HomeMy WebLinkAboutStaff Report 451-09TO: HONORABLE CITY COUNCIL 21
FROM: CITY MANAGER DEPARTMENT: COMMUNITY SERVICES
DATE: DECEMBER 7, 2009 CMR: 451:09
SUBJECT: Approval of Amendment Number 4 to the Management Agreement with
Brad Lozares for Golf Professional Services at 1875 Embarcadero Road,
Extending the Term One Year to December 31, 2010
EXECUTIVE SUMMARY
This report recommends that the Council approve and authorize the City Manager or his
designee to execute the attached Amendment No.4 to the Management Agreement with Brad
Lozares (Golf Professional) for golf course professional services at the Palo Alto Municipal Golf
Course, 1875 Embarcadero Road (Golf Course), extending the term one year to December 31,
2010. The current Management Agreement will expire on December 31,2009. IRS rules relating
to tax exempt bond issuance at the golf course to finance Golf Course improvements requires a
management agreement be in place.
Options for how to proceed in managing the Golf Course in the short term are limited. Staff and
the golfing public remain very satisfied with Brad Lozares despite the decline in golf play. Staff
proposes to extend the current Management Agreement one additional year at its current level of
compensation in order to allow time for staff to present to the Finance Committee and Council
recommendations made in the Golf Course Analysis and to discuss long-term plans to make the
Golf Course self-supporting, which will include an evaluation of the advantages and
disadvantages of private versus public golf course maintenance.
The economic downturn continues to impact the number of golf rounds needed to fully recover
direct and indirect expenses for the Golf Course operation. Although the Golf Course remains
competitive with golf courses in the region, the unfortunate reality is all golf courses are
experiencing a decline in play, similar to or worse than Palo Alto. Golf Course expenses
exceeded revenue in Fiscal Year 2009 by $326,000. After the first quarter review of revenues
and expenses a deficit is also expected in Fiscal Year 2010 estimated at $240,000.
RECOMMENDATION
Staff recommends that the Council approve and authorize the City Manager or his designee to
execute the attached Amendment No.4 to the Management Agreement with Brad Lozares (Golf
Professional) for golf course professional services at the Palo Alto Municipal Golf Course, 1875
Embarcadero Road (Golf Course), extending the term one year to December 31,2010.
CMR: 451:09 Page 1 of4
Staff acknowledges that such losses and impact on the General Fund, given the worsening
financial outlook for the City as a whole, may engender detailed questions and discussion by
Council. Staff will be prepared to respond at the meeting.
BACKGROUND
On March 16, 1998, the City issued tax-exempt bonds to finance Golf Course improvements.
Prior to the bonds being issued, the City and the Golf Professional had operated under one lease
agreement for both professional services and the lease of the City-owned facility. When the
bonds were issued in 1998, IRS regulations required that there be two agreements, a management
agreement for Golf Course professional services and a lease to operate the golf retail
establishment (Pro Shop).
In 1998, Council approved a 20-month Agreement and a IS-year lease with the Golf
Professional. The original management agreement was amended three times prior to Council
approval of a new restated management agreement (Agreement) on January 27, 2003. The new
Agreement set the fixed fee at $322,251 and removed the annual CPI adjustment. Cart rentals
and driving range fees were split, with the Golf Professional receiving 40 percent of revenue and
the City receiving 60 percent. The agreement also provided a productivity reward equal to a
stated dollar amount based on increases of golf rounds, power golf cart rentals and driving range
sales. On May 1, 2006, Council approved Amendment No. 1 to the Agreement which: 1)
extended the term for an additional eighteen months; 2) increased the fixed fee compensation by
3 percent; and 3) reimbursed the golf professional for 60 percent of the bank's credit card
merchant charges attributed to the golf cart rentals. In 2007, the Council authorized staff to
proceed with an operational analysis of the Golf Course. On May 14, 2007, the Council approved
Amendment No.2 to the Agreement which: 1) extended the term for one year to December 31,
2008, pending the outcome of the operational analysis; and 2) increased the fixed fee
compensation by two percent. On October 20, 2008, Council approved Amendment No.3 which:
1) extended the agreement for one year to December 31, 2009, pending Council review and
direction of the operational analysis; 2) increased the fixed fee by two percent; and 3) adjusted
the Golf Professional's productivity reward to reflect current market conditions.
On November 17, 2008, Council reviewed the Golf Course Operational Analysis at a study
session, but it is yet to go before the Finance Committee and the full Council due to the
uncertainly of flood control alternatives for San Francisquito Creek and possible budget
reductions for Golf Course maintenance.
DISCUSSION
In Fiscal Year 2009, the Golf Course expenses exceeded revenue by $326,000. This was due to
insufficient rounds of golf played and to the unavailability of reclaimed irrigation water for the
Golf Course resulting from capital improvement projects to the reclaimed water system. The use
of reclaimed water helps keep water costs down, when it is unavailable and additional potable
water is needed water costs rise dramatically. In Fiscal Year 2009 water costs were $130,000
higher than the prior year. Based on first quarter revenue and expense trends and year-end
projections (see attached five-year Golf Course Financial Summary), it is estimated that Fiscal
Year 2010 expenses will exceed revenues by $240,000. During the 2010 budget planning process
staff were concerned that the Golf Course would again struggle to reach full cost recover in
CMR: 451:09 Page 2 of4
2010. In an effort to mitigate concerns staff eliminated a full time Golf Course Maintenance
person, reduced supplies and material costs by $70,000 and continues to ration potable water use
to lessen potential losses. Moreover, staff and Brad Lozares continue to provide regular
promotional opportunities, special events and other incentives to generate more play.
Unfortunately, even with these efforts staff anticipates 72,000-74,000 golf rounds this year, when
76,000 to 78,000 rounds are needed to generate enough revenue to cover direct and indirect costs
in 2010.
It is important to point out that the Golf Course is on track to cover all operating costs and debt
service but will likely fall short of covering the full Cost Plan allocation of $332,155. The bond
debt, which after 10 years is still over $550,000 annually, will retire in 2018. The Cost Plan
charges mentioned above represent overhead services provided by the City to the operating
departments. These overhead services include: Accounting and Budget, Purchasing, Human
Services, Cash Management and other required services to support the administration of the
operating departments. The methodology to allocate Cost Plan is based on the number of FTE
within each department and program therein; it is not determined by the actual overhead costs for
a specific program or service area, as this is very difficult to accurately ascertain. Although the
Golf Course operation is a General Fund activity, it is expected to recover the allocated overhead
expenses.
Notwithstanding the drop in revenue from the number of rounds played, the service level the
Golf Professional and his staff provide is very professional and greatly appreciated by our
golfing public. The Golf Professional is very well regarded throughout the golf community for
outstanding customer service. Despite the significant drop in the number of annual rounds
played, from a high of over 100,000 in the late 1980's to its current level of approximately
72,000 rounds, the Golf Course still ranks in the top ten golf courses in the bay area. The Golf
Course Operational Analysis pointed out that the reduction in number of rounds was due to the
substantial increase in the number of golf courses built over the past 20 years and the challenging
economic conditions we are experiencing.
The current Management Agreement will expire on December 31, 2009. In order for the Golf
Professional to manage the Golf Course and receive compensation, IRS rules require that there
mu~t be an agreement in place. Under IRS regulations, the management agreements must be for
no more than 60 months. The agreements and amendments between the City and Golf
Professional have been for less than 60 months, in order to allow both parties to make
refinements to the agreement that reflect economic conditions and needs of the Golf Course.
Staff proposes to extend the current Management Agreement one additional year at its current
level of compensation to allow time for staff to discuss with the Finance Committee and Council
recommendations made in the Golf Course Analysis, and to consider alternatives for making the
Golf Course self-supporting over the long term which will include an evaluating the advantages
and disadvantages of pri vate versus public golf course maintenance. Once the Golf Course is in a
better financial position, the Golf Course Operation will reimburse the General Fund for past
deficits.
CMR: 451:09 Page 3 of4
RESOURCE IMPACT
The impact on the resources for Fiscal Year 2010 for this contract is estimated to be the same as
Fiscal Year 2009. The cost of compensation to the Golf Professional including fixed and
percentage payments is estimated to be approximately $650,000, and this amount is included in
the FY 2010 adopted budget.
Overall, if Golf Course revenues fall short of overall costs the General fund will need to absorb
the difference, which in 2010 is anticipated to be $240,000.
POLICY IMPLICATIONS
The proposed one-year extension is consistent with prior Council direction and will keep the
Golf Course operational until a long-term plan can be implemented to reduce or eliminate the
General Fund subsidy.
ENVIRONMENTAL REVIEW
Approval of the amendment does not constitute a project under the California Environmental
Quality Act (CEQA); therefore, no environmental assessment is required.
ATTACHMENTS
Attachment A: Amendment No.4 to Management Agreement
Attachment B: Golf Course FinanCial:ummary, '2
PREPARED BY: ~c/~~
ROBDEGEUS
Di~.~n Manager, Recreation & Golf Services
//0. ,
DEPARTMENT HEAD APPROVAL: (.'~~~
CITY MANAGER APPROVAL:
cc: Golf Professional
CMR: 451:09
Interim Director, Community Services Department
./
--------~+-~~~~~~~~--------
Page 4 of4
Attachment A
AMENDMENT NO.4 TO MANAGEMENT AGREEMENT BETWEEN
THE CITY OF PALO ALTO AND BRAD LOZARES GOLF SHOP FOR
PROFESSIONAL SERVICES AT 1875 EMBARCADERO ROAD,
PALO ALTO
THIS AMENDMENT NO.4 to the Management Agreement between the
City of Palo Alto and Brad Lozares Golf Shop for Professional Services at the Palo Alto
Municipal Golf Course, ("Agreement,") is made and entered into this day of
December 2009, by and between the City of Palo Alto, a municipal corporation (the
"CITY") and Brad Lozares Golf Shop, a sole proprietorship ("GOLF
PROFESSIONAL").
RECITALS
A. GOLF PROFESSIONAL has assumed responsibility for and continued the
operation and management of course play for the Golf Course facility on behalf of
the CITY on the terms and conditions set forth in the Management Agreement
dated January 28,2003.
B. On May 15, 2006, the parties amended the Agreement to extend the term
December 31, 2007, and to increase the fixed fee to $27,660.25 per month and
reimburse GOLF PROFESSIONAL for sixty percent (60%) of finance charges
associated with the payment of service charges for golf carts by credit card.
C. On May 15" 2007, the parties amended the Agreement to extend the term to
December 31, 2008, and to increase the fixed fee to $28,213.46 per month.
D. On October 20, 2008, the parties amended the Agreement to extend the term to
December 31, 2009, and to increase the fixed fee to $28,777.73 per month.
E. The parties now wish to amend the Agreement to extend the term of the
agreement to December 31, 2010 at the current level of compensation established
for 2009.
NOW, THEREFORE, in consideration of the terms, conditions, and
provisions of this Amendment, the parties agree as follows:
SECTION 1. Section III ("Term") is amended in its entirety to read, as follows:
"III. TERM
The term of this Agreement shall commence on January 1, 2010, and end on
December 31,2010.
SECTION 2. Section IV, A ("Compensation"), is amended in its entirety to read,
as follows:
"IV. COMPENSATION
1
091120 jb 0073262
During the term of the Agreement, GOLF PROFESSIONAL shall receive a fixed
fee and percentage fees. as defined below (collectively the "Management Fee").
A. Fixed Fee
GOLF PROFESSIONAL shall receive a fixed fee during the term of this
Agreement for GOLF PROFESSIONAL's Golf Course and driving range
management, Golf Course marshaling and starting and cart rental services.
The fixed fee for the term of this agreement will be $345,333 annually,
based on a calendar year. The fixed fee shall be paid in 12 equal monthly
installments.
During the eighteen-month extension term from July 1, 2006 to
December 31, 2007, GOLF PROFESSIONAL shall receIve
a fixed fee payable monthly in the amount of $27,660.25.
During the twelve-month extension term from January 1, 2008 to
December 31, 2008, GOLF PROFESSIONAL shall receive a
fixed fee in the amount of $28,213.46, monthly.
During the twelve-month extension term from January 1, 2009 to
December 31, 2009, GOLF PROFESISONAL shall receive a
fixed fee, in the amount of $28,777.73, monthly.
During the twelve-month extension term from January 1, 2010 to
December 31, 2010, GOLF PROFESISONAL shall receive a
fixed fee, in the amount of $28,777.73, monthly.
The CITY shall forward the fixed fee by the 5th working day of the
CITY's working month for the amount due for that month to the GOLF
PROFESSIONAL. If not received within ten calendar days after the fifth
working day of the month, a late charge of one percent of monthly
payment due and unpaid plus an administrative fee of $45.00 shall be
added to the payment due and unpaid, and the total monthly sum shall
become immediately due and payable to GOLF PROFESSIONAL. The
parties agree that such late charges represent a fair and reasonable estimate
of the costs that GOLF PROFESSIONAL will incur by reason of the
CITY's late payments and that acceptance of such late charges in no event
constitutes a waiver of the CITY's default with respect to such overdue
payment, nor prevents GOLF PROFESSIONAL from exercising any of
the other rights and remedies granted hereunder or by any provision of
law."
B. Percentage Fees
In addition to the fixed fee, GOLF PROFESSIONAL shall receive 38%
percent of the gross revenues of the driving range and retain 40% of the
gross revenue of the golf carts, golf club and pull cart rentals. Percentage
2
091120 jb 0073262
fees for each month will be calculated and paid no later than the 10th day
of the following month. In no event, however, shall the cumulative
percentage fees paid to GOLF PROFESSIONAL for a single calendar year
exceed the total fixed fee payments described in section IV -A herein for
that same calendar year.
C. Golf Cart Fuel Reimbursement
GOLF PROFESSIONAL shall reimburse the CITY quarterly for fuel
supplied to gas golf carts. Reimbursement shall be at the current retail full
service pump price on the date of billing for unleaded fuel, determined
quarterly by the CITY. GOLF PROFESSIONAL shall reimburse the
CITY by no later than by the 20th day of the month following the close of
each quarter.
Productivity Reward (Incentives)
In order to enhance overall golf division business incomes, customer
service and golf professional revenues, a productivity reward equal to a
stated dollar amount based on increases of golf rounds, gross power golf
cart rentals and driving range sales becomes effective with this agreement.
In addition to the fixed and percentage fees, the golf professional shall
receive the following productivity rewards based on exceeding the
following blaseline golf rounds and gross sales:
PAID GOLF ROUNDS: (FEE, DISCOUNT CARD & REPLAY ROUNDS)
* Greater than 77,500 rounds $3.00 PER ROUND
POWER GOLF CART RENTALS:
* Greater than $300,000
DRIVING RANGE SALES:
* Greater than $440,000
$100 PER $1,000 INCREASE
$200 PER $1,000 INCREASE
SECTION 3. Except as herein modified, all other provisions of the Agreement,
including any exhibits and subsequent amendments thereto, shall remain in full force and
effect.
LL
LL
091120 jb 0073262
3
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment No 4 to Management Agreement on the date first written above.
CITY OF PALO ALTO
City Manager
APPROVED AS TO FORM:
Senior Asst. City Attorney
APPROVED:
Director, Administrative
Services
091120 jb 0073262
BRAD LOZARES GOLF SHOP
By: f);v.Bf f{~afl#J
Name: f6r~ 1-.o1.are.5 --~--~~----------
Title: OWN<'~ ! PG-A jClIl-~fclreS~/QN'\.l
Taxpayer Identification No.
4
Attachment B
GOLF COURSE FINANCIAL SUMMARY
B M NOS W X
2 =~~~=-~ ___ =--==-=_====±=~~~!-=::;=b~~;:!±~~ H=~b~~~ ~ ~I;~~~=~~~~ ~=-=-=1=~~~-~~~~~I~~!e=1jl
7 00';0, mo" i 382,463 ! 353,691 t 346,447 I 365,908 i 415,000 j,; " 415:dQo, : .-;,::~;;;--·.------=-~.=~:tt~:3}!:i.==.~;:::E=~~~~ 1··· __ .3~~p"~~~~
:: -~~!~:~t;;:' .. ' ...... ··------I--~;;t_--;~:;~t_;!:;;,t-:~:: ~ .-;;;~L:d:S~
12 -:::;;;;';;;~o-;;;m";'~~';'=:::::=:::::::~--=--=;:;:;;:;;:::::=;:ii~t-=--=:;~.:r---=;~;;.+==~;;;cl·: ... ~.~~.,-.... ~.-~.?"~j .• ~ ..• ~.
13 To.I~~~~EN.!:!~ _____________________________ ~ ___ 1,04~L55~_~ ____ ;1.'!~!~.Q.1. 3, 111 ,9~.J ___ ~~42, 72.!~_~~!~ 170 J", ,3,.Q.44;1,09~
::~:C;;i;~~~m:;C;~~'::PG-::r-2:;t::~;~~~E~:-~5:t=:~~z~I~'ti
:~ _1:::~~~~~~~~~~~========~~==~====j===~;;;~:==~==~~~~~~==~~:~!:i===~~~;j=~~!~~~I===~:~!
25 J~EfJ!,,!~i!!gJ=~E!!!I~!!..~ _______________________ J __________ ~ ___ ----------~--------J---------~----------~-----'---
26 __ ~.0.!:!~ ______ ---------------______ ~-------~9-~~-L--481 ~_1..~ __ Jil~512~------~1.~~7 ! ____ j~~~~+~-,.--i~iih
27 ___ __ S.E3~E3!i!~ ________________________________________________ J _________ ~?_M!_i_~-------~~~"Q~l.. ________ .!~_'?_:"L?J--------i1Ql~.I3.~-------~~i"i?-~-~~~---_.3_~l,i~?_
29
30
31
32
33 ___ ,6.y9_~~~.Q.f_l!arg_~ _______________________ J-------~i~~~_~l-_____ i:!E"1.!~ ___ 1~i,~~flJ------I?~.9-'-'!E8 L---iZ.~?J-~1:.~-,'.-1. -.1 6, 6_Q~_ I '" . " ....
34 Cost Plan Charges I 357,361 ; 379,884 337,590 f 318,969 i 312,500 <332,155 -----------------------------------------i--------------~-------------------------j--------I---------7~,-:-::~.~_::7T·
35 -~!!.~!!J..~'!!....-------------------------i----!L~E.~!I..~~+----!t§J.~di~ _..!L.B..50, 16"-~----1.~!E,-~ii---!L~il?r?!~-.:;,j-~~-M.!J~§-
:: --q~~!:~I~!~~~!!..~----·-------------------------------T------~-~~~~-;-r-------~~~;;;--------~~;-~;±--------~~,~;~ I ----~2,93-~-~~~~~:f'~~~
::=~!::====-=-=~=-~=-==J~~=t~~: =-~~~:;~t~~=~~~
41 Club rentals : 7,422 6,438 6,473 i 6,197; 6,800 I: .. ·.,::5,951 --- ------------------------------------------------r ----------------,-----------------------------1----------------l------------::-~~~'~·~t~,;~.~~---·
:: --_:I:~~e~~~:!~!:~~~~~I-~~~~S~~~~~~~lE~~-j----l~~~~T----~~~!~ ____ ~;,!~-I----l;;~~ 1---1!;,~~~ Ij=-~~~~!
44 Subtotal ----------------------------r------~~;,;~T-------664~~;r-----~~~~;1-------;~2,~~-------,;;,~~~-.. r1r;-;~~~;-·
47 TO~~-~-;~~~~;;-----·-----------------------r---;~~;,;o~T-----;,~~,78; ----~,-;~~~;61---~~~-;:_;~---;,301,~~-?,7:;gr;;~; :: ~~~~:~~;;~:====:::: ... ~=-.~~;!:.~=--;4~~ =;2!F($~~:J ... .::::~r~1! ---------------------------------------1------------,-.'. -------------------------------~,----------ri----~--.'-----_-. ;,';. "
51 GOLF ROUNDS 76,000 i 76,241 74,630 72,1701 76,OOON,'~.72,()00