By Zelda Bronstein
DECEMBER 26, 2014 — Ever since Kilroy Realty Corp. announced last July that it had bought out one of the two businesses that own the San Francisco Flower Mart, concerns have percolated over the future of the flower vendors who rent space at the beloved city institution.
The issue is coming to a head next week: Many of the tenants’ current leases expire on December 31, and the new master lessor just passed out complex, 44-page commercial leases with some provisions that disturb supporters of the vendors.
Unless negotiations conclude soon, critics of the deal are planning to begin gathering signatures for a ballot measure that could quash Kilroy’s ambitious development plans for the site.
In a July 25 story, the Chronicle cited Mayor Lee’s pledge that “he would work with Kilroy to make sure the flower businesses remain where they are” That promise was reiterated by the San Francisco Flower Growers Association, which owned part of the site, in an August 19 letter to its tenants: “Rest assured that an integral part of Kilroy’s development plan includes a new, state of the art Flower Mart enabling the continued operations of present and future flower mart tenants and customers.”
Those assurances were again issued at a December 17 press conference—not by Mayor Lee, whose July press release was apparently drafted and edited by Kilroy Senior Vice President Mike Grisso in concert with mayoral staff—but by Kilroy’s new partner, the association that formerly owned the rest of the market’s site, the California Flower Market, Inc.
CFM Executive Vice President/General Manager Bob Otsuka revealed that Kilroy had purchased his organization’s property, and that CFM now held a master lease for the new flower mart and would manage the facility.
Under the heading “Just the Facts,” a leaflet in the press packet for the event averred:
All tenants will receive new leases at the existing rent and terms by Dec. 5, 2014….Among the many guarantees between CFM and Kilroy Realty, all vendors and tenants have been offered a five-year extension of their leases at their current rent and terms…
But in a December 24 email, Otsuka conceded that only some of the tenants had received new leases.
Moreover, despite prodding from former Board of Supervisors President Aaron Peskin and TODCO Executive Director John Elberling, Otsuka refused the request of the San Francisco Flower Market Tenants Association, a group of vendors, to extend current tenants’ leases by 60 days to give them time to study CFM’s new offer.
On December 23, the tenant group, which represents some but not all of the vendors, put out the following statement “regarding Kilroy Company’s proposed Lease Agreement (noted as pre-development) between SF Flower Mart LL (LL) and Tenants”:
It is completely unreasonable to expect the Flower Mart tenants to turn around comments to a lengthy 44-page commercial lease in 2 weeks. It is particularly egregious given the end of the year timing.
Our Request: The San Francisco Flower Market Tenants Association respectfully requests that the Kilroy Corporation grant each and every tenant including any and all tenants who have signed any documents, a 60-day lease extension (based on each individual tenant’s current lease).
In the morning of the same day, Elberling backed up this request in an email sent to Grisso, Supervisor Jane Kim, in whose district the Flower Mart sits, Rich, Planning Director John Rahaim, the members of the Planning Commission, and a dozen other recipients.
Noting that “normally a tenant is given at least 60 days to review a proposed new lease, with time enough to discuss any particular matters with the landlord,” Elberling observed that “the FM Merchants have never had such complex lease or rental agreement before.”
Then he addressed Grisso directly:
Mike—to start off the negations [sic]on a positive good faith basis, Kilroy Co. has to give the Merchants at least until the end of February. In the meantime it can simply extend any expiring existing rental agreements by letter.
Otsuka promptly replied:
John:
We are issuing leases out to all Tenants of the entire Market. We will work with the Tenants, as we always have for many, many years, in explaining terms of the agreement. We will give them enough time to fully understand the agreement and also have their respective counsel review the lease agreement and ask questions. We will not make an unreasonable demand to have the signed documents returned if the Tenant has not had the opportunity to review it.
We are giving our Tenants until the end of January, 2015 to return the leases to the Market Offices.
We have extended all existing agreements until the new subleases are put into place.
Again we have issued many leases over the years of similar scope and our Tenants have never had an issue of our procedures.
We want continued success here at the Market and we fully understand our commitment to our Tenants is integral to that success. With these new subleases we are providing our Tenants a place to do a profitable business.
That evening, Peskin sent Otsuka, Grisso, Kilroy Vice President Mike Sanford, Rich, Rahaiam, Kim, the Planning Commission, among others, an email stating that
At approximately 6:50 this morning I arrived at the Flower Mart and personally asked each and every tenant that was open (some stalls were closed and some stalls did not have the “person in charge”) if they had received a lease. The vast majority of the leaseholders I spoke with had not yet received a new form of the lease from the new owners of the Flower Mart (Kilroy) and/or their agent/master leaseholder (CFM). No lease holder that I met had receieved any agreement to extend their lease or sublease.
Peskin also noted that “many of the tenants from the SFFGA have never had a lease with you/CFM.”
At 8:30 on Wednesday morning I called Otsuka and asked if he would answer some questions about the new leases. He refused to talk to me, saying that he “wasn’t supposed to be here today” and “wanted to go home,” and that I should call him next week.
I don’t know if Otsuka wasn’t supposed to be at the Flower Mart on Wednesday; I do know that he didn’t go home—at least not right away—because about an hour later, I called flower vendor Dave Repetto, who was at the market. Repetto told me that Otsuka had just handed him a copy of a new lease. “He had a whole big stack of them,” Repetto said. What’s in it? I asked. Repetto hadn’t had a chance to read the document.
Later in the morning, Otsuka emailed Peskin et al.:
Aaron,
We began distributing the subleases shortly after our master lease became effective late last week. Our goal is to deliver each sublease in person, so we can walk through the document with each tenant. Over 60% of the Flower Mart tenants have existing leases in-place until 2017, so our initial distribution of subleases has been focused primarily on the tenants with nearer term expirations. As of this morning, we have delivered subleases to all but a handful of the tenants with nearer term expirations. I understand that everyone wants certainty, and so I ask for just a little more patience. All tenants will receive new leases with essentially the same terms as their existing leases, except with a much longer term than they have previously enjoyed – and we have communicated this to every tenant on numerous occasions.
Per my email to John Elberling yesterday morning, we will give the tenants ample opportunity to convert to a new long-term sublease, including an option for a nearly five year term to provide stability. There are no short-term extensions necessary to provide tenants with this additional time as their existing leases will remain in effect on a month-to-month basis.
As I stated to you at the press conference, we will take care of our Tenants by providing a lease agreement with fair, reasonable terms. Aaron, we have worked with our Tenant group for many, many years and have developed relationships that are built with a common understanding of the complexities of the wholesale flower business. With the new subleases, it is the first step towards making an even better market for everyone.
Our goal is to complete the sublease distribution to all the Tenants by the end of December.
Happy Holidays!!
Best Regards, Bob [emphasis added]
Peskin was not mollified. He particularly took issue with the claims that the delay reflected Otsuka’s commitment to conferring with every tenant, rents would remain the same, and short-term extensions of the current leases were unnecessary.
On the night of December 24, he shot back another email to Otsuka. “I understand,” he wrote,
that of this morning you did indeed finally distribute leases to a number of tenants who heretorfore had not received them. As you set forth in your email, there are still tenants that are facing lease expirations next week who have yet to receive a new form.
Then he challenged Otsuka’s assertion that he wanted to “walk through the lease with each tenant”:
I was at the Flower Market for approximately 2 hours today between approximately 10:00 am and noon. I received your email during the time I was there. The tenants I spoke with this morning stated that you merely dropped [the new leases] off and refuted your claim that you walked them ‘through the document.’
After repeating the charge that many of the SFFGA tenants have never had a lease with CFM, Peskin homed in on Otsuka’s argument that short-term extensions of current leases were not needed to provide tenants additional time “as their leases will remain in effect on a month-to-month basis.
I have been provided copies of existing SFFGA leases which include a holdover provision which states as follows:
“Holding Over. If Lessee, with Lessor’s consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provision of this Lease pertaining to the obligations of Lessee, but any options, granted to Lessee under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. If Lessee remains in possession of the Premises after the expiration or earlier termination of this Lease, then, without waiving Lessor’s right to cause Lessee to vacate the Premises, Lessee’s continued possession shall be on the basis of a tenancy at sufferance and Lessee shall pay as Base Rent during the holdover period an amount equal to the greater of (i) one hundred fifty percent (150%) of the fair market rental (as reasonably determined by Lessor) for the Premises or (ii) two hundred percent (200%) of the Base Rent and Additional Rent payable under this Lease for the last full month prior to the date of such expiration.” [emphasis added]
“In other words,” Peskin wrote,
absent a new lease, the holdover provisions of the previous leases provide that the tenants now owe substantially increased rent effective January 1, 2015.
I respectfully suggest that at a minimum you immediately provide each and every tenant with a legally binding guarantee that the increased rent provisions of the holdover provision set forth above are going to be waived while the tenants review the new form of lease with legal counsel.
And speaking of legal counsel, Peskin continued, at the November 17 press conference,
you indicated that you/CFM/Kilroy would be willing to provide the tenants with resources to retain counsel of their choosing to advise them on the new leases. How do you propose to accomplish this and carry through with your representation?
On Tuesday morning I tried to contact Grisso, only to learn that he would be out of town December 22-29, that Kilroy’s office would be closed December 25-26,and that I should contact one of his colleagues. With the clock ticking down on the tenants’ leases, this seems like an inopportune moment for the Kilroy executive who’s orchestrating the company’s project at Sixth and Brannan to be gone.
I called Kilroy Entitlements Associate Alexandra Stoelzle, as directed, and said I’d like to talk about the flower vendors’ leases. Stoelzle told me that the leases were outside Kilroy’s purview, and that I should contact CFM.
Meanwhile, it’s been months since we’ve heard from Ed Lee about the Flower Mart. The mayor will be running for re-election in November 2015.
At this point, it’s looking increasingly likely that the Save the Flower Mart’s initiative is also going to be on that ballot. The measure would retain the light industrial zoning that limits buildings at Sixth and Brannan to a height of 55-feet and thereby preclude Kilroy’s proposed 160-foot tech office tower.
On Tuesday, Peskin repeated to me what he said at the November 17 press conference: “Either Kilroy and CFM open meaningful, honest negotiations with the tenants, or in two weeks we’re going to start collecting signatures and put the initiative on the ballot.” I talked to him this morning, and he said Otsuka had not responded to his last email.
