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HomeMy WebLinkAbout06-19-18 Special Meeting NoticeArcadia Par 3 Lease Agreement June 18, 2018 Page 1 of 6 DATE: June 19, 2018 TO: Honorable Mayor and City Council FROM: Tom Tait, Public Works Services Director SUBJECT: REPORT, DISCUSSION AND DIRECTION REGARDING THE MANAGEMENT OF THE OPERATION AND MAINTENANCE OF THE ARCADIA PAR 3 GOLF COURSE Recommendation: Provide Direction SUMMARY The Arcadia Par 3 Golf Course, located at 620 E. Live Oak Avenue, is owned by the City and leased to American Golf Corporation (“AGC”) for complete operations and maintenance of the golf course. On November 18, 2008, the City Council approved a five-year lease agreement with the option of three additional five-year terms. AGC’s second term is set to expire on November 30, 2018, and they have notified the City that they will not be exercising their option for a third five-year term under the current agreement. AGC has proposed an alternative non-lease operations management agreement (Attachment “A”). The City Council may consider the following options for the management of the operation and maintenance of the Par-3 Golf Course: 1. Bid the operations and maintenance of the golf course on the open market; 2. Enter into a management agreement with American Golf Corporation; 3. Operate and maintain the golf course using City staff; 4. Enter into a public/private partnership to develop sports facilities and fields on the property; 5. Sell the golf course operation and property. Arcadia Par 3 Lease Agreement June 18, 2018 Page 2 of 6 It is recommended that the City Council consider bidding the operations and maintenance of the golf course at this time. This may be the most expedient course of action and does not preclude any of the other options should it not be ultimately desirable. BACKGROUND The Arcadia Par 3 Golf Course was opened in 1962. It sits on approximately 26 acres and has 18 holes measuring 1,947 yards long. Both the driving range and golf course are equipped with lighting, which allows for play after dark. Weather permitting, the golf course is open for business at least 12 hours per day 360 days per year. The golf course cannot be operated between 10 p.m. and 6 a.m. Additionally, there is a clubhouse for recreational use, pro shop, snack bar/grill, and a practice putting green area. American Golf Corporation provides golf patrons an opportunity to rent golf clubs, a pull cart, and electric golf carts. On December 29, 2008, the City entered into a contract lease agreement with AGC for the complete operation and maintenance of the Par 3 Golf Course. The existing agreement includes: Term Initial 5 years, with three five-year optional extensions for a possible 20 year term. Capital Improvements  Upgrade Driving Range Improvements  Irrigation Replacement = $1,000,000  Grill Installation in Clubhouse Total Investment Capital Fund Improvement Beginning July 2010, fund an annual CIP Reserve equal to 2.5% of gross revenues for future facility improvements and ongoing repairs. Additionally, the existing agreement allows for rental payments from AGC to the City to be the greater of either: Rent Year 1 15% Golf Revenue + 8% Other Revenue -or- $125,000 minimum rent Year 2 - 5 15% Golf Revenue + 8% Other Revenue -or- $150,000 minimum rent Year 6 - 10 17% Golf Revenue + 8% Other Revenue (subject to Gross Revenue exceeding $1,200,000 during prior 12 months) -or- $150,000 minimum rent Arcadia Par 3 Lease Agreement June 18, 2018 Page 3 of 6 Year 11 - 20 19% Golf Revenue + 8% Other Revenue (subject to Gross Revenue exceeding $1,350,000 during prior 12 months) -or- $150,000 minimum rent The lease is reaching the end of the second term and since entering the contract AGC has paid the City the minimum allowable rent for each term (Currently, $150,000 per year). Annual gross revenues for calendar year 2017 was $945,821 and the average over the past five years is approximately $930,000 (Attachment “B”). Additionally, the required funding of a Capital Improvement Fund Reserve has provided for a partial upgrade to the electrical lighting equipment and the improvement of the existing pro shop, manager’s office, and multi-purpose room. Recently, AGC notified the City that they will not be extending their lease for an additional five-year term. Despite their personal investment of over $1 million in capital improvements into the Par 3 Golf Course over the last 10 years, AGC has determined that increases in minimum wage requirements and competitive market conditions do not allow for increasing fees to overcome increased costs, resulting in a lease structure that is unfeasible. The City met with AGC to see if they would be willing to renegotiate the current structure of the lease agreement; however, they stated that their corporate direction is to move away from lease agreements such as these. Due to the strong relationship with the City over the last 25 years, AGC has proposed an alternative five- year management agreement. The management agreement includes the City paying AGC a $10,000 per month management fee, or $120,000 annually, to operate and maintain the Par-3 Golf Course. The management agreement would allow operations to remain as they do today since all revenues would continue to fund the operations and maintenance of the property. The three major components that would change going from a lease to a management agreement are: 1. AGC would not pay the City annual rent; 2. The City would pay AGC a monthly management fee of $10,000; 3. The City will now pay property taxes to the County; 4. The City could keep all greens fees and other revenue; and 5. The City would be required to pay for maintenance costs and upgrades. The negative of entering into a management agreement with AGC, or any other potential vendor, is that there are no assurances that the Par 3 Golf Course will generate sufficient revenue to maintain the property and earn a profit. Arcadia Par 3 Lease Agreement June 18, 2018 Page 4 of 6 DISCUSSION The Public Works Services Department (“PWSD”) has explored different alternatives to find the best way for the City to utilize the property. The following five options are summarized for City Council’s consideration: Option 1: Conduct a Request for Proposals to lease complete operations and maintenance of the Arcadia Par 3 Golf Course in the open market. In other words, see if any other company would be interested in the lease format that AGC previously worked under. There are cities that lease out complete operations and maintenance to a management company similar to what the City is doing currently. The PWSD recently met with the professional golf management company that leases the Los Angeles County Santa Anita Golf Course in Arcadia and they have expressed interest in possibly providing a proposal for the lease of the Par 3 Golf Course. The Cities of Downey, Garden Grove, Norwalk, Pasadena, and San Dimas also lease complete operations and maintenance to an outside professional golf management company. Option 2: Enter into a management agreement with American Golf Corporation. AGC has provided the City with a proposal for a five-year management agreement as an alternative to retain AGC’s professional golf management services at the Par 3 Golf Course. The management agreement proposes that the City pay a flat management fee of $10,000 per month, $120,000 annually, to AGC for all staff and services that are provided offsite. The annual gross revenues from golfing and other sales would then be used to pay for the day-to-day operations and maintenance of the Par 3 course, with whatever remaining profit that is available going to the City. Under this scenario there is no guarantee that the City will earn a profit from the property and AGC’s motivation for ensuring they perform at a profitable level would be greatly reduced. Option 3: Operate and maintain the golf course using City staff. The Cities of Cerritos, South Gate, Torrance, and Montebello currently own and operate their own municipal golf courses. Similarly, it is possible for City of Arcadia staff to operate the Par 3 facility. A manager familiar with golf course operations would need to be hired to oversee the staffing and administration of the facility. It is not known whether the Cities operating their own courses are currently operating successfully or in a deficit, but cities have traditionally struggled to operate as successfully as the private industry in this arena, largely due to City operations being one-off locations, whereas golf management companies benefit from economies of scale and wider marketing reach through brand recognition. Arcadia Par 3 Lease Agreement June 18, 2018 Page 5 of 6 If the City Council wished to explore operating the golf course, it would be recommended that a consultant be hired to evaluate the earning potential of the golf course, which would include auditing the current financial and maintenance operations of the golf course and calculating the initial capital investment needed for this new venture. The PWSD reached out to the City’s current landscape contractor to evaluate the annual landscape maintenance costs using the current maintenance schedule in the lease agreement. The estimated annual cost for landscape maintenance alone is approximately $500,000. Option 4: Enter into a public/private partnership to develop sports facilities and fields on the property. The City has been approached by American Sports Centers (https://www.americansportscenters.com/) to provide a sports delivery model where athletic and recreational facilities are developed by and leased to a private entity to be operated and maintained. There would be no up-front costs to the City and an agreement would need to be negotiated with a vendor that would include paying back capital costs associated with construction and day-to-day operations and maintenance of the property. The proposal received includes:  Nine Indoor Volleyball Courts (convertible into six basketball courts)  Two Multi-Purpose Rooms and Restrooms  Kitchen/Concession/Foot Court  Nine – 5v5 Small Sided Soccer Fields  Tot-lot Areas  Baseball Fields  Pitching Tunnels/Batting Cages  Two Multi-Purpose Fields (with overlays for soccer fields) There are several private companies offering this type of recreation model. Costs are typically recovered through daily usage fees and a share of the league fees. Option 5: Sell the golf course operation and property at fair market value on the open market. This would provide a large cash infusion to the General Fund, but would take away recreational opportunities and an annual revenue source from the City. At 26 acres, with asking prices in Arcadia generally around $50-100 per square foot for vacant land depending on the usage and lot desirability, the property could generate $50-113 million. This figure should be viewed as a very rough estimate at this time; should the City Council wish to pursue selling the property, it is recommended that a real estate agent and/or appraiser be engaged to properly estimate the potential land value. Arcadia Par 3 Lease Agreement June 18, 2018 Page 6 of 6 It is recommended that the City Council consider all identified options; at this time, it may be advisable to distribute a request for proposals from companies that may wish to operate the Par 3 Golf Course under the current lease model. Should those proposals not be sufficient or desirable, the other four options will remain available to the City. FISCAL IMPACT Depending on the option chosen, minimal annual revenues can range from $100,000 to $200,000. Another option is to increase proposed rent payments under a lease scenario and have the City budget and pay for all Capital Improvement Projects. Without having to pay for capital improvements, the golf management firms would potentially increase their proposed minimum rents and revenue sharing percentages. Selling the property would provide a substantial one-time cash influx, which could generate upwards of $100 million. More investigation of Option 4 is needed to determine annual revenue; however, the PWSD and Recreation Department met with representatives from American Sports Center and their team to discuss the project. Annual revenue to the City would be dependent upon the agreement negotiated with the private developer to construct, maintain, and staff the facilities. RECOMMENDATION Provide direction on how to proceed with the continued operations and maintenance of the Arcadia Par 3 Golf Course. Approved: Exhibit “A”: AGC Proposal Letter Exhibit “B”: Arcadia Golf Course Gross Receipts Summary 909 North Sepulveda Blvd. - Suite 650 – El Segundo - California - 90245 May 31, 2018 Via E-Mail Mr. Tom Tait Public Works Services Director City of Arcadia 11800 Goldring Road Arcadia, CA 91006 Re: Arcadia Par-3 Golf Course Dear Mr. Tait: This letter is to formally notify you that American Golf will not exercise its option for a third five -year term at Arcadia Par-3 Golf Course. As we discussed in our last meeting, despite our more than $1 million investment into Arcadia Par-3 Golf Course over the last 10 years, minimum wage pressures from the recent mandated minimum wage increases and competitive market conditions that do not allow for increased prices to overcome increased costs, have rendered a lease structure unfeasible at Arcadia Par-3 Golf Course. We have been a trusted partner of the City of Arcadia for nearly 30 years and have made considerable investments into the golf course. We regret that market conditions out of our control have put us in the position to allow the lease to terminate at the end of this current 5-year term on November 30, 2018. Given our long history with Arcadia Par-3 Golf Course, we are pleased to propose a 5-year management agreement as an alternative to retain American Golf’s professional management services at Arcadia. The management agreement would be at our most attractive fee of $10,000 per month and American Golf will contribute its owned maintenance and clubhouse equipment to the facility to allow for seamless operations when the management agreement commences on December 1, 2018. American Golf would also continue to manage the very successful and competitively advantageous Player’s Club program and provide access to this program for Arcadia Par-3’s patrons. American Golf is the largest golf course operator in the state of California and the largest in L.A. County. With our vast database of customers and innovative affinity programs, we believe we could still assist the City of Arcadia to have successful and profitable golf operations at Arcadia Par-3. Please let me know if you would like to discuss this structure further. Thank you again for our years of partnership and for your support of our golf operations at Arcadia. We look forward to working together on a seamless transition to a management agreement or to seamlessly transitioning management services as directed by your office. Very truly yours, Paul Ballam Vice President – Business Development Cc: Lee Finkel, American Golf Brian Bode, American Golf