A Win for Oakley: Black Bear Diner Gets 5 Year Lease Renewal

There was a piece in the Contra Costa Times today that had somewhat of a negative spin on the lease agreement between the City of Oakley and the Black Bear Diner. The article essentially gives the impression that the city gave away relief which could not be further from the truth.

First of all, let me correct Rowena Coetsee when she says “Oakley gives popular diner rent relief” because nothing was given. It was negotiated and both the council and the diner had to compromise. It was a difficult negotiation from what I hear.

What was so disgusting about this piece was it failed to include many items from the staff report which I’ve included below.

All that really matters is what the market value per square foot. According to the staff report, they believe it to be between $1.75 to $2.00 per square foot.  Under the previous lease, Black Bear Diner was paying $3.00 per square foot which I would have also walked away from to in search of a better lease agreement somewhere else.

Fortunately, the two parties agreed to a $2.08 per square foot agreement with a 3% annual inflation adjustment. Keep in mind, this is clearly above market value in this economy.

The appropriate spin from the Times should have been Oakley negotiated higher than market value from this tenant.  The city is still making more than it would have if someone else took over the location.

I for one am glad the City worked with James A. D’Amico because there is no better place to eat in the area—yes said area! I love this place. It has fantastic food, friendly people, good servers, and perfect environment! They run a wonderful establishment and would eat their daily if I could.

Kudos to the City for working with the tenant and making this a win for Oakley!

Below is a portion of the 62 page staff report.

 Key provisions of the Amendment include:

  • An extension of the reduced rents for five years; however, this time with no additional requirement for repayment of the reduction amounts;
  • A resetting of the implementation date of the 3% annual inflation adjustment to the rent from March 1, 2013 to March 1, 2018
  • That the agreement is effective December 1, 2011, and good for five years, with no further renegotiation during that period;
  • That with good performance by the Tenant over those five years- as defined in the Amendment- the City will consider the repayment of the prior reductions satisfied (and by inference, if Tenant fails to meet the performance standards defined, cash repayment will be required); and
  • The terms of the Amendment are not transferable to any other successor tenant or franchisee/operator.

Rental Market Perspective:
While Staff is reluctant to recommend a longer-term comprehensive restructuring of the agreement, it believes current market rents are $1.75 to $2.00 per square foot; and the attached Amendment is for rents equal to approximately $2.08 per square foot for the next five years. This is slightly above the high end of the range, reflecting some additional value for the City’s investment in tenant improvements. By comparison, under the existing lease, scheduled rents are well above market at approximately $3.00 per square foot.

Fiscal Impact

The Agreement preserves City rental income and sales tax revenues totaling approximately $175,000/year, and Redevelopment Agency property taxes totaling approximately $18,000/year for five years. Tenant also pays approximately $1 0,000/year for the sewer service charge and maintains both the building and landscaping. Base rent will remain $12,500 per month, near current market rents, and providing Tenant annual savings of $65,400 from the current scheduled rent for five years; and with good Tenant performance over the full five years, the existing obligation to repay $130,800 in previously reduced rent will be satisfied.

It is worth noting that in this economy, Tenant may not be able to make rents at the scheduled level and successfully continue operations. Were that to transpire, the City would Jose at least several months rent while searching for a new tenant, likely experience requests for the City to fund new tenant improvements, and is still not likely rent the facility for more than the $12,500 negotiated in the attached proposal.

Resetting the timeline for employing the inflation factor eliminates the scheduled escalations of 3% per year that would have occurred between March 2013 and March 2018, and reduces each year’s scheduled rents by approximately 16% following the five-year modification period. However, as noted, monthly rents do increase by $5,450 in 2016 when the negotiated rent reductions expire and the inflation factor becomes effective on March 1, 2018.

In total, the reductions in potential rents and recoveries over the remaining 11 + years of the lease are approximately $745,000; however, the existing scheduled rents are so high that their collection from any tenant is doubtful. A more realistic view of these circumstances is that making these concessions and reducing rents to closer to current market value, at least until the economy has some time to recover, does more to preserve ongoing revenues than sacrificing them; and by limiting the primary modification to five-years, it preserves higher expected rents in later years.

Both parties clearly benefit from the agreement, and after the five-year term expires, rents return to the December 1, 2011 level of $17,950/month without the need for renegotiation.

Full staff report:

http://www.ci.oakley.ca.us/UserFiles/file/agenda/2011%20Agenda/December%2013,%202011/text5_2%20Adopt%20a%20Reso%20auth%20the%20City%20Mgr%20to%20Execute%20lease%20amend%20%235%20with%20Black%20Bear%20Diner.pdf

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About burkforoakley

I call it like I see it . I love my city, I love my community and I want what is best for the people around me. Do the right thing, I will support you. Do the wrong thing, I will oppose you!
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