Perhaps the City’s recent flirtations with Indian casinos have whetted the municipal appetite for high stakes gambling. On December 16, 2003, the last City Council meeting of the year, the City Council approved, on a 7-2 vote (Butt and Bell dissenting), a lease for approximately 50 acres of Point Potrero Terminal (former Shipyard No. 3).

There was little debate on the terms of the lease, although the ultimate benefit for the City was entirely speculative and subject to events almost entirely out of the City’s control. There was no economic analysis showing what the City’s bottom line would be – or even a range. While I recognize the extreme nature of Richmond’s budget and cash flow crisis, I continue to be skeptical that the Port of Richmond is the cash cow that can provide significant relief – at least using the current model where use is narrowly focused on marginally performing segments of the maritime industry. I also remain leery of entering into long term, unsecured leases for large areas of Port property, particularly with the level of undefined risks and lack of detailed economic analyses that characterize the current proposals. If I tried to get a business loan from Mechanics Bank with the kind of information generated by staff for this deal, I would be laughed out to the street.

There were three interrelated pending actions on the December 16, 2003, City Council Agenda that would obligate the City of Richmond for up to decade, including approval of a lease with Auto Warehousing Company (AWC), extending an Exclusive Right to Negotiate (ERN) with Hanson Aggregate, and initiating a process to finance improvements required by the AWC lease with $5 million of bonds for which the City of Richmond General Fund would be the ultimate security.

The documents describing all three of these actions were sprung on city Council members Saturday morning, December 12, and barely four days later we were asked to vote them up or down.

For as long as I can remember, and decades before that, the City of Richmond has gambled on its Port properties to secure the City’s future. According to information in the 2003-2004 budget, the City is still paying $1.4 million a year in debt service on millions of dollars of outstanding debt incurred years ago to build improvements for former lessees that did not pan out. For the edification of relative newcomers, I commend to you the study Port of Richmond 1901-1980, prepared by the Local Study Workshop/League of Women Voters, Richmond Area, October 1980.

Little has changed since 1980, when the report’s authors concluded:

But this is not just a tale written to interest and amuse. It is a life and death saga, seriously involved in the economic good health of a city and its many thousand inhabitants. Reading the account, one may marvel at the courage and audacity shown, and the bad luck, or naiveté, or poor judgment which has, over the years, nullified some of the well-conceived and best-intentioned efforts of schemes.

At one time, Richmond was going to go into the container business and spent millions on docks and cranes for a high profile company that later bailed out and left the City holding a multimillion dollar bag. Later, the City entered into a long-term agreement with Paasha, another auto importer that eventually turned into a trickle of income. More recently, the City entered into a sole source agreement (even though there were competing bidders) with Stevedoring Services of America (SSA) to operate Terminal 3, another deal that has flopped. And it was less than a year ago that a Casino at Terminal 3 was going to bring home the City’s bacon.

The impending actions relating to the leases with AWC and Hanson, and the related bond to pay for AWC’s improvements raise many unanswered questions, the most troubling of which is lack of a thorough disclosure of the best and worst case cash flows.

AWC Lease

As I understand it, the proposed AWC lease incorporates a Minimum Annual Guarantee (MAG) calculated at $60,000 processed vehicles x $21.00 = $1,260,000. When the MAG is exceeded, the City and AWC revenue share 75-25 (Lease paragraph 6.4). Vehicle storage fees are $0.61/day (Lease paragraph 6.9), but it is not clear of that can be credited to the MAG.

To get an idea of the magnitude of the return compared to other real estate investments, the vehicle processing fees under the MAG are equivalent to a monthly gross rent of about $0.05/square foot (52 acres = 2,265,120 square feet; 52 acres/$1,260,000 = $0.55/SF/year = $0.05/SF/month). This is by no means net income. Before a single nickel is collected, the Port of Richmond spends $1,245,711 just to keep the doors open, excluding debt service, major maintenance and capital improvements – as well as the $100,000 recently spent on a casino study. Pt. Potrero Marine Terminal, the location of the proposed AWC lease, consumes another $203,250 annually. So the net income from the proposed AWC lease is going to be considerably less than $0.05/square foot – perhaps as little as half that. And the net cash flow, after debt service, may be close to break even.

There are other potentially substantial expenses to the City that are described in the lease but not quantified, including:

• Survey (Lease paragraph 2.2)
• Loss of layberthing income (Lease paragraph 3.2)
• “Patch and repair holes in asphalt…” (Lease paragraph 5.5.a)
• “… all alterations, repairs additions and improvements and to perform any necessary inspection and remediation of the premises and wharves which may be necessary now to comply with the demands of any other governmental authorities having jurisdiction related to Materials of Environmental Concern?” (Lease paragraph 5.5.b)
• “…maintain the wharves, including both in-board and out-board components thereof, and their substructure, fender and fire systems in good, useable, safe and sanitary condition …” (Lease paragraph 5.5.c)
• “…maintain berthing space alongside the wharves dredged to thirty-two feet mean low water or to such other depth as the parties may agree in writing.” (Lease paragraph 5.7)

The vehicle storage fees of $0.61/day (Lease paragraph 6.9) are particularly interesting when compared to comparable charges for vehicle storage by other businesses. Vehicle towing companies charge about $25 per day for storing a vehicle, and there are already hundreds of people paying around $100 per month (over $3.00 per day) to store automobiles and recreational vehicles in and around Richmond.

The City Council, acting as the SPA, approved a lease that was remarkably incomplete. The following documents that describe critical terms are listed or referenced in the lease but either do not yet exist or were not provided to the City Council:

• Exhibit 1 (Lease paragraph 2.3)
• Tariff No. 3 (Lease paragraph 3.4)
• Exhibit ___, Scope of Work (Lease paragraph 4.1.a, 4.1.f)
• Exhibit ___, Schedule (Lease paragraph 4.1.a)
• Exhibit ___, Approved Budget (Lease paragraph 4.3.d)

In addition, there are many critical dates listed in the lease that have either not been determined or have not been provided:

• Due date for plans, specifications, timetable and estimated cost of AWC’ Work (Lease paragraph 4.2.a)
• Due date for City’s Pre-Delivery Work (Lease paragraph 4.2.a, 4.3.a)
• Date Design Contingency must be approved (Lease paragraph 4.2.a)
• Date GLOVIS contingency must be satisfied (Lease paragraph 4.2.b)
• Date BNSF contingency must be satisfied (Lease paragraph 4.2.c)
• Date financing contingency must be satisfied (Lease paragraph 4.2.d)
• Date Permit Contingency must be satisfied (Lease paragraph 4.2.e)
• Date AWC must have entered into construction contracts (Lease paragraph 4.2.f)
• Date AWC must complete the Environmental Contingency (Lease paragraph 4.2.g)

My initial review of the lease raised a number of questions that should have been, but were not, answered in order to fully understand it:

• Who is Glovis America, Inc., and to what extent does performance of the lease depend on them? Do we have a verified financial statement on Glovis? To what extent does performance of the lease depend on agreements by Glovis with Hyunda and Kia, and what will the term of such agreements be?
• What will the City’s debt service and other costs be related to financing?

• Are all “Reimbursable Expenses” included in the $4.7 million maximum City commitment? (Lease paragraph 44.2.e, 4.3.c,4.4.b)
• Will AWC be bound by the provisions of RMC 2.50 (Richmond Business Opportunity), Living Wage Requirements ordinance and Local Employment program and Public Work Contracts Ordinance? To what extent do these bind Glovis, Hyundai and/or Kia?
• Is the cost of CEQA review a “reimbursable expense? (Lease paragraph 44.2.g)
• What is the City’s Pre Delivery Work (Lease paragraph 44.2.a, 4.3.a)
• What is a “licensed construction manager?” What type of license? (Lease paragraph 44.3.d.viii)
• What is the maximum par amount of the bonds? (Lease paragraph 44.4.i)
• What is the “maximum annual lease payments payable to the City under the Facilities Lease?” (Lease paragraph 44.4.i)
• What are comparable charges from other ports for processed vehicles and storage?
• Does the $250,000 limitation in Lease paragraph 411.2 pertain to obligations of the City under all of the following:

1.      “Patch and repair holes in asphalt…” (Lease paragraph 45.5.a)

2.      “… all alterations, repairs additions and improvements and to perform any necessary inspection and remediation of the premises and wharves which may be necessary now to comply with the demands of any other governmental authorities having jurisdiction related to Materials of Environmental Concern?” (Lease paragraph 45.5.b)

3.      “…maintain the wharves, including both in-board and out-board components thereof, and their substructure, fender and fire systems in good, useable, safe and sanitary condition …” (Lease paragraph 45.5.c)

4.      “…maintain berthing space alongside the wharves dredged to thirty-two feet mean low water or to such other depth as the parties may agree in writing.” (Lease paragraph 45.7)

5.      Is this cumulative? Does it apply to just the first 5 years, or also to a 5-year extension?

• Has the City obtained verified financial statements from AWC or Glovis America, and if so, why have these not been shared with the City Council?

Bond

I am particularly troubled by the concept of the City of Richmond using a bond to pay for AWC’s capital improvements. The staff report states:

The payments under the AWC lease, up to the minimum annual guaranty amount, would be applied to pay for the city’s rental obligations, but if such funds were not available, the city would be obligated to pay from its general funds.

No information was provided to the City Council about the financial structure of the bond issue, except that the net proceeds were apparently $4.7 million. We were not even told what the projected debt service would be and for how many years it would continue.

The City is going to borrow money from Richmond Wastewater District No. 1 (The sewage treatment plant and collection system paid for by sewer fees by only 60% of Richmond residents and busineses) in order to get started with work before the port bond can be floated. This is probably illegal.

I am adamantly opposed to the City fronting the cost of capital improvements specific to the needs of a lessee, particularly when the City’s general fund is at risk. The only security for this lease is AWC, which is currently a large and presumably successful organization. But so have been many similar organizations in the last several years.

Hanson Lease

As I understand it, the proposed Hanson lease would pay the equivalent of about $0.10 per square foot monthly ($3,920.40/acre = $0.10/square foot/month). The Surplus Property Authority (SPA) will continue to negotiate exclusively with Hanson, except that Hanson agrees that the SPA may enter into a lease with Auto Warehousing Company (AWC), in which case, the SPA may “relocate” Hanson into an “alternative property” (paragraphs 1, 2 and 3)

The alternate properties have not been revealed, but some of those discussed could be problematic. One, for example, is south of Terminal 2, a location proposed for a cement distribution facility several years ago. The Marina Bay community was in open revolt over the cement project, which was totally contained. I can imagine how they would feel about an open air aggregate pile.

Paragraph 4 seems to indicate that the SPA intends to reimburse Hanson any additional costs required by the relocation, including losses related to permitting and delays, costs of investigating, improving and operating the property and costs and fees of attorneys and consultants. These costs have already been discussed as over $500,000, just for studies and design. The cost of additional delay, new EIR’s and the geotechnical and structural requirements for an alternate site could be in the millions. The already meager income projected from Hanson could be reduced significantly.

CEQA

In the text of the proposed Lease with AWC, the drafters have apparently intended to postpone any CEQA review by listing it as a contingency (Lease paragraph 4.2.g) I am not sure I agree that such a tactic is consistent with state law – see attached Exhibit A. The staff report states that “The Lease agreement drafting has been completed and the document fully negotiated.” This does not seem like an action for which a CEQA review can be postponed. In the same staff report, under “Public Outreach,” is the statement, “Discussions regarding this project have been ongoing with the national park Service and Bay Trails.” Local Bay Trail organization leaders tell me that there have been no substantive discussions with them.

Conclusion

Exhibit A to AWC Critique.doc