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HomeMy WebLinkAboutStaff Report 410-08City Manager’s City of Palo Alto Summary Report 16 TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: COMMUNITY SERVICES DATE:OCTOBER 20, 2008 REPORT TYPE: CONSENT CMR: 410:08 SUBJECT:Approval of Amendment No. 3 to Management Agreement with Brad Lozares Golf Shop for Golf Professional Services at 1875 Embarcadero Road, Palo Alto RECOMMENDATION S~aff recommends that the Council approve and authorize the City Manager or his designee to execute the attached Amendment No. 3 to the management agreement with Brad Lozares for golf course professional services at the Palo Alto Municipal Golf Course, 1875 Embarcadero Road. BACKGROUND On March 16, 1998, the City issued tax-exempt bonds to finance golf course improvements. For the 20-plus years 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 pro- shop 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 a golf retail establishment. In 1998, the Council approved a 20-month management agreement and a 15-year lease with golf professional, Brad Lozares. The original management agreement was amended ttu-ee times prior to the Council’s approval of a new restated management agreement (Agreement) on January 27, 2003. On May 1, 2006, the 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 golf cart rentals. On May 14, 2007, the Council approved Amendment No. 2 to the Agreement, in which a 2 percent cost of living increase was approved with a City resource impact of $553.21 per month or $6,638.46 for the duration of the 12-month term - January 1, 2008 to December 31, 2008. DISCUSSION Brad Lozares and his staff have provided excellent services to the City of Palo Alto for more than 25 years, providing the primary interface between the Palo Alto Municipal Golf Course and CMR:410:08 Page 1 of 4 patrons. They are highly respected for their professionalism, knowledge of the game and quality of instruction. Amendment No. 3 is an extension of the agreement for only one year primarily due to the pending golf course operational study recently conducted by Economic Research Associates. The golf course operational study will come before the Council in a study session on November 17th, 2008. A review of the study will provide an opportunity to develop short and long term strategies for the future of Palo Alto Golf Course The study of the Palo Alto Golf Course examines Bay Area golf market trends, Palo Alto Golf Course market performance, the condition of existing facilities, capital improvement requirements, stakeholder and golfer responses to services and operational policies, and expected future financial performance of current and alternative operating options available for the golf course. Staff and Brad Lozares recognize the golf course operational study may provide some new direction for the golf course. A one-year extension of the Brad Lozares Management Agreement will allow the Council and staff time to review and discuss the golf course operational study and then develop a plan for how to proceed, while still maintaining high quality golf professional services in the interim. Term: The attached proposed Amendment No. 3 to the Agreement will extend the term of the Agreement for an additional 12 months -January 1, 2009 to December 31, 2009. Compensation changes: A number Of changes are recommended to the terms of compensation, Percentage Fees and Productivity Rewards, all of which are agreeable to Brad Lo~ares, and are described below: A) Fixed Management Fee It is recommended the golf professional receive a 2 percent cost of living increase of $564.27 per month, or $6,771.24 for the duration of the 12-month term, January 1, 2009 to December 31, 2009. B) Percentage Fee Changes In fiscal year 2007-08, the City of Palo Alto invested $559,086 to replace the deteriorated driving range synthetic turf and netting. The debt service for this investment is $82,186.40 annually for the next 5 years. To ensure there are sufficient revenues to cover the increased debt service, staff proposes an adjustment to the Driving Range fees percentage from the existing arrangement of 60% revenues to the City and 40% of revenues to Brad Lozares to a new arrangement of 62% of revenues to the City and 38% of revenues to Brad Lozares. The result of this change, along with increased fees and increased play is expected to generate sufficient revenue to meet the new debt obligation. C) Productivity Reward Changes CMR:410:08 Page 2 of 4 The productivity reward creates an additional incentive for the golf professional to increase revenues for both the City of Palo Alto and the Golf Professional. The current productivity reward terms have been in place since 2003 and need to be adjusted to reflect current market conditions for meaningful and -achievable incentives. The changes are described below: Paid Golf Rounds (Discount Card & Replay Rounds) If more than 77,500 annual rounds are played per year, then the golf professional will receive $3.00 per round. Explanation of change: This is a change from 87,000 rounds to 77,500. The average annual paid rounds played over the last three years was 75,623 rounds, consequently 77,500 rounds is a more realistic and attainable incentive for the golf professional. Power Golf Cart Rentals If more than $300,000 in annual power cart rental revenue is generated, then the golf professional will receive $100 per $1,000. Explanation of change: This is a change from a target of $250,000 in annual power cart rental revenue with golf professional receiving $200 per $1,000. The average annual power cart sales for the last three years were $294,806. In 2009, the golf professional will increase the fleet size and quality of power carts, and will raise fees which will increase Power Cart revenues significantly. Consequently, $100 per $1000 exceeding $300,000 is a more appropriate incentive. RESOURCE IMPACT The changes proposed in Amendment No. 3 to the Agreement will result in an additional annual City expense of approximately $6,771.23 for the 12-month duration of the Agreement. The financial terms of the Agreement will be accommodated within the existing resources available to the Community Services Department. The golf course operation is expected to fully recover costs including debt service and cost plan charges during the term of this Agreement. The impact of changes in Productivity Reward and Percentage Fees are dependent on the amount of play at the golf course; staff anticipates an increase in overall golf course revenue as a result of more meaningful and achievable incentives. POLICY IMPLICATIONS The proposed amendment is consistent with prior Council direction. ENVIRONMENTAL REVIEW Approval of the amendment to agreement does not constitute a project under the California Environmental Quality Act (CEQA); therefore, no environmental assessment is required. ATTACHMENTS Attachment A:Amendment No. 3 to Management Agreement CMR:410:08 Page 3 of 4 PREPARED BY: ROB DE GEUS Division Manager, Recreation & Golf Services DEPARTMENT HEAD APPROVAL: Interim Director, Community Services Department CITY MANAGER APPROVAL: Cit~fManager U CMR:410:08 Page 4 of 4 AMENDMENT NO. 3 TO MANAGEMENT AGREEMENT BETWEEN THE CITY OF PALO ALTO AND BRAD LOZARES GOLF SHOP FOR PROFESSIONAL SERVICES AT 1875 EMBARCADERO ROAD, PALO ALTO Attachment A THIS AMENDMENT NO. 3 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 OCTOBER 2008, by and between the City of Palo Alto, a municipal corporation ("CITY") and Brad Lozares Golf Shop, .a sole proprietorship ("GOLF PROFESSIONAL"). RECITALS 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. 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. The parties now wish to amend the Agreement to! (1) extend the term of the agreement to December 31, 2009; (2) increase the fixed fee compensation by two percent (2%) Consumer Price Index ("CPI") to $28,777.73; (3) increase driving range fee revenue to the CITY by 2% and decrease the driving range fee revenue to GOLF PROFESIONAL by 2%; and (4) decrease the baseline number of Productivity Reward Incentives for paid golf rounds from 87,000 to 77,500; increase the baseline number of Productivity Reward Incentives for power golf cart rentals from $250,000 to $300,000 and decrease the productivity reward for power golf cart rentals to $100 per $1,000. NOW, THEREFORE, in consideration of the terms, conditions, and provisions of this Amendment, the parties agree as follows: follows: SECTION 1. Section III ("Term") is amended in its entirety to read as "ILL TERM 080926jb 0073071 The term of this Agreement shall commence on January 28, 2003 and end on December 31, 2009. SECTION 2. (Sect_ion IV ("Compensation"), is amended in its entirety to read as follows: "IV. COMPENSATION 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 The 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 $322,251 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, the 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, the 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, the GOLF PROFESISONAL shall receive a fixed fee, in the amount of $28,777.73, monthly. 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 City’s late payments and that acceptance of such late charges in no event constitutes a waiver of 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. 080926jb 0073071 2 B.Percentage Fees In addition to the fixed fee, GOLF PROFESSIONAL shall receive 38% percent of the gros~s revenues of the driving range and retain 40% of the gross revenue of the golf carts, golf club and pull cart rentals. Percentage 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 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 CITY. GOLF PROFESSIONAL shall reimburse the City no later than the 20th of the month following the close of each quarter. Productivity Reward (Incentives) In order to enhance overall golf division business incomes, customer service & 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. (IRS section 1.141 revenue procedures). In addition to the fixed and percentage fees, the golf professional shall receive the following productivity rewards based on exeeedin~ the ~ following baseline 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 INCREASE $100 PER $1,000 DRIVING RANGE SALES: * Greater than $440,000 $200 PER $1,000 INCREASE INCENTIVE DOLLAR DISTRIBUTION: An unaudited statement of golf rounds and gross sales will be presented to the City in January of each calendar year. The City shall distribute to the golf professional such incentive payments for increased golf rounds, cart rentals and driving range sales as a direct city purchase of supplies related 3 080926jb 0073071 to driving range and power carts. When the fully audited statements become available, usually in April of each calendar year_, a full reconciliation of actual productivity amounts will be completed, resulting in either additional direct third party reimbursements or a refund to the City from the Golf Professional for any overpayment. Do In addition to the foregoing, GOLF PROFESSIONAL shall receive a one- time payment of $22,202 as full and complete compensation for any and all claims arising out of GOLF PROFESSIONAL’s continued performance under the extended initial agreement during the period between May 1, 2001 and January 27, 2003." 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. IN WITNESS WHEREOF, the parties hereto have executed this amendment the day and year first written. ATTEST:CITY OF PALO ALTO City Clerk APPROVED AS TO FORM: Sr. Asst. City Attorney APPROVED: Director, Administrative Services City Manager BRAD LOZARES GOLF SHOP By: Name: Title: Taxpayer Identification No. 080926jb 0073071 4