Rendering shows ‘Bayside Landing & Suites’ a proposed redevelopment for the south end of The Embarcadero, as it might be seen by a seagull flying overhead. Renderings courtesy Gene Doughty
The Morro Bay City Council approved a lease amendment for a small brewpub on the Embarcadero, compromising a little bit after a small army of customers and employees stood up for the owners and stood up to the City during public comment.
It was one of two major decisions the City Council made regarding leases on the waterfront, as they also approved a conceptual plan to redevelop four small, under-performing lease sites at the south end of The Embarcadero..
Lease for Three Stacks
The Three Stacks & A Rock pub, located at 595 Embarcadero in the building that housed the Morro Bay Aquarium for some 50 years, has been trying to get a longer-term lease done with the City since opening about 18 months ago.
The owners, Chuck and Ananda Nettnin, had posted about the upcoming Council meeting on their Facebook Page, urging customers to come out and support them in their dealings with the City.
“As some of you may know,” reads the post that was put online a couple of days before the Council meeting on Jan. 9, “we entered into an agreement with the City to take over their abandoned building & transform it into the business it is today. The deal was, they would consider the money we spent and negotiate a fair and equitable percentage rent. Unfortunately, the city is not honoring their contract with us.”
Instead, they wrote that the contract proposed by the City would mean Three Stacks paying “the highest percent rent for anyone on the Embarcadero. 10% on any beer/wine sold without food on gross sales.”
At the meeting speaker after speaker, including one who came in from Cambria, told the City that the business was a beloved and special place where both locals and tourists can feel comfortable and mingle. The Nettnins were congratulated and thanked for all the hard work and large amount of money they put into the building, some $400,000. The Council was urged to pull the item and allow for further negotiations on the percentage tax, and to help out a small business.
In his staff report, Harbor Director Ted Schiafone said the Lease became “effective May 1, 2022, for a 10-year lease term with a base rent of $23,000; no percentage rent for the first 12 months; and the option to convert to a ground lease after 5 years upon mutual agreement.”
Both sides would probably agree they couldn’t reach an agreement, but they had opposing opinions as to why.
“All other businesses,” Three Stacks’ post reads, “are allowed to deduct their base rent (monthly rent) from their % rent. The City is also revoking this from us. Therefore, not only will we be paying the highest % rent, we will be the only business on the Embarcadero that will not be able to deduct our base rent from percent rent. This will result in our slow death and potential to go out of business.”
The owners also said form the podium that the City came in with a firm 10 percent and would not budge, accusing the City of not negotiating at all. Let alone in good faith.
EBN asked Schiafone about this. “As reported to Council last night,” Schiafone told Estero Bay News, “staff met with the tenants multiple times, had numerous written correspondence and met in Closed Session. The tenants also met individually with council members, city manager, and a representative of the Morro Bay Chamber of Commerce. This process occurred for nine months without coming to an agreement. The lease stipulates that if an agreement cannot be reached, percent rent as listed in the Harbor Department Lease Management Policy will apply.”
Ordinarily on the City controlled lease sites (nearly all of the Embarcadero’s western side), the City retains ownership/control over the land and the leaseholder owns the improvements — from the buildings and fixtures, to the utility hook ups, a so-called “ground lease” — but Three Stacks is a bit different.
When Dean and Bertha Tyler were forced to close the Aquarium it was after a biding process wherein they lost out to the Central Coast Aquarium, a non-profit educational organization and facility in Avila Beach.
The Avila nonprofit won the bidding with a wonderful proposal to build a stylish, modern aquarium, and establish a true tourist attraction.
But the Aquarium’s plans fizzled and they eventually abandoned the project, turning the lease back to the City. Meanwhile, the other bidders the Tylers died — first Dean and then Bertha, who were both in their 90s.
Ordinarily with such bidding wars, if the top bidder fails the City would offer it to the other, assuming that bid was also acceptable. The Tylers bid was not acceptable to the Council at the time, and the building sat vacant for some time.
The lease the City and Three Stacks signed was not a typical “ground lease” resulting from a competitive bidding and selection process.
Instead it’s more of a tenant-landlord or “building” lease, as the City owns both the land and the building, though it was the pub owners’ money that fixed it up and turned it into a welcoming and beloved place.
And with the traditional ground leases, the rule of thumb has always been to grant 10 years on a lease for every $250,000 invested, up to 40 years, so by that standard, Three Stacks with $400,000 invested should get at least a 20-year lease.
But Schiafone said, “This is a building lease and not the typical ground lease we have with other tenants. There is not a rule of thumb regarding that investment.”
In the end, Schiafone said the Council made one compromise. “Council approved the amendment with one modification,” he said. “Percent rent for alcohol sales will be 5% for the first two years and then go to 10% after that time period.”
Schiafone said in his report that at the full 10-percent, it would have increased the annual rent from $23,000 by an additional $25,000 (to $48,000 a year). But that full, daunting amount would be reduced somewhat by the Council’s vote. Whether it’s enough to keep the tiny brewery open for their loyal customers, will be the key.
New Life for Old VRs
In another waterfront matter, the City Council approved a “consent of landowner” agreement with Paul Gillen, the owner of Associated Pacific Constructors, a marine engineering and construction company, to redevelop his maintenance yard and three tiny lease sites on the Embarcadero’s south end.
Two circa-1940s-50s cottages used to be leased to the late-Reg Whibley, who ran one as a vacation rental and lived in the other. Whibley was also the founder of Associated Pacific and sold out to Gillen upon his retirement nearly 20-years ago. The third, southern-most site has always been vacant and is mostly over the water.
Gillen’s proposal, called “Bayside Landing and Suites” is being designed by local architect Gene Doughty, and would tear down the two vacation rental units and replace them with a new 2-story building and a total of eight units — five downstairs and three upstairs — with decks on the water side.
The 10-foot Harborwalk would be extended from Estero Inn next door and carried behind the existing 2-story Associated Pacific office building.
That existing building that now has a maintenance shop on the ground floor and offices upstairs, would be remodeled and repurposed into retail shops and a restaurant. Upstairs would be “beer /wine and light food service,” reads Gillen’s bid letter, with the kitchen located downstairs. A public restroom would also be put in.
These lease sites have water areas too and the proposal is to build slips for boats, which is what Associated Pacific does up and down the California Coast. This plan also means Associated Pacific’s local construction business would continue to wind down.
“Associated Pacific,” Gillen said, “is in the process of downsizing their construction operations so the lease site now lends itself to a redevelopment of not only this site but proposing a larger and more cohesive project that will encompass the current vacation rentals and vacant lease parcels to the south.”
The Council’s vote last week is but the first step in a long and winding yellow brick road to development.
Schiafone said, “This simply allows Associated Pacific to submit their proposed plans to the Planning Commission. This is the start of the process. Nothing has been approved regarding the proposed development. The Planning Commission meetings are open, so residents, businesses and any other stakeholders will have the opportunity to weigh in. Council will make the final decision as to the development of this project.”
Actually, all projects on the Embarcadero automatically go to the Coastal Commission, which claims original jurisdiction over the State Tidelands property.
Gillen’s proposal includes a somewhat conservative budget. For total development costs he lists $2.5 million; add 20% in contingencies and the total proposed construction costs rise to about $3 million.
He further breaks it down to $2.65 million in costs for the land portions and $343,000 in waterside improvements. Adding in all the other expenses that come with a waterfront project and he’s projecting the project to cost $3.3 million.
For the Harbor Department, Schiafone projects the revenue from the three sites to rise from currently $35,000 a year to over $170,000 a year.
On Jan. 11, just before deadline, Schiafone issued another official statement:
“This tenant had free rent for 32 months from August 2019 to May 2022. Starting May 2022, they paid $1,916 per month base rent for approximately 3,800 square feet of space.
“That is approximately 50-cents per square foot per month. They also did not pay any percentage rent during that time. Other restaurants on the Tidelands that are managed by the City, paid between $2 to $5 per square foot per month in base rent. The lease called for percentage rent to begin May 1, 2023. That is what this lease amendment calls for.
“The City has followed the terms of the original lease and has been very fair in dealing with this tenant.”
He said the City has a responsibility as stewards of what is actually State-owned and City-managed public property. “As trustee of State Tidelands, the City is responsible to manage those properties in a financially prudent manner so that it can be maintained and available to the public. To do that we must obtain rent rates that allow the City to meet those obligation. The City is pro-business and wants this tenant to be successful, however, we cannot subsidize rent for this business. Doing that would be considered a gift of public funds.”