$11.2 Million In Rent Losses Add To San Diego’s COVID-19 Budget Woes
Wednesday, May 27, 2020
Photo by Zoë Meyers / inewsource
UPDATE: 4:30 p.m., May 28, 2020
By the end of June, San Diego estimates it will have lost $11.2 million in deferred rent payments on city-owned properties because of the coronavirus pandemic, and the number is expected to continue to grow.
inewsource talked with about a dozen lessees that the city identified as behind on rent, and their stories revealed a variety of challenges. Some were already delinquent and said the economic fallout from COVID-19 has added to their worries. Others said accounting errors were to blame. And some said they had fallen briefly behind on rent but hoped to catch up.
Multiple lessees said they’ve lost sleep over the financial stress.
The list includes a bait shop, a company that trains Navy SEALs in skydiving and a dozen nonprofits that help everyone from the elderly to young children. Properties range from parking lots to land outside the city limits to some of San Diego’s most prime real estate.
For some, COVID-19 has crushed business as usual.
“The revenue has absolutely come to a screeching halt,” said Evans Hotels executive Bill Evans, whose company owns The Lodge at Torrey Pines in La Jolla and other hotels with city leases.
By mid-May, 46 lease contracts were listed as owing money for April or May, or both months, according to records inewsource obtained. For comparison, just nine leaseholders still owe money for January or February – meaning most of the rent losses occurred after the pandemic hit the region.
The city generates about $85 million annually from rents on 415 properties it owns.
As businesses and nonprofits struggle to stay afloat in the midst of economic shutdowns and record-breaking unemployment numbers, the city faces revenue deficits in excess of $350 million. Most of its financial problems come from plummeting hotel room and sales tax revenues. But in providing leeway for its renters, which is allowed under an eviction moratorium ordinance the City Council passed in March, San Diego’s budget faces further stresses.
Mayor Kevin Faulconer’s latest budget proposal shows $4.6 million in potential rent losses due to COVID-19 in the fiscal year that begins July 1. Eventually the city hopes to recoup the money, because none of the rent due is being erased. The lessees still owe the money, they just have more time to pay.
Councilmember Scott Sherman, who sits on the council committee that’s responsible for city real estate assets, called for understanding on missed rent payments and said the city should try to help out tenants “as best we can to the ability we can.”
“It’s quite frankly a drop in the bucket compared to the overall deficit,” Sherman said.
But he acknowledged problems may worsen in the months ahead, with commercial buildings possibly sitting vacant if consumer spending doesn’t bounce back.
Revenue losses add up in Mission Bay
One of the reasons San Diego’s rent losses are expected to grow is that many of the highest payments are from agreements that require businesses to pay a percentage of their earnings to the city. Most of those invoices aren’t due until a month after the rent period. For example, May rents are not due until June 30, said Racquel Vasquez, a spokeswoman for the Real Estate Assets Department.
Losses from properties such as SeaWorld and the Bahia Resort Hotel on Mission Bay, which pay the city a percentage of their revenue, will be significant.
Over half of the yearly revenue the Real Estate Assets Department receives comes from Mission Bay leases and concessions, said Angela Colton with the Independent Budget Analyst’s Office, which advises the City Council. Many of those properties have had to close during the pandemic.
This economic downturn “doesn't track and trend exactly like previous recessions, so it's harder to gauge and it's harder to predict what's going to happen,” Colton said.
“The timing is unique as well because it's hitting right at the time we're trying to put together a budget for the upcoming fiscal year with all of these unknowns,” she said.
Evans said all of his company’s properties have received rent deferrals from the city. That includes the Bahia Resort and Catamaran Resort on Mission Bay and The Lodge at Torrey Pines.
“We have not paid the minimum rent because legally we’re not required to do so,” he said.
But Evans wants the city to go further and forgive minimum rent due by any lessees during required closures. His company’s properties sent letters to the city in late April requesting “near-term” waivers of minimum rent and calling for “discussions to adjust our future lease obligations.”
“We understand that the city has major revenue shortfalls that are coming, but for them to forcibly close us, our ability to do business, and then demand full rent payments. It's wrong on many levels,” Evans said.
Mission Bay parks and walkways remain largely closed to the public, and access to the Catamaran’s dock has been blocked off.
The Bahia, which is still open and renting rooms primarily to doctors and nurses, has single-digit to low double-digit occupancy rates and is losing money every day, Evans said. The hotel’s revenue is down 95%, according to the letter it sent to the city. In April, its revenue was about $100,000 compared to more than $2.5 million for the same month last year.
Even so, he said, all of his company’s properties are still making some rent payments to the city based on a percentage of their current reduced revenues.
Local businesses see revenue dry up
As of last week, 44 of the city’s 415 leased properties requested rent deferrals.
Kenton Properties LLC, a commercial real estate company, is among the lessees that ran into trouble paying rent. It owes $6,180 to the city for a small parking lot it rents to Modern Times Beer and a second tenant in Point Loma.
General Manager Art Bleier said he was grateful to the city for allowing Kenton to defer its rent for April and May, but the company plans to be caught up by June 1 because its tenants are now able to pay. Kenton’s revenues rebounded a bit in May after a bad April, he said.
"By the city offering what they did, it took the impact away from us,” Bleier said.
Everingham Bros. Bait Co. also received a rent deferral from the city. The longtime San Diego business leases water from the city for its live bait barge in Mission Bay.
“We lost all income in the middle of March,” owner Buck Everingham said.
The timing was bad. The company relies on making most of its money for the year during the fishing season, which typically runs from March to October or November, Everingham said.
The company initially missed its $7,429 May rent payment but has since paid the city in full after securing a Paycheck Protection Program loan as part of a federal coronavirus relief effort. The loan covers certain costs over an eight-week period, including for payroll and rent.
Private boats have resumed fishing, but the county health department has yet to allow sport boats, which Everingham said make up about 75% of his company’s income.
Everingham said he doesn’t know what the future holds. He has about 50 employees and is relying on the PPP money to pay his rent and staff salaries. Once that runs out, he said, he’ll have to reassess but worries about his employees and their families.
“What devastates us, devastates them in turn,” he said. “It’s emotional. We’re very tight-knit.”
CORRECTION:An earlier version of the story had the wrong location for the bait barge that Everingham Bros. Bait Co. leases from the city. It is in Mission Bay.
inewsource intern Natallie Rocha contributed to this report.
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