Marina del Rey Prospers at Expense of County : Real estate: Developers make big profits through favorable long-term leases. Public services lose out.

TIMES STAFF WRITER

It is one choice chunk of real estate--on the water, on the Westside, close to freeways and the airport.

Marina del Rey--anchored by the world's largest man-made small-craft harbor--is owned by the public and managed by Los Angeles County. The marina was conceived in the late 1950s as a money-making partnership between government and business.

But The Times has found that the partnership has, at the expense of the public, primarily benefited a small group of developers who operate the marina's apartments, restaurants, hotels, boat slips and shopping centers under long-term leases.

Ten years ago, appraisers hired by the county concluded that the marina land was being leased for far less than prime waterfront land would command in the private sector.

Independent real estate experts consulted by The Times say this practice continues today. The marina, which made a $15.7-million profit for the county last year, could generate three to five times that amount under the terms of the existing leases, they say.

The marina income has a direct effect on county services because it enters the county treasury with no strings attached. The Board of Supervisors can direct the money to the county's most pressing needs. A shortage of these funds in recent years has prevented supervisors from meeting urgent needs such as mental health, trauma care and AIDS programs.

County officials say they are doing their best to maximize revenue from the marina, but their hands are tied by leases written 30 years ago when the harbor was carved out of swampland south of Venice. The leases--most for 60 years--were designed to encourage development long before the marina was a financial success.

"It was just a dirty old slough, a mess," said Deane Dana, chairman of the Board of Supervisors, whose district includes the marina. "Nobody envisioned it becoming the wonderful playground that it is now. . . . It was a risky venture."

The county's management of the marina, Dana said, should not be judged by the standards of private business because the government is subject to pressures from numerous directions--including the public, marina residents, boat owners and leaseholders.

"It's difficult to run the county like a business," he said. "Government just can't get away with what you can in the private sector."

As a public facility, Dana said, part of the marina's purpose is to enhance the quality of life for county residents. "I liken (it) to our parks," he said. "Money isn't everything."

Today, Marina del Rey is at a turning point. County officials are engaged in private negotiations with leaseholders that could enlarge the county's share of the marina's profits or perpetuate the developers' advantage past the middle of the next century.

The county and developers have come to the bargaining table to address a mutual problem: The marina is aging, and not altogether gracefully. Its buildings and harbor facilities need to be renovated and, in some cases, rebuilt to keep Marina del Rey competitive with newer developments on the Westside. Before making additional investments in the marina, however, developers want the security of longer leases.

The leaseholders are proposing to pay the county some cash up front and promising to redevelop and modernize their holdings. In exchange, the county would extend the leases, most scheduled to expire in about 30 years, until at least 2062.

Over the years, the leaseholders have cultivated a close relationship with supervisors and officials who administer the marina, according to records and interviews.

The six largest leaseholders, who control nearly two-thirds of the leased property at the marina, are major campaign contributors to supervisors. Marina leaseholders and developers have given more than $500,000 over the past six years.

Some leaseholders also give gifts, such as more than $30,000 in free food and lodging at hotels and memberships in yacht and athletic clubs, to top officials in the Department of Beaches and Harbors, which manages the marina.

Over the last 15 years, the supervisors have made decisions that have greatly increased the income of the leaseholders and added tens of millions of dollars to the value of their marina holdings.

The leaseholders are not required to disclose their marina profits to the county or public. County officials recently estimated that one marina leasehold containing 204 apartments, 462 boat slips and a restaurant generated a pretax profit of $3 million in 1990 for developer Jona Goldrich. The county's 1990 income from that property was $942,000.

One major leaseholder, Douglas Ring, described Marina del Rey as "the greatest real estate investment in Southern California." Apartment developer Jerry Epstein said: "I'm not crying poverty. . . . We do very, very well."

Under individually negotiated leases, the county collects a percentage of each leaseholder's gross revenues. The county's share ranges from a few percentage points at some retail shops to 25% or more on some boat slips.

When the leases were signed in the 1960s, the county and leaseholders agreed to keep the percentages low for the first 20 years to encourage development. The county was then permitted to raise the rates to fair market levels--what a private owner would charge in the open market--but the county settled in the 1980s for considerably less than that.

In its inquiry, The Times consulted Fred E. Case, a retired UCLA management professor and an authority on Southern California real estate.

Case and other real estate experts say it is a fundamental precept of commercial real estate management that landowners seek an annual profit linked to the value of the land itself, whether publicly or privately owned.

"If the county is going to keep county resources tied up in marina land, it is in the interest of the taxpayer that the county be earning a market return based on the value of the asset," said David Dale-Johnson, director of the real estate program at USC's School of Business Administration.

Experts say that comparing Marina del Rey to other publicly owned marinas in Southern California is difficult because none are as large or diverse in their land uses. The most appropriate comparison, they say, is to the Irvine Co., which has an extensive leasing operation in Irvine and Newport Beach, where land values and rents are comparable to those on the Westside.

In its leases, the Irvine Co. seeks an annual pretax return of 9% of the land's value.

The Los Angeles County government is seeking a similar return on its land in downtown Los Angeles, where it negotiated a long-term lease with developer Maguire Thomas Partners for an office building project.

But at Marina del Rey, the county--even if it wished to do so--cannot adopt such a policy because officials do not know what the land is worth. No marina properties have been appraised since the mid-1980s.

"What the real value of that land is I can't tell you,' Ted Reed, director of the Department of Beaches and Harbors, said in a recent interview. "I don't know."

At The Times' request, Case performed a market valuation of the marina, a financial study that is less comprehensive than a formal appraisal. He estimates that the land at the marina is conservatively worth $1.4 billion.

Informed of this figure, Dana said: "I'd say that's probably right." Reed said he had "no reason to quarrel" with Case's estimate. "There's a finite amount of oceanfront, marina-front property available," he said.

If the marina is worth $1.4 billion, the county's $15.7-million profit last year was a return of 1.1%. In general, Case and other real estate experts say, an annual return of 10% on the value of the land is considered good, 8% is adequate, and 5% or below is substandard.

Rick Peiser, director of USC's Lusk Center for Real Estate Development, said that even in today's recession, a landowner would "probably seek something on the order of 8% (return) of the market value."

The county's marina return is low, Case concluded, because it is charging leaseholders much less than fair market rates.

Meanwhile, Case found, leaseholders are demanding full market rents from their tenants--the individuals who rent the marina's 5,314 apartments and 5,265 boat slips, and the merchants who operate businesses there. The result, he said, is a steadily widening gap between what the leaseholders collect and what they pay to the county. Leaseholders are pocketing this difference, which Case calls a "continuous unearned surplus."

In the short run, Case said, it may not be feasible for the county to earn 8%--$112 million a year--from the land because a lot of the land is committed to low-revenue uses such as boatyards and parking lots. Nonetheless, he said, "if they had market value leases, they could easily earn $50 million to $75 million."

County officials who manage the marina insist that the rents are at market rates.

They note that Marina del Rey, like other Southern California marinas, receives a percentage of the gross receipts collected by leaseholders--and that the percentages are comparable to those of other public marinas from Ventura County to San Diego.

"We do surveys periodically of what various public and private marinas are charging," Reed said.

Case said that is a "bad comparison" because the Westside location of Marina del Rey makes its land more valuable than any other publicly owned marinas in the Southland. Thus, he said, the income from Marina del Rey land should be greater.

Reed acknowledged that the county's $15.7-million annual profit was probably low, given the value of the land.

"It's not much, is it?" he said. "I can only answer that over a period of time that percentage will increase as provisions of the leases that we've negotiated kick in."

The leases signed 30 years ago, Reed said, contained "provisions (that) probably weren't as strong as they should have been."

The marina leases have become so valuable that a secondary market has developed in which they can be bought and sold much like conventional real estate. The supervisors have approved seven major lease sales, totaling $218.5 million, since 1984. Nearly all proceeds went to the leaseholders because the original leases contain no provision for the county to share in the profits when leases change hands.

Some developers use the leases as collateral for loans. Abraham M. Lurie, the marina's biggest developer, has told lenders that his lease on an undeveloped 3.7-acre waterfront parcel is worth $12 million--just the lease, not the land. He has borrowed $5 million against it. He pays the county $1,001 a month in rent on the parcel.

With such leases, Lurie and other marina developers control choice property for a fraction of what it would sell or rent for on the open market, Case said. Essentially, this allows them to build and operate commercial properties without having to fully bear the largest single cost usually associated with development--the cost of acquiring the land.

Even though the public owns the land, the county has yielded to the leaseholders much of the vast appreciation in marina land values since the 1960s.

The original leases were "very, very favorable" to the developers, Dana said. "That's why we've got to get back and renegotiate and get better deals by extending leases."

In the past, when the leaseholders and county officials have gone behind closed doors to negotiate changes in the leases, the leaseholders have won concessions.

In 1977, supervisors agreed to relax some lease terms that limited the profits the leaseholders could make. In 1984, after years of lobbying by leaseholders, supervisors lifted rent controls on marina apartments, and gradually removed price controls on boat slips.

The changes, which allowed apartment rents and boat-slip rates to rise higher than any Southern California harbor except Newport Beach, were unilateral acts by the supervisors. The leaseholders conceded nothing in return.

The biggest concession, according to experts consulted by The Times, occurred in 1989 at the end of a seven-year legal standoff. The marina leases signed in the early 1960s permitted the county to raise the lease rates to "market levels" after 20 years. So in 1982 the county began renegotiating and hired appraisers to recommend new rates for the 56 marina parcels.

The appraisers concluded that the county was charging the leaseholders far too little and urged sharp increases, according to reports obtained by The Times under the California Public Records Act.

"Land values along Southern California waterfronts have soared to unprecedented heights in the past few years," said Christy J. Petrofanis in his 1983 appraisal. The county "not only has a vested interest in the property, but is entitled to a reasonable return from it, much as would be the case with a private owner. . . . There should be an equitable sharing of income between the county and the lessee."

What was intended as a simple rent renegotiation process grew complex when several leaseholders filed suit against several appraisers, accusing them of improper appraisal practices. The suits blocked the appraisers from determining new rents. Rents remained stuck at the old levels while the lawsuits and negotiations dragged on.

The leaseholders threatened to hold out indefinitely if the county attempted to raise rents beyond what they were willing to pay.

Eventually, county officials, along with their new legal consultant, Los Angeles attorney Richard Riordan, offered to settle for far less than the appraisers had recommended.

Beaches and Harbors Director Reed, in a January, 1989, letter to leaseholder Selden Ring, described the range of rents that the appraisers had recommended for apartments and boat slips, then offered to settle for the bottom end of each range. The leaseholders would have to accept the offer quickly, Reed said, or the county would take them to court and seek rents in the "higher end of the ranges."

The leaseholders settled. They agreed to pay about $7 million in retroactive rent and interest for the period the rent levels were in dispute.

Riordan said recently that the leaseholders had been "jerking the county around," and that to settle the issue, "we gave them a little bit of a break."

The county accepted a 10.5% share of the gross receipts from the marina apartments, instead of seeking up to 16%, as recommended by the appraisers. Last year, a 16% share on the apartments would have brought in nearly $5 million more to the county general fund.

Westside real estate consultant Stephen Dietrich, who at The Times' request analyzed the 1989 agreement, said the supervisors passed up a major opportunity to bring the county's financial relationship with the leaseholders more into balance.

"The combination of the refusal to establish a minimum rent based on the value of the land and to adjust the percentage rentals to realistic percentages constitutes a gift," said Dietrich, whose clients include major Southern California developers.

Dana had no explanation when asked why the county had settled for less than its appraisers had recommended. "I can't answer that," he said.

Reed said the county agreed to the low settlement partly out of a desire "to break the logjam" and collect the retroactive rent.

"We needed the money," he said.

Major Leaseholders

ABRAHAM M. LURIE

Holdings: Marina Beach, Marina del Rey and Marina International Hotels; two apartment complexes; Fisherman's Village; Marina Beach Shopping Center, and Pier 44. For almost a quarter of a century, he has leased but not developed the last vacant piece of waterfront property.

Statistics: 267 apartments, 594 hotel rooms, 1,122 boat slips

The marina's biggest developer, Lurie sold a 49.9% stake in his marina properties in August, 1989, to a group of Saudi Arabian investors led by billionaire businessman Abdul Aziz al Ibrahim, brother-in-law of King Fahd. Since last summer, Lurie and the Saudis have been locked in a bankruptcy court battle for control of the properties.

JEROME SNYDER

Holdings: Marina City Club; also primary leaseholder of land subleased to Ritz-Carlton Hotel and Red Onion restaurant.

Statistics: 600 condominiums, 101 apartments, 335 boat slips.

Snyder and associates took over the Marina City Club in December, 1986, and converted the circular high-rise apartment buildings into condominiums, nearly 90% of which have been sold. But the project has experienced cash-flow problems recently. In March, Snyder owed Los Angeles County more than $859,000 in rent, but a substantial amount of the back rent has since been paid by his lender, the Aetna Life Insurance Co.

The RING FAMILY

Holdings: Four waterfront apartment complexes, including the marina's largest, 981-unit Mariner's Village.

Statistics: 2,235 apartments, 1,358 boat slips.

The complexes are owned by partnerships headed by members of the Ring family, including brothers Ellis (top) and Selden. Other investors include Selden Ring's son, attorney Douglas Ring (bottom); developer Jerry Epstein; and former state Sen. Alan Robbins, who resigned in November after pleading guilty to federal political corruption charges in Sacramento.

JERRY EPSTEIN

Holdings: Del Rey Shores apartments.

Statistics: 202 apartments; also has partnership interest in 846 apartments and 640 boat slips.

Epstein was one of the earliest Marina del Rey leaseholders. Long active in civic affairs, he serves on the California Transportation Commission and is former president of the Los Angeles Board of Airport Commissioners.

JONA GOLDRICH

Holdings: Dolphin Marina and Trizec Towers, a high-rise office complex.

Statistics: 204 apartments, 462 boat slips, a restaurant and two 12-story office buildings with retail and restaurant space.

A prominent developer based in Culver City, Goldrich is seeking approval of a precedent-setting deal to extend his lease on the Dolphin Marina complex until the year 2062.

Marina del Rey

Developed in the early 1960s, Marina del Rey covers 804 acres and contains more than 5,000 boat slips. An unincorporated community surrounded by Los Angeles, the marina is public property managed by the county government. The apartments, restaurants, hotels and other businesses are operated by private developers under leases with the county.

* Population (1991): 10,642**

* Ethnic breakdown: 87% Anglo, 4% Latino, 4% African-American, 4% Asian-American. (Other: Less than 1%)

* Housing units: 5,914 (91% rentals). Two-bedroom apartments range from $1,025 to $2,800 a month.

* Background: Marina del Rey had a reputation as a swinging-singles haven in the '60s and '70s, and as a landing place for the recently divorced or separated. The singles are still there. About a quarter of the residents are divorced or separated. The average of 1.8 people per housing unit is far below the 2.8 average for Los Angeles County. Only 4% of residents are children.

* Government: Day to day administration is by county Department of Beaches and Harbors. The Small Craft Harbor Commission, appointed by the county Board of Supervisors, meets monthly and advises the supervisors on overall marina policy.

Source: Census Bureau and Dept. of Beaches and Harbors

** 1990 Census reported a population of 7,431. The county formally protested and conducted its own survey, which yielded the above figures.

Marina Income

About two-thirds of Los Angeles County's income from Marina del Rey comes from a share of rents on apartments and boat slips. The following charts compare the gross receipts collected by developers and the amount paid to the county for use of the property. Developers are not required to disclose their profits from marina operations.

Gross Receipts Rent Paid LA County APARTMENTS 1991 $89,440,991 $9,266,385 BOAT SLIPS 1991 $23,975,639 $5,795,158

Note: The rent paid to the county increased dramatically in 1989 following renegotiation of the rates, retroactive in most cases to 1982.

Source: Los Angeles Times analysis of data from Los Angeles County Department of Beaches and Harbors

For the Record Los Angeles Times Tuesday April 14, 1992 Home Edition Part A Page 3 Column 4 Metro Desk 2 inches; 63 words Type of Material: Correction Marina leases--A Times graphic that appeared Sunday with a story on Marina del Rey leases listed various partners in four apartment complexes controlled by members of the Ring family. Former state Sen. Alan Robbins is an investor in a partnership controlling two of the complexes, but Ellis Ring is not a member of that partnership and says that he has no financial dealings with Robbins. Developer Jerry Epstein also is not a member of that partnership.
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