Title
Report regarding a resolution approving a sublease agreement with Joanne Wan, DBA Milk Tea Lab, LLC, for the commercial space at 636 El Camino Real, Suite C. (Katie Donner, Management Analyst II)
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RECOMMENDATION
Recommendation
Staff recommends that the City Council adopt a resolution approving a 10-year sublease agreement with Joanne Wan, DBA Milk Tea Lab, LLC (Milk Tea Lab), for the commercial space at 636 El Camino Real, Suite C, with one option for an additional 10-year extension.
Body
BACKGROUND
Milk Tea Lab opened in 2019 in South San Francisco at 636 El Camino Real, Suite C. Known for its customizable drinks, fun laboratory-inspired tonics, and cozy hangout atmosphere, Milk Tea Lab offers a variety of classic milk teas, fruit refreshers, and smoothies. The shop operates daily from 12:00 p.m. to 11:00 p.m. and is part of a Bay Area franchise with nine locations. Since opening in South San Francisco, Milk Tea Lab has established itself as a popular destination along the El Camino Real corridor, contributing to the City's diverse retail and dining offerings.
Existing Lease
Milk Tea Lab’s sublease with the City is expiring on September 30, 2026, with the tenant paying $3,939.29 (or $2.46 per square foot). Milk Tea Lab currently occupies 1,600 square feet for its retail operation.
Lease Proposal
Joanne Wan, the owner of Milk Tea Lab, sent the City a lease proposal in Summer 2026 for the 1,600-square-foot retail space she currently occupies. Ms. Wan initially proposed a 10-year sublease at $3,200 per month, or $2.00 per square foot, for the first 12 months, and an extension option. The initial proposal represented a 19% reduction from the tenant’s current monthly rent of $3,939.29.
Following discussions with staff, the proposed starting rent was increased to $3,440 per month, or $2.15 per square foot. The proposed rate represents a reduction of $499.29 per month, or 12.7%, from the tenant’s current rent, while remaining within the range of observed market asking rents and consistent with the rental rate of the adjacent El Camino Florist tenant.
Staff also proposes including one option to extend the sublease agreement for an additional 10 years. Any extension option would need to be requested in writing by the Tenant and approved by the Economic and Community Development Director. Rent during the extension term would continue to increase by 3% annually. The proposed long-term sublease would provide greater certainty of continued occupancy at the property while providing Milk Tea Lab with rent relief.
DISCUSSION
Staff used CoStar, a commercial real estate data and analytics platform subscribed to by the City, to determine the market rent for El Camino Real. Staff reviewed market rental rates along El Camino Real and found asking rents ranging from $1.95 to $3.00 per square foot. Milk Tea Lab proposes a monthly rental rate of $3,440, or $2.15 per square foot based on the 1,600-square-foot space. The proposed rate falls within the observed range of market asking rents and is consistent with the rental rate of the adjacent tenant at the property. While the recommended rate is below the tenant’s current rental rate of $2.46 per square foot, it presents a valuable opportunity to keep an established local business in South San Francisco. The proposed $3,440 monthly rent represents a reduction of $499.29 per month, or 12.7%, from Milk Tea Lab’s current monthly rent of $3,939.29. Ms. Wan, along with many other small business owners in the City, have expressed how inflation has exacerbated an already difficult business climate.
The proposed $2.15 per square foot starting rate is also consistent with the rental rate recently approved by City Council for the adjacent El Camino Florist tenant. In February 2025, City Council approved a new 10-year sublease with El Camino Florist at $2.15 per square foot, with a 3% annual rent escalator and options for additional renewal terms. Establishing the same $2.15 per square foot starting rate for Milk Tea Lab would maintain consistency between the adjacent retail tenants while providing Milk Tea Lab with a similar long-term lease structure.
Staff also considered the value of maintaining occupancy at the property. One of the three retail spaces at 636 El Camino Real has experienced a long-standing vacancy. Although a lease has been signed for the vacant space, the storefront has not yet been activated or opened. Securing a long-term commitment from Milk Tea Lab would provide greater certainty of continued occupancy and contribute to an active retail presence along the El Camino Real corridor.
Milk Tea Lab has demonstrated stable tenancy at the property for several years and has remained in good standing throughout its tenancy, with no notable issues or concerns identified by staff. The continued operation of an established tenant with a positive tenancy history provides additional support for securing a long-term sublease at the property.
Ms. Wan is committed to keeping Milk Tea Lab in South San Francisco, contributing to a vibrant retail mix and attracting destination shoppers to South San Francisco. Approving the proposed sublease would affirm the City’s commitment to keeping the City’s existing retail tenants in place and stable as part of our South San Francisco business community.
FISCAL IMPACT
The City will earn $473,229.12 in rent revenue over the initial 10-year sublease period. The City will earn $635,980.08 in rent revenue if the 10-year extension term is approved. Below is a breakdown of the rent collected in each year of the lease. Even though this represents a reduction in revenue from prior years, the revenue collected will still be more than anticipated City expenditures associated with the property.
|
Year |
Monthly Rent |
Annual Rent |
|
1 |
$3,440.00 |
$41,280.00 |
|
2 |
$3,543.20 |
$42,518.40 |
|
3 |
$3,649.50 |
$43,794.00 |
|
4 |
$3,758.99 |
$45,107.88 |
|
5 |
$3,871.75 |
$46,461.00 |
|
6 |
$3,987.90 |
$47,854.80 |
|
7 |
$4,107.54 |
$49,290.48 |
|
8 |
$4,230.77 |
$50,769.24 |
|
9 |
$4,357.69 |
$52,292.28 |
|
10 |
$4,488.42 |
$53,861.04 |
|
11 |
$4,623.07 |
$55,476.84 |
|
12 |
$4,761.76 |
$57,141.12 |
|
13 |
$4,904.61 |
$58,855.32 |
|
14 |
$5,051.76 |
$60,621.12 |
|
15 |
$5,203.31 |
$62,439.72 |
|
16 |
$5,359.41 |
$64,312.92 |
|
17 |
$5,520.19 |
$66,242.28 |
|
18 |
$5,685.80 |
$68,229.60 |
|
19 |
$5,856.37 |
$70,276.44 |
|
20 |
$6,032.06 |
$72,384.72 |
|
|
Total |
$1,109,209.20 |
Associated Documents
1. 26-2187 Resolution