Landmark Port of L.A. lease could earn millions; Japanese shipping corporation is ready to do business.

Landmark Port of L.A. lease could earn millions

Los Angeles city officials are poised to approve a landmark lease with a Tokyo steamship company that may become a model for future negotiations at the Port of Los Angeles.

This week the City Council is expected to ratify the contract, worth several hundred million dollars, allowing Nippon Yusen  Kaisha to use a 100-acre waterfront parcel for 25 years. The port, which collects about 65 percent of its revenues by collecting tariffs from shipping companies, has pursued NYK since September 1988, largely because it is considered a stable, rich and powerful company.

NYK, a member of the giant Mitsubishi Group, fields about 320 ships worldwide, making it Japan's largest shipping company and among the world's biggest.

NYK would ship approximately 160,000 20-foot containers in or out of its new Port of the L.A. location annually, according to a NYK source. That would account for about 8 percent of last year's total port volume.

"We wanted to lock major players in for a long term," said port Deputy Executive Director for Maritime Affairs Tay Yoshitani, who oversaw negotiations with NYK.

The agreement calls for a 25-year term, the longest granted to any of the port's 350 tenants, plus a 10-year extension option.

There are other unique features in the complex lease, according to a July report by the City Administractive Officer that recommended the NYK lease.

The minimum annual rent guaranteed by NYK for the first five years of the lease would average $10.4 million, the highest in the port, even though some tenants have contracted for more land.

Also, the port has agreed to a first-ever cap on expenditures it will make to build a massive loading terminal for NYK. After $15.2 million is spent, NYK must pick up any additional costs.

The NYK lease will likely be scrutinized by other big tenants whose contracts call for rent renegotiation every five years.

"This will set the standard in compensation for future users," predicted NYK's chief negotiator, Ray Cunan.

Several port officials said NYK's lease might be seen as a model for similar tenants but declined to elaborate. In October, a five-year term will expire for the giant Evergreen Marine Corp. steamship, company, followed by Mitsui OSK, with a December renegotiation.

"If you cut a special deal with somebody, they (other lessees) will want the most favorable things out of the contract," said port executive Yoshitani. He claimed that the port did not bend over backwards for NYK, despite some very significant inducements it made.

* The port was deeply committed to a $100 million preparation of the site -- it's largest capital project -- before signing the agreement with NYK July 20. Yoshitani said the millions spent so far were for contaminated-soil cleanup and whart construction, among other projects.

* The 9.6 percent estimated rate of return on the port's investment falls short of 10.0 percent goal set by the port's governing Board of Harbor Commissioners. The city report said the 9.6 percent rate is "conservative" and does not take into consideration additional tariffs NYK will collect from its clients and pass on to the port. These funds, which pay for storage, piloting and penalties on loading delays, will be turned over to the port in addition to half of the money NYK collects for docking and wharfage -- all standard charges set by the city. These tariffs comprise the bulk of rent paid to the port.

* the minimum guaranteed return is 7.1 percent, also below the board's goal of 7.5 percent.

Harbor Commissioner Floyd Clay defended the lower rates. He said NYK would very likely bring in far more goods, and therefore more tariff funds to the port, than the minimum. "We believe they'll put more freight through here."

Further, the contract demands that NYK move at least 2 million tons of cargo destined for east of the Rockies, netting the port $4.4 million a year. If the falls short, the $4.4 million must still be paid. "Considering the relative ease with which most of this rail-transported cargo can be diverted to competing ports, this is an important provision in the agreement," said the city report.

NYK also ships into ports in Oakland and Seattle.

Ports chase after steamship business with an "intensely competitive nature," said the report. Yoshitani said Los Angeles pushed for a longer term than 25 years and higher total return than 10 percent but was rebuffed by NYK. "We tried," he said.

Another port official close to the negotiations said Long Beach, which runs the adjacent port, "was hot and heavy after NYK." The city "has 150 acres over there they've just spent a fortune on," he added, referring to the 147-acre Pier J expansion that will cost an estimated $250 million. Cunan said Long Beach courted NYK before the company chose Los Angeles.