HomeMy WebLinkAbout2001-11-19 City Council (6)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL 9
FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE
SERVICES
DATE:
SUBJECT:
NOVEMBER 19, 2001 CMR:414:01
APPROVAL OF AMENDMENT NUMBER TWO TO THE FACILITY
LEASE AT 1875 EMBARCADERO ROAD TO BRAD LOZARES FOR
OPERATION OF A GOLF RETAIL SHOP
REPORT IN BRIEF
The purpose of this staff report is to obtain Council’s approval of an amendment to the 15-
year lease agreement with Brad Lozares (Professional) to operate the golf retail facility.
The second amendment to the lease will accelerate the City’s fifteen year payment schedule
for its share of capital improvements to the retail space at the golf course. The accelerated
payments will provide needed cash flow and coincide with the five-year loan taken by the
Professional to implement the capital improvements. Additional payments to the
Professional will be offset by budget adjustments within the City’s Golf Services Division,
resulting in no impact on the City’s reserves.
CMR:414:01 Page 1 of 4
RECOMMENDATION
Staff recommends that Council approve and authorize the City Manager to execute
amendment number two to the 15-year agreement with Brad Lozares for lease of the facility
at the Palo Alto Municipal Golf Course to operate a golf retail establishment.
BACKGROUND
On May 15, 1995, Council approved a Golf Course Improvement Master Plan
(CMR:248:95) to upgrade various components of the golf course. The plan involved the
issuance of tax exempt debt to pay for a portion of the Master Plan improvements. On July
21, 1997, (CMR:327:97) Council approved the Golf Course Master Improvement Plan
construction and financing. In the report, staff recommended that golf course revenues cover
all golf course expenses (including debt service), with no subsidy from the General Fund.
On March 16, t 998, Council approved a 15-year lease agreement and a management agreement with
Brad Lozares for operation of the golf course retail shop. The shop continues to be honored
annually by Golf Digest as one of the one hundred best shops in the nation. This year Brad
Lozares was also.honored by being elected to the Quarter Century Club of the Professional
Golfers Association of America and was awarded Professional Golfer of the Year for
Northern California. The lease requires Brad Lozares, acting in this capacity as tenant, to
provide the following services:
1)
2)
3)
operation and management of a fully equipped golf shop including, at a minimum,
sale of quality golf equipment and related incidental merchandise, sufficient in
inventory and diversity to meet the needs of the course users at rates and prices which
are fair and reasonable;
quality golf lessons and instruction for all levels of play and all other services
customarily provided by a.PGA Class A golf professional;
promotion of golf and golf related activities in cooperation with existing golf clubs,
organizations and the City.
The minimum rent during the first five years of the lease is the greater of $2,000 per month
or 4 percent of the golf shop merchandise sales. Subsequently, the minimum will be adjusted
annually, based on prior year’s retail sales.
DISCUSSION
Golf rounds declined from 91,300 in 1999-00 to 88,200 in 2000-01. The current downturn
in the economy and strong competition from other golf courses are expected to l~eep golf
rounds at less than optimal levels. These conditions are affecting the City and the
Professional’s resources. As with the City, the Professional has experienced rising labor
costs to maintain qualified staff and higher medical and dental plan costs as revenues have
begun to decline. The Professional has already taken steps to reduce costs by cutting staff
hours, reducing retail stock, and delaying some vendor payments. City staff also is in the
CMR:414:01 Page 2 of 4
process of evaluating steps to align expenses with revenues and these actions will be
reflected in midyear and 2002-03 budget adjustments.
The 15 year lease term.,, allowed the Professional to invest in a major retail shop expansion
and still recover his investment over time. Under the terms of the lease, the City agreed to
share (up to $200,000) in the cost of construction, wherein the City’s contribution would be
in the form of r- monthly rent-credit, at no interest, spread over the term of the lease. The
tenant, on the other hand, obtained an interest bearing, five year, conventional loan for the
cost of the construction, including the City’s share. Payment of the conventional loan over
a five-year period has created a cash flow burden for the tenant. Staff is recommending that
the lease be amended to accelerate the City’s reimbursement to the tenant to coincide with
the tenant’s five-year loan and relieve the tenant’s burden of carrying the City’s share of the-
loan over the 15-year term of the lease.
The City began deducting monthly payments of $1,242 from the rent owed under the terms
of the lease 23 months ago to repay its share of the loan over a 15 year period. If the
payment were accelerated, the new monthly rent would be $3,333. Staff is proposing that
a check be issued in the amount of $48,095, that would pay the Professional the difference
between the amount previously paid ($1,242) and the new monthly figure ($3,333) for the
preceding 23 months. Beginning in November 2001, payments for the remaining 37 months
would continue at $3,333 per month rather than at $1,242 per month. This payment will be
credited to the monthly lease revenue due from the Professional and will require a reduction
of lease revenue in the amount of $16,729 for the remainder of the 2001-02 fiscal year. Once
the City’s share of the loan has been fully paid in November 2004, the City will begin to
receive the full monthly lease payments of either $2,000 or 4 percent of the golf shop
merchandise sales, whichever is larger.
RESOURCE IMPACT
The terms of the accelerated loan payment will result in additional expenses and lower
revenues for fiscal year 2001-02. The financial impact of the agreement will be entirely
absorbed from within the Community Services Department, Golf Services Functional Area
budget. No additional appropriation from reserves is requested.
Expenses ($48,095)
$48,095 to pay the difference between the loan amount ($1,242) previously paid to the
Professional over the 23 months prior to November 2001 and the new monthly loan payment
($3,333) figure;
Revenue ($16,729)
$16,729 decrease to credit the monthly lease revenue due from Mr. Lozares for the remainder
of the 2001-02 fiscal year.
CMR:414:01 Page 3 of 4
POLICY IMPLICATIONS
Proposed changes recommended in this report are consistent with prior Council direction.
ENVIRONMENTAL REVIEW
The Management Agreement and the amendment to the lease are not a project under the
California Environmental Quality Act (CEQA) and requires no environmental review.
ATTACHMENTS/EXHIBITS
Attachment A: Amendment to the Lease Agreement
PREPARED BY:
WILLIAM W. FELLMAN
Manager, Real Property
DEPARTMENT APPROVAL:
CITY MANAGER APPROVAL:
Director, ~dministrative Services
EMILY HARRISON
Assistant City Manager
cc: Brad Lozares
CMR:414:01 Page 4 of 4
ATTACHMENT A
AMENDMENT NO. 2 TO LEASE #211 BETWEEN THE CITY OF PALO ALTO AND
BRAD LOZRES FOR THE PALO ALTO MUNICIPAL GOLF COURSE PRO-SHOP
THIS AMENDMENT to the Lease between the City of Palo Alto and Brad Lozares, dated ,
hereinafter referred to as "Lease,"is made and entered into this __ day of ,2001, by and
between the City of Palo Alto, a municipal corporation, hereinafter referred to as "City" and Brad
Lozares, hereinafter referred ta as "Tenant,"
RECITALS
No
No
Section XVII-A provides for the City to reimburse Tenant for up to one-half the cost of
the construction for tenant improvements to the Pro-shop, not to exceed $200,000 as
amended by amendment number one dated November 23, 1998. TENANT’S
reimbursement would be in the form of a no interest rent credit rendered in equal monthly
amounts over the remaining term of the Lease, approximately Thirteen Years.
City and Tenant agree that term of the City’s reimbursement to the TENANT has created
an unnecessary hardship for the TENANT in that TENANT is obligated to pay both its
share and the City’s share of the cost of construction as part of a 5 year interest barring,
conventional loan.
Co City and Tenant agree that the reimbursement to the TENANT by the City should be
accelerated to match the TENANT’s conventional loan term of 5 years.
City and Tenant desire to amend the Lease to accelerate the City’s reimbursement to
TENANT for City’s share of the cost of construction for tenant improvements to the Pro-
shop.
NOW THEREFORE, in consideration of their mutual covenants and agreements, the parties
hereto agree as follows:
SECTION 1 SECTION XVII-A (CONSTRUCTION AND/OR ALTERATION BY
TENANT), paragraph A is amended to read as follows:
CAPITAL IMPROVEMENTS. On May 15, 1995 the Palo Alto City Council
approved a master plan for the golf course. The master plan includes various
proposed projects for remodeling and improving the Golf Course facilities that
will better service the needs of the golfers. (Pro-shop expansion and additional
cart storage.) Tenant may choose to participate in the Pro-Shop and the additional
cart storage expansions by building and constructing those improvements, with
City’s written approval, under City supervision and in conformance with the
City’s bid procedures. Once the project is completed and Tenant has provided
document proof of the actual costs, City agrees to reimburse Tenant for one-half
the costs. Tenant’s reimbursement will be in the form of a no-interest rent credit
rendered in equal monthly amounts over a sixty (60) month period, commencing
on the second full month after completion of the project. The City’s payments for
(23) months will be $1242 per month. On or before December 1, 2001 City shall
pay to Tenant a lump sum amount of $48,095. Payments for the twenty-fourth
(242) month through the sixtieth (60th)months shall be $3,333 per month. City’s
share of the reimbursement shall not exceed $200,000, and the project must be
completed within the first five years of the initial lease term. Notwithstanding
any provisions of this clause, if Tenant wish to make improvements that are not
covered in the Master Plan and the City does not wish to participate, Tenant may,
upon necessary approvals from City, plan and implement capital improvements
solely at its own expense.
SECTION 2 Except as herein modified, all other provisions of and exhibits to the Lease and
Lease Amendment # 1 shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment the day and year
first above written.
CITY OF PALO ALTO BRAD LOZARES
Assistant City Manager
BY
Golf Professional
APPROVED AS TO FORM:
Senior Assistant City Attorney