Title
RESOLUTION NO. 2016-218 OF THE CITY COUNCIL OF THE CITY OF CHULA APPROVING A GOLF COURSE FACILITY MANAGEMENT AGREEMENT WITH TOUCHSTONE GOLF FOR THE INTERIM OPERATIONS OF THE CHULA VISTA GOLF COURSE
Body
RECOMMENDED ACTION
Recommended Action
Council adopt the resolution.
Body
SUMMARY
During the past year, staff has reviewed the status of the golf course operations, the existing market, and current trends. Following the review, it was determined that changes in golf course operations and upgrades to facilities were necessary to provide the public with a quality golf course while remaining profitable. It would, however, take additional analysis to determine the specific changes necessary and to identify funding sources to pay for such changes. In the interim (i.e. during the time needed for additional analysis), staff determined that a temporary golf course management company would be needed to maintain the course and keep it operational: the current management company would stop managing the course on November 1, 2016. A tentative management agreement has been negotiated with Touchstone Golf, LLC, and that agreement is the subject of this action.
ENVIRONMENTAL REVIEW
Environmental Notice
Environmental Notice
The activity is not a “Project” as defined under Section 15378 of the California Environmental Quality Act State Guidelines; therefore, pursuant to State Guidelines Section 15060(c)(3) no environmental review is required.
Body
Environmental Determination
The Director of Development Services has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that the activity is not a “Project” as defined under Section 15378 of the State CEQA Guidelines because it will not result in a physical change in the environment; therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines, the activity is not subject to CEQA. Thus, no environmental review is required.
BOARD/COMMISSION RECOMMENDATION
Not Applicable
DISCUSSION
The City of Chula Vista entered into a 20 year lease agreement with American Golf Corporation (AGC) in 1984. The lease contained provisions for two five year extensions bringing the total to thirty years. The lease was amended in 1986 at which time the term was extended an additional two years bringing the termination date to October 31, 2016. Under this lease arrangement the City had very little direct involvement in the operation or maintenance of the golf course. The City received rent that was structured around a base rent for golf operations, a base rent for the sales of food and beverages and a percentage of revenue from both after certain thresholds were attained. This rent totaled $357,116 in calendar 2015.
In anticipation of the expiration of the lease and in light of declining revenues from the golf course both for AGC and subsequently the City, Staff determined that an assessment of the status of the golf course operations, the current status of the golf market in general and an overview of current trends in the management of municipal golf courses. The firm of Pro Forma Advisers was retained in September of 2015 to provide this comprehensive assessment.
The Market
Pro Forma’s report showed that the golfing industry is declining nationwide in both participants and in revenue. In contrast to a steady increase in play from the mid-1980’s through 2000 (2.4% increase per annum) golf play decreased 11% between 2001 and 2011. In the Southern California the golf market has declined by over 15% since 2007 although this drop is also due in large part to the poor economy. In the last three years, the market has become more stable however and most economic models predict annualized growth in the range of .5 to 1.5 percent.
CVMGC Economic Performance
Annual gross revenues at CVMGC ($2.57 million est.) fall in the mid-range of comparable municipal golf courses, however revenue from golf operations fall near the bottom. Merchandising revenue at CVMGC is also at the low end of the range for comparable courses. The food and beverage operations at the course are relatively strong due to the proactive marketing by AGC, group events and banquet functions. This strength has helped offset the decline in golf revenue.
Condition of the Facility
In 2004 the City amended the lease with AGC to put in place a schedule of capital improvements and maintenance. The amendment specified a five-year capital improvement program. The intent was to have a program that would result in a better maintained course and facilities. This program was not adhered to and the result is significant issues with deferred maintenance. AGC has implemented approximately $75,000 per year in capital improvements over the last five years but the facility will require about $4.1 million in improvements in the near to mid-term. Two significant items included in these needed improvements are the replacement of the maintenance facility and renovations to the existing club house.
Interim Agreement Term
Given the current status of the golf market and the condition of the improvements it was decided that prior to committing to a long term arrangement some time would be needed to develop a strategy to improve both the quality and performance of the facility. Specifically, a business model and strategic plan needs to be developed that is more flexible, allows greater input and direction from City and is better aligned with the current economic realities. The strategic plan also has to address the need to fund a capital improvement program for the facility. Staff feels that one year is sufficient to develop a structure to accomplish these goals.
Proposed Management Agreement Business Model
For the past 32 years the CVMGC has been under lease to American Golf Corporation. In 1984 when the City entered into this agreement, a lease was the mechanism for having an outside entity operate a municipally owned golf course. It afforded the City a long term management solution with a steady stream of revenue. It also required very little input or resources from the City. Conversely, it provided the operator with very little incentive to maintain the facility at a high level and no incentive to perform upgrades. As a result the facility has fallen behind current standards and as described above, has serious issues as a result of deferred maintenance the facility.
In reviewing the operation of all municipal golf courses in the state it was found that only the City of Los Angeles operates their muni courses under a lease agreement. All other courses are operated in-house, under a management agreement or a hybrid version of the two. While a lease typically has a term of 10 to 30 years the management agreement model or a hybrid is typically done over a three to five year period. This allows the agency to have far greater control on the level of operation and the flexibility to adapt to changing market conditions or the underperformance of contractor or business unit.
In reviewing the status of CVCMC it became clear that this facility should transition to a management agreement model at some point. When negotiations with American Golf stalled we began talking to Touchstone about stepping in for the one year period. In the course of these negotiations a conclusion was reached that moving to the Management Agreement model at this time would allow the City to be better prepared to market and develop the facility going forward. When the golf course management contract is advertised next year almost all firms that submit proposals will do so as a management or management hybrid operator. Very few firms are willing to enter into a long term lease commitment in the existing economic environment. Taking a year to work out the system with a firm as qualified and experienced as Touchstone will be a great advantage.
Touchstone Golf
Touchstone Golf manages 34 courses and restaurants in 9 states. These include Mt. Woodson Golf Course in near Poway, River Walk Golf Course in San Diego and the Presidio Golf Course in San Francisco. They have extensive experience in management transitions and have worked with American Golf on several such as this.
Touchstone is proposing to manage CVMGC for one year for a fee of $7,000 per month ($84,000/year). Additionally, the contract has an incentive clause. The clause provides Touchstone Golf with a fee in excess of the monthly fee if Net Operating Income (NOI) exceeds $325,000, which approximately equals to the current NOI. The incentive is 15% of the net operating income above $325,000. To gain this incentive they will have to increase revenue and profitability to the City. They will retain and employ all or almost all of AGC’s current staff; the City will have no employees. All management, accounting, maintenance and day-to-day operations will be conducted by Touchstone with direction from the City on standards, fees, and maintenance levels. By December 20, 2016 Touchstone and the Staff will present a budget for the facility to Council for approval.
DECISION-MAKER CONFLICT
Staff has reviewed the property holdings of the City Council members and has found no property holdings within 500 feet of the boundaries of the property which is the subject of this action. Consequently, this item does not present a disqualifying real property-related financial conflict of interest under California Code of Regulations Title 2, section 18702.2(a)(11), for purposes of the Political Reform Act (Cal. Gov’t Code §87100,et seq.).
Staff is not independently aware, and has not been informed by any City Council member, of any other fact that may constitute a basis for a decision maker conflict of interest in this matter.
LINK TO STRATEGIC GOALS
The City’s Strategic Plan has five major goals: Operational Excellence, Economic Vitality, Healthy Community, Strong and Secure Neighborhoods and a Connected Community. By providing a quality municipal golf course and banquet facility that is affordable the City is promoting healthy community.
CURRENT YEAR FISCAL IMPACT
For the current fiscal year staff anticipates no net fiscal impact. An initial $300,000 City funded outlay will be required to purchase equipment and inventory assets, transfer lease agreements to the City, and provide initial operating funds for the new operations agreement with Touchstone Golf. This outlay will be offset by ongoing revenues from the golf course operations. Staff will return at a later date to appropriate the funding for the initial outlay required as part of the presentation of the budget and financial structure proposed for the agreement with Touchstone Golf.
ONGOING FISCAL IMPACT
In the four remaining months of this contract next fiscal year revenue should exceed expenditures and the facility should provide a profit to the City comparable to the lease revenue received in past years.
ATTACHMENTS
Management Agreement
Staff Contact: Rick Ryals, Real Property Manager