City lease gamble fails to pay off

Acting as landlords, Dayton city officials signed a lease calling for below-market rent on a downtown restaurant project that was troubled from the start and which ended only after the restaurant’s owner accrued more than $60,000 in unpaid rent and taxes.

Emails requested and reviewed by the Dayton Daily News between city officials and the owners of Sa-Bai Asian restaurant at 200 S. Jefferson St. show growing frustration on the part of city officials, while contrite restaurant owners promise rent payments and ask the city for more time. But by mid-March 2013, exasperated city officials started eviction proceedings against Sa-Bai, and the restaurant’s owners ended the venture.

The lease that the city offered in 2009 to Cincinnati-based restaurant operator Chanaka DeLanerolle still puzzles business owners in the adjacent Oregon District — especially since the new restaurant was a direct competitor of an established Oregon District Asian restaurant that was only a few hundred feet away.

City of Dayton officials were “picking and choosing winners and losers, basically,” said Michael Martin, president of the Oregon District Business Association. “It’s not the city’s responsibility to do that.” The city’s taxpayers, Martin said, “bore the brunt” of Dayton officials’ decision to enter into a below-market lease with Sa-Bai.

Rob Strong, co-owner of Thai 9 Asian restaurant at 11 Brown St., said of the city’s actions, “I was a little disappointed in the direct competition, especially because it was so close, and the fact that the rent was so cheap,” Strong said. “The under-market value (of the city’s lease) made it tough competition.”

Dayton city officials strongly defended the lease, saying it was worth the gamble to rejuvenate a street-level property in a strategic location. Deputy City Manager Stanley Earley said the estimated $200,000 in renovations and improvements that Sa-Bai’s owners made to the restaurant will help the city market the space to future tenants.

Earley said the city’s lease with Sa-Bai’s owners was negotiated by Bart Shaw, the former director of the Dayton Convention Center who left Dayton in late 2012 to take a job as operations director for the convention center in Fort Wayne, Ind.

“But I think he did a reasonable job, and I have no problem with what he did,” Earley said. “Given the cost of the buildout (renovations), and the existing condition of the facility, and the lack of demand for that space, that lease was viewed as a reasonable contract.

“I’m sorry that Sa-Bai didn’t work out. But at the end of the day, we got a lot of work done at the facility, and we had a viable restaurant in there for a period of time.”

The project began with great promise — and an enthusiastic press release from city of Dayton officials who believed they were helping to breathe new life into long-vacant space at the gateway to the Oregon District. The space across from the city-owned Dayton Convention Center, near Gilly’s nightclub and the Neon movie theater, was vacated by Chin’s Oriental Cafe in 2003 and by Elbo’s bar shortly afterward.

“Based on his track record in Cincinnati, Mr. DeLanerolle obviously has the experience and skills necessary to operate a successful restaurant,” then-Mayor Rhine McLin said in the city’s news release.

A city manager’s report revealed details of the lease agreement that called for a five-year original term with three five-year option terms:

• Sa Bai restaurant would pay no rent for the first five months, from July 1 through Nov. 30, 2009, “allowing the tenant to complete renovations and build their business.”

• For the remaining four years and seven months of the lease’s five-year original term, the restaurant was supposed to pay $2 per square foot, a rate that would have risen to $2.15 for years six through 10 and to $2.30 in years 11 through 20.

Kelly Gray, vice president of the Dayton office of Equity Inc. and commercial real estate specialist focusing on retail and restaurants, said it is not unusual for a landlord to offer free rent at the outset of a lease in exchange for the tenant’s agreement to make improvements and renovations to the property. But the subsequent rent of $2 per square foot “is below market,” Gray said.

“That’s more like industrial rates than retail rates,” Gray said, estimating that market rates for retail-restaurant space in the area in and around downtown Dayton would range from $6 to $8 per square foot. She also said landlords sometimes offer below-market leases to restaurants as an amenity to other tenants or nearby businesses.

For Sa-Bai, even with the favorable lease, trouble began almost immediately.

DeLanerolle originally told city officials the restaurant’s target opening date was Aug. 31, 2009 – about two months after the city’s announcement. Instead, it opened two years later, in June 2011.

The recession played a role in the delay. DeLanerolle owned four Cincinnati-area restaurants when the Dayton deal was first consummated, and he still owns The Celestial and Teak Thai Cuisine. But two other properties that housed restaurants were sold, including Mt. Adams Fish House, which closed before Sa-Bai opened.

“I was losing money on the two properties that we sold,” DeLanerolle told the Dayton Daily News at the time. “Now that those are gone, we should be in good shape.”

But Sa-Bai’s owners already were behind by about $14,000 on their rent, taxes and utilities even prior to opening, former convention center director Shaw said at the time. “We’re still very excited about it, and we understand that it took a little more time than everyone had hoped,” Shaw said in early 2011.

But by October 2012, Sa-Bai had closed for two weeks with little warning, then reopened with what Sa-Bai’s Facebook page at the time called “a revamped menu and all new staff.”

It apparently didn’t help much. Within two months, city officials were applying pressure about missed rent payments.

“Hope all is going well with the new staffing, and adjusted hours of operation at Sa-Bai,” Michael Cashman, interim director of the Dayton Convention Center, said in an email to DeLanerolle on Dec. 10, 2012. “I just wanted to follow up with you and find out what kind of payment schedule you were planning to put in place to get back on track with your lease agreement. I have been getting pressure and questioning from different people at City Hall … .”

DeLanerolle responded with a promise: “We will pay and stay current on rent and pay minimum $500 a month on back rent,” the restaurant owner wrote.

By Jan. 9, 2013, Cashman was more blunt. “It seems I’m getting calls almost every day asking, ‘What’s going on at Sa-Bai?’ Please let me know what is really going on,” he wrote to DeLanerolle.

By Feb. 14, the tone of Cashman’s emails had turned much more ominous. Cashman wrote that ” … the eviction process will be placed in motion if no payments are received by tomorrow.” A full week later, DeLanerolle responded that his email had been down, and that he would instruct his brother-in-law, who managed Sa-Bai, “to drop you a check ASAP.”

On March 11, the letter demanding that DeLanerolle vacate the premises was sent. By then, the restaurant had been closed for several weeks. The owners complied with the order to vacate.

Reached by phone earlier this week, DeLanerolle said Sa-Bai “never broke even a single week” that it was open. But he said he made several improvements to the restaurant’s interior, including extensive plumbing and electric renovations and new bathrooms that cost an estimated $200,000.

DeLanerolle said a combination of factors contributed to Sa-Bai’s failure: The recession was hurting business downtown. The convention center was not doing as much business as he expected. Thai 9 restaurant proved to be tough competition. Expenses were high because sushi and Thai dishes required two kitchen staffs. The restaurant’s visibility was poor.

One thing that didn’t contribute to Sa-Bai’s demise: The rent. DeLanerolle said the amount of the rent called for in the lease “was very, very fair.”

Cashman said in an interview last week that the haf-dozen or so prospective tenants that are interested in renting the former Sa-Bai will be asked to provide a business plan spelling out how their venture will succeed.

Cashman said he does not expect to enter into a deal similar to the one his predecessor made with Sa-Bai.

“I’m sure there will be something different about it,” he said of the next lease. “You hope to learn from the past.”

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