MEMORANDUM May 23, 2013 TO: MEMBERS, PORT COMMISSION Hon. Doreen Woo Ho, President Hon. Kimberly Brandon, Vice President Hon. Willie Adams Hon. Leslie Katz Hon. Mel Murphy FROM: Monique Moyer Executive Director SUBJECT: Informational Presentation regarding the Port’s Real Estate Leasing Policies, Process and Procedures. DIRECTOR'S RECOMMENDATION: IMFORMATION ONLY-NO ACTION REQUIRED Executive Summary This staff report provides a high level summary of the Port’s Real Estate Leasing Policies. Leasing Procedures Pursuant to the Burton Act 1 , the Port is trustee, on behalf of the people of the State of California, of an area in San Francisco between the historic mean high and mean low tide, including both filled and unfilled areas, as described more specifically in the Burton Act. Generally, the Port is 7.5 miles on land along the Bay area from Aquatic Park in Fisherman’s Wharf to Heron’s Head Park near India Basin. The Port’s holdings include both open and built lands and piers. The built leasable space equals approximately 20 million square feet. The Port leases portions of this property for purposes consistent with the public trust for maritime commerce, navigation and fisheries and the Burton Act trust. Such uses include a wide range of maritime businesses, visitor-serving retail and restaurants. These leases are often longer-term leases with maximum terms of up to 66 years. This Print Covers Calendar Item NO. 11B 1 The Burton Act is codified in Chapter 1333 of the Statutes of 1968 and governs the transfer to the City & County of San Francisco of the State’s interest in the Port in trust for purposes of commerce, navigation, and fisheries.
Pursuant to the City Charter, purely maritime leases are subject to approval by the Port Commission in its sole discretion. Other leases such as restaurant, commercial or retail leases, or mixed use development projects that either (a) generate $1 million or more in anticipated revenue or (b) are 10 or more years in duration, are subject to approval by the Port Commission and the Board of Supervisors. When the Port is not leasing its land for purposes that promote the public trust for maritime commerce, navigation and fisheries, the Burton Act expressly authorizes interim leasing for other purposes in order to generate revenue to support Port activities. Interim leases are leases that are typically for shorter term durations, and can be for any type of use consistent with underlying City zoning. Such interim leasing represents a significant portion of Port leasing activity, and provides an opportunity for businesses to lease property along the waterfront. The City’s administrative policy is to competitively solicit leasing opportunities, except where impractical or infeasible. The Port adheres to the City policy and has adopted a Retail Leasing Policy which has been reviewed by the Board of Supervisors. The Port’s Retail Leasing Policy requires competitive bidding, but also provides certain exceptions subject to the Port Commission’s authorization on a case-by-case basis. In cases where a current tenant is (i) in good standing, (ii) the tenant represents the best market opportunity for the Port, and (iii) the tenant is making a significant capital investment in Port property, the tenant may qualify for additional lease term without undergoing a bid process. The Real Estate Division manages 550 of the Port’s leases. These leases represent approximately 90% of the Port’s overall portfolio. Terms of these leases range from monthly to 66 years. Some of the leases are master ground leases, such as Pier 39 and the Ferry Building, under which there are numerous subleases. Most of the Port’s leases are with small or single proprietors. The Port has a high volume of leases for relatively small leased areas at nominal rental rates. To competitively bid such leases would be impractical because the benefit of doing so does not outweigh the cost of the resources that would be required just for this effort. As such, the Port typically does not competitively bid office, warehouse space, or open land leases. Instead the Port relies on a parameter rental rate structure that is based on an analysis of comparable rent charged in the private sector. The parameter rental rate schedule is set annually according to market conditions. However, where a business model is highly competitive and represents a major revenue opportunity for the Port (e.g., retail, parking, concrete batching, construction materials recycling) the Port issues a competitive solicitation. Standard Form Agreements The Port Commission has delegated specific authority to the Executive Director to enter into real estate agreements, leases and licenses that use the Port’s standard form without alteration (except for minor changes approved by the City Attorney or changes in insurance provisions approved by the City Risk Manager). Based on this delegation, the Port's Real Estate Division and Port legal team maintain a set of Port Commission 2
approved standard or "boilerplate" leases and licenses for use in real estate agreements that, if accepted in their entirety by a prospective tenant, are not subject to further Port Commission approval. Staff currently maintains the following standard forms: (1) standard form lease (used for all office, storage and industrial leases) (Port Commission Resolution 06-39). (2) fish processors form lease (Port Commission Resolution 06-23). (3) cell site form lease (Port Commission Resolution 96-123). (4) standard form license (used for all entry onto Port property for any reason, including special events, construction laydown, use in public rights of way, environmental sampling) (Port Commission Informational Item May 2006). (5) Jefferson Street Sidewalk Encroachment Permit (Port Commission Resolutions 06-48; 07-21 and 11-12). The standard form leases are often used as a starting point for other common real estate transactions that do require Port Commission approval. For example, the standard form lease is used for retail leasing tenancies by adding provisions relating to percentage rent payments and other necessary terms dealing with restaurants or retail leasing. But the bulk of the lease terms remain as approved in the standard form lease. The forms are subject to ongoing and periodic review and revision by Real Estate and legal staff. Changes to specific provisions of the forms are often initiated by other Port staff, tenants or prospective tenants. The forms are available to the public upon request only, rather than being posted on the Port’s website to insure that only the most current versions of the documents are disseminated. The agreements consist of three parts: 1) the basic lease or license information ("BLI"); 2) the standard boilerplate provisions, and 3) the exhibits and schedules. The BLI contains the basic and unique business terms for each agreement, such as tenant information; term; specific permitted and prohibited uses; rent; required tenant improvements (and associated rent credits, if any); and specific relevant disclosures and information. The BLI prevails in the case of a conflict with the standard provisions. The bulk of the agreement consists of the standard provisions which are discussed further below. The standard provisions apply in all instances and are subject to very limited negotiation by Port staff. These provisions are generally consistent with standard commercial practices although certain provisions such as insurance and indemnity may be more stringent given the nature of the Port, as both a waterfront and a public trustee, and to comply with all City ordinances. The forms also contain numerous provisions required under applicable City laws to be included in agreements relative to the use of City property and other City contracts. Common exhibits and schedules include: (i) the premises map and/or legal description; disclosures regarding the condition of the structure and substructure; (ii) the presence of hazardous materials and FEMA flood mapping; and 3
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