HomeMy WebLinkAbout2022-08-16; City Council; ; Amendment to the Retail Lease Agreement with House Martel LLC for the Chapters Café at the Carlsbad City LibraryCA Review __AF__
Meeting Date: Aug. 16, 2022
To: Mayor and City Council
From: Scott Chadwick, City Manager
Staff Contact: Curtis M. Jackson, Real Estate Manager
curtis.jackson@carlsbadca.gov, 442-339-2836
Subject: Amendment to the Retail Lease Agreement with House Martel LLC for the
Chapters Café at the Carlsbad City Library
District: 3
Recommended Action
Adopt a resolution approving the fourth amendment to the retail lease agreement with House
Martel, LLC to modify base rent and percentage rent obligations and to continue to defer
payment of deferred rent until April 29, 2024, for the Chapters Café at the Carlsbad City Library
on Dove Lane, and authorizing the City Manager to execute the amendment.
Executive Summary
The city deferred rent payments on the Chapters Café at the City Library for a total of 15
months in 2020 and 2021 because of the impacts of the COVID-19 pandemic. Its operators are
now requesting the city modify the base rent and how the percentage rent is calculated and
defer the rent for 32 more months, until April 29, 2024, citing the pandemic’s continuing
impacts of the on the café’s business.
Only the City Council has the authority to amend the retail lease agreement with the café’s
operators, House Martel LLC.
Discussion
Background
The initial five-year lease agreement with House Martel to complete tenant improvements at
the City Library site and operate a cafe that the City Council initially approved in 2018 included
an initial base rent of $14,796 a year, increasing 3% annually to $16,653 in the fifth year. The
current agreement expires in 20 months on April 29, 2024, and the current rent is $15,697 per
year.
Aug. 16, 2022 Item #5 Page 1 of 13
Timeline
March 2020 - Chapters Café requested temporary forgiveness of rent payments, citing
financial hardship due to the COVID-19 pandemic and related public-health restrictions
that had resulted in the closure of the City Library and the café.
May 12, 2020 - Carlsbad City Council approved guidelines for considering city lease
deferral requests due to the COVID-19 pandemic
April 2020 – At the recommendation of the City Council’s Ad Hoc City Council Economic
Revitalization Subcommittee, the City Council approved the Economic Recovery and
Revitalization Initiative, which included several measures to support pandemic-related
economic response, recovery and revitalization, including city lessee rent relief
guidelines for lease holders of city properties (Resolution No. 2020-068).
Oct. 6, 2020 - the City Council approved Amendment No. 2 to the lease agreement with
Chapters Café, which allowed the deferral of rent for up to nine months – from May 1,
2020, to Jan. 31, 2021. (Resolution No. 2020-198)
Feb. 9, 2021, the City Council approved Amendment No. 3, which allowed the rent to be
deferred for up to an additional six months, from Feb. 1 to Aug. 31, 2021. (Resolution
No. 2021-039).
Request to reduce base rent
Beginning in September 2020, Chapters Café transitioned from being completely closed due to
the pandemic to being partially open to being fully open, as it is now, with all services to library
patrons and visitors restored. However, patronage at the City Library remains lower than it was
before the pandemic, which has continued to impair the café’s business.
In an effort to not be in breach of the agreement, Chapters Café asked the city, on Sept. 20,
2021, to modify the current guaranteed annual rent amounts due from $15,697 per year, or
$1,308 per month, to $9,000 per year, or $750 per month, increasing three percent annually.
This fourth amendment with Chapters Café would modify the base rent and percentage rent
under the agreement and continue to allow the tenant to defer payment of the deferred rent
until April 29, 2024.
Request to modify percentage rent
Under the terms of the current agreement, Chapters Café is required to pay a base rent or 3%
of its overall gross income, whichever sum is greater, on a monthly basis.
Chapters Café has now asked to modify the percentage rent due to the city to an amount equal
to 12% of the amount by which gross sales exceed what is referred to as the rent breakpoint in
an amount not to exceed $5,000 per lease year on an annual basis. The rent breakpoint is
calculated by dividing the annual base rent for the applicable lease year by the percentage rent.
Under the proposed amendment, for the 2022 lease year, the rent breakpoint would be
$75,000, so Chapters Café would be required to pay, in addition to base rent, a percentage rent
of 12% of all gross sales above $75,000, not to exceed $5,000 per lease year.
Aug. 16, 2022 Item #5 Page 2 of 13
Request to defer rent payments
Chapters Café has $30,823 in deferred base rent due to the city. The café’s operators have
asked the city to continue to defer payment of the deferred rent through April 29, 2024, the
date of the termination of the initial term of the agreement.
Chapters Café has also asked to be allowed to offset or pay down the deferred rent by applying
the percentage rent payments described above to the deferred rent, with a maximum offset
payment annually of $5,000 for the remaining initial term of the agreement.
The cafe will be obligated to pay the balance of the deferred rent due upon the termination of
initial lease term of the agreement. If there is a balance of deferred rent due at the termination
of the initial five-year term, and the city approves the five-year renewal option, Chapter’s Café
will continue to pay percentage rent until the balance of the deferred rent is paid in full. Once
all deferred rent has been paid in full, percentage rent will continue to be paid to the city until
the termination of the five-year renewal option.
Recommendation
Chapters Café has approximately 20 months remaining on its initial lease term. Its operators
had been timely in making rent payments until it was forced to close due to the restrictions
imposed in March 2020 to combat the pandemic. Chapters Café has made full and partial rent
payments to the city over the course of the initial term, including during its previously approved
rent deferral periods, in the amount of $15,798. Chapters Café has also continued to maintain
its leasehold in good condition, continued to comply with all other terms of its lease, and has
complied with all relevant aspects of the state and county health orders.
Staff recommend the City Council give authority to the City Manager to execute this fourth
amendment to the retail lease agreement with Chapters Café to modify the base rent and
percentage rent obligations and to continue to defer payment of deferred rent until April 29,
2024.
Options
1. Approve the amendment to the lease agreement as recommended
Pros
• City would benefit from continuing to provide the cafe amenity for patrons of
the Dove Library complex, as well as continue to collect rents to pay back the
deferred rent of $32,000, and recoup the initial $80,000 tenant improvement
investment by the city.
• Amending the lease decreases the possibility of the tenant defaulting on the
lease terms, allowing the city to continue to collect rents.
Cons
• City will be reducing rent from $1,308 to $750 per month (subject to annual
escalators).
• City will not recoup the full amount of deferred rent in 2022, as required by
Amendment No. 3.
2. Deny the amendment to the lease agreement
Pros
• Chapters Café will be required to pay rent at originally agreed lease rate
Aug. 16, 2022 Item #5 Page 3 of 13
• Chapters Café will be required to pay deferred rent in 2022, as required by
Amendment No. 3.
Cons
• Chapters Café has not been able to pay rent at the originally agreed lease rate
that was predicated on the 2018 City Library patronage numbers, and would
likely default on its lease
• Chapters Café does not have the liquidity to pay the deferred rent in 2022 as
required by Amendment No. 3 due to the lasting impact of the City Library
complex’s reduced services and patronage related to COVID-19, and would likely
default on its lease.
• The city will not recoup payment for both the deferred rent of $32,000 and the
initial tenant improvement budget of $80,000.
• The city will be required to issue a new request for proposal to re-lease the
property, a process that could take up to six to nine months and there is no
guarantee that a new tenant will choose to lease the property.
Staff recommend Option 1.
Fiscal Analysis
Chapters Café is currently obligated to pay $15,697 in base rent per year ($1,308.08 per month)
under the current agreement. Amendment No. 4 will reduce the annual base rent to $9,000 per
year ($750 per month), and Chapters Café will be obligated to pay, in addition to base rent, a
percentage rent of 12% of annual gross sales over the rent breakpoint amount of $75,000,
which will be used to offset of pay down the deferred rent amount of $30,823 in an amount not
to exceed $5,000 per year over the remainder of the initial term.
Chapters Café will be required to pay the balance of deferred rent due to the city at the
termination of this agreement.
To date, Chapters Café has made payments to the city in the amount of $15,798. Over the
remaining 20 months of the agreement, Chapters Café shall pay approximately $15,270 (not
including percentage rent), for a total of $31,068 in total consideration to the city to help offset
the initial city-funded tenant improvement budget of $80,000
During the COVID-19 pandemic, Chapters Café applied for and was able to secure a loan in the
amount of $5,000 from the City of Carlsbad business loan program (with an outstanding loan
balance of $2,600), a California Restaurant Association grant in the amount of $2,000, an
Economic Injury Disaster Loan in the amount of $5,000, and a federal Paycheck Protection
Program forgivable loan in the amount of $16,400. These funds were used to help pay for a
portion of its rent, employee salaries, utilities, other operational expenses, and supplies.
Chapters Café is not in default in paying back all applicable loans.
Next Steps
Chapters Café and city staff will implement the terms of the amended agreement.
Environmental Evaluation
Aug. 16, 2022 Item #5 Page 4 of 13
The proposed action is exempt from the California Environmental Quality Act under guidelines
15301 - Existing Facilities, which exempts the leasing of property involving negligible or no
expansion of use beyond that existing at the time of the agency’s determination.
Public Notification
This item was noticed in keeping with the Ralph M. Brown Act and it was available for public
viewing and review at least 72 hours before the scheduled meeting date.
Exhibits
1.City Council resolution
2.House Martel, LLC rent modification and rent deferral extension request letter
Aug. 16, 2022 Item #5 Page 5 of 13
RESOLUTION NO. 2022-203
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA
APPROVING THE FOURTH AMENDMENT TO THE RETAIL LEASE AGREEMENT
WITH HOUSE MARTEL, LLC TO MODIFY BASE RENT AND PERCENTAGE RENT
OBLIGATIONS AND TO CONTINUE TO DEFER PAYMENT OF DEFERRED RENT
UNTIL APRIL 29, 2024, FOR THE CHAPTERS CAFE AT THE CARLSBAD CITY
LIBRARY ON DOVE LANE AND AUTHORIZING THE CITY MANAGER TO EXECUTE
THE AMENDMENT FOR THE CHAPTERS CAFE LOCATED AT THE CARLSBAD CITY
LIBRARY AT 1775 DOVE LANE
WHEREAS, on Aug. 2, 2018, the city and House Martel, LLC (Chapters Cafe), entered into that
certain Lease Agreement (Agreement) for the property located at 1775 Dove Lane, Carlsbad,
California (Premises) consisting of approximately 750 square feet of commercial building space
located within the Carlsbad City Library (Resolution No. 2018-136); and
WHEREAS, on Jan. 29, 2019, the city and Chapters Cafe entered into Amendment No. 1 to the
Lease, extending the required business opening date ninety-days, from 180 days to 270 days from the
Aug. 2, 2018, lease effective date (Resolution No. 2021-039); and
WHEREAS, on Oct. 13, 2020, the city and Chapters Cafe entered into Amendment No. 2 to the
Lease, deferring rental payments for up to nine-months from May 1, 2020, to Jan. 31, 2021
(Resolution No. 2020-198); and
WHEREAS, on Feb. 9, 2021, the city and Chapters Cafe entered into Amendment No. 3 to the
Lease, deferring rental payments for up to an additional six months from Feb. 1, 2021, to Aug. 31,
2021 (Resolution No. 2020-198); and
WHEREAS, Chapter Cafe is now requesting to modify Base Rent from $15,697 per year ($1,308
per month) to $9,000 per year ($750 per month); and
WHEREAS, in addition to Base Rent, Chapters Cafe is now requesting to modify percentage
rent obligations to 12 percent of gross sales above the rent breakpoint of $75,000 in an amount not
to exceed $5,000 per year, which shall be used to offset or pay down deferred rent under the
Agreement; and
WHEREAS, Chapters Cafe is now requesting to continue to extend the rent deferral period
until April 29, 2024, as the impacts associated with the COVID-19 pandemic persist; and
Exhibit 1
Aug. 16, 2022 Item #5 Page 6 of 13
WHEREAS, the City Council concurs that the City Manager's recommendation that the
modification to Base Rent, Percentage Rent, and rent deferral relief requested is consistent with the
guidelines adopted pursuant to Resolution No. 2020-083; and
WHERAS, this request is based on the ongoing impacts associated with COVID-19, which
include the initial closure and subsequent and continued reduced patronage levels at the Dove
Library since March 16, 2020; and
WHEREAS, Chapters Cafe has 20 months remaining on its initial lease agreement term and
was timely in its rent payments until the Cafe and the library were closed because of the pandemic in
March of 2020, has made full and partial rent payments of $15,798 to the city over the course of the
initial term, including during its previously approved rent deferral periods, has continued to maintain
its leasehold in good condition, continued to comply with all other terms of its lease, and has
complied with all relevant aspects of the State and County health orders; and
WHEREAS, the Fourth Amendment will provide immediate relief to Chapters Cafe by
modifying Base Rent and Percentage Rent payments, as well as extending the rent deferral period
until April 29, 2024, with the balance of the deferred rent to be paid back to the city at the
termination of the initial five-year term, unless the city approves the five-year lease renewal option,
in which case Chapters Cafe will continue to pay Percentage Rent until the balance of the Deferred
Rent is paid. Once all Deferred Rent has been paid in full, Percentage Rent will continue to be paid to
the city until the termination of the five-year renewal option.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as
follows:
1.The above recitations are true and correct.
2.That the City Manager is hereby authorized to execute this Fourth Amendment to the
Retail Lease Agreement with Chapters Cafe, attached hereto as Attachment A, and to do so
in full compliance with the terms and conditions expressed in the Agreement and to the
satisfaction of the City Attorney.
Aug. 16, 2022 Item #5 Page 7 of 13
PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of
Carlsbad on the 16th day of August, 2022, by the following vote to wit:
AYES:
NAYS:
ABSENT:
Hall, Blackburn, Bhat-Patel, Acosta, Norby.
None.
None.
tjfL �FAVIOLA MEDINA, Clerk Services Manager
(SEAL)
Aug. 16, 2022 Item #5 Page 8 of 13
AMENDMENT NO. 4 TO RETAIL LEASE AGREEMENT
A This Amendment No. 4 to Retail Lease Agreement ("Amendment") is entered into as of lA�. I e, , 2022, by and between the CITY OF CARLSBAD, a Californiamunicipa orporation ("Landlord") and House Martel, LLC, a California limited liability company ("Tenant") and shall be effective and binding upon the parties as of the date of its execution by both parties.
RECITALS
WHEREAS, Landlord and Tenant are parties to a Retail Lease Agreement entered into as of August 2, 2018 ("Lease") for the property located 1775 Dove Lane, Carlsbad, CA 92011, consisting of approximately 750 square feet of commercial building space located within the Carlsbad City Library.
WEREAS, on Jan. 29, 2019, the Landlord and Tenant entered into Amendment No. 1 to the Lease, extending the business opening date ninety-days, from 180 days to 270 days from August 2, 2018, to April 30, 2019; and
WHEREAS, on Oct. 13, 2020, the Landlord and Tenant entered into Amendment No. 2 to the Lease, deferring rent payments for up to nine-months, from May 1, 2020, to Jan. 31, 2021; and
WHEREAS, on Feb. 9, 2021, the Landlord and Tenant entered into Amendment No. 3 to the Lease, deferring rent payments for up to six additional months, from Feb. 1, 2021, to Aug. 31, 2021; and
WHEREAS, due to the ongoing financial impact that the current Coronavirus (COVID-19) pandemic has had on Tenant, Tenant has requested a decrease in Base Rent and to continue to defer payment of the Deferred Rent (defined below) until a later date; and
WHEREAS, Tenant has applied for Federal, State, and local grants, loans and awards which may be used to offset the financial impacts of the COVID-19 pandemic, and if awarded any funds through these programs, Tenant intends to utilize such funds to fulfill its obligation to pay Landlord in full any amount of Deferred Rent due under this Lease; and
WHEREAS, Landlord has agreed to a modification of the Base Rent and Percentage Rent under the Lease and to continue to allow Tenant to defer payment of the Deferred Rent until April 29, 2024, subject to the specific terms and conditions set forth in this Amendment; and
WHEREAS, all capitalized terms used in this Amendment, unless otherwise specified, shall have the same meaning as the capitalized terms used in the Lease.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are expressly acknowledged, Landlord and Tenant agree as follows:
AGREEMENT
1. Article 1: Basic Lease Provisions: Subsections 1.3 Term and RentCommencement, 1.4 Base Rent and 1.5 Percentage Rent of the Lease are hereby deleted in their entirety and replaced with the following language:
1.3 Term and Rent Commencement. Approximately five (5) years, commencing upon the date when this Lease has been executed by both parties (the "Term CommencementDate"), and expiring, unless sooner terminated in accordance with this Lease, on April 29, 2024 (the Expiration Date"), subject to the extension options set forth in Section 3.2 below. Tenant shall commence paying rent under this Lease on April 30, 2019 (the "Rent
Commencement Date"); provided, however, that concurrently with the execution of this Lease, Tenant shall pay to Landlord the Base Rent for the first (1st) full month beginning on the Rent Commencement Date. As used in this Lease, "Lease Year" means each twelve (12) month period (or portion thereof) during the Term commencing with the Rent Commencement Date.
Page 1 of 3
Aug. 16, 2022 Item #5 Page 9 of 13
Attachment A
1.4 Base Rent. Beginning on the Effective Date of this Amendment:
Base Rent Per Month $750.00 Annual Base Rent $9,000
1.5 Percentage Rent. Commencing on the Rent Commencement Date and continuing throughout the remainder of the Term, for any Lease Year in which Gross Sales (defined in Article 5 below) exceed the Rent Breakpoint (defined below), in addition to Base Rent, Tenant shall pay percentage rent equal to twelve percent (12%) (the "Percentage") of the amount by which Gross Sales with respect to such Lease Year exceed the Rent Breakpoint with respect to such Lease Year (collectively, "Percentage Rent"), in an amount not to exceed five thousand dollars ($5,000) per Lease Year. As
used herein, "Rent Breakpoint" means the amount calculated by dividing the annual Base Rent for the applicable Lease year by the Percentage (i.e. the •• breakpoint, which is $75,000). Tenant shall pay Percentage Rent on an annual basis on the anniversary of the Lease Year and report Gross Sales on a monthly basis as set forth in Article 5 below. Percentage Rent payments shall be due within thirty (30) days of each Lease Year as described In Section 1.3 above. Further, the Percentage Rent due each Lease Year shall be applied annually toward the outstanding balance at the end of each Lease Year of Deferred Rent described in Section 1.5(b) below to reduce the amount of the Deferred Rent to the extent possible prior to the termination of this Agreement.
1.5 (b) Deferred Rent. Notwithstanding the provisions in Article 1 of the Lease, Tenant may continue to defer payment of past due Base Rent for the period commencing May 1, 2020, and continuing through April 29, 2024, in the aggregate amount of $30,823 ("Deferred Rent"). Tenant shall pay Landlord the Deferred Rent no later than April 29, 2024. The Deferred Rent will not be subject to interest or late charges or cause an event of default under Article 17 of the Lease, provided:
(1) Failure to Comply. If Tenant fails to timely comply with Sections 1.4 or 1.5of this Lease, as amended, then (i) any unpaid Deferred Rent will becomeimmediately due and payable and subject to 3% interest compounded monthly; and(ii)Landlord will have the right to pursue any available remedies under the Leaseand/or applicable law.
(2) Tenant Certification. By execution of this Amendment, Tenant certifiesthat Landlord has not defaulted in the performance of its obligations under theLease and Tenant has no claim, defense, excuse or offset with respect to theLease as it relates to COVID-19, or otherwise. Tenant further acknowledges andagrees that prior to executing this Amendment, Tenant has had an opportunity todiscuss this Amendment with its legal counsel, tax professionals and financialadvisors.
(3)Confirmation. Except as modified by this Amendment, all provisions ofthe Lease shall remain in full force and effect. In the event of an irreconcilable
conflict between the terms of the Lease and the terms of this Amendment, theterms in this Amendment shall control.
Page 2 of 3 Aug. 16, 2022 Item #5 Page 10 of 13
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above.
LAf':IDLORD:
a Califomi
Dated: �b/4?
APPROVED AS TO FORM: Celia A. Brewer City Attorney
TENANT:
HOUSE MARTEL, LLC a California limited liability com
By:
Title:
Page 3 of 3 Aug. 16, 2022 Item #5 Page 11 of 13
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Aug. 16, 2022 Item #5 Page 12 of 13
Exhibit 2
07/14/22
Curtis Jackson
Office of the City Manager
1200 Carlsbad Village Drive
Carlsbad, CA 92008
Curtis,
The sales volume at Chapters Cafe continues to be far lower than the projections from the
original lease due in part to the lower traffic volume caused by the pandemic and subsequent
shortened programs offered at the library.
I'm requesting an amendment to my lease to lower the base rent to an amount more in line with
the current sales volume.
I have been paying $500 a month since last September when the rent deferment ended.
Please let me know if anything can be arranged.
Thank you,
Lisa Martel
Chapters Cafe
1775 Dove Lane #146
Carlsbad, CA 92011