Harbor House, the restaurant and bar at Pier A, has fallen behind by more than $1.7 million on the rent it is required to pay the Battery Park City Authority (BPCA). This arrearage began last April, when the proprietors ceased paying rent. As a result, the Authority has agreed to revise its lease terms with the operators of Pier A, and reduce their annual minimum rent.
At the December 11 meeting of the Authority’s board, BPCA general counsel Abby Goldenberg explained, “in 2011, the Authority entered into a 25-year lease agreement with the current operator of the restaurant and bar facility located at Pier A.” This lease required rental payments to begin in 2013, at an annual level of $750,000.
“As anyone who’s been to Pier A knows, it’s a unique property in a lot of good ways,” she continued. “But at the time that we entered into the lease, we were all sort of guessing about the profitability and the nature of the business model that could succeed there. Since then, we’ve obviously amassed additional data about the actual economics associated with operating that business, and we have received word from the operators of Pier A that the current lease structure is proving, in actuality, to be unfeasible. And, in fact, they have fallen behind in their rent payments as a result of the lack of feasibility from an economic perspective.”
The financial difficulty that Ms. Goldenberg described led the operators of Pier A to stop paying rent last spring, a situation that continued through October, when the BPCA agreed to begin renegotiating their lease.
“Obviously this is an important part of our community and our primary goal here is to have a successful business there and make sure that it continues to contribute to the thriving nature of the neighborhood,” Ms. Goldenberg added. “In the interest of that, we’ve worked with them to restructure to some extent the pertinent terms of their lease. The high-level summary of the revisions is that the rent will be based on a percentage of gross sales, with a minimum payment required — that being a million dollars a year annual minimum lease payment, or the greater of either a million dollars or seven percent of gross sales throughout the year.”
This marks are dramatic departure from the original terms of Pier A’s lease. That agreement required the operators to pay a minimum annual rent of $1.475 million in 2018, and to continue at that level through 2022. After that, the minimum annual rent was slated to rise to $1.6 million, through 2027. From the years 2028 through 2032, the minimum annual payment would have jumped to $1.75 million. Finally, it would have escalated to $1.9 million for the each of the five years starting in mid-2033, and ending when the lease expired, in mid-2038.
Under these terms, the operators of Pier A would have paid a total in annual minimum rent of $39.125 million through the lease’s end, in 2038. But an annual minimum rent of $1 million per year going forward will reduce the sum of these minimum rent payments to a total of $25 million (a figure that includes back rent, which must be repaid under this agreement) during the same period. This will represent a 36 percent reduction in their minimum annual rent over the duration of the lease.
The newly revised lease’s requirement that the operators of Pier A remit to the Authority their total unpaid back rent (of $1.7 million) calls for equal monthly installments over the remaining 20 years of the lease, apparently at zero interest.
Unchanged in the new lease is an additional obligation for the operators of Pier A to pay a supplemental rent of eight percent of all gross sales over $18 million per year. With gross sales of $17.3 million in 2016 and $17.9 million in 2017, Pier A has yet to reach this threshold. However, the seven percent levy on these sales totals, enshrined in the new lease, does amount to annual rent that is higher than the $1 million minimum payment cited in the same document, coming in at $1.21 million and $1.25 million for those years, respectively.
Also remaining from the original lease is a requirement that Pier A pay a second form of annual rent to the BPCA for the non-exclusive use of the public plaza in front of the facility, which the Authority renovated at a cost of $6 million. (This was in addition to $6 million the Authority spent to rehabilitate the structure of Pier A itself, combined with a further $30 million from the City’s Economic Development Corporation.) Pier A’s rent for the plaza is currently pegged at $65,000 per year, but is subject to periodic escalation.
“The other important thing to know,” Ms. Goldenberg added, “is that with regard to the money that is owed currently by Pier A, none of that money is being forgiven, all of it will be repaid. We’ve just restructured those repayments on a sort of ‘blend and extend’ model, such that those monies will be repaid in a manner that can extend over the lease.”
She continued that the new lease terms, “maintain a fair and equitable and reasonable rental payment to the Authority. But I think it more accurately reflects the realities. The net of it is that we do have a fair and reasonable revenue stream from the property.”
BPCA chairman George Tsunis responded, “I think this was a successful conclusion to something that could have gone bad very, very quickly. There is a little bit of relief on the downside, if their seasonality of business does not turn out as budgeted. But we also were capturing, because of the higher percentage, the upside. So we’re sharing that with them.”
Mr Tsunis continued, “I also want to point out the immense — north of $20 million — investment that they made. And that there were assurances that the ownership and management did not take any monies out for management fees or distributions. They were truly struggling.”
He added, “there’s a subordination that they have to pay us first. And now there is a guarantee on payment, so we’re correcting something that was missing in the original lease. This was something that everyone here had eyes on and had input, and in my opinion was very fair and equitable.”
The BPCA’s flexibility on Pier A’s lease terms, and its willingness to offer significant discounts to the operator of an upscale restaurant that is struggling financially, may provide context and precedent to a separate set of negotiations, in which neighborhood residents (both rental tenants and condominium owners) are seeking relief from the terms of the ground leases that various apartment buildings have with the Authority, which threaten to make the neighborhood unaffordable to middle-class residents in the years ahead.
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