Originally posted at Voice of San Diego.
By Lisa Halverstadt.
A long-term deal between SeaWorld and the city of San Diego gives taxpayers a stake in the company’s success.
SeaWorld has been a fixture in San Diego for 50 years but the marine park doesn’t own the land it sits on. The company rents its Mission Bay Park property from the city.
The company’s 50-year lease with San Diego is structured so that the city gets more cash the more SeaWorld’s business booms, an arrangement that means taxpayers could take a direct hit if state lawmakers approve a bill that could have dire consequences for SeaWorld’s bottom line.
SeaWorld rents 190 acres from the city, which includes about 172 acres of land and roughly 18 acres of water, and has rights to that property until at least 2048.
Last year, SeaWorld paid the city nearly $14 million in rent.
In 2012, the company paid about $12.7 million, which made up about 46 percent of total rent revenue the city collected from its Mission Bay leases in 2012.
Both figures exceeded the minimum required rent payment outlined in the lease at the time.
Monthly rent checks aren’t all SeaWorld forks over to the city.
Most renters don’t pay property taxes but SeaWorld’s lease with the city requires it. In fact, it paid about $5.2 million in property taxes this fiscal year, making it the 10th largest property taxpayer in San Diego.
A past agreement with the city also required SeaWorld to set aside more than $10 million over five years for traffic upgrades near the park, including widening projects for SeaWorld Drive and the West Mission Bay Drive Bridge. That temporary mandate ended in 2007.
But the largest annual payment comes in the form of annual rent charges, so I set out to answer some key questions about the lease.
How are rent payments determined?
SeaWorld has agreed to give the city a cut of nearly 20 sources of revenue.
For example, the company pays the city 3.25 percent of its gross revenues from general admissions, 10 percent of parking lot fees and 6 percent of alcohol sales.
That means the city gets more money out of the SeaWorld lease when the park’s business is thriving.
The formula has led to year-over-year gains in lease payments in recent years – rising from about $11 million in fiscal year 2011 to about $14 million in 2013 – but the amounts have varied in the last decade.
Even if SeaWorld’s revenues drop significantly, the company must pay the city a minimum rent of $10.4 million.
How often is the lease updated? Can the city renegotiate if SeaWorld’s profits skyrocket or fall?
The SeaWorld lease allows for negotiation every 10 years.
A 1998 lease amendment laid out how this works. Beginning in 2004, both SeaWorld and the city got the ability to confer over revenue percentages every 10 years, provided at least five years remained on the lease. The city’s real estate assets department is tasked with leading the charge on the city side, though officials have hired a handful of consultants to help out over the years.
But talks need to begin at least 18 months before the Jan. 1 “adjustment date,” as it’s referred to in lease documents.
SeaWorld and the city can go to mediation if they can’t reach an agreement 15 months in advance, which is what happened in 2004, when SeaWorld argued the city sought too much of its revenues.
Whatever adjustments they agree on, increases to the city’s cut of SeaWorld admission charges can’t exceed 4 percent or increase more than 1 percent during one negotiation period.
Why did the city structure its lease this way?
A resort and hospitality guru who helped negotiate substantive changes to the lease about a decade ago says the answer is simple: Tying lease payments to SeaWorld revenues ensures San Diegans benefit when visitors pack Shamu Stadium or buy more T-shirts.
Maurice Robinson, a Manhattan Beach-based consultant who represented the city in 2004 SeaWorld lease talks, said he relied on dozens of comparable revenue percentages included in leases with other parks and resorts to push for the rates currently in the city’s SeaWorld lease. Many of the city’s leases with Mission Bay hotels are based on similar percentage-of-revenue formulas.
But there’s one portion of SeaWorld’s lease that differs from many others. Theme parks tend to get the largest chunk of their revenue from ticket sales, and Robinson said other such leases he tracked down relied on an overall percentage of revenue – between 3.6 percent and 8.4 percent – rather than the categories laid out in the SeaWorld lease.
San Diego takes a 1.5 percent to 50 percent cut of nearly 20 different SeaWorld revenue streams – and 3.25 percent from park admissions – but it’s not clear what overall percentage of revenue the city takes in today. SeaWorld doesn’t provide revenue information for specific parks.
As of 2002 – before the most significant recent overhaul of the lease – SeaWorld lease payments amounted to about 3.9 percent of its San Diego park’s total revenue.
Robinson argues the city’s piecemeal approach to revenues, plus a slight uptick in the city’s cut of ticket sales since the early 2000s, have likely translated into better returns for the city.
“From both sides’ standpoint, it doesn’t make sense to apply one overall average rental percentage to services that have such a different profit profile,” he said.
When was the SeaWorld lease last updated – and how?
SeaWorld agreed to some minor tweaks to its lease with the city, effective this January.
Almost two years ago, SeaWorld agreed to give the city a cut of two new revenue streams. Each month, the city now gets 50 percent of the money SeaWorld makes from wireless equipment installed or operated at the park and a 30 percent cut of commissions it makes from distributed antenna systems, which serve areas flooded with lots of smartphone users.
SeaWorld’s minimum rent also increased from about $9.6 million to $10.4 million.
What else does the lease require SeaWorld to do for San Diego?
Here are a few interesting examples.
• SeaWorld must provide an educational program “which shall be suitable for and available for all elementary school children with supervision to be provided by the schools.”
The city’s 1978 lease with SeaWorld dictated that the per-student cost couldn’t exceed $1.25 but consumer price index adjustments have upped the price tag.
As part of this clause, SeaWorld is required to submit annual audits to the city that lay out the number of students who participated, per-student charges and income SeaWorld received from the programming.
The latest audit the company submitted to the city shows more than 87,000 students participated in SeaWorld programming in 2013. It reported spending $6 per student.
• SeaWorld can’t operate a similar marine park in California, Arizona or Baja California.
• SeaWorld must submit annual attendance information to the city.
The company reported that about 4.6 million visitors came to SeaWorld San Diego in both 2012 and 2013.
Interested in learning more about San Diego’s lease with SeaWorld? You can check out many of the city’s lease documents with the company here.