Port policy questioned after giving tenant $100K rent break

Landings at Colony Wharf employee Blane Jackson, right, helps steady a boat as its lowered into the water by a crane on Friday, June 17, in Bellingham, Wash.
Landings at Colony Wharf employee Blane Jackson, right, helps steady a boat as its lowered into the water by a crane on Friday, June 17, in Bellingham, Wash. eabell@bhamherald.com

In April, the Port of Bellingham commissioners effectively gave one of the port’s tenants a $114,000 break on its lease for the year, despite protests from competing tenants.

The Landings at Colony Wharf, a boatyard and barging facility that sub-leases its space to a variety of small ship repair outfits, was set to switch from a rental agreement based on a percentage of its income to a set fee of $16,300 per month on May 1.

But before the rent went up, the company asked the Port to continue the percentage rent that it had received over the last two years, under which rent worked out to an average of about $6,800 a month for 6.7 acres of land and 43,000 square feet of buildings.

The company has paid a percentage-based rent for about a decade and wanted to keep that format going while construction took place in the Whatcom Waterway and on land at the C Street Terminal, as that disrupted work at the business, said Mark Lake, one of five Colony Wharf co-owners.

The construction is part of environmental cleanup the port is completing as required by the state. The waterway work is nearly complete, but the upland work is set to start later in 2016.

The waterway work involved removing a hydraulic barge ramp that Colony Wharf used to unload barges. The company has had to change the way it can take barging jobs due to the ramp removal, Lake said.

“After all the construction that’s happened out there, and setbacks we’ve taken as a barging facility and a yard, it would be hard for us to make those kinds of payments,” Lake told the commissioners on April 19.

But competitor Phil Riise, owner of Seaview North boatyard, argued the commission would be creating an unlevel playing field among competing tenants on the waterfront by approving the extension.

He said he was happy with the higher rate he signed on for, but he wanted fairness.

“The rate has to be market, or damn close to it,” Riise told the commissioners. “It has to be competitive.”

Otherwise, Riise argued, the Port would effectively be subsidizing some facilities and not others.

He and other tenants called on the commissioners to reject Colony Wharf’s request, but it was approved 2-1.

$0.34 Price per square foot, per year, that Landings at Colony Wharf was supposed to start paying for land on May 1

$0.15 Price per square foot, per year, the company paid on average for land in 2015, under a rate that was extended through May 2017

Lake said it didn’t really make sense to him why people would be upset with Colony Wharf asking for help with its lease rate.

“If (Riise) needs a better rate, then he should go to the port and ask for it,” Lake said in an interview.

Leases vary from policy

Under existing practice, leases are negotiated on a case-by-case basis, and those that don’t meet rental revenue standards come before the port commission before approval.

During the April 19 meeting, Port Real Estate Director Shirley McFearin showed the commission some examples of other marine trades tenants’ lease rates.

They ranged from $3.83 per square foot to $9 per square foot — even though the Port estimated fair market values between $10 and $13 per square foot.

The Port usually calculates rents based on 9 percent of those rates.

So Colony Wharf, starting with a rate of $3.83, was supposed to start paying about 34 cents per square foot per year for land on May 1, with higher rates for its buildings.

But in 2015, under the percentage rates that the company will receive through May 2017, Colony Wharf paid about 15 cents per square foot per year for land — which is like having a rate based on $1.61 per square foot instead of $3.83.

That type of gap between policy and the actual lease rate highlights a Port-wide problem, Commissioner Mike McAuley said.

“For me, it’s really Colony Wharf is a poster child for a conversation that’s much bigger than just them,” McAuley said in an interview.

About four years ago, McAuley requested port tenant lease information from staff so he could look it over.

“It’s a very, very wide-ranging number between the lowest lease rate and the highest lease rate, and I’ve been troubled with it ever since,” he said. “Port staff are always arguing up toward the ceiling, tenants are arguing back toward some magical number.”

To change the way that the Port operates those leases, and to support marine trades, the commission directed staff to put together a lease policy that would relate specifically to the marine trades.

It’s hard to say everybody is going to pay the same rate. But I’m trying to come up with a more definitive policy that the commission can live with.

Shirley McFearin, director of real estate for Port of Bellingham

That could include setting a floor that would be the minimum rate the Port could charge, McAuley said.

But Commissioner Dan Robbins said he doesn’t think that tenants would like it if the Port were to set a baseline.

“I think the Port staff in the past has done a good job of saying are they in charge of their dock, their bulkhead, their building, or are we responsible?” Robbins said. “There’s so many variables. To put a flat fee on it, we can do it, but it’s going to mess everything up because it’s not going to be fair.”

Robbins said he thinks the Port’s current system, which allows for case-by-case evaluation, works.

“There’s always extenuating circumstances,” McFearin said. “It’s hard to say everybody is going to pay the same rate. But I’m trying to come up with a more definitive policy that the commission can live with.”

She will look at rates among like-for-like businesses, what other ports around this area charge for leases, and what private sector landlords charge as well, to make sure that the Port does not undercut the private sector, either.

“There’s no easy answer,” McFearin said.

Other tenants unhappy

Riise wasn’t the only tenant who was dissatisfied.

Paul Burrill of Sound Pacific Seafoods told the commission his company pays the high end of the range, and they were initially OK with that, until they saw what other tenants were getting.

“If this lease rate is set this low, it could cause problems with lots of other companies wanting to come back and renegotiate,” Burrill said.

Burrill’s business partner Brian Pernula also expressed his frustration with the rates in comparison to what their company pays.

“We talked about renegotiation, and we were told that wasn’t really an option because all tenants pay the same amount based on the square footage,” Pernula said. “Since fair is fair, we signed the line. The joke’s on us.”

Lake said he wants the other tenants to do well, and they should ask the Port for support for their businesses, too.

“If (Pernula) starts doing well and gets a new bulkhead put in, I’m not going to go ask for that for me now,” Lake said. “I’m my own person, we’re our own company, and we’re going to do what’s best for us, the marine trades and the community.”

Riise said in an interview that when he asked for a percentage deal, the Port explained that was the exception among its properties.

Colony Wharf owned the property it is leasing for many years, then sold it to the city of Bellingham in 2006 for $3.28 million, or $11.04 per square foot, including buildings.

It then leased the property back from the city at the percentage rent.

When the Port took over that lease, the decision was made to ease the company up toward the types of rent that other tenants pay, McAuley said.

Riise said he understood that, but he thinks extending that type of lease would burden taxpayers.

“I’m about everyone getting a fair lease but still have the Port be able to collect rents and be able to do the necessary infrastructure,” Riise said. “If everyone were able to do business like Colony Wharf, the taxpayer would have to make up the difference. I don’t think that’s the right thing to do.”

It’s not like we’re taking these buckets of money and burying them at home. We’re investing our money back into this business.

Mark Lake, co-owner of Landings at Colony Wharf

Robbins said he voted against extending the percentage-based rent another year for similar reasons.

“We’re giving away taxpayers’ money, below what a market rate should be,” Robbins said.

Robbins also said he thought that the Port should have a policy requiring any tenants seeking a rent reduction to show financially that it is necessary.

“I don’t think any tenant that comes before the Port of Bellingham for a rent reduction should be able to even open up their lease without showing us their financials to see that there’s a problem and understand why,” Robbins said.

Lake said that at the end of the day, Colony Wharf is not getting rich off the operation.

“It’s not like we’re taking these buckets of money and burying them at home,” Lake said. “We’re investing our money back into this business so hopefully in 10, 15 years we do have a strong business. That’s the whole goal.”

Samantha Wohlfeil: 360-715-2274, @SAWohlfeil