On October 23, 2002 the tenant, Castaway Restaurant/Verdugo Restaurant Corporation (VRC), requested an extension of their lease and on December 17, 2002 the City Council directed staff to proceed to negotiate with the Castaway/VRC on a new lease for the Restaurant.  City staff has met over the past several years with the Castaway/VRC to negotiate a new lease agreement.  In addition to the basic business terms of the proposed lease amendment, the Amended and Restated Lease Agreement for Castaway Restaurant addresses concerns and issues brought forth by several City departments including Community Development, Public Works, Parks, Recreation, & Community Services, Police, Fire, Finance, City Attorney�s and City Manager�s Offices. 

In preparation for this public hearing, staff sent out public notices to property owners and tenants in the Hillside Neighborhood Protection Plan area bounded by Olive Avenue, Glenoaks Boulevard, Cambridge Drive, Bel Aire Drive, and Sunset Canyon Drive.  Public notices were also sent out to property owners in the hillside area above Sunset Canyon Drive in proximity to the Castaway including Country Club Drive, Orange Grove Avenue, Orange Grove Terrace, Church�s Court, Vista Grande, Valley View Crest, Vista Ridge, and Starlight Circle.  The public notice was published in the August 31^st Burbank Leader as well.

ANALYSIS:

The current ground lease rent structure is significantly below market rates because the existing lease agreement was negotiated in the 1960�s.  In addition to bringing the rent structure to market rates, the Amended and Restated Lease Agreement extends the term of the existing lease, incorporates the Concession Agreement from 1975, retains the Luau Grounds as part of the lease and provides that the Castaway will maintain all the parking areas and surrounding hillside areas. 

A matrix showing the significant terms of the Agreement are attached as Exhibit �A� and compare the central points in the existing lease with the Amended and Restated Lease Agreement.  The provisions of the Amended and Restated Lease Agreement will be effective upon its execution and the existing lease and concession agreement will be terminated.  In addition to the terms described in the attached matrix, provided below are other significant terms of the Amended and Restated Lease Agreement including the Capital Improvement Reserve Fund, operating hours for all the restaurant facilities, special maintenance items, the Annual Inspection Program and cure periods.

Capital Improvement Reserve Fund

The Castaway Restaurant will be required to deposit 2% of their gross sales into a Capital Improvement Reserve Fund.  These deposits will be made on a monthly basis and will continue through the span of the Agreement.  At the termination of the Agreement, any remaining reserve funds will be returned to the Castaway.  Under the terms of the Agreement, the Castaway will be required to use this fund for facility improvements such as replacing building elements, mechanical systems, roofing and structural repairs.  Improvements that are eligible to be paid out of the reserve fund will be identified through a joint inspection between the City and Castaway of the restaurant, banquet facilities, luau grounds and surrounding areas.  Each year after that, the Castaway will prepare a Capital Improvement Replacement Plan that details the specific items to be replaced for the year; and on an annual basis a joint inspection will be conducted to assess whether all the facilities are maintained at a first class level.  Examples of specific items that can be included in the Plan for improvements are the installation of additional curb barriers for the hilltop parking lot by the restaurant.  As well as the replacement of fencing around the Luau Grounds and the installation of new fencing around the Overflow Parking Area for additional safety due to its proximity to the 16^th hole of the De Bell Golf Course.

Every two years, should the Castaway believe they have completed all necessary capital improvements to the facility, the Castaway may request to spend additional funds for discretionary items such as the replacement or refurbishment of furniture, fixtures, equipment, and carpeting.  Once the request is made, it is at the discretion of the City Manager to approve the expenditures.  Though, before an approval is given to use the reserve funds for discretionary expenditures, the Community Development Director may require that additional reserve funds be set aside for anticipated, long term expenditures or for unanticipated emergency expenditures.    

In addition to the improvements to be made out of the Capital Improvement Reserve Fund, there are immediate capital improvements that will be required of the Castaway to complete within the first nine months of the effective date of the Amended and Restated Lease Agreement.  These improvements are conditional upon the City�s approval and are not included as part of the 2% reserve fund.  The immediate capital improvements that will be required include:

• Install a new entry security gate, decorative entry archway, monument sign and landscaping;

• Remodel atrium;

• Repaint exterior of Mountain View and Starlight Rooms;

• Install a new masonry �Castaway� identification sign; and

• Plant a minimum of ten Tivoli-lit pepper trees in an acceptable size to the City along the downhill side of the entrance road (Harvard Road).

Should the Castaway need an extension of the nine month period of time to complete these improvements, they may submit a request to the City Manager/Assistant City Manager for consideration.  However, any extension will not be permitted to exceed a twelve month period of time.

Operating Hours

Pursuant to the terms of the Amended and Restated Lease Agreement, the Castaway Restaurant is permitted to operate a restaurant, cocktail lounge, banquet facilities, gift shop, and luau grounds.  Any other uses will require written consent from the City.  The operating hours for the Castaway facilities are included in the Agreement and are as follows:

Any functions that are proposed to take place at the Luau Grounds will first need to be approved by the Park, Recreation and Community Services Director before the event is booked.  Any event at the Luau Grounds that will extend past 9:00 p.m. will need additional and specific City approval as well.  The City may request that the Castaway pay a fee for Police assistance with traffic along the Harvard/Sunset Canyon intersection for events that go past 9:00 p.m. and this Police assistance will be required one and a half hours before and after the closing time.

Special Maintenance Items/Annual Inspection Program

The Castaway will be responsible for maintaining the restaurant (including cocktail lounge), the banquet facilities, the luau grounds, the parking areas and the surrounding areas.  Examples of general maintenance items include, but are not limited to, repairs to the heating, ventilation, air conditioning systems, as well as painting, plumbing, and brush clearance in the surrounding areas.   In addition to these items, there are special maintenance items in the Agreement provisions that the Castaway is required to address.  These items consist of a long-term maintenance schedule for all the parking lots, expansion stipulations for the Luau Grounds, a Parking Plan, wastewater treatment procedures and an Annual Inspection Program.

The Castaway is responsible for the maintenance of all the parking areas, including the Overflow Parking Area, which is the lower parking lot located near the Wildwood Canyon Park entrance.  The Castaway will be required to restripe the parking areas once every three years and resurface the parking areas at least once every ten years beginning on the effective date of the Agreement.  Although the Castaway is required to maintain the Overflow Parking Area, they do not have exclusive rights to this lot and are permitted to use it as overflow parking only when their main parking lot by the restaurant is full.  With regards to the Luau Grounds, beyond general maintenance itself, any renovation of that area will need to match the existing square footage.  The City of Burbank zoning designation for the Castaway, including the Luau Grounds, is open space.  Therefore, the Castaway may repair and improve the structures they currently have at the Luau Grounds, but if they desire to further expand the area to include additional food and/or beverage bar structures, they will be required to apply for a Conditional Use Permit.

The Amended and Restated Lease Agreement also includes two penalty fine structures for special maintenance issues concerning health and safety.  One is in regards to the Parking Plan and the other is for non-compliance of wastewater treatment and discharge procedures.  In the past, the restaurant valet service has used the emergency fire lanes for overflow parking instead of using the actual overflow parking area near the Wildwood Canyon Park entrance.  The Agreement requires the Castaway to provide a Parking Plan that details all the available parking spaces for the restaurant and its facilities, including the overflow parking area, and ensures that the emergency fire lanes will stay clear of parked vehicles at all times.  Should the Castaway violate their Parking Plan, there is a provision in the Agreement stating that the City may fine the Castaway $250 for the first offense and $500 for the second offense within the same twelve months.  The Castaway will also be required to conduct quarterly staff training that focuses on occupancy law requirements, safety rules, and other permit conditions in order to educate their staff on the importance of all safety issues. 

The second penalty fine in the Agreement is a deterrent for environmental violations and addresses wastewater treatment procedures.  Should the Castaway violate any wastewater treatment procedures that cause sanitary sewer overflows, stormwater conveyance system contaminations, and line blockages, a fine can be imposed by the City.  The penalty fines for violating this provision is $1,000 for the first event, $2,000 for the second event, $3,000 for the third event, and continuing in additional increments of $4,000 for each subsequent violation within a twelve month period.  The Agreement also requires that Wastewater Pretreatment Equipment is in proper working order and serviced by a licensed waste hauler at a minimum of once every sixty days. 

Both penalty fine structures will be adjusted annually, from the effective date of the Agreement, based on the local Consumer Price Index (CPI) in order to keep the fines current with market rates during the term of the Agreement.  Should the CPI decrease in any given year, the fines will not decrease and will instead remain at the same rate as the previous year.

Finally, there will be an Annual Inspection Program that will take place every twelve months.  At that time, the City will inspect the restaurant, banquet facilities, luau grounds, parking areas and surrounding areas for compliance with the Agreement.  After each inspection, both parties will meet to discuss the results of the inspection and address any concerns and issues.  This annual inspection does not preclude the City from making other code enforcement or fire inspections as necessary during the course of the year.

Cure Period

The Amended and Restated Lease Agreement has provisions that address cure periods if the Castaway is in default of any terms in the Agreement.  For example, the Castaway is required to maintain an �A� rating from the Health Department for all their facilities.  If the Castaway drops from an �A� rating to a �B� rating, they must notify the City with a written explanation of the problem and include copies of the Health Department�s citations.  The Castaway will then have until the next Health Department inspection to cure the problem.  If the Castaway is not reinstated with an �A� rating by that time, they will be in breech of the Agreement.  Furthermore, if the Castaway were to drop from an �A� rating to a �C� rating, they would automatically be in breech of the Agreement.  In addition to this provision, should the Castaway default in their rent payment, fail to use the Capital Improvement Reserve Fund in the manner in which stipulated in the Agreement, or if any other conditions of the Agreement are not met, the City will send a written notice requesting that the Castaway address and cure the default.  The failure on the part of the Castaway, to either cure or be in the process of curing the default within 30 days after receiving a written notice from the City, will lead to a breech in the Agreement.  As a result, the City may exercise the option of removing the Castaway from the property or pursuing any other legal remedy deemed appropriate.  Upon the execution the Agreement, the Castaway will also be required to make a $15,000 cash security deposit into an interest bearing certificate of deposit account.  The City will have rights to this account if the Castaway fails to cure any defaults.  At the termination of the Agreement, any unused security deposit funds will be returned to the Castaway. 

CONCLUSION:

The Amended and Restated Lease Agreement addresses the issues the City has regarding Castaway Restaurant�s maintenance and improvement needs and will ensure that the restaurant remain as a first class establishment.  The term of the Amended and Restated Lease Agreement is 20 years.  As mentioned before, the Agreement will be effective upon its execution and the existing lease and concession agreement will be terminated.  Should the City Council adopt the resolution approving the Agreement, the execution date will be October 1, 2005, the first day of the following month.  This will set the termination date to October 1, 2025.  The Agreement does have a provision whereby Castaway is given the option to extend the term of the lease for one additional ten year period.  In order to exercise this �Option Period�, Castaway will need to submit an Option Notice at least three months before the term expires to the City.    Incorporated into this Option Notice will need to be an inspection report and a proposed Scope of Work detailing improvements the Castaway plans to make to the restaurant, banquet facilities, luau grounds, parking and surrounding areas.  The Castaway will also need to cure any defaults before the date the extended term is to begin in order to make it effective.   If Castaway were to exercise the �Option Period� in the Agreement, and receive approval from the City, the termination date of the Agreement would extend to October 1, 2035. 

The Agreement is Categorically Exempt from the provisions of the California Environmental Quality Act (CEQA) pursuant to Section 15301 of the CEQA Guidelines pertaining to leasing existing public or private structures involving negligible or no expansion of use beyond that which already exists.

FISCAL IMPACT:

Under the Amended and Restated Lease Agreement, the minimum base rent for the Castaway will be $180,000 per year, payable $15,000 per month.  Every five years, the minimum base rent will be adjusted to the greater of the prior period�s base rent or 75% of the average total annual rent for the previous five years.  This adjustment is intended to keep the rents current with market rates.  The percentage rent for the Castaway restaurant portion will be 5% of the gross sales for the first two years of the Agreement, and then increased to 7% of the gross sales for the remaining term of the Agreement.  The percentage rent for the banquet facilities will be 7% of the gross sales for the entire term of the Agreement.  The Castaway, on a monthly basis, will pay the greater of either the base rent or the percentage rent.  The base rent will be due the first of the month, and the percentage rent will be collected at the end of the month if and when the amount is higher than the base rent.  The Castaway will also be required to submit an Annual Statement of the total rent paid at the close of each fiscal year.  In the event of an overpayment, the Castaway will be credited on their next payment.  Alternatively, if there is an underpayment, then the remaining amount will be added to the Castaway�s next base rent payment.

Keyser Marston Associates Inc. (KMA) has estimated that under the existing lease, the City�s revenues between 2005 and the 2012 expiration of the ground lease would be $2,454,000.  If the Council were to approve the Agreement in 2005, the City can expect to realize approximately $5,627,000 in revenues between the execution date and the 2012 expiration date.  This is an increase of $3,173,000 in revenues during that period of time.

RECOMMENDATION:

Staff recommends that the City Council adopt a resolution approving the Amended and Restated Lease Agreement between the City of Burbank and Verdugo Restaurant Corporation for the Castaway Restaurant.

ATTACHMENTS:   

Exhibit A          Comparison Matrix: Existing and Amended and Restated Lease Agreement

Exhibit B          Amended and Restated Lease Agreement

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