Boondoggle by the Bay

Why the tacky political giveaway called Pier 39 shouldn't be used as a model for the coming redevelopment of San Francisco's waterfront

The Board of Supervisors and the Port Commission approved the agreement in 1977, and gave Simmons a lease good for 60 years, with fixed rental fees at a low "preferred rent," plus a meager percentage of the center's gross revenues to be paid to the city.

The length of the lease was not surprising, given that Simmons would need time to repay the $29 million he had borrowed to finance the development. The sweet part, however, was the low "preferred rent" set in the lease and the small percentage of revenues that Simmons was required to pay the city.

Even considering the amount of risk that Simmons was taking, the financial side of the deal seemed to favor the developer unbelievably. The arrangement's one-sided nature became easier to understand when it was revealed that Supervisors Dan White and Terry Francois and other city officials had emerged from the deal with subleases at the new development.

Then-Deputy City Attorney George Agnost criticized the proceedings, and demanded that the city revisit the contract with Simmons. But amendments to the lease in 1979 made the terms only slightly more favorable to the city. And it extended the lease by five years, so it would not end until 2042.

Soon afterward, Simmons decided to sell North Point Pier, giving control of his sweetheart lease with the port to the Bass brothers in 1981.

Pier 39 Ltd. Partnership inherited a dream deal with the port, a 65-year claim on a gold mine.

Shops and restaurants from all over the country want a storefront at the third-most-visited tourist spot in the world, and they pay handsomely for it. According to Pier 39's leasing office, Pier 39 charges its retail subtenants $3 to $18 per square foot per month, or a percentage of their gross sales, whichever is greater.

On top of rent, subtenants pay 2 percent of their gross sales (after taxes) for general marketing and promotion, plus $2 per square foot per month for common area maintenance. In fees alone, last year subtenants paid roughly $7 million.

Pier 39, on the other hand, has been paying the port, on average, about $1.2 million in total rent over the last five years -- or roughly 7 cents per square foot, per month.

The way in which Pier 39's lease payments are calculated, combined with strange lease provisions that allow Pier 39 to be both landlord and tenant at the site, leaves the partnership in a monopolylike situation that John D. Rockefeller might well have envied.

Under the lease, Pier 39 must pay the port $500,000 in base rent, plus an additional amount that is calculated as a percentage of the rent that subtenants pay to the partnership. But the Pier 39 partnership is in a position to minimize that "excess" rent, because the Bass brothers, who control the partnership, also control many of the businesses that pay rent to the partnership as subtenants.

In the end, even though Pier 39 reported $125 million in gross retail sales in 1996, additional rent paid to the port was calculated on only $20 million of those sales. And Pier 39 paid only 7 percent of those reduced sales figures to the port.

The Pier 39 lease even limits how much Pier 39 must pay the port when Pier 39 has a hugely profitable year and gross revenues exceed $15 million, as they have for at least the last five years.

Paul Osmundson, director of planning and development for the Port of San Francisco, admits that the lease has "several problems" that can be summarized this way: The port gets very little, and Pier 39 gets a lot.

"There was nothing in the lease that provided for a case in which Pier 39 did really well, which they have," says Osmundson. "But there's nothing we can do about that now, because it's in the lease."

Critics have long questioned the fairness of Pier 39's arrangement with the port.

A 1990 report by city Budget Analyst Harvey Rose showed that Pier 39's monthly rent was less than the rents paid by most other Port of San Francisco tenants in the Fisherman's Wharf area.

According to the report, restaurants paid an average monthly rent of $1.88 per square foot, while retail stores paid about 70 cents per square foot.

More recently, at the port's request, analysts Keyser Marston Associates reviewed 16 restaurant and retail leases in the same area in 1995. They concluded that Pier 39 and several other tenants with master leases with the port were getting a very good deal indeed:

"Despite the tremendous value conferred on business opportunities by the locational advantage of the properties leased by the Port, the current rental structures of the subject leases falls short of the leasing practices observable in the market place," the report said. "KMA suggests that percentage rents be increased to market levels."

And the deals appear to keep coming. Last June, Crowley Maritime sold most of its Red and White Fleet and its lease at Pier 41 to Pier 39's Blue and Gold Fleet. The sale made Blue and Gold the largest tour and ferry boat company on the waterfront.

The port knew that Blue and Gold was getting a very good deal on its lease for Pier 41. Seven years earlier, the city budget analyst had told the city and port that then-tenant Red and White was paying roughly 31 cents per square foot each month, while other port tenants were paying 59 cents on average.

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