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The city and SeaWorld went to arbitration in 2004 after the marine park argued its rent payments should plummet from $7.4 million to $2.1 million despite rising profits.
A decade ago, SeaWorld asked for something most renters can only dream of: A roughly 70 percent reduction in its annual payout to the city.
The marine park, which paid the city about $7.4 million to lease 190 acres in Mission Bay in 2003, argued the following year that it should fork over just $2.1 million despite growing profits.
City leaders weren’t having it.
They assembled a cadre of attorneys and consultants to argue the city deserved far more, an effort that experts on both sides agreed cost taxpayers more than $100,000.
A panel of three independent arbitrators largely ruled on the city’s side, deciding that SeaWorld should pay at least $7.6 million annually. The park’s rent payments have ended up exceeding that figure every year since, because the city gets a cut of various SeaWorld revenue streams.
SeaWorld’s most recent lease negotiations with the city, which went into effect in January, were far less contentious. Park and city officials inked an agreement that matches much of what arbitrators mandated in 2004, avoiding the unpredictable third-party process both sides found essential a decade ago.
A former city official and a consultant who represented the city argue SeaWorld learned from being on the losing side of that battle and has since taken a different approach. SeaWorld and an expert who represented the company in 2004 stand by their past arguments.
“The arbitration to which you refer occurred a decade ago and the positions of the parties then were supported by independent, third-party real estate appraisers,” SeaWorld said in a statement to Voice of San Diego. “We were pleased that the arbitration process was not necessary when the parties entered into the current renewal.”
But the past disagreements over rent payments offer a window into a particular moment in SeaWorld’s history here. It was then owned by brewing giant Anheuser-Busch. The company was later sold to equity firm Blackstone Group, which made SeaWorld a publicly traded company last year.
In the five years before the 2004 arbitration, SeaWorld reported increased revenues and profits, the latter of which increased about 8.5 percent annually, according to the arbitrators’ report.
And six years earlier, San Diego voters narrowly approved an exemption to the city’s 30-foot coastal height limit – a change that gave SeaWorld the freedom to build a new roller coaster and other amenities, and likely added to the value of the Mission Bay property.
SeaWorld agreed to sink more than $10 million into traffic upgrades near the park over roughly the same time span.
Gene Krekorian, a consultant who was SeaWorld’s top expert in the 2004 arbitration, told VOSD the park thought the city wasn’t taking necessary upgrades into account when it considered rent.
Theme parks are unusual properties and remaining competitive with others means near-constant upgrades and new rides. Partly for that reason, Krekorian said, new U.S. theme parks are a rarity.
“These are static attractions, so to keep peoples’ interest and get them to come back you need to have new offerings,” he said.
Krekorian estimated SeaWorld set aside about 10 percent of its revenues each year for construction at the time of the arbitration.
Krekorian and others arguing on SeaWorld’s behalf said those investments should factor into the lease payments. Essentially, they wanted to subtract those expenses from the value of SeaWorld’s Mission Bay property – which a 1998 appraisal placed at about $56.6 million – and then base rent payments off the remaining figure. They assumed about 8 percent of the latter figure would be a fair rent payment, which is how they got to the $2.1 million proposal.
City officials were shocked by the number.
“I recall all of us thinking they were trying to pull one,” former City Councilman Michael Zucchet said.
The City Council directed city leaders to take the fight to arbitration despite hefty costs and risks. Arbitration is a form of conflict resolution that occurs outside of court, where a private arbitrator (or panel of arbitrators) acts as judge and jury — usually at a cost of hundreds of dollars an hour.
The city’s experts said SeaWorld should be paying more rent than it already was but contended the hike should come from increasing the city’s take from many of the 15 revenues that SeaWorld shared with the city – everything from alcohol sales to general admission charges – rather than the overall rent figure.
At least one of the city’s consultants called SeaWorld’s proposal disingenuous.
“By subtracting the improvements first, you’re taking out 100 percent of your costs,” consultant Maurice Robinson told VOSD.
He acknowledged SeaWorld spends significant cash on new rides and upgrades but said the city’s argument was about a fair rent.
A panel of three arbitrators heard the case over three days in January 2004 and then began their own investigation, documents show.
They mostly came down on the city’s side.
The arbitrators decided to go with 12 of the 15 figures the city suggested for its cut of various revenue streams and only significantly diverged from the city’s preferred numbers in one area: ticket sales. (The city wanted a 5.5 percent cut of revenues from general admissions, a figure that exceeded the percentage allowed in its lease with SeaWorld.)
The arbitrators estimated these changes would translate into more than $10 million for the city each calendar year – about 375 percent more than SeaWorld argued was fair.
This is part of our Quest: SeaWorld series digging into the park’s impact on our region. Check out the previous story – Three Big Moral Questions ‘Blackfish’ Raises – and the next in our series – What We Learned at SeaWorld’s Big Bash.