I've been holding off writing about West Street Market, because any time a stream of negative news emerges about West Street Market, the tenants seem to suffer. Specifically, Rick Martinez of West Street Wine Bar mentioned when Reno Gazette Journal last year said the market 'could close', traffic counts went down significantly at West Street Market.
However, now that both Downtown Marketplace and Reno Envy are no longer tenants, it raises new issues with revenue coming in to cover expenses associated with the market and its lease. So last month, City staff was instructed to return to the council with several options for West Street Market in March.
There are several factors that has put the market in the position it is in today:
1. The Projected General Fund Subsidy - When the market was constructed it was projected that the market would have a net income by 2008/2009 fiscal year. However, since the opening of the WSM, the Redevelopment Agency has provided a subsidy to manage, operate and promote the market. For Fiscal Year 2010/11 that subsidy is estimated to be $180,000. The market will need $200,000 in fiscal year 2011/2012 to remain open due to a significant reduction in tenants. Since the market opened, Reno Envy, Earthly Delights, Brickhouse Bakery, Downtown Marketplace and a few interior craft booth spaces have left. Since the Redevelopment Agency budget is projected to have no funds available for this project in Fiscal Year 2011/12, any WSM subsidy would need to have an identified funding source, such as the General Fund.
2. Master Lease - On January 30, 2008 the Agency Board authorized a lease agreement between BF Management and the RDA. This lease is for a ten year term, and expires on April 2018 and the lease payment is approximately $144,000 annually (with a 3% annual CPI Adjustment) plus taxes, maintenance, utilities and security. The lease states the tenant will operate either as an urban/farmers market or another food and entertainment venue. Any other use will first require approval of the landlord. Terminating the lease early would have significant legal consequences and expenses.
3. Sub Leases - The WSM currently has five tenants: The West Street Wine Bar, Se7en Teahouse and Bar, Nikos Greek Kitchen, Nevada EcoNet and Great Basin Basket. With the exception of Great Basin Basket, all tenants are halfway through a five year term, and have an additional five year option at the end the first term.
4. Reduction in Staff - In January 2010 the RDA eliminated the Market Manager position. At that time one of 2.5 remaining RDA staff members continued to work on the project. In April 2010 the RDA was reduced to 1.5 full time staff members. At this time, given necessary reductions to address Fiscal Year 2010/11 revenue shortfalls, there will be no remaining Agency staff to continue the day-to-day operations of the WSM.
5. Capital Improvements Not Completed - The RDA was unable to complete physical improvements at the WSM due to lack of funding and job creation. In November 2008 the Agency Board approved the use of additional CDBG funding in an amount not to exceed $197,000 to complete Phase III improvements to the West Street Market. Prior to completion, two items were postponed due to insufficient job creation required by using CDBG as the funding source. The outstanding improvements included common area floor finishing ($20,000) and roof repair ($25,500).
Quite a situation yeah? So given these challenges, staff will present several options to the city council today for the council to consider:
1. Maintain the Original Vision for the WSM: This option would direct staff to continue towards the vision of an urban farmers market. Additional funds would be required from outside the RDA to implement the original vision, including completion of construction not finished due to budget and job creation limitations. Staff estimates a need of between $150,000 and $200,000 for annual operations, depending on occupancy, for the next seven years, and $50,000 for improvements to the buildings to continue the original vision of the market.
2. Change the Vision of the WSM: Depending on policy direction, this option could necessitate additional renovations of the building, renegotiation of leases with all the tenants, and review of tenant compliance by City departments. As part of this option, a current tenant has expressed interest in the RDA applying for a Special Use Permit (SUP) for the property. If granted, this permit will allow tenants to operate a full bar with bands and other live entertainment seven days a week. The activities at the market may require the Redevelopment Agency or the tenant to secure licenses or permits which will accommodate the frequent use of the space for the sale of alcohol and band performances within the same space. The WSM would continue to operate at a loss under this option and a funding source other than RDA would need to be identified for Fiscal Year 2011/12, estimated to be up to $200,000 for annual operations, depending on occupancy, for the next seven years, and $50,000 in improvements to the buildings.
3. Sub-lease the Property to a Single Entity: This option could alleviate the financial burden of an annual subsidy from the RDA to the WSM, but would require the relocation or lease termination of several or all tenants. Selection of this option will require staff to return with a full analysis including possible single uses or tenant for the site. For the past several months staff has been working with several developers and real estate brokers on the possibility of this option with no success or interested parties.
4. Close the WSM: Currently the WSM operates with an estimated $200,000 annual loss. This subsidy from the RDA can no longer be afforded in Fiscal Year 2011/12. If staff is directed to keep the WSM open in any capacity, funding would need to be provided by the General Fund or other identified funding source. If the Agency were to abandon the idea of the WSM, staff would need to negotiate with the landlord on the termination of the Master Lease, or default on the Master Lease. Each of these options would expose the Agency to substantial legal liability based on an approximate estimation of non-payment of monthly rent through the remaining term (seven years), in addition to taxes, maintenance (NNN Lease), and legal fees.
5. Develop Community Space: This option would involve the sublease of existing vacant space to the City’s Parks, Recreation and Community Services Department (PRCS). Operated as a City facility, the WSM could serve as a downtown community center providing additional services programmed through Parks and Recreation and COmmunity Services. Programs offered could be senior dances, age appropriate youth events during the summer, or other similar activities, depending upon available Department budgetary funding. Under this option, the WSM would continue to operate at a loss and the funding source would be from the sublease to PRCS for Fiscal Year 2011/12 though Fiscal Year 2017/18. As in Options #1 and 2, it is estimated that between $150,000 and $200,000 will be needed for annual operations, depending on occupancy, for the next seven years and $50,000 in physical improvements to the buildings. The city would continue to try to find tenants for the remaining spaces. The addition of programmable lease space and/or tenant leases would reduce the $200,000 liability of the General Fund.
So those are the options for the city. No matter what, the market will continue to operate at a loss until the building is filled up. So do you like the community center idea? Would that work with West Street Wine Bar and Se7en as existing tenants?
I personally feel if the city lowered the asking lease rates to those comparable to other downtown properties, or perhaps even less because West Street Market is unfinished, they might have better luck acquiring tenants. For example, asking $3.35 per square foot for their front space ($2814 per month) for a space that receives little foot traffic in the winter and moderate foot traffic in the summer, just seems a bit high even with the common area maintenance fees included. Meanwhile, I found a listing for the Palladio last verified March 14, 2011, which is offering an 800 s.f. 1st floor retail space for $1 per square foot. Now I've been told by several commercial brokers that it's 'wrong' to compare asking rates of different locations solely by price per square foot. On the other hand, the Palladio space and street-front West Street Market space are nearly the same size, so it seems logical to compare the asking rates for both. Your thoughts on this? Any commercial brokers out there reading this? Is what West Street Market asking for in terms of lease rates fair and competitive in this economy?
The only way out for West Street Market is to become successful and fill the remaining tenant spaces. According to the staff report for today's meeting, no one is interested in leasing WSM as a single entity. It will cost more to close the market, back out of the lease, terminate the subleases and deal with all the legal fees than to keep it open, so closing it isn't really an option either. So it seems as though option 5 is the best choice. We'll see what the council decides today. What are your thoughts? I have some very intelligent readers, and would love to hear your ideas on what to do with the market.
Great write up on a challenging situation for the city. I'm a commercial broker, and agree and disagree with your thoughts. I don't feel the issue is high lease rates. And those commercial brokers who mentioned price per square foot should not be compared on a foot by foot basis were correct. For example with the Palladio unit you mentioned, the $1 per square foot lease rate doesn't include the building improvements that would have to be done including restrooms and handicap lifts since the spaces aren't truly at street level due to flood guidelines. The issue with WSM is that there is now a stigma attached to it because it's run and managed by the City of Reno. When Reno Gazette Journal reported the tenants were being stifled by the RDA and lack of staff to properly manage it, it send out a signal to people looking for retail space downtown to 'avoid West Street Market' at all costs. I've been approached several times by businesses looking for downtown commercial space and their request often ends with 'Anywhere but West Street Market.' That to me says the problem lies not with asking rates but the reputation of the market itself.