Is the price right?

City Council members, residents and preservationists are questioning a city decision to lease prime oceanfront space in Kapiolani Park to a food concessionaire at below market rates and outside of prescribed public bidding and auditing standards.

The city leased the Kapiolani Beach Center pavilion and bathroom space to Sakara Blackwell, president of Optimum Marketing & Management Corp., in June 2011 for a $350 monthly fee or 5 percent of gross sales, whichever is higher, said Charlian Wright, concessions contract specialist at the city Department of Enterprise Services. Since then Blackwell’s team has operated Queen’s Surf Cafe & Lanai in the city pavilion near the Waikiki Aquarium, a vending machine and a mobile cart along Kuhio Beach.

In its first year the concession grossed average monthly sales of $68,850, which means the city received an average of $3,442 a month, according to Wright. She said Optimum is also required to maintain the public rest­rooms and some of the nearby landscaping.

While the cafe has earned neighborhood accolades and has a strong fan base on online food sites, its lease terms have prompted inquiries from members of the City Council, two neighborhood boards and the Kapio­lani Park Preservation Society. Complaints have surfaced because the terms of Optimum’s revocable permit, which recently was extended through December, appear less stringent and cheaper than what the city charges for similar concessions.

"I told the department that I don’t have anything against the vendor. It’s a beautiful setting, and we haven’t had any complaints about the business," said Councilwoman Ann Koba­ya­shi, Budget Committee chairwoman. "My concern is the process. If this isn’t the highest and best use of the space, the city is losing money. It’s also a fairness issue."

The next-closest space is the Waikiki Beach Food Concession near the police substation. Until the end of March, Hyatt Regency Waikiki Beach Resort & Spa was paying a monthly fee of $16,000 based on 32 percent of projected sales of $50,000. After Hyatt declined to extend its lease, the city awarded a revocable permit in May to Service Systems Associates to operate the Waikiki Beach Bistro in the space. New terms were $5,000 a month plus 5 percent on sales over $40,000 a month, Wright said. The permit expires in fiscal year 2013, she said.

Under those terms the Queen’s Surf Cafe would be paying $6,442.50 per month, versus its current $3,442.

"I’ve gotten several complaints from Waikiki residents. (Queen’s Surf Cafe) sure appears to be a sweetheart deal," said Waikiki Neighborhood Board member John Dew, who informed the Diamond Head-Kapa­­hulu-St. Louis Heights Neighborhood Board, which represents the area.

Linda Wong, chairwoman of the Diamond Head board, asked Koba­ya­shi to investigate.

"Two people on our board really like the cafe," Wong said. "My feeling is that you might like everything, but it has to be done right."

Councilman Stanley Chang, whose district covers Waikiki, said it is too early to comment but acknowledged that he joined investigative efforts this month after learning of concerns.

Wright said that "with the percentage of gross sales and the cost of maintenance, the monthly rent (at Queen’s Surf Cafe) does compare to other beach food concessions that the city has."

Some critics are incredulous.

"This is prime oceanfront space," Dew said. "Surely, they could have found a tenant willing to pay more."

Most Waikiki retail rents are $25 to $30 a square foot for oceanfront space and $8 to $10 a square foot for less active spaces, said Kim Scoggins, who has made Waikiki deals for 30 years and is Hawaii vice president and division manager for commercial real estate company Colliers International.

"Typically they’d be paying more like $25,000 in net rent for a retail space like this," Scoggins said. Although he acknowledged that net rents for Kalakaua Avenue retailers are different from rents for concessionaires, Scoggins said "a base fee of $350 is ridiculous."

High minimums offset the possibility that landlords might not realize the full percentage of sales from businesses that do mostly cash transactions, he said. Also, the city should be charging a percentage of sales more in the neighborhood of 10 percent, Scoggins said, and audits should be performed.

"It’s really up to (the city) to make sure their system is correct and that they are watching," he said.

Although the city’s lease gives it the right to audit sales at the Queen’s Surf Cafe, Optimum said it has not been audited.

Waikiki Retail Analyst Steph­any Sofos said few landlords shirk their responsibilities when it comes to auditing tenants that deal primarily in cash. "I’m not saying that this business has done anything wrong," she said. "However, the city is strapped for money, so you would think that they would want to ensure that they were getting all of the rent that is due them."

Wright defends the city’s decision to award Optimum a permit and the terms that were set. "We checked to make sure that they had the background in previous food concessions on the island as well as making sure that they had the financial backing to sustain their agreement," she said.

The city gave the permit to Blackwell only after two requests for bids failed to attract a response and the space sat empty for nine months, Wright said. She declined to speculate on why the city received no offers for the choice space.

Kekoa Ornellas, managing consultant for Optimum, said the space was undesirable when Blackwell inquired about a lease. People were living in the pavilion, and there were signs of drug dealing and prostitution, he said.

Ornellas said Blackwell obtained a revocable permit under a pilot program that allowed the city and Optimum to see whether it could turn the location around.

"Our families, having been longtime area residents, felt that the opportunity to return this part of Kapiolani Park back to a place of gathering was worth the challenges and risk," he said. "Not any operator can come in and do what we did. It wasn’t easy, and it continues to be a challenge."

Ornellas said he and Blackwell and their families have more than 80 years of combined food industry experience, which is why they were willing to take a chance on a space that others likely walked away from after a site inspection. Blackwell is the daughter of Gilbert Saka­­g­uchi, who founded Magoo’s Pizza in the late 1960s.

Optimum has invested an undisclosed amount on improvements and has spent $5,000 to $6,000 monthly maintaining the public bathrooms, Ornellas said. Optimum also faced the hurdle of running a "dry" cafe, he said, alcohol being a major factor in profitability for restaurants nationwide.

"Concerned parties may not have all the historical facts," he said about critics of the lease deal.

Indeed, the city has not produced the failed bid requests despite inquiries from Koba­ya­shi, the park preservation society and the Star-Advertiser, which has filed a freedom of information request.

"My staff was told (by city workers) that they are waiting to approve someone sending us a reply," Koba­ya­shi said. "That worries me because if everything is on the up-and-up, you just send the stuff."

Waikiki Neighborhood Board Member Jeff Merz said transparency and consistency are important to the city’s bidding process.

"You don’t cut corners even if you know there is only one bidder," said Merz. "You would still go through the process so that it doesn’t give the appearance of impropriety or raise questions of favoritism."

Preservation society President Ale­thea Rebman said she has made more than three requests to the city for information that should be publicly available.

The society received complaints that cafe operators were not restocking bathrooms as required in their lease or maintaining the outdoor barbecue area, she said. The cafe also is using the park for commercial enterprises, such as Zumba classes, which are not allowed by the Kapiolani Park Trust, Rebman said.

"This concessionaire is treating the area as if it is their own," Rebman said. "The park must be preserved for use by everyone."

Ornellas said the cafe has operated in accordance with its city contract. "We introduce programs that we feel will benefit the community. When we have received negative responses to our efforts, we have discontinued the programs," he said.

Queen’s Surf Cafe provides a safer, cleaner environment with better access to public facilities, the park and the beach, Ornellas said.

Patty Sullivan, a tourist from Phoenix, agrees. Sullivan, who discovered the cafe on a previous trip to Oahu, said she will probably eat there six times this stay.

"It’s adorable and you can’t beat the view," Sullivan said as she lunched at the cafe last week. "The food is great and offers incredible value. It really doesn’t get any better than this."

Kathleen Kazanowsky, a homeless woman from Florida who was washing her bedding in the beach showers adjacent to the cafe, said the concession has improved Waikiki.

"The free music is great," she said. "They really cater to the neighborhood, and the food is outrageously good."

Her homeless friend, who goes by the name "Smiley," said conditions are better since Optimum took over.

"The bathrooms are much improved," he said. "They’re the cleanest in Waikiki. This is the best concession that they’ve had here."

But whether the concession stays or goes will depend on several factors. Optimum’s permit expires Dec. 3, Wright said. The city is working on criteria for a new bid request, which it will publicize soon, she said.

Optimum must review the terms and conditions before deciding whether to make an offer, Ornellas said. He said that there are unique challenges to running a city concession.

"In a public space such as this, although there are defined terms to the agreement, those terms have the potential to be called into question at any moment by one of your 900,000 or so landlords that make up the City and County of Hono­lulu’s population," he said.

CONCESSIONS ON THE BEACH

The operators of Queen’s Surf Cafe & Lanai at the city’s Kapiolani Beach Center pay significantly less than other city concessionaires along Waikiki’s heavily trafficked waterfront strip. The owners say they have spent a considerable amount above their monthly lease fee to improve the property and maintain the public restrooms. Comparable costs of Waikiki concessions: