Big changes coming along Morro Bay's waterfront as leases expire

Renewal process triggers negotiation and city-mandated upgrades

nwilson@thetribunenews.comApril 12, 2014 

Over the next few years, Morro Bay residents and visitors should expect to see significant makeovers of some of the most prominent businesses along the city’s celebrated waterfront.

That’s because leases on 11 key parcels will expire by 2020. They account for about a third of the properties the city rents along Embarcadero Road.

As the leases expire, tenants must rebuild or remodel before agreeing to new terms, a process that typically takes five years. Some leases expiring in the next few years include the Morro Bay Aquarium; properties that house prominent restaurants such as Off the Hook, Hofbrau and The Libertine Pub; and several commercial fishing businesses.

The costs of the required upgrades range from $15,000 for minor improvements to $1 million or more for massive building overhauls.

“It’s a busy time for us,” said Eric Endersby, director of the city Harbor Department. “We have some bigger sites coming up for renewal, including the aquarium site. Some of our oldest leases are coming up, and we’re negotiating all of them.”

The city’s vision

On bustling summer days, pedestrians mosey along the waterfront munching on saltwater taffy and sipping Thai iced teas. They pop in and out of gift shops, eat lunch on decks facing out toward boats drifting on the bay, or rest their feet on city benches to take in Morro Rock or the commercial fishermen sorting their catches after hours or days at sea.

City zoning and the California Coastal Act both require the waterfront primarily to offer visitor-serving uses on bayside properties where businesses operate.

But Morro Bay’s waterfront also is a hub of recreational water activity and commercial fishing that attracts tourists, local residents, and anglers alike. The Tidelands lease area along the Embarcadero consists of three areas with different uses.

The northern third of the Embarcadero is zoned for commercial fishing and other marine uses, with some older restaurants and shops grandfathered in. The central section is devoted to tourism, with restaurants, hotels, retail shops, and pubs. The southern stretch targets water uses that include boat slips and boat repair shops.

The general principles the city has set forth in its Waterfront Master Plan are to “enhance and protect the Waterfront resources and fishing village image,” creating a balance between a working harbor and tourism hub.

The city’s “fishing village” vision calls for architectural renovations that encourage a mix of small buildings with varying roof lines and facades. Buildings must have a wide sidewalk in front and a waterfront walkway behind to maximize bay views.

“What we’ve been going for is a smaller, more eclectic feel than in the past,” City Councilman Noah Smukler said. “The idea is to give people a place where they can easily walk along the harbor and enjoy the proximity to ocean as they go in and out of stores.”

Lease Negotiation Process

The city leases out about 30 sites along the Embarcadero, last year collecting $1.3 million that helps pay for the city’s Harbor Department. An additional $1.9 million in revenues last year came from fees for slips, moorings, and piers, Endersby said.

The Harbor Department oversees the city’s lease redevelopment process, with final approvals from the City Council and Coastal Commission. The department collects both rents and a percentage of gross sales from the businesses.

Some leaseholders operate businesses on their sites while others sublease to business owners. The leases range from a few years to decades. Some of the most attractive for leaseholders are the four remaining 50-year “Pipkin leases” established out of a class action lawsuit filed decades ago against the county by former property owners who lost their land to military use in World War II. Most of the Pipkin leases, named after one of the plaintiffs in the lawsuit, expire in 2018.

A general rule of thumb is that for each 10 years of a lease, about $250,000 in improvements is required from the leaseholder.

“We don’t have a set policy on that,” Smukler said. “That $250,000 figure has been used as a rough guideline. … We look at each project individually and see what needs to be done.”

The city also details specifics for new leases in the “Waterfront Design Guidelines” section of its “Waterfront Master Plan” that include an eight-foot setback from the street curb for a sidewalk and a continuous 8-to-10 foot walkway behind the buildings to give visitors an unobstructed view of the waterfront.

Also, 30 percent of footage on lots with two-story buildings must be kept open as a view corridor to the bay.

A minimum annual rent of 8 percent of the property’s independently-appraised value is required for most sites. Pipkin leases have had more favorable terms of 6 percent, which will rise to 8 percent upon renewal.

The Morro Bay Marina site, held by Stan Trapp, consists of two parcels and pays about $124,000 in annual rent based on a standard assessment of 8 percent of the appraised value of the land. Many smaller sites pay about $20,000 in rent, such as the Morro Bay Yacht Club. Off the Hook pays about $25,000 annually.

“The Harbor Department wants a viable business that is safe, profitable and beneficial to residents and visitors,” said developer Smith Held, a waterfront leaseholder. “Since Harbor gets a percentage of gross sales, it has a strong interest in business viability. The tool it uses to reach its goals is lease negotiations.”

Big Fish Lease on the Horizon

One of Morro Bay’s most prominent businesses along the waterfront — the aquarium — is one that is in need of a massive overhaul.

The building, owned by Dean and Bertha Tyler, who are in their 90s, was built by the family in 1960. The Tylers’ lease began Oct. 1, 1968 and expires in 2018.

The facility houses sea lions, harbor seals and tanks with local marine life such as an octopus, sea anemones and a variety of fish.

But the remodeling of the building will entail a host of changes to satisfy city standards. The building will need to be set back to accommodate the required 8-foot sidewalk rather than the 6-foot sidewalk allowed in the 1960s.

The building also must be modified to create space for the waterfront walkway. The building now abuts the water, cutting off foot traffic. The square building also cuts off required viewsheds to the bay.

“The aquarium is a good example of things that have changed over the years in terms of what the city expects,” Endersby said.

In June, the City Council voted 3-2 to reject a 10-year lease the Tylers proposed that included dock upgrades and cosmetic repairs. The Tylers are not reapplying.

“If you invest $250,000 on repairs, it could take us 20 or 30 years to get it back,” Bertha Tyler said. “That’s not feasible. I would have liked to see the old aquarium stay, but we’re moving on from it.”

The city is now looking for a tenant to redevelop the site as “a unique and affordable visitor-serving marine aquarium” with an Oct. 16 deadline for applications.

Central Coast Aquarium, based in Avila Beach, plans to submit a proposal, said Tara Malzone, the Central Coast Aquarium’s executive director. She hopes to bring in potential partners such as Cal Poly and the National Marine Estuary Program, which already has a small office on the Embarcadero.

“It will cost millions,” Malzone said. “We think it will be an exciting project to take on. Can we reach more people in Morro Bay with research, education and awareness of marine life? That would be the mission and the goal.”

The aquarium will remain in Avila Beach if it takes on the Morro Bay location as well.

Other projects in the works

The Harbor Center at 901 Embarcadero is home to the popular Hofbrau restaurant, and two retail stores, Crills II (offering saltwater taffy) and Poppy (a women’s clothing store and gift shop).

Held is the leaseholder and estimates he will spend about $1.2 million on site improvements to be completed by 2017 for a lease that would expire in 2060. The City Council has approved the project and is awaiting Coastal Commission approval this spring, Held said.

The work will include a new 750-square-foot retail unit, remodeled and enlarged handicap-accessible bathrooms, six new 35-foot boat slips, a larger harbor walk, expanded outdoor seating area, and new sidewalks and windows.

“It’s a lot of money, but the city’s goal is to have something in it for the city and the business owner,” Held said. “If the process were too expensive, I couldn’t make money doing it. If you have to put down $2 million, you probably can’t make a profit doing that.”

Some of the challenges Held has faced include a study on mitigations for potential impact on eelgrass, a plant that plays a pivotal role in the health of the bay and its wildlife. Eelgrass can’t be subjected to shade impacts under the federal Clean Water Act.

In an environmental review as part of the city’s planning process, patches of eelgrass were identified in the general areas of the project. Held spent $3,000 for a study to show the Coastal Commission that his project won’t affect the plant.

Another prominent lease at 801 Embarcadero, held by Burt Caldwell, houses The Libertine Pub. The lease is due for renewal in 2018 and remodeling plans are underway. Caldwell plans to spend about $1 million to reduce the building from two stories to one and add a roof deck for pub patrons.

“(Libertine) is a pretty successful lease site for the most part,” Endersby said. “But the building has reached its useful life. It needs the eight-foot sidewalks in the front. It has two buildings scabbed together. It’s just a good candidate for redevelopment.”

Caldwell said the City Council has given a conceptual okay of the project, which still needs final approval and a Coastal Commission sign-off.

“I’d be happy to start building as soon as we get approval,” Caldwell said. “I envision the business (which he operates) would be shut down for about three months. We’d like to plan it in the winter around the peak summer months when most of our businesses on the waterfront make most of our income.”

The city and leaseholders have a mutual interest in seeing sites occupied and thriving. Leaseholders, who own the buildings on the parcels they lease, must sell their lease to a new lessee before it expires or renew the lease, or else the buildings on the property revert to the city.

“What that’s designed to do is encourage the owner to keep up their property,” Endersby said. “In other words, don’t run the lease site until the wheels fall off after 20, 30, 40 years and leave it for the city to clean up.” But for the most part, that doesn’t happen, Endersby said.

“Most leaseholders come to us and say this is what we’re thinking,” he added. “Most just don’t let their leases run out.”


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