REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Eric G. Parra, Interim City Manager
VIA: Jennifer Villasenor, Director of Community Development
PREPARED BY: Kriss Casanova, Economic Development Manager
Subject:
title
Approve and authorize execution and recordation of a Lease Agreement with Surf City Partners, LLC for 21 and 22 Main Street at the Huntington Beach Pier and Approve Building Fee Waivers
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Statement of Issue:
The City Council is asked to approve a Lease Agreement with Surf City Partners, LLC (“Lessee”) for concession space at 21 and 22 Main Street on the Huntington Beach Pier. The lease would extend through June 2043, with a monthly base rent of $5,500, plus 3% of any gross sales over $2 million annually. The base rent will increase by 3% each year. The Lessee plans to invest over $1 million to turn the retail space into a restaurant with outdoor seating and related amenities. The project will also include expanding and remodeling public restrooms and building a new bait shop. Additionally, the Lessee is requesting that the City Council waive plan check and inspection fees, and provide a $300,000 rent credit to help with the restroom and bait shop construction costs.
Financial Impact:
The starting base rent is $66,000 per year ($5,500 per month) with annual 3% increases. Additionally, the City may receive percentage rent, which is 3% of gross sales above $2 million annually. If the City Council approves the requested rent credit of $300,000, the City is expected to begin receiving rent payments in year five of the lease, after the rent credit is fully applied.
Recommended Action:
recommendation
A) Approve and authorize the Mayor and City Clerk to execute the “Lease Between the City of Huntington Beach and Surf City Partners, LLC;” and,
B) Direct the City Clerk to record lease agreement with the Orange County Clerk Recorder; and
C) Approve the waiver of up to $50,000 in City permit fees related to plan check and building division inspection fees.
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Alternative Action(s):
Do not approve, and direct staff accordingly.
Analysis:
In 2021, the City issued a Request for Qualifications (RFQ) for an 800-square-foot concession building at 21 Main Street on the Huntington Beach Pier. Surf City Partners, LLC (SCP) responded with a proposal to transform the retail concession space into a restaurant with outdoor dining, as well as a cart/kiosk for bait-and-tackle supplies.
The City selected SCP’s proposal and entered into an Exclusive Negotiations Agreement (ENA) to allow SCP to secure regulatory approvals and begin good-faith negotiations. The ENA was later amended to include the restroom building directly across from the site. Although the ENA expired in 2022, the City and SCP have continued to work together to move the project forward. Let’s Go Fishing, the previous tenant, was operating on a month-to-month lease and officially ceased operations at the end of April 2023.
SCP has obtained all necessary approvals, including from the Design Review Board and a Conditional Use Permit, and has received a Coastal Development Permit (CDP) recommendation from the Coastal Commission, pending satisfaction of special conditions. The Lessee will oversee, with a proposed budget exceeding $1 million, construction of the improvements per the approved plans. Construction is expected to take six to eight months, with access to the pier maintained throughout. The proposed changes for 21 and 22 Main Street include:
• 21 Main Street: Convert the former bait-and-tackle shop into a new restaurant/bar with outdoor seating. The existing building will be demolished and rebuilt with a 220-square-foot addition, accommodating a total occupancy of 75 people.
• 22 Main Street: Modify the public restroom building by adding an ADA-compliant restroom, employee changing/restroom/locker area, restaurant storage with a cooler, a trash enclosure area, and a new bait shop. The public restrooms will be remodeled into separate men’s and women’s spaces with interior sinks.
• Additional features: The project will include a walk-up to-go window at the restaurant and/or an 8 ft. by 4 ft. “walkable” food and beverage cart.
The restaurant, named Huntington’s, will offer high-quality comfort food and beverages. Public benefits proposed by the Lessee include providing tables and chairs for public use, remodeling and helping to maintain the public restrooms, establishing a permanent bait shop, and installing four fishing pole holders and four fishing line recycling receptacles. Additionally, the Lessee will sponsor a biannual fishing derby (in May and September) for school-age youth from inland communities. The restaurant will also be part of the Surfrider Foundation’s Ocean Friendly Restaurant Program and will create approximately 20-25 new jobs.
The lease outlines the terms for improving and operating the restaurant, covering design, financing, construction, and operation. Key terms, based on Council direction, include:
• Rent: The base rent will start at $66,000 annually ($5,500 per month), increasing by 3% each year. Additionally, 3% of gross sales above $2 million per year will be paid as percentage rent (e.g. if sales reach $2.2 million in the first year, the base rent would be $66,000 and the percentage rent would be $6,000).
• Rent Commencement: Rent payments will begin on the restaurant opening or 15 months after lease execution, whichever comes earlier. However, if the rent credit (described below) is approved, rent payments will not start until after the credit has been fully applied.
• Term: The initial term will last approximately 19 years, aligning with City's pier lease with the State (expiring in June 2043). The Lessee will have three 10-year extension options, with the first option available if the Lessee is not in default, and subsequent options by mutual agreement. The rent will be reset to fair market value at each extension.
• Rent Credit: If approved, the City will provide a rent credit of up to $300,000 for the remodel and construction of public restrooms and related uses at 22 Main Street, based on documented costs provided by the Lessee. The rent credit will be applied once rent payments commence, and rent will be deferred until the credit is fully used, which is estimated to take approximately five years.
• Permit Fees: The City will waive up to $50,000 in City plan check and building inspection fees.
• Financing: The Lessee will provide a completion bond in the amount of $1.3 million, along with proof of financing before pulling building permits.
Next Steps
If the City Council approves staff’s recommendation to authorize the proposed lease (Attachment 1), the agreement will also need approval from the State Lands Commission for a sublease endorsement, since the City leases the pier from the State of California. Additionally, the Coastal Commission’s special conditions must be met before a Coastal Development Permit can be issued. These conditions are included in the lease as Exhibit B. Construction is expected to begin in late 2024, with the opening planned for summer 2025.
Environmental Status:
The request for the City Council to approve the subject lease agreement is covered by the General Rule that the California Environmental Quality Act (CEQA) applies only to projects that have the potential for causing a significant effect on the environment (Section 15061.b.3 of the State CEQA Guidelines). It can be seen with certainty that there is no possibility that this activity will have a significant effect on the environment. Therefore, this activity is not subject to CEQA. It should be noted that construction and operation of the project was analyzed and findings made pursuant to CEQA under Conditional Use Permit No. 22-012.
Strategic Plan Goal:
Goal 2 - Fiscal Stability, Strategy A - Consider new revenue sources and opportunities to support the City's priority initiatives and projects.
For details, visit www.huntingtonbeachca.gov/strategicplan.
Attachment(s):
1. Lease Between the City of Huntington Beach and Surf City Partners, LLC
2. PowerPoint Presentation