MEMORANDUM May 23, 2013 TO: MEMBERS, PORT COMMISSION Hon. Doreen - - PDF document

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 Act1, 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

• f the State’s interest in the Port in trust for purposes of commerce, navigation, and fisheries.

2 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

• pportunity 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
• pen 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

3 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

• nly, 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

4 (iii) applicable rules and regulations. These three components facilitate efficient drafting and enforcement of real estate agreements. Although the standard provisions of the various form agreements vary slightly, as- needed according to function, each of the forms contains: (i) provisions regarding the nature of each parties' rights under the agreement; (ii) Port's unilateral right to terminate under specific limited circumstances; (iii) payment terms, security deposit requirements and other financial obligations such as environmental guarantees, if applicable, permissible and prohibited uses; (iv) compliance with law requirements; allocation of maintenance, repair and utility obligations; (v) stringent hazardous materials reporting and cleanup requirements; (vi) insurance requirements recommended by the City's Risk Manager; (vii) protective indemnity and hold-harmless provisions including a waiver of claims due to nearby development projects; (viii) defaults and remedies; (ix) surrender provisions; (x) City requirements required by ordinance; and Port policy requirements such as the Southern Waterfront Beautification Policy. As noted, the forms are "living documents" and Port staff updates the forms when appropriate and consistent with Port Commission directives. Recent revisions to the forms include: (i) in response to prospective tenants' inquiries, clarification of the interest rate (10% per year) and clarification that Port staff may, in its discretion, charge a $50 fee for late payments; (ii) in response to several current and prospective tenants' requests, addition of the right of tenants to install equipment, such as wireless antennae on a building's roof, provided all permits are obtained and subject to other terms of the lease; (iii) after consultation with the City's Risk Manager, addition of "participants insurance" coverage when necessary for special events and "garage keepers" coverage for valet parking operations and addition of requirement to use Port's new internet-based insurance compliance tracking system; (iv) at the request of Port maintenance and environmental staff, clarification that a tenant's obligation to maintain and repair utilities serving the premises includes routine inspection and assessment of the utilities using qualified licensed professionals and reporting the results of such inspections to Port; and (v) as a result of changes to City laws, addition of a provision stating that the leasehold interest may be subject to special taxes to finance energy efficiency, water conservation, water pollution control and similar improvements under the SF Administrative Code.

5 As to individual negotiations, the majority of tenants is satisfied with the form agreement

• r request minor or non-substantive changes that can be accommodated under the

Port's policies without any reduction in benefits or increased liability to the Port. However, there are a few specific provisions that Port staff is regularly asked to negotiate which include (i) cure periods, (ii) holdover rent increases, (iii) unilateral termination, (iv) City ordinance requirements, and (v) hazardous materials and insurance provisions. (i) Cure periods: many tenants seek additional time, over the three-day period provided by the form lease, to cure a failure to pay rent on time. Given that the lease form tracks state law, which also allots tenants three days to cure non-payment of rent, Port staff does not negotiate on this point. Holdover rent increases: Prospective tenants often object to a 200% increase in rent should that tenant holdover without Port consent. This provision is very commonly found in commercial leases, both in private leases and leases with other City departments, and is purposefully designed to allow Port to maximize its ability to lease space to a new tenant at current market rates in a timely manner, so Port staff does not recommend such a change (however, Port staff exercises its discretion in determining when to impose such a charge). (ii) Unilateral termination: Sometimes potential tenants object to Port's unilateral right to terminate the lease in case of a Port project or deterioration of Port facilities (e.g., red-tagging). Port staff sees this as a very important right because Port staff must retain flexibility to terminate (and often relocate) a tenant in order to pursue maritime and other major development and infrastructure repair projects and must be able to ensure that Port property is safe for occupancy especially in light of the Port's aging infrastructure and deferred maintenance. The standard form (and state relocation law) provides for compensation to a tenant should Port need to terminate under these circumstances. (iii) City ordinance requirements: many prospective tenants wish to eliminate or negotiate certain requirements of City law. These provisions are legislated by the Board of Supervisors and governed by ordinance and are generally not subject to change or waived by departments. (iv) Hazardous materials/insurance provisions: Tenants occasionally object to the broad hazardous materials, indemnity and hold-harmless provisions and insurance coverage requirements. Port staff does not revise these risk allocations or transfer provisions as they are integral to the Port's ability to limit its liability consistent with its mission. The Port manages over 550 real estate agreements, and it is important to be consistent in applying conditions and requirements whenever possible to remain impartial and transparent.

6 Port Real Estate Policies Monthly Rental Rate Schedule On September 8, 1993, the Port Commission (Resolution No. 93-127, as amended by Resolution 93-135) delegated authority to the Executive Director to approve and execute leases, licenses, and Memorandums of Understanding on behalf of the Port, provided that the terms of these agreements meet certain parameters as found in the Port’s Leasing Policy. Contained within the 1993 delegated authority is a schedule of minimum rental rates for leases that can be executed by the Executive Director without Port Commission approval. This delegation has been renewed annually. The current delegation, under Resolution 12-52 provides that the delegated authority can only be executed under the following criteria: 1 Use Type: The agreement is for an office building or bulkhead office space, open or enclosed pier shed space, paved or unpaved open space, or open pier

• r apron space or roof-top space but is not for a

retail use. Provides use type consistency with Port Commission Approved Business Parameters. 2 Use Consistency: Except for temporary uses (with terms not exceeding six (6) months), the use under the agreement represents a like-kind use to the existing or the immediate prior use of the facility; Allows for short-term temporary uses without certain requiring certain entitlements that may be required for longer term uses. 3 Assignments and Subleases: Staff is authorized to consent to assignments and subleases on a form approved by the City Attorney and provided the terms and conditions of the sublease or assignment complies with the terms and conditions of the Lease; Delegated authority allowing Executive Director to execute Assignments and Subleases that meet the Port Commission approved Business Parameters. 4 As-Is Execution: The tenant executes the Port’s standard form agreement with no alterations except for minor changes approved by the City Attorney or changes in insurance requirements approved by the City Risk Manager; Provides for Port disclosure of facility condition in lease document. 5 Term Limits: The term of the agreement does not exceed five (5) years, except for those leases in the Fisherman’s Wharf Seafood Center at Pier 45 Sheds B and D that have a maximum lease term of ten (10) years (Port Resolution No. 94-122; Amended February 28, 2006, by Resolution No. 06- 15). Leases for telecommunication sites may be up to nine (9) years (Port Resolution No. 96-123); This refers to Port Commission delegated authority allowing the Executive Director to execute leases without Port Commission approval if those agreements meet the Port Commission approved Business Parameters. 6 Select Tenant Improvement Allowance: Port staff has the authority to issue tenant improvement allowances for floor and wall coverings if those Allows the Port to receive improvements and provide an incentive for prospective

7 credits do not result in the net rent over the term of the lease to be below the Minimum Net Effective Rental Rates found in the Rental Rate Schedule. Allowances for paint (amended June 8, 2010 by Resolution 10-37) up to a maximum of $3.50 per square foot, and for floor covering, up to a maximum

• f $5.00 per square foot (amended July 10, 2012 by

Resolution 12-52), are allowable when: 1) new paint and/or floor covering is necessary in order to lease space in full service office buildings; and 2) Port staff is unable to perform such work prior to the proposed lease commencement date. These allowances are considered “landlord’s work.” therefore; such work is not included in calculating the minimum Initial Lease Rental Rates. tenant to contract with the Port. 7 Limited Early Entry: One month early entry for each year of lease term may be granted, up to three months, for the purpose of space preparation (not to exceed three months). (amended July 14, 2009 by Resolution No. 09-34). Provides incentive to prospective tenants to contract with Port and allows for space preparation prior to tenants’

• ccupancy.

8 Large Land Discount: Port staff is authorized to offer a 5% discount for land transactions with minimum premises of 43,560 square feet and a minimum term

• f 36 months (Amended June 8, 2010 by Resolution

10-37). Provides incentive to prospective large land users to contract with Port. 9 Reporting to Port Commission: Port staff provides a monthly report to the Port Commission indicating Leases, Licenses, Memorandums of Understanding, consents to sublease, and assignments executed pursuant to this policy. Port staff provides the Commission a monthly list of agreements executed pursuant to Commission Business Parameters. The Port’s leasing policy provides for an annual update of the Rental Rate Schedule. The Schedule sets ranges of minimum lease/license rental rates per square foot and ranges of Minimum Net Effective Rental Rates per square foot (if any rent credits are to be provided) by type of use and facility for office, shed and industrial space. In addition to this annual delegation and parameter rent policy, numerous other Port Commission directives address leasing issues and Port staff considers all policies when drafting new or renewal agreements. These policies include:  Environmental Risk Management Policy and Financial Assurance Requirements (Port Commission Resolution 07-81): Intended to provide the Port with financial protection in the form of a deposit in the event of the need environmental mitigation.  Retail Leasing Policy (Port Commission Resolution 11-15): Provides guidelines and criteria for existing Port Retail tenants to extend lease term.

8  Month-to-Month Leases (Port Commission Resolution 10-50): Provides guidelines and criteria for execution of Month-to-Month agreements.  Maritime Excursion Lease Renewal Policy (Port Commission Resolution 10-01): Provides guidelines for existing Excursion Vessel operators to add additional lease term.  Tenant in Good Standing Policy (Port Commission Resolution 09-49): Provides defined criteria to determine if existing Port tenant is in good standing i.e. Credit Worthiness and lease defaults.  Southern Waterfront Community Benefits and Beautification Policy (Port Commission Resolution 07-77): Provides a mechanism in leases located south of Mariposa (16th) Street for the Port to receive improvement benefits in the southern waterfront Copies of these policies can be obtained from the Real Estate division upon request. Next Steps At the August 13, 2013 Port Commission meeting, Real Estate staff will return with a presentation that focuses on the leasing application process and how applicants become tenants of the Port of San Francisco. Staff will also review with the Port Commission the boiler plate lease provisions. Prepared by: Jeffrey A. Bauer, Senior Leasing Manager For: Susan Reynolds, Director of Real Estate