A Percentage of Nothing | Essay | Chicago Reader

A Percentage of Nothing 

The Park Grill's deal with the city isn't just sweet--it's ridiculous.

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Last week the Sun-Times ran a story about a juicy little sex-and-clout scandal involving the Park Grill restaurant in Millennium Park. If you didn't see the story you probably heard some of the seamier stuff, like the part about how Matthew O'Malley, one of the Park Grill's two principals, had a baby with Laura Foxgrover, the Park District official whose department oversaw the bidding process for the Millennium Park restaurant contract. Or how the roster of investors includes many friends and associates of the mayor.

But the outrage taxpayers should be feeling has less to do with who got the deal than with the deal they got. In fact, having read the bids and the final contract, I think the Sun-Times went easy on the Park District. The bit about the baby's just a distraction. The deal is so bad that city officials have been forced to feign concern, though they're still concealing its many flaws by giving the Sun-Times information they must know is inaccurate. The Park District allowed a well-connected tenant to rent valuable property for next to nothing. It also handed over the right to hold private events there, forcing citizens to pay at times for the privilege of even entering the park.

In 2001 the Park District began taking bids for the right to run the concessions in Millennium Park, the soon-to-be tourism blockbuster at the north end of Grant Park. Three bidders were considered: Mitchell and Clifford Einhorn, who own Twisted Spoke; Richard Mott, who runs the North Pond restaurant, concessions in the parks, and a service that operates cafeterias and coffee shops at local colleges; and a consortium of investors headed by O'Malley, who owns the Chicago Firehouse, and James Horan, who runs Blue Plate Catering.

After the Sun-Times story broke, Park District superintendent Tim Mitchell told reporters that the timing of the bids, submitted just ten days after the 9/11 attacks, put the Park District at a disadvantage in subsequent lease negotiations--because it "was a very difficult time in the economy."

But none of the bidders mentioned the 9/11 attacks in their bids or showed any skepticism about the economy. On the contrary, they filled their bids with sunny projections.

The Einhorn brothers estimated revenues of $8 million a year and expected to remain open for breakfast, lunch, and dinner to meet the dining demands of an "exceptional location" with "constant traffic."

Mott wrote that his establishment would be part of a "critical mass of activity that will make Millennium Park a success."

O'Malley and Horan predicted that their restaurant would serve as a "year-round draw to thousands . . . expected to stream to and from major lakefront events." All of the bidders pledged to pay construction costs.

As for rent, they were a little cagey, obviously not wanting to offer too much too soon. The Einhorns made the best offer, though it really wasn't so much an offer as an assumption about how much they'd be expected to pay. They noted that "industry standards show rental expense should be 5%-6% of revenues," and wrote, "it is assumed that a base lease for ten years will be signed at an annual rate of $400,000."

Mott was less specific, promising only to pay rent "in the form of direct fee payments to the Chicago Park District." A few pages later, in a breakout of projected expenses, he estimated his rent payments would be $270,000 by 2006.

Though their bid was twice as long as those from the other two candidates, weighing in at 208 pages, O'Malley and Horan didn't make any promises about rent. After pages and pages of fluffy verbiage about decor and food they said: "Typically, a tenant will receive build-out allowances, rent abatements or a combination of the two types of considerations from the landlord. Due to the fact that the exact scope of this project [is] yet to be determined, it is not possible to propose any abatements and/or other finalized consideration at this time."

By October 2001 the Park Grill, technically the bidder promising the lowest revenues, had been selected for the big job. The other bidders may not have had much of a chance. Several restaurant operators have told me it's not unusual for the city to have a favorite in mind for a job before bids are collected. "It costs time and money to put together a bid," says one north-side restaurateur. "I've had friends in City Hall tell me, 'Don't bother with a bid.' That's when you know it's a done deal."

(Mott doesn't think the fix was in. "I got a fair hearing," he says. "I think I made a strategic error in my bid. I should have partnered with a bigger partner.")

The Park District and the Park Grill negotiated for about 16 months before signing a 20-year lease on February 11, 2003. The deal provides two revenue streams for the Park District—the "minimum fee" and the "percentage fee." O'Malley and Horan agreed to pay the Park District an annual minimum fee of $275,000—but in exchange for the Park Grill paying all the build-out costs, the Park District agreed to waive the fee until the 15th anniversary of the contract's start date or until the Park Grill makes $3 million or half its construction costs, whichever's less.

This is where things get interesting. That clause means the Park Grill doesn't have to pay the minimum fee until it has netted about $3 million or until 2018—whichever comes first. I've gone over this lease with various accountants, commercial leaseholders, lawyers, restaurant operators, city officials, and political insiders who have done deals with the city. They say landlords frequently lower rents to help tenants pay for build-out costs. But no landlord—at least, no landlord who wants to make any money—links his rent to a tenant's net earnings. "If you're going to make rent contingent on future earnings, you do it on the gross," says one commercial leaseholder with properties all over town. "You never, ever, do it on the net!"

Here's why: "Gross is all your income. Net is what you have after you pay your expenses," says a merchant who has negotiated many leases. "Say you're bringing in $10 million. That's when you bring in the accountants. It's nothing illegal, just creative accounting. You have your bills—supplies, salaries, whatever. You pay yourself a salary. You pay your partner a salary. A good accountant can get the net to next to nothing. A landlord who takes his rent based on the net is getting a percentage of nothing. Only a dummy takes a percentage of nothing."

The Park District negotiators did get O'Malley and Horan to agree to pay an additional annual fee based on gross sales—the "percentage fee." But the language of the contract is ambiguous: it's possible that the percentage fee is also waived by the minimum-fee abatement. Let's be generous to the Park District negotiators and assume that it's not. Let's assume that O'Malley and Horan are paying this fee, and that the group will make the $8 million the Einhorns projected their operations would rake in annually: the Park Grill would pay the Park District about $240,000 a year in rent.

The Park District also agreed to pay for the Park Grill's gas, water, and garbage collection. The Sun-Times says the garbage pickup for the Park Grill costs taxpayers about $245,000 annually. The Park District is clearly losing money on the deal, and that's before you throw in gas and water.

In addition to giving O'Malley and Horan the exclusive right to operate the restaurant, a souvenir shop, a bakery, and several kiosks and concession carts, and paying for gas, water, and garbage pickup, the contract also allows them to hold private concerts and admission-only special events in Millennium Park's "concession area," which is roughly everything west of the band shell. Last summer, the Park Grill held a smooth-jazz concert series in the concession area and in the fall they held an Oktoberfest event; they charged admission for both. Essentially the lease allows the Park Grill to turn Millennium Park, a public space paid for with public funds, into private property that the public has to pay money to traverse.

It's certainly unlike other deals the Park District has signed with restaurateurs. According to Richard Mott, North Pond pays an annual rent of 5.5 percent of gross sales or $85,000, whichever is higher. Typically, the Park District charges its concessionaires 5 to 6 percent of gross sales from the start of operations. If they're operating a kiosk, the rent goes up to 15 percent of the gross, since there's so little overhead.

When I first called the city a few months ago asking about the Park Grill's lease, it was apparent that I had touched a nerve. I got bounced from the Department of Cultural Affairs to the Park District to Cultural Affairs and back to the Park District. The Park District press office directed me to the Park District's Freedom of Information officer, who instructed me to file a request for copies of the bids and the contract under the Freedom of Information Act. It took weeks to get any documents, and even then I didn't get everything I'd requested.

I still haven't been able to find out how much rent, if any, the Park District has received from the Park Grill. Park District spokeswoman Michelle Jones has promised to get back to me with that information but hasn't yet.

On the day the Sun-Times story broke, Tim Mitchell met with reporters to defend the Park District against charges of cronyism. He said most of O'Malley's well-connected investors signed onto the deal after it was negotiated, and that Laura Foxgrover had no part in choosing the Park Grill or negotiating its lease. He also said he wanted to renegotiate the lease to get a better deal for the district.

Good idea. City Hall always finds a way to get what it wants, and judging from this week's news reports it's trying to renege by claiming that the Park District didn't have the authority to sign the contract—something it didn't bother to mention when the deal was being cut. But the city can't pretend it didn't know what was going on. This is a conglomeration of well-off and well-connected entrepreneurs. They have exclusive rights to feed the millions of people who stroll through the city's most celebrated park. It's too bad someone representing the taxpayers' interests didn't try to make some money on the deal.

Art accompanying story in printed newspaper (not available in this archive): photo/Robert Murphy.

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