- Private Investment Team
Port of San Diego extends rent deferral program for tenants as bay front businesses slowly reopen
By MIKE FREEMAN
JUNE 24, 2020
The San Diego Union-Tribune
Hotels, restaurants and other port tenants can put off rent for an additional three months, but some tenants say rent forgiveness/lease restructuring will be required to recover from the pandemic
The Port of San Diego has extended rent deferrals for waterfront hotels, restaurants, retail shop and other tenants for an additional three months as tideland businesses slowly reopen from coronavirus lockdowns.
While many tenants were appreciative of the additional time, several said it will take more than deferrals to get them through the crisis. They ultimately believe rent abatement and/or lease restructuring will be needed.
“It is critical for the immediate and long-term viability of our company to move from a deferment discussion to an abatement discussion,” said Kathryn Wells, corporate sales director at Hornblower Cruises. “As a tenant, we will have lost millions of dollars this year that will be unrecoverable. We need the port to be our partner in today’s circumstances and consider a rent waiver.” The port’s board wasn’t willing to go that far in a meeting on Tuesday. But as part of the resolution to extend rent deferrals, the board supported a staff recommendation to consider lease term changes on a case-by-case basis.
“Deferral is not going to work in every situation,” said Tony Gordon, the port’s director of real estate. “There are some businesses that are hit harder, that are going to need something more than the deferral of rent. And the access to relief for those tenants would be a structural reset, essentially a renegotiation of the terms of the lease.”
Any renegotiated leases would be brought to the board for approval. Seaport Village tenants, many of whom have short term leases, are eligible for deferral. But port staff has reached out to them individually to discuss their situations, said Gordon.
“It is very important to keep occupancy high at Seaport Village, to have a vibrant atmosphere out there,” he said. “Increased vacancy can have sort of a snowball effect that we don’t want to see.”
Established in 1962, the San Diego Unified Port District includes 34 miles of waterfront along San Diego, National City, Chula Vista, Imperial Beach and Coronado. The port district does not collect taxes. Instead, it is funded by lease revenue from about 800 businesses operating in the tidelands, such as hotels, restaurants, shops, cruise lines, shipyards and cargo operators.
In early April, the port deferred rent for hotels, restaurants, retails and other commercial tenants from March through May in response to coronavirus shelter-in-place orders that shut down most firms. A month later it also offered 50 percent deferral to industrial tenants.
On Tuesday, the port extended the rent deferral through August even as businesses along the bayfront began to reopen.
In addition, the port pushed back the date when tenants must begin repaying deferred rent. They now have until October 2021. Previously, deferral repayments were set to begin in January.
The goal is to give tenants a full summer season next year — hopefully without the cloud of COVID-19 — before starting repayment. Tenants will have 10 months — from October 2021 to June 2022 — to fully repay what’s owed.
Gordon said the port’s rent relief program mirrors what is being offered by private-sector landlords and other ports.
Moreover, there are signs of a recovery now that businesses are reopening, he said. Toy store Geppetto’s recently signed a lease for Seaport Village, and four other prospective tenants are in talks.
Though they are now open, restaurants, retail shops, tour boats and other commercial port tenants say are operating at 40 to 50 percent capacity due to social distancing requirements.
Many businesses had to invest to make their establishments safe under COVID-19 protocols. Some of the big convention hotels remain closed and don’t expect meeting business to return until the middle of next year. Shops and restaurants that rely on cruise ships and out-of-town tourists also aren’t expecting a quick turnaround.
“Although we are very appreciative and support the proposal to extend the minimum rent deferral program, which will give you more time to collect data, we don’t believe it will be enough to assist our hotels for a sustainable future,” said Chuck Abbott, general manager of the InterContinental San Diego Hotel.
“Unfortunately, until we have meetings, banquets and events, most of the hotels will remain closed, and the ones that are open will really be struggling to generate revenue to be profitable,” he said.
Restaurants, retailers and other commercial port tenants typically pay rent based on a percentage of sales. But they also must meet a baseline annual minimum rent amount.
Minimum rent — calculated based on 75 percent of sales averaged over the three years — is a particularly thorny issue for some port tenants. Driven by the recent strong economy, the past three years have been good, setting a high benchmark for minimum rent.
But today, sales aren’t close to past levels, making minimum rent difficult for some tenants to pay.
Peter Mackauf, the proprietor of Ben & Jerry’s in Seaport Village, joined several tenants in urging the port to waive minimum rent at least for the rest of this year and instead levy rents based on a percentage of current sales.
“The deferral is good, but at the end of the day, we need a waiver of minimum rent,” said Sharon Cloward, president of the San Diego Port Tenants Association, in an interview. “The minimum rent that they were paying pre-COVID, they had a full restaurant or a full hotel. That no longer exists.”
The port estimated that rent deferrals will shrink revenue by a total of $14 million for the 2020 and 2021 fiscal years. It could make up that revenue through deferral repayments by the end of its 2022 fiscal year.
But that depends how many leases end up being renegotiated.
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