Santa Monica has cooked up a rent hike on alfresco dining spaces, and the recipe is leaving a bad taste with restaurateurs.
Sam King’s bill for the outdoor dining area at his iCugini restaurant will jump to $51,490 per year – more than triple what he’s currently paying. That’s because the Santa Monica City Council voted last month to increase the rates it charges restaurants that occupy city sidewalk space for outdoor dining.
King, whose Costa Mesa-based King’s Seafood Co. Inc. owns iCugini and other L.A. restaurants such as downtown’s Water Grill, said the hike may force him to raise prices he charges for iCugini’s Italian fare or redesign the restaurant to eliminate the 736-square-foot patio.
“It just doesn’t seem like there’s a partnership,” King said. “This is more or less a shove down the throat rather than a working partnership.”
King and some of Santa Monica’s other restaurateurs are considering raising prices, giving up their outdoor spaces or even leaving the city as a result of the increase, which will go into effect in two years. Rates vary depending on the prominence of the location, and enclosed patios pay higher rent because they can be used year-round.
Restaurant owners argue the rent hike comes at a particularly bad time, as it’s unclear whether consumers will return to eating out at prerecession levels. What’s more, they are facing increased competition from the nearby Santa Monica Place mall, which opened in August with seven sit-down restaurants in addition to a food court.
Jenny Morton, who co-owns Blue Plate Oysterette on Ocean Avenue, said she’ll likely be forced to raise prices due to the rent increase on her restaurant’s 182-square-foot dining patio. But Morton fears that she can only raise prices so much for her fresh seafood specialties, such as Oysters Rockefeller for $28 and lobster rolls for $22.
“People want busy restaurants that make the town look vital to tourists and locals alike,” Morton said. “But if I have to keep raising prices to accommodate my rent increase and my food costs increasing, no one would come to the restaurant.”
Under current rates for sidewalk space, Santa Monica restaurants pay 79 cents to $1.90 per square foot per month depending on the prominence of the location. The revised rates range from $1.75 to $5.83. By comparison, Beverly Hills charges restaurants $1.40; Culver City charges restaurants $1.
Ocean Avenue establishments iCugini, Il Fornaio and Ivy at the Shore will be hit the hardest by the increase, each facing more than $30,000 a year in additional sidewalk rent. All three restaurants feature enclosed areas that can be used year-round, therefore generating more income compared with a space that’s partitioned off with an open-air barrier.
On average, Santa Monica restaurants stand to see their outdoor dining costs increase by about $3,768 per year, according to a report by the city’s Housing and Economic Development Department. Santa Monica last reviewed outdoor dining fees in 2005, when the City Council set the current square footage rates and decided to increase them annually based on the consumer price index.
However, the rate structure was boosted last month as a result of the city’s practice of regularly re-examining all fees and taxes.
Santa Monica estimated the value of outdoor dining space by surveying interior rental rates of restaurants in such places as Huntington Beach and Pacific Palisades. An appraiser determined that fully enclosed sidewalk space was worth 100 percent of asking lease rates, barrier-enclosed space was worth 50 percent and unenclosed space was worth 30 percent.
What’s more, said Santa Monica Mayor Richard Bloom, the two-year delay in implementation gives restaurants time to plan for the rent hike.
“The City Council was very cautious in its approach on this particular fee,” Bloom said. “We did hear from some restaurants that felt at this moment in time, it might be an additional burden that would make this difficult for them.”
Still, industry consultants said restaurants will have to find ways to make up for the additional costs or eat them. And some said the two-year heads-up is little help.
“I don’t care if they plan it out in three years,” said Jerry Prendergast, owner of Culver City restaurant consultancy Prendergast & Associates. “If I wrote my business plan three years ago for a 10-year plan and now all of a sudden my costs are going to go up, I may have to rethink whether I want to be in Santa Monica.”
‘Exit collapsing’
Il Fornaio has been serving locals and tourists Italian specialties for more than 13 years. Its dining patio offers views of the ocean and Santa Monica Pier.
Michael Mindel, senior vice president of marketing at Corte Madera-based Il Fornaio America Corp., said he’s not sure how the company will respond.
“This is going to change the entire approach to us wanting to be in Santa Monica,” Mindel said. “Just as we are starting to see the light at the end of the tunnel, it’s like the exit has collapsed in front of our eyes.”
He said Il Fornaio is considering raising its menu prices, getting rid of its patio or leaving the city.
The majority of restaurants along the bustling Third Street Promenade are going to see their outdoor dining fees increase by about 65 percent to $3.13 per square foot per month from $1.90 per square foot per month.
Italian restaurant Trastevere, which opened on the Promenade in 1993, is looking at an annual bill of $23,888 for its 636-square-foot patio under the revised rate, compared with the current $14,500.
Barbara Tenzer, a broker who specializes in Santa Monica commercial real estate and who is also a business associate of Trastevere owners Franco Sorgi and Paolo Simeone, said the city should re-evaluate the increases.
“It’s something that’s hanging over the head of the tenants,” Tenzer said.
The increases are also likely to create headaches for landlords. That’s because restaurant owners considering opening their doors in Santa Monica might think twice about the move given the higher rates, according to industry analysts. As a result, landlords could be forced to lower their rents or be left with vacant space.
“It will make it more difficult to lease,” said Michael Dubin, owner of Santa Monica restaurant consultancy Michael Dubin and Associates Inc., whose clients include King’s Seafood. “If you have to pay twice the rent for the patio as you do the interior, you are going to say to the landlord, ‘You are going to have to give me a discount on the interior space because I have to pay high rent for the patio.’ ”
Some familiar with Santa Monica’s business community said the Promenade would appear to be particularly vulnerable to vacancies caused by the rent increase. That’s because the city doesn’t allow restaurant space there to be converted to retail shops. So if a landlord is unable to lease a vacant space to another restaurant, the space may remain empty.
Several see an irony in that policy. On the one hand, the city protects restaurant space, and encourages sidewalk dining because it helps create vibrant streets. But on the other, the city’s rent increases will discourage restaurants and particularly alfresco dining.
The leadership of Downtown Santa Monica Inc., a public-private management company that oversees the Promenade, negotiated with the city while the rent hike was being planned.
“Many think this is counter to those efforts to try to maintain and sustain outdoor dining and restaurants in the district,” said Kathleen Rawson, executive director of the organization.
