Template revised January 10, 2019.
COMMISSION
AGENDA MEMORANDUM
Item No.
6h
ACTION ITEM
Date of Meeting
June 23, 2020
DATE: June 5, 2020
TO: Stephen P. Metruck, Executive Director
FROM: Melinda Miller, Director, Portfolio & Asset Management
Stephanie Jones Stebbins, Managing Director, Maritime Division
SUBJECT: Third Amendment to Ground Lease with Duke’s Chowderhouse, LLC. at Shilshole Bay
Marina
Amount of this request:
$
Total estimated project cost:
$
ACTION REQUESTED
Request Commission authorization for the Executive Director to execute the third amendment
to the ground lease with Duke’s Shilshole Bay Chowder House, LLC., substantially similar to the
attached draft amendment and on the following terms, effective April 1, 2020: (1) reduce the
square footage of the amended ground lease to 4500 square feet; (2) reduce the base monthly
rent during the Construction Phase from $4188/month to $2,048/month and during the Post-
Construction Phase from $14,753/month to $7,216/month; (3) to defer payment of the
Construction Phase Rent from April 1, 2020 through March 31, 2023; and (4) Duke’s to repay the
Port for the deferred rent over ten years, beginning April 1, 2023 through March 31, 2033.
EXECUTIVE SUMMARY
Due to the economic impact of COVID-19 on the restaurant industry in general and Duke’s
specifically, staff is proposing to amend this ground lease. The adjustments being proposed for
Duke’s are consistent with relief offered across the Port during this public health crisis.
There are two significant elements that have affected the development of a highly desired
restaurant at Shilshole – the ongoing economic impact of COVID-19 and skyrocketing
construction costs that undermined its financial feasibility. This is a ground lease that lays the
expense and risk of building the restaurant on Duke’s alone.
In response to the increased costs and to the evolving market, Duke’s approached staff with a
proposal for a smaller, more flexible restaurant, three years deferred rent, and reimbursement
by the Port for the difference in the rent they had already paid and the new rental amount.
COMMISSION AGENDA – Action Item No. 6h Page 2 of 5
Meeting Date: June 23, 2020
Template revised June 27, 2019 (Diversity in Contracting).
Staff counter-proposed and ultimately Duke’s agreed to no reimbursed rent and the terms
mentioned below which make the Port whole during the initial lease term.
The intent of this amendment is to allow Duke’s the time to redesign, permit, and build their
revised project and provide them with the flexibility to respond to ongoing economic uncertainty
due to COVID-19 and help them weather the crisis. To this end, construction rent would be
deferred for three years or substantial completion of the restaurant, whichever is sooner. All
deferred rents will be repaid over the subsequent ten years. The rent rate per square foot
remains the same as in the current lease. The lease expires in April 2041.
JUSTIFICATION
Over the 2-1/2 years of design development, Duke’s experienced unexpected escalation of
construction costs, from $4.3 million at schematic design to $8.3 million during the final formal
bid process. This resulted from both an increase in the scope and unprecedented escalation in
the construction market due to a booming economy. In early March, Duke presented a revised
plan for a scaled down and more flexible restaurant model that will meet both their budget
requirements and the evolution of the restaurant industry away from large full-service
restaurants. They have contracted with an international restaurant consultant and developer
who will oversee the design and construction of the new concept in line with their restaurant
model that has been successful in many international locations.
Parallel to this project evolution, the impact of COVID-19 hit Duke’s hard. Many of Economic
Development and Maritime Division landside tenants, including Duke’s, have been affected in
some manner by the ongoing Covid-19 pandemic, the broader economic crisis, and the mandates
from various regulatory agencies including the Governor, Mayor, and most recently, the Seattle
City Council. Some sectors, particularly the restaurant and hospitality sector, have been severely
affected through direct closure, starting on March 23, 2020.
Following on the Commission’s policy direction and the Executive Director’s guidance, the Port
offered a deferred payment plan to all tenants who were directly affected by the various
mandates made by the Governor, Mayor, and Seattle City Council. For those tenants who apply,
rent and other charges are being deferred for four months (April through July) without finance
charges and re-payment plans begin on October 1, 2020, in most cases. Most agreements give
the tenant twelve months to repay the deferred rent. This payment plan does not change the
terms and conditions of the lease. Duke’s is participating in this program and if this amendment
is approved, we will terminate their Deferral Program agreement.
Out of 190+ tenants, 74 tenants were deemed to be directly affected and invited to apply. 59
tenants applied for the program and 45 agreements have been executed to date. During this
period, the Commission also authorized lease adjustments to Aviation Dining and Retail tenants
that included waiving the Minimum Annual Guarantee and providing lease extensions.
COMMISSION AGENDA – Action Item No. 6h Page 3 of 5
Meeting Date: June 23, 2020
Template revised June 27, 2019 (Diversity in Contracting).
Duke’s is a family-owned, local company that was established in 1976 and currently operates
restaurants in seven locations in Seattle, Bellevue, Kent and Tacoma, Washington. All operations
were shut-down by the Governor’s first mandate in March. This week, King County now allows
partial re-opening for restaurants with many operating constraints including occupancy limits
between 25-50% of permitted occupancy.
Recent polls, as reported in the LA Times article of May 23, have stated that “much of the country
remains unlikely to venture out to bars, restaurants, theaters, or gyms anytime soon, despite
state and local officials…allowing businesses to reopen…” It is widely held that the recovery for
the restaurant industry will be long and shallow.
Duke’s has made significant investments ($250K+) in the design and permitting of the original
restaurant concept at Shilshole. They are committed to this new smaller concept that they
believe better suits the evolving post-COVID-19 restaurant market and the seasonal nature of the
location.
Diversity in Contracting
Staff have contacted the Diversity in Contracting Department to discuss this request and found
no opportunity for WMBE participation as it is an amendment to an existing lease.
DETAILS
Lease Term Current Agreement Amendment #3 eff. 4/1/20
Premises 9,200 SF 4500 SF
Construction Rent/month $4,188 $2,048
Begin Post-Construct. Rent May 1, 2021 April 1, 2023
Post-Construction Rent/month $14,753 $7,216
Lease Expiration April 30, 2041 April 30, 2041
ALTERNATIVES AND IMPLICATIONS CONSIDERED
Duke’s management approached the Port with a proposal to help them survive the effects of the
first Governor’s mandate that closed all their restaurants and the uncertain dining market and
their recent conclusion that escalating construction costs had made their original restaurant plan
too expensive to build. Staff discussed their proposal at length and proposed a revised structure
which Duke’s has accepted, contingent on Commission authorization.
Alternative 1 – Reject Duke’s proposal for lease amendment
Cost Implications: Revenue loss if tenant abandons the lease. None if they continue the project.
Pros:
(1) If tenant continues with the project, continues monthly revenue.
(2) Maintains continuity of lease terms
COMMISSION AGENDA – Action Item No. 6h Page 4 of 5
Meeting Date: June 23, 2020
Template revised June 27, 2019 (Diversity in Contracting).
Cons:
(1) Exposes tenant to significant financial risk from COVID-19 economic impact
(2) Tenant may abandon lease thus provoking legal action
(3) Exposes Port to costly legal action, lost revenue, and renovation expenses
This is not the recommended alternative.
Alternative 2 – Agree to terms as initially proposed by Duke’s
Cost Implications: Reduced square footage, three years to redesign, permit, and build the new
concept effective January 1, 2020, and as a credit to their Construction Rent the Port to reimburse
Duke’s for difference in rent between 9200 SF and 4500 SF restaurant concepts, retroactive to
beginning of lease.
Pros:
(1) Accepts tenant’s proposal thus strengthening relationship
(2) Supports the likely only viable option for a restaurant development at Shilshole
(3) Gives tenant flexibility to weather impact of Public health crisis and complete the new
restaurant concept
Cons:
(1) Essentially no revenue until building completed
(2) Potential perception of gift of public funds
(3) Retroactive credit of rent difference not acceptable
This is not the recommended alternative.
Alternative 3 – Accept negotiated terms proposed by staff
Cost Implications: Effective 4/1/20, reduce square footage from 9200 SF to 4500 SF, defer
construction rent for three years and pay back over ten years, post-construction rent will start
no later than 4/1/23.
Lease expires in April 2041.
Pros:
(1) Provides reasonable terms to tenant and recovers deferred rent for Port
(2) Accepts tenant’s proposal thus strengthening relationship
(3) Supports the likely only viable option for a restaurant development at Shilshole
(4) Gives tenant flexibility to weather impact of Public health crisis and complete new
restaurant concept
(5) Little financial risk to Port since Duke’s is financing the design, permitting, and
construction
Cons:
(1) Postpones collection of deferred rent
(2) Delays opening of highly desired amenity for customers
This is the recommended alternative.
COMMISSION AGENDA – Action Item No. 6h Page 5 of 5
Meeting Date: June 23, 2020
Template revised June 27, 2019 (Diversity in Contracting).
FINANCIAL IMPLICATIONS
This is a ground lease and the development and construction costs are borne by the tenant.
There are no incremental costs to the Port for this request.
Financial Analysis and Summary
Project cost for analysis
No incremental costs to the Port for this request
Business Unit (BU)
Maritime Portfolio Management
Effect on business performance
(NOI after depreciation)
This amended lease agreement will generate the Total
Cash Flow of $2,035,593 for the remainder of the lease
term until April 30, 2041. The first-year post-construction
lease revenue for this amendment will be $64,945.
IRR/NPV (if relevant)
Total Effective Rent: $2,035,593
Discounted Effective Rent at 4.5%: $1,156,753
CPE Impact
N/A
Future Revenues and Expenses (Total cost of ownership)
Future revenues will be generated based on lease rates and terms stated above in the third
amendment.
ATTACHMENTS TO THIS REQUEST
(1) Presentation
(2) Draft Ground Lease Amendment
PREVIOUS COMMISSION ACTIONS OR BRIEFINGS
September 24, 2019 - Commission authorized Second Amendment to the Ground Lease
January 9, 2018 – Commission authorized First Amendment to the Ground Lease
May 9, 2017 – Commission approved the Ground Lease with Duke’s Chowder House, LLC.
