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A Look At The Latest Market House Lease

| January 19, 2011, 01:15 PM | 9 Comments

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UPDATE: Added contact information (blog, phone, email) for Mayor Cohen at end of post

Yesterday, Annapolis Mayor, Joshua Cohen released the final “agreed upon” lease for the Market House between the City and Gone To Market, LLC. The initial lease was presented to the City Council late last month but with glaring holes as the two sides seemed to be at an impasse.

Many council members believed that the lease would never come to fruition and the “word on the street” was that Lehr Jackson, principal with Gone To Market, was ready to pack his bags and head back to Baltimore.  But the two sides ironed out a lease on Friday and it was distributed yesterday afternoon.

We spent the morning scanning the 41 page document and have come up with some questions and concerns. As a disclaimer, these concerns are based on general observations and from a non-legal, non-real estate mind. Any of our attorney or real estate professionals who read this site are encouraged to chime in and opine in the comments section.

The Main Issues

  • Opening Date. The opening date of the Market House is undetermined. At different points in the document, it fluctuates between July of 2011, October 2011, and march of 2012. Yet the Gantt chart for construction indicates July.
  • Operating Expenses. Any rent the City receives is based on profitability. To determine profitability, you take the revenue less the operating expenses. The language defining operating expenses seems very weak and includes provisions for two salaried positions (salaries undefined) of a property manager and a leasing manager. A $120K a year property manager could easily mitigate any profits.
  • Auditing. It is up to the Gone To Market to tell the City how much they made and to pay the appropriate sum for rent. While the City “may” audit the books, it might make more sense to require an audit of the books to assure that the City is recovering all that they can from the Market House.
  • Property Taxes. Gone To Market is exempted from paying property taxes on what is arguably the most valuable piece of real estate in Anne Arundel County. Granted, the City is the owner of the parcel, but in most commercial leases, the property taxes are passed through the owner to the tenants and then divided up based on the individual proportionate share.
  • Property Management. This ties into operating expenses. The tenant is allowed to hire one or more persons to be on site during operating hours. The operating hours are 10 hours per day (more on that) so this implies that it will either involve multiple people or significant overtime to achieve.
  • Hours Of Operation. The lease stipulates that the hours are to be 8am to 6pm except Sundays and holidays. Does this mean that it is closed on Sundays or holidays? Open longer? Open shorter? Is 8am to 6pm the ideal time frame for a market to be open? Will the Market House lose any early morning business by not being open earlier? Will they lose any dinner (eat in or take out) business by not remaining open past 6pm. One of the issues most downtown merchants face is that they are not open when their customers want them to be open.
  • Termination. Gone To Market can get out of the lease after 5 years for essentially any reason. The initial term is for two years, followed by extensions (if accepted) of three years, followed by another extension of five years, followed by two more extensions of ten years. However, for the City to terminate the lease, there have to be specific reasons (financial gain is not allowed) and must be sent through the Council. There is a fee/penalty to be paid to Gone To Market or the City for early termination and it appears to be a fair and impartial process.
  • City Required Work. The City is being required to do substantial work which has not been detailed, but bulleted, in the document. The City is preparing to spend an unbudgeted $600,000 to facilitate this work. People familiar with the construction industry feel that the cost is significantly underestimated (closer to $1 million) and the time scheduled allotted is unreasonable. However, the City (hopefully) can fastrack any permits and approvals needed to move this project forward.
  • Marketing. We could not find any specific mention of marketing the Market House which has been essentially closed for six years. However, the Gantt chart indicates that this is the responsibility of the City and is to take place between  February 1 and March 15. Alderman Sheila Finlayson (Ward 4) has been asking for a marketing plan for several months with little result.
  • Financial Assumptions. The second to last page of the document offers a snapshot of the finances associated with the Market House. While the numbers appear to be encouraging, the question is raised, are they realistic? We are dealing with a 5,000 sf building and Gone To Market is anticipating rental income of $78 per square foot.  For a 250 square foot vendor stall this will equate to nearly $1700 a month in rent for a 16′ x 16′ space. Will vendors selling the types of products (aside from the one chosen to sell alcohol) mandated by the lease be able to sustain their businesses? Looking at some other local commercial properties, 24 Annapolis Street in West Annapolis is asking $24.00/psf,  109 Main Street is asking $20.77/psf. And the most expensive one listed is at 45-47 State Circle at $45.00/psf.  Is the location of a vacant Market House enough to command nearly 4 times as much rent?

Please take a few moments to review our marked up copy of the lease and please leave leave your thoughts in a comment.

The Next Steps

Since everyone wants to get this debacle behind us, the remainder of the process is being fast tracked. The time for public input is on Monday. If you have concerns, Monday’s special meeting at 7:00pm will be your only opportunity to voice them to the City Council as whole. Additionally, please contact your Alderman with any concerns–you elected them, let them serve you. If you are not sure which Alderman represents you, please consult the City’s Ward Map.

  • Monday, Jan. 24 7:00 pm at City Hall in Council Chambers: The City Council will hold the public hearing on the lease and all legislation on the Market House
  • Wednesday, Jan. 26: The Economic Matters Committee will review business and marketing plans from Gone to Market.
  • Monday, Jan. 31: The City Council will hold a special meeting to consider a final vote on the lease and related legislation

If you’d like to leave a comment for Mayor Cohen, you can do so on his blog , via e-mail , or call the Mayor’s office (410-263-7997).

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Comments (9)

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  1. If you’d like to leave a comment for Mayor Cohen, you can do so on his blog (http://www.mayorcohen.com), via e-mail ([email protected]), or call the Mayor’s office (410-263-7997).

    Phill McGowan
    Public Information Officer
    City of Annapolis

  2. Bob McWilliams says:

    There should be a Marketing Plan and a 5 year projected P&L. Otherwise, the City is just shooting in the dark, with no estimation of expected revenues or an idea of how those revenues will be generated. There’s no benchmark by which to evaluate progress.

    The absence of some sort of base rent is an especially bad idea. Even if the place is successful and Jackson make lots of money, it will be easy to show no profit.

    The lease is unbalanced, in that there is little risk and practically no initial investment for GTM.

    The City has put themselves in a weak negotiating position by not having other options. They put all their eggs in one basket with GTM, just as they did with D&D and site. You can’t cut a good deal, if you counterpart knows you have nowhere else to go.

  3. ed says:

    if the city is going to get bent over and give away the property for no rent, and no tax revenues, why not turn it into a farmers market, where any of the maryland farmers who are already going bankrupt can come and sell their fresh food stuffs and take home the modest amount that they would earn from their sales.

    – no renovation required
    – no property managment salary
    – income goes directly to maryland economy
    -annapolitans are provided with healthy nourishment
    – city government looks good for taking care of people

    why the heck should our tax dollars go into the pockets of the wealthy baltomorons who are in bed with the mayor?


  4. Bob McWilliams says:

    Ed may have a point. If you’re not going to get any revenue, why sink another $600,000 into the place?

  5. Fred Shubbie™©® says:

    Ed, why did you use the term “Baltimoron”? Have you seen the vibrant and money making inner-harbor lately ? Annapolis can only dream of attracting crowds like they do. And by Hiring out of town consultants and lawyers and such, Cohen is simply making the unspoken point that Annapolis has NO TALENT !!

    But if he thinks he can import the attractions and the vibrancy of the places from which he selects his ‘partners’, he really should take the time and reconsider that possibility.

    yippee tie yo, tie yay . Aunt Bea’s pies !!!—what a great name for a new Market House vendor !!!

  6. Bill Kardash says:

    The more I read the MH lease, the more red flags I see:
    1. LJ can walk on the lease if no beer/wine license is gotten .. this tells me the real profit expected is from the sale of beer/wine .. not the food stuffs we are lead to believe and the community desires;
    2. the 50-50 split really doesn’t work out that way: even using the example in Exhibit F, the Tenant is entitled to a 2% of gross sales “asset mgmt fee”. Per the example, this works out to be $98K. Then the City and Tenant split the “net revenues”: that gives the Tenant $45,500 more. Add both and the Tenant will get $143,500 while the City gets $45,000. Thie is more like 75-25, with the City on the short-end of the stick.
    3. the Tenant can deduct any capital (improvement) expenses over 10 yrs … PLUS the depreciation that goes with these expenses.
    4. all these operating expenses virtually guarantee the City won’t see a nickle for a long time. Since the Tenant gets 2% of gross sales from the start, they are protected.
    5. most small vendors will see most cash transactions. This will complicate monitoring gross sales and LJ and the City will see no benefit from these sales.
    6. the City’s commitment ti the buildout is (at least) $600K .. althought it could easliy be more. The idea that the City should bear this cost entirely is particularly galling. The City would be better off waiving the “net revenue sharing” and have LJ pay for the buildout. Let LJ make all he can so long as the tax-payer doesn’t have to subsidize a private enterprise.

  7. John Frenaye says:

    All good points Bill. I did not mention the liquor license since that seemed to be a mandate prior to even going forward with the negotiations. The legislation is already before the council and will likely be rubber stamped. And to be honest, having a beer/wine license at that location probably makes a lot of sense.

  8. Bob McWilliams says:

    The simple question is, “what, if anything, does Lehr Jackson have to lose in this lease”?

    The answer seems to be nothing. In fact, with the 2% gross sales management fee, he’ll probably make pretty good money no matter what happens.

    And, with a beer/wine license, no limit on the hours of operation, and free rent, I think Mickey Mouse could manage the place and still make money – even though the City won’t see a nickle.

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