A city leasing program is coming under fire — and some increased scrutiny — after a concessionaire with contracts at two major parks was recently arrested in an alleged real estate scheme.
Questions about how the program screens its applicants and manages its multimillion-dollar assets began surfacing this month with the arrest of 38-year-old Sakara Blackwell, president of Optimum Marketing and Management Corp., the company that holds long-term city contracts to run the Barefoot Beach Cafe at Kapiolani Park and the concession stand at the Diamond Head end of Ala Moana Beach Park.
Blackwell, who did not respond to an interview request from the Honolulu Star-Advertiser, has pleaded not guilty to the allegations outlined in a federal grand jury’s 45-count indictment against her and alleged co-conspirators Marc Melton, 43, and Jennifer Ann McTigue, 46.
Tracy Kubota, deputy director at the city Department of Enterprise Services, said Optimum is in compliance with its city contracts, so the arrest has no immediate effect on the company’s business with the city.
"The city will continue to work with the contractor as long as the terms of the contract are being met," Kubota said. "It is premature to comment further, but we will monitor the situation closely."
But City Councilwoman Ann Kobayashi, chairwoman of the Council’s budget committee, said Blackwell’s arrest highlights the need for further city oversight.
"I’m calling for a hearing on this so that we can take a closer look," said Kobayashi, who intends to put the issue on the agenda for a budget hearing Wednesday. "We need to see what happened in this case and make sure we have better screening of applicants so that this doesn’t happen again. I want to hear more about what controls that we have in place to screen and manage our vendors."
Blackwell, Melton and McTigue are alleged to have fraudulently obtained the releases of more than $4.5 million in mortgages or other financial liens against seven properties. The defendants then allegedly sold the properties for prices totaling more than $3.3 million. According to the indictment, Blackwell deposited money she is alleged to have fraudulently obtained into a banking account for Optimum.
In light of the charges against Blackwell, Kobayashi said she wants to ensure that the city is protecting its assets.
Since concession stands are mostly cash businesses, Kobayashi said the charges against Blackwell cast doubt on her deals with the city. If a city audit finds that Blackwell underreported sales or if her legal woes prevent her from operating her businesses or meeting her payment obligations, Kobayashi said the city could potentially lose thousands of dollars of monthly income on its assets, and the public could lose access to refreshments at two of Oahu’s most popular beachfront parks.
"Here we are trying to advertise on city buses to raise revenue when we are possibly losing out on these contracts," Kobayashi said. "The city needs to have stringent controls on these cash businesses."
But Kubota said Blackwell "has been in compliance with all of her dealings with the city historically. If anything had come up, it would have been a breach of contract and would have disqualified her from bidding on any other city contract. The city has previously reviewed sales records and found them in compliance."
City contractual requirements mandate that all city concessions forward sales and fiscal reports to the city. Kubota said the reports, which are due March 31, will be provided to the Department of Budget and Fiscal Services for review.
In addition to her concerns about Blackwell’s legal woes, Kobayashi also questioned whether the city’s contract terms have netted the strongest possible returns. Kobayashi raised that point in 2012 when she joined a handful of Waikiki residents and preservationists who were questioning the enterprise department’s decision to circumvent the public bidding process and issue Blackwell a revocable permit to run the Kapiolani Park concession.
Under the terms of that original permit issued in June 2011, Blackwell agreed to maintain an on-site public restroom and pay the higher of a $350 monthly fee or 5 percent of gross sales. In comparison, Hyatt Regency Waikiki Beach Resort & Spa at one time had been paying a monthly fee of $16,000 based on 32 percent of projected sales of $50,000 to operate a Waikiki Beach food concession near the police substation.
After Hyatt declined to extend its lease, the city awarded a revocable permit to Service Systems Associates to operate the space. However, the terms, which ran through April 2013, were $5,000 a month and 5 percent of gross sales over $40,000.
"What Optimum was paying was ridiculously low. They got a real sweetheart deal," said Waikiki Neighborhood Board Member John Dew, adding that he’s glad Kobayashi is leading the charge to review the leasing of city concessions.
The enterprise department earlier justified its arrangement with Optimum by saying that growing homelessness near the Kapiolani site had made it difficult to rent. They said the contractor cleaned up neighborhood blight by creating a popular eatery at the formerly empty site.
"People in the neighborhood were very pleased by the success of the Barefoot Beach Cafe," said real estate analyst Stephany Sofos, who lives near the concession. "They turned a struggling site around."
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DETAILS OF CONCESSION TERMS
Optimum’s current deals with the city:
» In Optimum’s current Kapiolani Park concession contract, which runs through January 2018, the company agreed to pay the city a $500 monthly fee and 5 percent of gross sales during the first and second years of the lease. In the third year, Optimum’s monthly fee increases to $750, and the percentage of sales rises to 6 percent. That percentage stays the same in the fourth year; however, the monthly fee rises to $1,000. In the contract’s final year, the monthly fee does not change, while the percentage rises to 7 percent.
» Under the terms of the Ala Moana Beach Park concession contract, which runs through February 2018, Optimum pays the city $500 a month plus gross receipts of 4 percent a month for the first and second year; $750 a month plus 5 percent of gross receipts monthly for the third year; $1,000 a month plus 5 percent of gross receipts a month for the fourth year; and $1,000 a month plus 6 percent of gross receipts a month for the fifth year. While the contract began in February 2013, Optimum did not get the concession open until the first weekend in August due to upgrades, which included installing new equipment.
Source: City Department of Enterprise Services
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Sofos also points out that Blackwell was the sole responder when the city finally put the Kapiolani site out to bid. She said Optimum’s current Kapiolani site contract is market-priced considering that the concession does not sell alcohol.
Sofos said rental percentage rates in Ala Moana and Waikiki can range from 5 percent to 15 percent depending on the location and whether the venue can serve alcohol.
But Kim Scoggins, vice president and Hawaii division manager for Colliers International, said that if the city were charging commercial rates, it should be getting closer to 10 percent for oceanfront sites in Waikiki and Ala Moana.
Blackwell reported last year that the Kapiolani Park concession had nearly $1.4 million in sales. Per her contract, she paid the city $78,309 and donated an estimated $55,000 in services to clean bathrooms near the concessions.
"The sales sound right, but the percentage is below the going rate," Scoggins said. "With those kind of sales, the concessionaire would typically be paying around $140,000."
By Scoggins’ calculations, taking into account the in-kind bathroom services, the city still would have been short $6,691 on what it could have realized if the contract were based on market rates.
In the case of the Ala Moana concession, Blackwell reported $116,277 in sales for the five months that it was open and paid the city $10,149. While that location isn’t as high-volume as Kapiolani Park, Scoggins estimated it should be netting closer to $700,000 in annual sales.
Blackwell’s reported sales for those five months were $175,390 short of the nearly $291,667 that Scoggins had estimated they could have been. Applying Scoggins’ estimates to this case, the city’s take was about $19,000 less than its potential net if the reported sales had performed to market and the city had required the business to pay 10 percent of its sales.
However, Sofos said operators at the Ala Moana site, like the Kapiolani concession site, historically have failed to thrive. "It’s hard to say what an operator should get there," she said. "We haven’t got any successful cases that can be used to compare the results."
Linda Wong, chairwoman of the Diamond Head/Kapahulu/St. Louis Neighborhood Board, still sees Kobayashi’s probe as necessary to protect city assets.
"I hate to say it, but I’m not actually surprised by what has transpired," Wong said. "It seems like there have been prior businesses that just slipped through the cracks without proper processing. I mean, this time there’s an FBI investigation on one of the contractors."
