; and (c) add Attachment I, Insurance Requirements.
26. A new Article 40 is added as follows:
“Article 40 , Effective Date. The effective date of this First Amendment and the parties’ rights and obligations hereunder shall be either (a) the date on which this First Amendment is approved by the Oversight Board, if the DOF does not request to review First Amendment within the five-day statutory review period provided under the Redevelopment Dissolution Law, or (b) the date on which this First Amendment is approved by DOF if DOF does request to review this First Amendment within the five-day statutory review period provided under the Redevelopment Dissolution Law, provided that it is executed by both OCII and the Tenant (“Effective Date”).”
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27. Miscellaneous. The following miscellaneous provisions apply to this First Amendment:
a. Incorporation. This First Amendment constitutes a part of the Lease and any reference in any document to the Lease as amended hereby.
b. Ratification. To the extent of any inconsistency between this First Amendment and the Lease, the provisions contained in this First Amendment shall control. Except as otherwise amended hereby, all terms, covenants, conditions and provisions of the Lease shall remain in full force and effect.
c. Successors and Assigns. This First Amendment shall be binding upon and inure to the benefit of the successors and assigns of the Landlord and Tenant, subject to the limitations set forth in the Lease.
d. Counterparts. This First Amendment may be executed in any number of counterparts, all of which, together, shall constitute the original agreement.
e. Governing Law; Venue. This First Amendment shall be governed by and construed in accordance with the laws of the State of California. The parties agree that all actions or proceedings arising directly or indirectly under this First Amendment shall be litigated in courts located within the County of San Francisco, State of California.
f. Integration. This First Amendment contains the entire agreement between the parties with respect to the subject matter of this First Amendment. Any prior correspondence, memoranda, agreements, warranties or representations relating to such subject matter are superseded by this First Amendment. No prior drafts of this First Amendment or changes from those drafts to the executed version of this First Amendment shall be introduced as evidence in any litigation or other dispute resolution proceeding by either party or any other person, and no court or other body shall consider those drafts in interpreting this First Amendment.
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IN WITNESS WHEREOF the parties have executed this First Amendment to the Commercial Lease as of the date first above written.
SUCCESSOR AGENCY TO THE SAN SAMOVAR TEA LOUNGE YERBA BUENA, FRANCISCO REDEVELOPMENT AGENCY, a LLC, a California corporation public body, corporate and politic
By: By: Tiffany Bohee Jesse Jacobs Executive Director Managing Member
APPROVED AS TO FORM:
By:______James B. Morales Agency General Counsel
Authorized by OCII Resolution No. ___ -2015 adopted on ______, 2015 Authorized by Oversight Board Resolution No. ____ - 2015 adopted on ______, ____2015
CITY ACKNOWLEDGEMENT
Department of Real Estate
By:______John Updike Director
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ATTACHMENT I
INSURANCE REQUIREMENTS
A. Tenant must procure and maintain for the duration of the Lease, including any hold-over extensions and all Lease extensions, insurance against claims for injuries to person or damages to property that may arise from or in connection with the execution of this First Amendment by the Tenant, its agents, representatives, employees or subcontractors against claims for injuries to persons or damages to property that may arise from or in connection with the Lease of the Premises, meeting at least the minimum requirements set forth below. If the Tenant maintains additional coverages and/or higher limits than the minimums shown in below, the Landlord requires and shall be entitled to the additional coverage and/or the higher limits maintained by the Tenant.
B. Minimum Scope of Insurance. Coverage must be at least as broad as:
1. Insurance Services Office Commercial General Liability coverage (occurrence form CG 00 01).
2. Insurance Services Office Automobile Liability coverage, code 1 (form number CA 00 01- any auto).
3. Workers’ Compensation insurance as required by the State of California and Employer’s Liability Insurance.
C. Minimum Limits of Insurance. Contractor must maintain limits no less than:
1. General Liability: $2,000,000 per occurrence for bodily injury, personal injury and property damage. If Commercial General Liability Insurance or other form with a general aggregate limit is used, either the general aggregate limit must apply separately to the Lease and any amendments, or the general aggregate limit must be twice the required occurrence limit ($4,000,000). Applicable Umbrella or Excess Liability limits may be used to meet the terms of this paragraph. For subcontractors only, the minimum limit for General Liability is $1,000,000 per occurrence.
2. Automobile Liability: $2,000,000 per accident for bodily injury and property damage. For subcontractors only, the minimum limit for General Liability is $1,000,000 per occurrence.
3. Workers’ Compensation and Employer’s Liability: Workers’ Compensation limits as required by the State of California and Employer’s Liability limits of $1,000,000 for bodily injury by accident and $1,000,000 per person and in the annual aggregate for bodily injury by disease. (Required only if Tenant has employees).
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4. Property Insurance against all risks of direct physical loss, including, but not limited to, fire, lightning, extended coverage perils, vandalism and malicious mischief, and sprinkler leakage, all for full one hundred percent (100%) of the replacement cost of the all of the Tenant Improvements and Tenant's trade fixtures, furnishings, equipment and other personal property, and plate glass coverage for all interior glass surfaces, provided, however, that, if the Tenant agrees to repair and replace plate glass, including related structural damage, then with the consent of the Landlord, which shall not be withheld unreasonably, Tenant shall have the option to self-insure for plate glass breakage;
5. Rental Value or Business Interruption Insurance assuring payment to the Landlord of an amount not less than twelve months Minimum Rent, as those terms are defined in this Lease;
6. Host Liquor Liability Insurance if Tenant sells intoxicating beverages on the Premises, or any Portion thereof; and
7. Umbrella or Excess Liability coverage with limits not less than $5,000,000 per occurrence.
D. Prior to Completion of Any Tenant Improvements. The Tenant or its contractors shall procure, pay for, and maintain the following insurance with respect to any Tenant Improvements:
i. Builders' Risk Insurance, during the course of any work of sufficient extent not to be covered by property insurance required above, on an all risk form (excluding earthquake and flood) for the completed value of such work; and
ii. Professional Liability Insurance with limits not less than $1,000,000 each occurrence, covering errors and omissions in any Architectural and Engineering Professional Design Services. Evidence of said coverage shall be provided by the applicable Architectural or Engineering design firms.
E. Deductibles and Self-Insured Retentions. Any deductibles or self-insured retentions must be declared to Landlord. If Landlord has concerns regarding the Tenant’s financial capacity to accommodate such deductibles or self-insured retentions in the event of a claim, Landlord may require the Contractor to reduce such deductibles or self-insured retentions.
F. Other Insurance Provisions: The general liability and automobile liability policies are to contain, or be endorsed to contain, the following provisions:
1. The “Office of Community Investment and Infrastructure/Successor Agency to the Redevelopment Agency of the City and County of San Francisco and its respective commissioners, members, officers, agents and employees” are to be covered as additional insureds as respects: liability arising out of automobiles owned, leased, hired or borrowed by or on behalf of the Tenant; and liability arising out of work or operations performed by or on behalf of the Tenant. Attachment 1 First Amendment to Commercial Retail Lease (West Café) Page 2 of 4
2. For any claims related to this Lease, the Tenant’s insurance coverage must be primary insurance as respects to Landlord and its respective commissioners, members, officers, agents, and employees. Any insurance or self-insurance maintained by Landlord and its respective commissioners, members, officers, agents or employees shall be in excess of Contractor’s insurance and shall not contribute with it.
3. Any failure to comply with reporting provisions of the policies shall not affect coverage provided to Landlord and its respective commissioners, members, officers, agents or employees.
4. Each insurance policy required by this clause must be endorsed to state that coverage will not be suspended, voided, canceled by either party, or reduced in coverage or in limits, except after thirty (30) days’ prior written notice by certified mail, return receipt requested, has been given to Landlord.
5. Tenant hereby grants to Landlord a waiver of any right to subrogation which any insurer of said Tenant may acquire against Landlord by virtue of the payment of any loss under such insurance. Tenant agrees to obtain any endorsement that may be necessary to affect this waiver of subrogation, but this provision applies regardless of whether or not Landlord has received a waiver of subrogation endorsement from the insurer.
6. If any of the required policies provide coverage on a claims-made basis:
i. The Retroactive Date must be shown and must be before the date of the contract or the beginning of contract work.
ii. Insurance must be maintained and evidence of insurance must be provided for at least five years after completion of the contract of work.
iii. If coverage is canceled or non-renewed, and not replaced with another claims- made policy form with a Retroactive Date prior to the contract effective date, the Tenant must purchase “extended reporting” coverage for a minimum of five years after completion of contract work.
iv. A copy of the claims reporting requirements must be submitted to Landlord for review.
G. Acceptability of Insurers. Insurance is to be placed with insurers with a current A. M. Best's rating of no less than A:VII, unless otherwise approved by Landlord’s Risk Manager. If Pollution Liability coverage is not available from an admitted insurer, the coverage may be written by a non-admitted insurance company. A non-admitted company should have an A.M. Best’s rating of A:X or higher. Exception may be made for the State Compensation Insurance Fud when not specifically rated.
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H. Verification of Coverage. Tenant must furnish Landlord with certificates of insurance and with original endorsements evidencing coverage required by this clause. The certificates and endorsements for each insurance policy are to be signed by a person authorized by that insurer to bind coverage on its behalf. The certificates and endorsements may be on forms provided by Landlord. All certificates and endorsements are to be received and approved by Landlord. Prior to the First Amendment Commencement Date, Landlord reserves the right to require complete, certified copies of all required insurance policies, including endorsements demonstrating the coverage required by these specifications at any time.
I. Periodic Review. The Tenant and the Landlord shall review the limits and types of insurance carried pursuant to this Lease not less frequently than once every five (5) years during the Term of this Lease. If in the reasonable judgment of the Landlord, it is found to be the general commercial practice in the City to carry liability insurance in an amount substantially greater than the amount then being carried by the Tenant with respect to risks comparable to those associated with Tenant's use of the Premises, the amounts carried by the Tenant shall be increased to conform to such general commercial practice or if additional types of insurance are necessitated by a change in the use of the Premises, additional insurance appropriate to the change in use shall be required.
J. Subcontractors. Contractor shall include all subcontractors as insureds under its policies or shall furnish separate certificates and endorsements for each subcontractor. All coverages for subcontractors shall be subject to all the requirements stated herein.
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