PART II -- Lost in a Maze

By Jorge Casuso

Feb. 19 -- It had been nearly eight years since a lease was signed for the site of the old Sinbad's building that for a quarter century had sat vacant on the Santa Monica pier. And now, at the turn of the millennium, the only sign of the much-touted -- and decried -- Club Route 66 was an empty lot where the original Sinbad's once stood.

But as the City-owned site sat quiet, a far different scene was unfolding behind closed doors, where City and pier officials were waging a lingering battle with the developer of the 699-seat restaurant and nightclub that was widely viewed as a key to the future of the pier. That battle ended earlier this month, when developer Russell Barnard filed a $23 million claim against the City and the Pier Restoration Corporation.

The claim, which paves the way for the next battle, this one in the courts, alleges that City and pier officials breached the terms of the lease, costing Barnard more than $1 million in damages and nearly $22 million in lost profits. (The losses are based on the full term of the 10-year lease with three 10-year options.)

But if Barnard places the blame on the City, sources close to the negotiations paint a far different picture -- one of a savvy, if well-intentioned, developer who played every angle in an effort to drag out the process while he sought money to bankroll his ambitious project.

"The City granted Russ Barnard extreme latitude as to the timely performance of his obligations set forth under the lease," said Bill Spurgin, who chaired the PRC's leasing committee during much of the negotiations. "The success or the failure of this project was in the complete control of the tenant, not the City.

"All the tenant had to do was perform by submitting to the City evidence that he had financing," Spurgin said. "The tenant failed to do so. The record will show that the City gave him great latitude, but the fate was in his hands."

If it was to Barnard's advantage to drag out the process, he was helped by a City lease that made it difficult for the landlord to force the tenant's hand, by a slow-grinding bureaucratic process and by a dysfunctional relationship between the City and a long-entrenched pier board, some former City officials contend.

"I think that all parties bear some responsibility," said Paul Rosenstein, who was a council member when most the negotiations took place and as mayor cast a key vote on the project. "I know little about the inside details, but I felt at various times that Russ was stalling to raise investment capital, that the PRC stalled the project because of ineptitude and ego problems and that the City probably stalled at times too for its various bureaucratic problems.

"I made a lot of noise around City Hall about the need to resolve the lease issues, but I was either ignored or there were excuses that led to nothing happening," Rosenstein wrote in an email to The Lookout. "For a while a big part of the problem was that it was never clear who was in charge: the City or the PRC. There was a lot of finger pointing… Looking back, my big mistake was in not raising these issues publicly enough."

One of the key problems contributing to the lengthy process was a City lease that one source familiar with the agreement called "perhaps the worst lease in the history of mankind."

"The lease agreement created a trap of revolving events," said the source, who asked to remain anonymous. "Russ was to present the PRC with proof of financing. The main problem was that the landlord had no remedy if the tenant didn't deliver."

Jeff Mathieu, who heads the City department that oversaw the negotiations, said the agreement outlined certain requirements that had to be fulfilled before the next stage could kick in.

"There is a lease, and the lease has certain responsibilities within it," said Mathieu, who heads the City's Resource Management Division. "It had a long protracted performance schedule. The initial steps must be satisfied, and each action has to be satisfied."

The record shows that pier officials tried twice to force Barnard to show proof of his commitment to develop the site. A lease modification proposed by the PRC in June 1995 required that Barnard put up a $200,000 deposit, which would be refunded when the project was completed. Barnard, officials said, refused to sign.

In December 1997, the PRC once again submitted a lease modification agreement requiring a deposit. Again, officials said, Barnard balked.

The lease, one source said, "didn't have teeth in it. It didn't give the City the opportunity to terminate it."

It was also vague, never clearly defining the term "financing," City officials said.

As pier officials tried and failed to force Bernard's hand, the Planning Commission and City Council were in effect undermining the effort by voting to extended the permit term of the Conditional Use Permit and Reduced Parking Permit.

In September 1995, the Planning Commission granted Barnard the extensions, as well as the necessary approvals to expand the outdoor entertainment area despite vocal opposition from neighbors and police, who worried that the proposed venue was a noisy "drinking stadium" that would be a security drain.

"Due to noise, operational, and security concerns, Planning staff recommended that the project be redesigned to accommodate the stage and the live entertainment inside the building and included conditions requiring the operator to provide uniformed security guards," according to a staff report to the City Council.

In March 1996, after additional modifications to address the public's concerns, the council voted 4 to 2 to grant the final approvals to extend the permits and redesign the project, but not without a challenge. After Rosenstein cast the deciding vote, Councilman Ken Genser asked that the vote be reconsidered "in light of potential conflict of interest."

Genser was concerned that Rosenstein had testified before the Planning Commission in favor of the project, which he then heard in a quasi-judicial capacity when it was appealed to the council.

Rosenstein countered that he was testifying about the general need for a venue such as Club Route 66 and not about the particulars of the project, which he had not reviewed.

"I had spoken in very vague general terms," Rosenstein said recently. "I was saying that the council wanted that type of facility. I wasn't speaking to the specifics of the plan."

Rosenstein's deciding vote would hold up and, with the CUP and parking permits extended, Barnard applied for a building permit.

Still there were further disputes with pier officials, who still wanted to see proof that Barnard had the necessary financing. Without any guarantee that a building would go up, City officials balked at undertaking the necessary substructure work.

"We could have done substructure work, but we didn't see evidence of a project committed," Mathieu said.

Instead, Barnard says that City officials gave him a verbal commitment to reimburse the costs and interest in the form of rent credits when Club Route 66 was up and running. But the City, Barnard says, never put the agreement in writing.

In 1998, Barnard was granted a building permit to begin construction of the structure, which would revert to the City at the end of the lease. City officials in charge of the lese negotiations said they had no say in the matter.

"The substructure work was related to the entitlement, not the lease agreement," Mathieu said. "We can't tell planning what to do, and planning can't tell us how to adjust our agreement."

Barnard was then allowed to enter the premises, where he began minor substructure improvements that kept the permit alive. The building permit, which was extended twice, would expire in February 2000.