Show Us What's In And Isn't In Proposed Revised Queen Mary Lease, Because...

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Opinion

by Terry Jensen

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(Nov. 13, 2015) -- In city management's proposed revised Queen Mary lease, is the City of Long Beach letting its taxpayers' pockets be picked once again?

On Nov. 17, city management will ask the City Council to agree to accept what it calls a "minimum rent" in a revised proposed lease for the Queen Mary and 64.22 acres of adjoining land and water of 8/10 of ONE CENT per square foot per month. Yes, I said less than a penny per square foot for the Queen Mary ship and sizable property and waterfront around the Queen Mary.

It's not the only rent the City may or may not receive under the proposed revised lease, but in this taxpayer's opinion some basic questions deserve to be asked and answered to demonstrate whether this is a good deal for taxpayers.

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Based on the City's history of poor leases from a taxpayer perspective, I'm concerned that this could be another bad one...and without more information, I believe that Councilmembers and taxpayers really can't know for sure at this point.

The Council, and taxpayers who will will ultimately pay for decades, deserve at minimum to see the full text of what's proposed to be signed before it's signed and not after. Long Beach officials, who often talk about transparency and open governance, should apply that to disclosing the unfiltered text of what they're being told to approve before they agree to bind the City and its taxpayers for decades under a very significant proposed lease.

Based on what one can't know from management's agendizing memo (text here), here are a few questions the sitting Mayor and Councilmembers ought to ask IN PUBLIC so they and the public will know. Some Councilmembers may actually want changes, clarifiers or other text included in the lease. What a concept: responsive governing and responsible oversight.

What is the appraised value of the land? One can't make an informed decision without first knowing the value of the land. In the real world, lease rates are determined by a market ground-lease rental rate expressed as a percentage applied to the land's market value. The property should be appraised for highest and best use and current market and use conditions. Was this done? What's the figure?
City staff asks the Council to approve leasing 64.22 Acres (43.38 acres of land and 20.84 acres of water) for only $300,000 in annual fixed lease payments. That's only $389.39 per month per acre...which is less than ONE CENT per square foot of land and water! I believe that only a mile away, some developers are asking roughly $.19 per square foot or $8,276 per acre for a vacant storage lot. At minimum, staff should demonstrate its justification for such a disparity in lease rates.
How does city staff justify having the City only receive cost of living lease rent adjustments (increased sums payable to the City) every 10 years when in the real world, 5 year adjustments are quite common? The proposed lease not only limits cost of living increase adjustments to every ten years, it caps them over a decade at 40%. In my view, five year adjustments commonly found in leases elsewhere should apply to this property.
Are the adjustments cumulative or simple interest? Ask a banker. BIG difference.
Staff's agendizing memo states the CPI reflects a annual increase of 3.4% Is it not true that there is NO GUARANTEED increase in CPI adjustments?
Staff's agendizing memo doesn't indicate that the market value of the land is adjusted any time in the 66 years of the lease. From my experience, it is quite common and advisable to have a reappraisal of the land every 10 years or a maximum of 20 years with an adjustment in the value of the land and lease rate adjusted to market. Staff should have to justify why it didn't include a reappraisal every 10 years and an adjustment to the land-lease rate for the City's taxpayers.
The agendizing memo indicates that lessee/developer gets a 9% priority return on the initial "Stipulated Investment Basis" which is the purchase of the leasehold interest AND capital investments. Why is city staff asking the Council to let taxpayers accept a position subordinate to the developer? What is the value of the "Stipulated Investment Basis"? It is my understanding the purchase price of the lease in November 2007 was $43 Million. At minimum, staff should provide the Council with a pro forma of the revenue and profits associated with the priority return of the developer.
The agendizing memo indicates the City will receive Percentage Rent calculated at 10% AFTER the Lessee receives its "Priority Return." At minimum, staff should provide the Council and the public with calculations that indicate what amounts in number terms the City is likely to receive in percentage rent after the payment of the developers priority return.
The agendizing memo indicates the Amended Lease will provide flexibility for the Lessee to terminate the lease as to individual development parcels and recast the lease. What are the proposed terms and conditions of the recast leases? What adjustments in lease rates will benefit the City in the recast leases?

I believe other items also deserve clarification, including land rent adjustments, participation in sale and refinance, base maintenance and replacement plan, Carnival Passenger fee splits and other terms and conditions. From staff's agendizing memo, it's not clear to me whether the City's lease is or isn't subordinate to a lender. Will the city have to pick up debt that the LLC incurs to a lender before the City gets paid? And does the proposed lease agree that the City won't be paid rent on some developable portions of the property until it's leased out and generating revenue?

I have nothing against Garrison Investment Group or the proposed assignee Urban Commons, LLC. But I do believe the City needs to demonstrate transparency by providing answers to the financially reasonable questions above in open session. That will require Councilmembers who aren't afraid to do their jobs, ask those questions, get those answers and make additions or changes if indicated. That would show taxpayers that this Council is exercising responsible oversight in protecting the City's assets.

At this point, I greatly fear that this could become another badly negotiated lease to taxpayers' detriment. In a constructive spirit, I've offered above some prudent questions whose answers may show taxpayers that it is or isn't smart as currently offered.

Whether one ultimately agrees or disagrees with a Council decision, it should at least be an informed decision.

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