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Port Will Pay $3.5 Million to End Rift Over Trade Center : Development: Both sides are pleased to end the dispute over office space that the harbor leased but never used.

TIMES STAFF WRITER

To end a leasing dispute with developers of the World Trade Center, directors of the Port of Long Beach have consented to pay about $3.5 million of public funds for renting three floors of prime office space the port never used.

The agreement settles a long-running squabble that created a rift in the normally cordial relations between the port and the business partnership that is developing the trade center complex on downtown land owned by the port.

Eager to smooth the waters, both sides say they are happy to have the dispute behind them.

“Obviously I think it’s a good settlement or we wouldn’t have made the agreement,” observed Robert Langslet, president of the Long Beach Harbor Commission, which oversees the port, the second busiest in the nation. “I think it’s fair to all parties.”

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While the port agreed to pay $3.5 million to extricate itself from an $8-million, five-year lease for office space at the World Trade Center, the center agreed to increase its payments for the use of four adjacent vacant lots slated for development as part of the complex.

The dispute centered around an unusual and little-known pact first outlined in 1986 between the city-owned port and IDM Corp., the largest real estate development company in Long Beach. The port had chosen IDM and Kajima International Inc., a subsidiary of one of Japan’s largest construction firms, to develop the trade center complex on a 12-acre tract assembled and cleared by the port at a cost of $30 million.

Concerned that construction had not yet begun, the port in late 1986 committed itself to leasing 60,000 square feet, about three floors, in the trade center’s first building, a 27-story office tower.

“We are acting now . . . as an additional incentive to start the building as soon as possible,” wrote James McJunkin, then the port director, to IDM President Michael J. Choppin in a letter cited in Superior Court documents.

In a recent interview, McJunkin said Kajima wanted IDM to come up with more leasing commitments before it would start construction. Ground was broken on the project soon after the port said it would take three floors.

But while McJunkin said that the port was initially considering moving its offices into the new building, subsequent letters between the port and IDM made it clear that the port administration had no intention of moving from its seven-story building in the harbor area to the trade center. Instead, the port said it would help find other tenants for the three floors, with the understanding that once those tenants signed leases, the port would be released from its obligations.

In May of 1989, the same month the office tower opened, those terms were finally written into a formal, five-year lease agreement involving 53,371 square feet, according to court documents.

Problems emerged when the port later that same year said it had lived up to its end of the bargain by helping the trade center land one of its biggest tenants, the U.S. Customs Service, along with two other companies, which together occupied three floors. It was because of the port’s lobbying efforts that the customs office decided to move its Pacific Region headquarters from downtown Los Angeles to the Long Beach trade center, port officials said. The developers disagreed, contending that the port had not been that helpful and insisted the port was still liable for its leasing commitments--which at $135,000 a month rent for five years, amounted to a total of $8 million.

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Last October, the port filed a lawsuit against the partnership, Greater Los Angeles World Trade Center Associates, withdrew it after a settlement was reached, and then refiled it again last month after the settlement fell apart. A second settlement was approved last week by both sides and is now being finalized by the city attorney’s office.

“The dispute’s been resolved to everyone’s satisfaction and we’re looking forward to the continued development of the World Trade Center site,” said Jim McMillan, vice president of marketing and communications for IDM, declining further comment on the matter. He said 75% of the center’s office space has been leased.

Steven R. Dillenbeck, harbor executive director, said the new settlement calls for the port to pay slightly more than two year’s rent for the three floors, or about $3.5 million, to the trade center partnership, which will then release the port from the remainder of the lease. The payment will take the form of credits on the rent the trade center owes the port on its land lease. The partnership now pays about $600,000 a year for the office building site, and will pay similar rents on other portions of the complex as they are developed.

Under the settlement, the trade center also will double its payments to the port for use of four adjoining vacant parcels slated for development.

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In an exceptionally generous arrangement, the port has been letting the trade center use two lots free of charge to park equipment and trailers needed for construction of the center’s second phase, a 400-room Hilton hotel now under way. It has charged $12,300 a month for another two parcels the center uses for paid parking.

Now the trade center will either pay the port a total of slightly more than $23,000 a month for all four lots or 50% of its gross parking receipts, whichever is greater. It is expected the parking receipts will be the larger of the two after the hotel opens, but in the meantime the port’s rate of return on its initial investment in the lots will be less than 4%, lagging behind inflation.

The port’s commitment to lease three floors of an upscale office building that had not been built was unprecedented for a public agency in Long Beach. “I certainly have never seen it before and I know of no other arrangement in the city like that,” City Auditor Robert Fronke said.

Port officials defend their action, saying it was necessary to get a highly desirable development project started.

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“It’s part of the cost of the project,” said Langslet, the harbor board president. “We’re going to come out fine on it. It’s another showing of what the port has done to help the city,” he continued, adding that he expected IDM to eventually exercise its option to buy the 12-acre trade center site from the port at market value.

Fronke added: “If it was a deal maker or a deal breaker, then the action was appropriate. The deal was too important to the city to let it get away.”

Still, some in the real estate business expressed concern. “Not very prudent of those gentlemen is it?,” observed a commercial real estate broker. “Sort of wasting public money.”

He argued that by saying it would lease private office space it didn’t need and didn’t use, the port was in a sense creating a false picture of market demand.

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Mayor Ernie Kell, who appoints the harbor commissioners, said he thought the port was wise to settle the legal fight. Of the original leasing agreement, he said, “I think it might have been a mistake to do that, but that’s hindsight. We had other developers that were willing to build it without those conditions.”

He added, “I’m sure it was a business decision, and I don’t have any quarrel with that.”

WORLD TRADE CENTER, LONG BEACH

Height: 27 stories.

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Size: 553,000 square feet/office, retail space.

Opened: May, 1989

Occupancy: 75% (office space)

Location: Ocean Boulevard, near Long Beach Freeway (710)

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Developers: IDM Corp., Kajima International Inc.

Source: Port of Long Beach


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