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HomeMy WebLinkAboutFS 2013-08-20 Item 2A - Discussion - Foster Golf Links Marketing and OperationsTO: City of Tukwila Jim Haggerton, Mayor INFORMATIONAL MEMORANDUM Mayor Haggerton Finance & Safety FROM: Rick Still, Parks and Recreation Director Tracy Gallaway, Volunteer & Events Superintendent DATE: August 14, 2013 SUBJECT: Foster Golf Links Marketing and Operations ISSUE Review of Foster Golf Links Marketing and Operations. BACKGROUND Finance & Safety requested information regarding Foster Golf Links marketing and operations. The Council desires to reduce the general fund subsidy of Foster Golf Links operations. DISCUSSION Finance & Safety requested a comparison of operational data from 2011 and 2012 for select municipal operated and privately operated golf courses. Attachment A is a comprehensive list of golf courses in the Puget Sound area. Attachment B includes the specific courses that were selected by Finance & Safety for comparison to Foster Golf Links. Course data has been completed for municipally run golf courses. Course data for privately run courses has been requested but not received. Staff has prepared a marketing work plan identifying strategies to: 1) Retain and strengthen our core customer group; 2) Engage lapsed golfers and attract new golfers. Detailed work plan strategies are listed in Attachment C. In lieu of the City of Tukwila hiring a consultant, we have attached documents from two local municipalities that have recently hired consultants to do comparative reviews of operational models. Attachment D is the review and recommendation by NGF Consulting on the best operational model for the Auburn Golf Course. Attachment E is the review and summary of operating options completed by Pro Forma, LLC for the Lynnwood Municipal Golf Course. Full reports can be made available if desired. RECOMMENDATION Discussion only. ATTACHMENT A. Comprehensive list of golf courses in the Puget Sound Region B. Municipal Golf Course Comparison C. 2013 Foster Golf Links Marketing Work Plan D. Auburn Golf Course Operation Review Recommendations by NGF Consulting E. Lynnwood Municipal Golf Course Evaluation of Operating Options — pages 34 -43 W:\2013 Info Memos - Council \FGL Marketing and Operations 8 -14 -13 memo.docx 1 2 Golf Course Comparison Public Private Attachment A PUBLIC PUBLIC PUBLIC PRIVATE 1 Auburn Golf Course City of Auburn 29630 Green River Rd SE Auburn 253- 833 -2350 18 6,450 71 121 $24.09- 35.18 Weekend Driving Golf City City Concession Full Banquet Yes new clubhouse & course upgrades # Facility Owner Address Location Phone Holes Yards Par Slope Daily 9 -18 9 -18 Range Par 3 Lessons Maintenance Pro shop Restaurant Operations Service Space Catering Comments PUBLIC PUBLIC PUBLIC PRIVATE 1 Auburn Golf Course City of Auburn 29630 Green River Rd SE Auburn 253- 833 -2350 18 6,450 71 121 $24.09- 35.18 $27 -40 P area yes City City Concession Yes Yes Yes new clubhouse & course upgrades 2 Riverbed Golf Complex City of Kent 2019 W Meeker St Kent 253- 854 -3673 18 6,701 72 121 $22 -38 $24 -42 yes yes yes City City Concession Yes Tent Yes front 9 redesign, course also has miniature golf 3 Lynwood Municipal Golf Course City of Lynwood 20200 68th Ave. W Lynwood 425- 672 -4653 18 4,741 65 102 $20 -30 $20 -34 yes yes City City Columbia Hospitality Yes Yes Yes course future uncertain 4 Cedarcrest Golf Course City of Marysville 6810 84th St NE Marysville 360- 363 -8460 18 5,811 70 114 $21 -32 $21 -37 City City Concession Grill 5 Maplewood Golf Course City of Renton 4050 Maple Valley Hwy Renton 425 - 430 -6800 18 5,698 72 118 $24 -32 $24 -38 yes yes City City Concession Yes Yes Yes 6 Foster Golf Links City of Tukwila 13500 Interurban Ave S Tukwila 206 - 242 -4221 18 4,804 68 101 $21 -30 $24 -35 p area yes City City Concession Yes Yes Yes nines were switched last year 7 Tumwater Valley Golf Course City of Tumwater 4311 Tumwater Valley Drive Tumwater 360- 943 -9500 18 7,514 72 120 $33 $37 yes yes City City Concession Yes Yes Yes PUBLIC /PRIVATE PUBLIC or PRIVATE PRIVATE PRIVATE 8 Bellevue Golf Course City of Bellevue 5500 140th Ave NE Bellevue 425- 452 -7250 18 5,555 71 113 $34 $40 Yes yes City Premier Golf Premier Golf Grill lighted range 9 Gold Mountain Cascade Golf Course City of Bremerton 7263 W Belfair Valley Rd Bremerton 360- 415 -5432 18 6,059 71 117 $33 $40 yes yes City Columbia Hospitality Columbia Hospitality Yes Yes Yes 10 Gold mountain Olympic Golf Course City of Bremerton 7263 W Belfair Rd Bremerton 360- 415 -5432 18 6,034 72 124 $45 $65 yes yes City Columbia Hospitality Columbia Hospitality Yes Yes Yes 11 Enumclaw Golf Course City of Enumclaw 45220 288th Ave SE Enumclaw 360 -825 -2827 18 5,561 70 105 $16 -24 $16 -24 Swiftwater Golf Management Swiftwater Golf Management Swiftwater Golf Management Grill 12 Legion Memorial Golf Course City of Everett 144 W Marine View Dr Everett 425- 259 -4653 18 6,111 72 121 $24 -33 $27 -38 p area yes City Premier Golf Premier Golf Grill 13 Walter Hall Memorial Golf Course City of Everett 1226 W Casino Rd Everett 425 - 353 -4653 18 5,808 72 114 $20 -29 $23 -35 p area yes City Premier Golf Premier Golf Grill 14 Lake Wilderness Golf Course City of Maple Valley 25400 Witte Rd SE Maple Valley 425- 432 -9405 18 5,081 70 111 $20 -30 $35 Premier Premier Golf Premier Golf Yes Yes Yes 15 Interbay Golf Center City of Seattle 2501 15th Ave W Seattle 206 -285 -2200 9 1,272 28 None $15 $17 Yes yes City Premier Golf Premier Golf course also includes miniture golf 16 Jackson Park Golf Course City of Seattle 1000 NE 135th St Seattle 206- 363 -4747 18 5,841 71 114 $34 $39 Yes yes City Premier Golf Premier Golf Grill 17 Jefferson park Golf Couse City of Seattle 4101 Beacon Ave S Seattle 206- 762 -4513 18 5,800 70 116 $34 $39 Yes City Premier Golf Premier Golf Grill constructing new clubhouse 18 West Seattle Golf Club City of Seattle 4470 35th Ave SW Seattle 206- 935 -5187 18 6,004 72 123 $34 $39 no City Premier Golf Premier Golf Yes Yes Yes downtown view 19 Sumner Meadows Golf Links City of Sumner 14802 8th St E Sumner 253- 863 -8198 18 6,169 72 122 $19 -27 $25 -38 yes yes Billy Casper Golf Billy Casper Golf Billy Casper Golf Grill 20 Meadow Park Golf Couse Metro Parks Tacoma 7108 Lakewood Drive W Tacoma 253- 473 -3033 18 5,801 71 117 $20 -32 $22 -37 yes yes yes Metro Parks Tacoma Metro Parks Tacoma Concession Grill 21 Chambers Bay Piece County 6320 Grandview Drive W University Place 877 -295 -4657 18 6,011 72 130 $155 $169 yes yes Kemper Sports Kemper Sports Kemper Sports Yes Yes Yes 12 holes have changed in preparation for the 2015 US open 22 Fort Steilacoom Golf Course Piece County 8202 87th Ave SW Lakewood 253 - 588 -0613 9 2,379 34 96 $11 -16.50 $11 -16.50 9 no Piece County Premier Golf Premier Golf 23 Lake Spanaway Golf Course Piece County 15602 Pacific Ave S Tacoma 253 -531 -3660 18 6,274 72 129 $22 -31 $24 -37 Yes yes Piece County Premier Golf Premier Golf Grill 24 Kayak Point Golf Course Snohomish County 15711 Marine View Drive Stanwood 360- 652 -9676 18 6,109 72 123 $33 $43 yes yes Access golf Access golf Access golf Yes Yes Yes W M: \Events and Volunteers \4 BAB \ Golf \Attachments A and B 8/14/2013 Golf Course Comparison Public Private Attachment A PRIVATE PRIVATE PRIVATE PRIVATE 25 Washington National Golf Club Oki Golf 14330 SE Husky Way Auburn 253- 333 -5000 18 6,424 72 136 $82 Weekend Driving Golf Oki golf Oki golf Oki Golf Full Banquet yes 26 Facility Owner Address Location Phone Holes Yards Par Slope Daily 9 -18 9 -18 Range Par 3 Lessons Maintenance Pro shop Restaurant Operations Service Space Catering Comments PRIVATE PRIVATE PRIVATE PRIVATE 25 Washington National Golf Club Oki Golf 14330 SE Husky Way Auburn 253- 333 -5000 18 6,424 72 136 $82 $99 yes yes Oki golf Oki golf Oki Golf tent yes 26 Redmond Ridge Oki Golf 11825 Trilogy Pkwy Redmond 425- 836 -1150 18 6,503 70 131 $80 $95 yes yes Oki golf Oki golf Oki Golf tent yes 27 Trophy Lake Golf and Casting Oki Golf 3900 SW Lake Flora Road Port Orchard 360 -874 -8337 18 6,162 72 129 $65 $85 yes yes Oki golf Oki golf Oki Golf Yes Yes Yes 28 Echo Falls Oki Golf 20414 121st Ave Woodinville 877- 395 -2138 18 6,000 70 122 $47 $59 yes yes Oki golf Oki golf Oki Golf Yes Yes Yes 29 Harbor Pointe Golf Club Oki Golf 11817 Harbor Pointe Blvd Mukilteo 425 - 355 -6060 18 6,055 72 125 $55 $69 yes yes Oki golf Oki golf Oki Golf Yes Yes Yes 30 Hawks Prairie Oki Golf 8383 Vicwood Ln Lacey 800 - 558 -3348 36 6,800 72 138/117 $40 $46 yes yes Oki golf Oki golf Oki Golf 31 Newcastle Oki Golf 15500 Penny Lane Newcastle 425 -793 -4653 36 7,024 72 133/ $170/$125 $170/$125 yes yes Oki golf Oki golf Oki Golf Yes Yes Yes 32 Capitol City Golf Club Access golf 5225 Yelm Highway SE Olympia 360 - 491 -5111 18 6,369 72 120 $24 $31 yes yes Access golf Access golf Access golf Yes Yes Yes 33 Willows Run Golf Coyote Creek Access golf 10402 Willows Rd NE Redmond 425 -883 -1200 18 5,826 72 110 $43 $56 yes yes Access golf Access golf Access golf Yes Yes Yes Louise dISU InLUUes miniture golf 34 Willows Run Golf Heron Lake Access golf 10442 Willows Rd NE Redmond 425 - 885 -5476 9 1,107 27 None $11 -17 $13 -19 yes yes Access golf Access golf Access golf Yes Yes Yes 35 Willows Run Golf Eagles Talon Access golf 10402 Willows Rd NE Redmond 425 - 883 -1200 18 6,238 72 121 $43 $56 yes yes Access golf Access golf Access golf Yes Yes Yes 36 Druids Glen Golf Course Access golf 29925 207th Ave SE Covington 253- 638 -1200 18 6,004 72 134 $42 $58 yes yes Access golf Access golf Access golf Yes Yes Yes 37 Home Course PNGA WGA 2300 Hoffman Blvd Dupont 866- 964 -0520 18 6,093 72 127 $52 $62 yes yes PNGA WGA PNGA WGA 38 Elk Run Golf Club private 22500 SE 275th Place Maple Valley 425 -432 -8800 18 5,400 71 118 $22 -34 $28 -42 yes yes Owner Owner Owner Yes Yes Yes 39 Brookdale Golf Club Privately owned 1802 Brookdale Road E Tacoma 253 - 537 -4400 18 6,203 71 115 $15 -20 $17 -25 Owner 40 Lipoma Firs Golf Course Privately owned 18615 110th Ave E Puyallup 253 - 841 -4396 27 6,217 72 121 $17 -25 $20 -30 yes yes Owner Owner Owner 41 Kenwanda Golf Course Privately owned 14030 Kenwanda Drive Snohomish 360- 668 -1166 18 5,336 69 104 $18 -24 $18 -28 Owner 42 McCormick Woods Golf Course Ryan More Golf 5155 McCormick Woods Drive SW Port Orchard 360 -895 -0130 18 6,165 72 124 $45 $59 yes yes Ryan More Golf Ryan More Golf Ryan More Golf Yes Yes Yes 43 Oakbrook Ryan More Golf 8102 Zircon Drive SW Lakewood 253 -584 -8888 18 6,290 71 126 $45 $59 yes yes Ryan More Golf Ryan More Golf Ryan More Golf Yes Yes Yes 44 Classic Golf Club Ryan More Golf 4908 208th St E Spanaway 253 -847 -4440 18 6,008 72 129 $39 $49 yes yes Ryan More Golf Ryan More Golf Ryan More Golf Yes Yes Yes 45 Whispering Firs Military Building 895 Lincoln Blvd. Joint base FT MC 253- 982 -4927 18 6,646 72 122 $35 $40 yes yes Military/civilian services Military /civilian services Military/civilian services Yes Yes Yes 46 Eagles Pride at Joint Base Lewis - McChord Military Interstate 5 Exit 116, Mouts Rd Tacoma 253- 967 -6522 27 6,440 72 120 $21 $40 yes yes Military/civilian services Military /civilian services Military /civilian services 47 Battle Creek Golf Course Private 6006 Meridian Ave N Marysville 360- 659 -7931 18 6,153 73 117 $17.50 -27 $20 -34 yes yes yes Owner Owner Owner Yes Yes Yes 48 . ••s•∎ ,.nuai S vuu ,fuu-.,I101 11JIV1 SIII Course Private 14604 149th St Ct E Orting 360- 893 -3171 18 6,647 72 113 $36 $45 yes yes yes Owner Owner Owner Yes Yes Yes 49 Allenmore Elks 2125 Cedar St Tacoma 253- 627 -7211 18 5,906 71 115 $30 $35 Elks Elks Concession Yes Yes Yes building a new pro shop 50 Lake Padden Golf Course Lake Padden, LLC 4882 Samish Way Bellingham 360- 738 -7400 18 6,575 72 127 $18 -30 $19 -37 yes yes Lake Padden, LLC Lake Padden, LLC Lake Padden, LLC Yes Yes Yes 51 Wayne Golf Course Private 16721 96th Ave NE Bothell 425- 486 -4714 18 4,326 65 93 $17 -23 $18 -26 Owner Owner greens tee of 515 before noon mon and wed 52 Tyee Valley Golf Course Port of Seattle 2401 S 192nd St Sea Tac 206 -878 -3540 9 3,000 36 108 $12 -15 $12 -15 concession concession seniors /juniors play for $10 weekdays 53 Twin Rivers Golf Course Privately owned 4446 Preston -Fall City Road SE Fall City 425- 222 -7575 18 5,563 70 108 $20 -33 $21 -38 yes yes Owner Owner 54 Snohomish Golf Course Privately owned 7805 147th Ave SE Fall City 360 -568 -2676 18 6,325 72 123 $17.50 -27 $22 -34 Owner Owner Owner 55 Snoqualmie Falls Golf Course Privately owned 35109 SE Fish Hatchery Rd Fall City 425- 392 -1276 18 5,465 71 102 $20 -31 $25 -39 yes yes Owner Owner 56 Tapps Island Golf Course Privately owned 20818 Island Parkway E Sumner 253 - 862 -7011 9 2,786 65 122 $18 -28 $21 -33 Owner Owner Owner 57 Jade Greens Golf Course Privately owned 18330 SE Lake Holm Road Auburn 253- 931 -8562 9 2,531 34 108 $17 -27 $20 -30 yes yes Owner Owner Owner 58 Mount Si Golf Course Privately owned 9010 Boalch Ave SE Snoqualmie 425 -888 -1541 18 6,008 72 115 $24 -39 $31 -49 yes yes Owner Owner Owner Yes Yes Yes 59 Madrona Links Golf Course Privately owned 6304 22nd Ave NW Gig Harbor 253 -851 -5193 18 5,193 71 109 $20 -27 $22 -30 Owner Owner Owner Yes Yes Yes 60 North Shore Golf Course Privately owned 4101 North Shore Blvd Tacoma 253 -927 -1375 18 6,039 71 123 $15 -28 $20 -35 yes yes Owner Owner Concession Yes Yes Yes 61 Delphi Golf Club Privately owned 6340 Neylon Drive SW Olympia 360- 357 -6437 9 1,944 32 101 $13 -19 $15 -21 Owner Owner Owner 62 Cascade Golf Course Privately owned 14303 436th Ave SE North Bend 425 - 888 -0227 9 2,817 36 108 $18 -27 $19 -29 yes Owner Owner Concession Yes c)1 M: \Events and Volunteers \4 Rick \ Golf\Attachments A and R 8/14/2013 ATTACHMENT B Municipal Golf Course Comparision Course Auburn Golf Course Riverbend Golf Complex Lynnwood Municipal Golf Course Cedarcrest Golf Course Tumwater Golf Course Foster Golf Links Operated by Auburn Kent Lynnwood Marysville Tumwater Tukwila Yardage 6,450 6,701 4,741 5,811 7,154 4,808 Acreage 150 167 75 99.6 200 77 2011 Rounds 45,968 56,900 40,302 37,380 28,000 45,947 2012 Rounds 45,704 56,700 40,803 34,366 26,000 47,392 2011 Revenues $ 1,366,634 $ 1,214,313 $ 1,034,513 $ 912,939 $ 1,815,667 $ 1,340,416 2012 Revenues $ 1,371,364 $ 1,240,538 $ 1,037,580 $ 890,869 $ 2,121,354 $ 1,441,050 2011 Expenses $ 1,302,064 $ 1,269,118 $ 1,418,973 $ 1,029,000 $ 1,815,667 $ 1,544,678 2012 Expenses $ 1,348,992 $ 1,221,537 $ 1,076,650 $ 1,042,000 $ 2,121,354 $ 1,402,686 Municipal Employees 8 FTE 11.35 FTE 4 FTE 4 FTE 4 FTE 8.25 FTE Information pending on the following courses: Course Bellevue Municipal Golf Course Lake Padden (Bellingham) Gold Mountain Olympic Gold Mountain Cascade Enumclaw Golf Course Maplewood Golf Course Operated by Premier Golf Center Lake Padden, LLC Bremerton Bremerton Swiftwater Mgmt., LLC Renton Yardage 5,555 6,575 6,034 6,059 5,561 5,698 Acreage 107 2011 Rounds 51,337 2012 Rounds 55,045 2011 Revenues $ 2,082,414 2012 Revenues $ 2,140,049 2011 Expenses $ 2,272,417 2012 Expenses $ 2,226,071 Municipal Employees 9 FTE 7 ATTACHMENT C Foster Golf Links - 2013 Marketing Work Plan Goals 1. Create a welcome environment for members, guests & community 2. To grow the game 3. Financially successful 4. Source of pride to the community Strategies 1. Retain & strengthen core customer 2. Engage lapsed golfers 3. Drive new golfers to the facility Tools 1. Cybergolf (webpage) a. Create tournament and league microsites b. Utilize market discounts ( "groupon" type service) c. Integrate our social media with website 2. Text messaging services 3. Golf Now tee time booking services Strategy #1 — Retaining & strengthening core customer 1. Build better relationship with core customer a. Increase communication b. Listening to wants & needs i. Survey data base, members, league players & E- members Developing core customer involves creating a value and developing a relationship in all three areas of service the facility offers. This will require that all the staff members work to create a positive experience for every customer. 1. Pro shop 2. Restaurant 3. Golf course Developing & maintaining functional database 1. Culled 2. Update 3. Categorize a. Customer preference b. League players c. Members d. Zip codes e. Age f. Gender g. Price driven customers 9 Strategy #2 & #3 — Engage lapsed golfers and attract new golfers Foster Golf Links provides a great venue to engage lapsed golfers and promote new players. 1. Friendly course, easy to play 2. Affordable 3. Family friendly (weekend special rate) Get "Golf Ready" program (PGA program providing group lessons at affordable rates) Targeted Audience 1. Ladies clinics 2. Events 3. Reorganization of the ladies club 4. Family golfers Create loyalty program Utilize information captured in customer database to create an incentive based loyalty program. Tournaments & League Play Tournaments are a great revenue source and opportunity to develop new customers. Provide better service to our league participants. 1. New downloadable tournament package on website 2. Tournament & league microsite for each group 3. New tournament menu 10 ATTACHMENT D Auburn Golf Course Operational Review by NGF Consulting (November 2011) RECOMMENDATIONS ON BASIC OVERSIGHT AND STRUCTURE The NGF Consulting recommendation for the future operation of the Auburn Golf Course is based on our understanding of the economic performance of the facility and the City's need to maximize this performance. The following section summarizes the options available to the City of Auburn by presenting descriptions of the most typical management options for public sector golf operations, as well as advantages, disadvantages and public policy implications of each option. Before presenting the recommended management arrangement for the City's golf course, NGF Consulting has presented three basic options the City could consider for golf facility operations. Management Options These options, which are presented in order of most direct City involvement to the least City involvement, include: 1. Self Operation. Under this scenario, the City would continue to operate the facilities under direct control of the Director of Recreation and through an on -site Golf Manager who is a City employee (essentially status quo). 2. Full- Service Management Contract. Hire a management company to operate all aspects of the Auburn GC. 3. Concession Agreements. Similar to a lease agreements and can come in several types or combinations, the most common being: a) Multiple Concessions would involve creating multiple contract agreements for separate entities for each facet of the golf operation (pro shop, food / beverage, and maintenance). 4. Lease / Concession. Lease the facility to a private operator in exchange for an annual (or monthly / quarterly) lease payment to the City. The lease could be established to include certain lessee requirements, including capital investment in facility improvements. Maintenance standards and compliance policies would be included, and some restrictions regarding setting of green fees could be included. 5. Hybrid Contract. A hybrid contract combines some of the advantages of a lease with those of a management contract. These are usually of shorter term (3 -5 years) than a lease and should have escape clauses that can be triggered if the operator does not perform up to expectation. Management contracts and operating leases are the most commonly used terms to describe a contract between a municipality and a private golf course operator. Each has significant differences, but also several common characteristics. A general discussion of each option, along with key advantages and disadvantages is presented in the following paragraphs. Option 1: Self - Operation by City Self- operation gives the City the greatest control over golf operations. The City of Auburn would continue to have control over all employees, course maintenance, policies and procedures, hours of operation, fee schedules, and operating and capital budgets. All revenues would be National Golf Foundation Consulting, Inc. — City of Auburn Golf Operations — DRAFT Report — 44 available to pay for operating and maintaining the facilities. This option is essentially the 'status quo' option for Auburn. Advantages of Self- Operation • Simplest option • Direct City control of the assets • All workers are City employees Disadvantages of Self- Operation • Golf operation may experience fiscal loss and require subsidies from other departments (i.e., taxpayer support). • Revenues may not cover rapidly increasing costs (particularly labor), especially when 11 the golf market is in decline. • In the future, the City may lack necessary expertise in managing golf facilities (not the case in 2011). • When revenues and /or operating /capital reserves are down, needed improvements may not be funded (or at least deferred). Auburn Golf Course has traditionally funded capital upgrades, but recent addition of debt service has made this difficult in last few years. Discussion and Policy Implications Under this option, the City will have to be prepared to fund all needed improvements, and these needs may be in excess of the Golf Enterprise Fund balance (as at present). Providing this funding would be consistent with the City's goal of providing affordable recreation to its citizens, and the community benefit of having the Auburn GC would be preserved. If the City was not willing to fund capital improvements and ever - increasing operating expenses, this could ultimately result in a less attractive product to golfers, leading to rounds and revenue decreases. Further, this operational scenario allows for the maximum public accommodation of the facility in terms of access and programs in areas such as high school golf, beginner programs, senior discounts, winter passes, league programs, and the Men's Club activities. Option 2: Full Service Management Contract The primary goal of a management contract or management agreement is to provide a golf facility with experienced, professional managers who are responsible for the daily operations, thus relieving the owner (City) of this task. In a typical management contract, the municipality hires a firm that is charged with all management responsibility. The municipality funds all capital improvements, and the management firm hires all employees. Because employees work for the management firm and not the City, payroll cost may be less; thus, the operating expenses may be reduced. Management fees paid as compensation in these agreements typically fall between two and four percent (3% to 6 %) of total revenues, or approximately $41,000 to $82,000 for the Auburn Golf Course without F & B, and possibly as high as $65,000 to $130,000 if the full gross F & B is included. Advantages of Management Contracts • Operating costs are often significantly reduced due to labor cost reductions. These reductions come in several forms, including staff reductions (number of positions National Golf Foundation Consulting, Inc. - City of Auburn Golf Operations - DRAFT Report - 45 reduced - possibly affecting service), reduction in salary, and reductions in fringe benefits. • It is assumed that the company hired would have individuals to staff the facility that have experience and expertise in golf facility operations, plus the support of (sometimes national) corporate network. Not only can this company provide help in operations and maintenance, but also in other areas such as marketing and merchandising. • The City is removed from day -to -day operation in exchange for a payment of a predetermined fee plus a percentage of gross revenues or some other formula, which is equitable to both parties. In addition, net revenues (if any) are retained by the City. Disadvantages of Management Contracts • Though this option offers the City more control than with an operating lease, it offers less control than self- operation. • Unlike a lease, management contracts usually do not provide a guaranteed income for the owner (the City), but rather a guaranteed income for the management entity (operating risk remains with the City). • The City would still be responsible for capital improvements (which NGF Consulting believes will continue to be an important element in the case of Auburn Golf Course). • The City would still need staff with golf course expertise who could spend a significant amount of time overseeing the golf operation and contract compliance. 12 Discussion and Policy Implications This is an option that is typically considered as a reaction to total system failure and the inability of City staff to either appropriately operate the golf course (management, marketing, maintenance, etc.), or control expenses. Still, under this option the total business risk would still lie with the City of Auburn, and it seems very unlikely that this type of arrangement would significantly alter the basic revenue /expense equation that is present at Auburn Golf Course in 2011. It is also expected that any agreement of this type would have to include the food and beverage and banquet operations, as these elements are key to overall golf operations and would be required by any private management agreement. Further, the City of Auburn has 8 full -time and 16 seasonal (part-time) employees on the payroll, plus volunteers. Many of these employees are long -term City employees with lengthy records of service to the City of Auburn, and some are even unionized. It is likely that under any privatization structure, the method used by the private sector to achieve desired economic profitability will be to either terminate existing City golf employees, or reduce salaries and benefits of existing employees. It is understood by NGF that replacing unionized workers through privatization is not allowable in Auburn. Further, NGF notes that in the last few years the golf system has experienced what can best be described as a "perfect storm" of events including a national recession, increasing competition, changing demographics, and extremely poor weather in 2010 and 2011, factors that would have affected any private operator as well as City employees. Option 3: Concession Agreements This form of agreement is similar to a lease agreement. However, a concession agreement usually involves granting a license to operate a facility rather than the right to occupy the premises. It is very common in the golf industry, especially in the food and beverage service area, and presently exists with the food and beverage concession with Copper Falls Restaurant. The second most typical concession agreement would be for the Pro Shop, including one or more of the cart, merchandise, lesson, and driving range revenue centers. In this case, the municipality receives all green fees, plus an agreed upon percentage of the other revenue centers. The municipality typically is responsible for maintenance. This was in place at Auburn Golf Course in previous years through the 1980s and 1990s. Because of the short term of most concession agreements, there is little incentive for the concessionaire to make major investments. Advantages of Concession Agreements • The City would be removed from the day -to -day operation (if a pro shop or full facility concession) in exchange for green fees and a pre- determined percentage of other gross receipts. • Concession agreements provide more control than an operating lease, but less than a management contract. • The term of a concession agreement is typically shorter than an operating lease. Disadvantages of Concession Agreements • Concession agreements do not provide guaranteed revenue to the municipality and the City will still be responsible for facilities maintenance (operating risk remains with the City). • The City would be responsible for all major capital improvements. • In most cases, the City would be expected to retain the very expensive course maintenance function. • There are likely to be few highly qualified management firms interested in a shortterm concession agreement, as these agreements are most often with a single individual (golf professional). Management firms frequently prefer to put their resources into projects that have longer terms and have the potential to be more financially rewarding. 13 Discussion and Policy Implications - Maintenance -Only Concession Another area of separate concessions is in maintenance -only contracts. In this case, the pro shop and food & beverage operations would operate under separate concession agreements, or by the City, but the City would privatize the maintenance function to another private entity. This model has become more common in certain areas of the country where labor costs for maintenance are increasing too rapidly to keep under control, or where maintenance staffs have been reduced significantly to reduce expense thereby reducing the overall quality of maintenance. Golf course maintenance, including associated labor, is almost universally the largest single line expense item on a golf course's operating budget. This is especially true in public sector golf operations, when employee wage and benefit costs are often significantly higher than in the private sector. There are a number of companies that specialize in fixed -fee outsourced golf course maintenance, ranging from single- contract operators to industry leaders such as ValleyCrest National Golf Foundation Consulting, Inc. - City of Auburn Golf Operations - DRAFT Report - 47 Golf Course Maintenance, which reports 54 total contracts, and International Golf Maintenance (IGM), which totals 45 contracts. Maintenance companies are able to offer considerable maintenance cost savings due to several reasons, foremost of which is the ability to employ cost - effective manpower and scheduling strategies, which most municipalities are constrained from doing. Additional savings are often achieved through the ability of the larger companies to leverage national purchasing agreements for equipment, materials and supplies, and through other economies of scale. The advantages to this type of arrangement include a likely reduction in maintenance labor expense with comparable quality. The disadvantages include difficulty finding good companies, enforcing the contract, and getting the system to work well together with pro shop management. Auburn Golf Course has a particularly strong resource in the Head Superintendent who has been at this golf course for 35 years, a resource that may not be included in any maintenance outsource arrangement. Again, the NGF understands that replacing unionized workers through privatization is not allowable in Auburn. Option 4: Operating Lease The primary goals of an operating lease are to relieve the golf course owner (City) of all operating concerns, to ensure a minimum rent payment to the City, and to improve and /or protect the asset. An operating lease is similar to a management contract in that the lessee, like the management firm, hires and fires all employees and is responsible for the day -to -day operation of the facility. The difference between the two is that the lessee would be committed to pay all operating expenses, supply equipment, and, typically, provide some capital for investment in the golf facility. The ability of the selected private vendor to have control over the labor resource at the facility, and not have to pay "municipal" wages and benefits, would be key to making this arrangement work. These leases are typically for a longer term (longer than 10 years), especially when large lessee capital investment is involved. In exchange for incurring all operating expenses and capital upkeep, the private lessee would receive most (if not all) of the revenue and pay the City either a flat payment (flat lease) or a percentage of revenue (percentage lease). It is assumed by NGF that the City of Auburn would require the lease payment to be at least equal to the required annual debt service on the clubhouse (approximately $415,000 per year through 2025). In today's golf economy, it is very unlikely the City will be able to find a private partner willing to pay that amount as many recent leases observed by NGF in the 2011 golf economy have been much closer to the $50,000 to $100,000 per year range, excluding carts and equipment. As both the carts and equipment are owned by the City, some accommodation may be made but still unlikely to reach the level of $400,000 per year in lease payment to the City. Advantages to Leasing • Burden of Risk. Leasing the facility to a private entity shifts the burden of operational risk to the lessee. This includes the risk associated with rapidly rising labor and other expenses, as well as potential continued downturns in rounds played and revenues. Barring a breach of the contract, the City could have a guaranteed net revenue stream. The only expenses remaining with the City will be those associated 14 with administering the contract, oversight, and compliance. • Simplicity. The City would be relieved of the day -to -day responsibility in maintaining and operating these facilities. (As with all management options, the City should still have a person who has golf course expertise monitoring the operation and enforcing contract compliance — i.e., Director of Golf Operations or Golf Course Manager). National Golf Foundation Consulting, Inc. — City of Auburn Golf Operations — DRAFT Report — 48 • Capital Improvements. Depending on the relative attractiveness of the business opportunity to the private entity, the lease terms could require (or at least incentivize) the lessee to make, or at least contribute significantly to, needed capital improvements (i.e., improving drainage, maintenance facility and on- course services). • Maintenance Equipment. The lessee would be responsible for providing maintenance equipment and golf carts. Disadvantages to Leasing • Control. This lease option offers municipalities the least amount of control over the golf course operation, especially with regard to resident use of the facility and pricing. • Profit Motive. This is closely tied to the control issue. If not carefully executed, a lease arrangement may conflict with the objective of providing an affordable recreation activity for residents, as private interests (including maximizing return) can often be in opposition to public interests (such as providing a community service). • Labor Issues. The lease could lead to public sector employees losing their positions at the golf course, or at least face reductions in pay and /or benefits. • Revenue Constraint. As would be expected when one party shares a disproportionately low share of the risk, the City would receive less of the upside revenue potential than it would with a management contract. • Long Term. Leases are typically for a long term, especially if capital improvements are included in the lease terms. This makes it difficult to get out of the lease, should the municipality become displeased with the lessee's operation of the facility. • Down Market. The lessee may be forced to cut maintenance expenses and /or raise fees if revenues do not meet expectations. Unexpected golf market downturns often lead to the lessee seeking to renegotiate terms. Discussion and Policy Implications While leasing of public sector golf facilities was popular in previous decades, its popularity waned in the 1990s as golf revenues were increasing and public agencies began to see what they thought were large sums in golf revenue going to an outside vendor and not being reinvested in the facility or going as profit to the municipality. However, since the turn of the 21st century, leases are coming back into fashion for municipal golf facilities, particularly in the 2009- 2011 period of time, with public sector budget challenges. Leasing out the golf operations shifts the burden of operating risk to the private vendor, eliminates large fiscal losses, and, in some cases, provides a guaranteed revenue stream to public agencies. In most cases, the vendor will also contribute to capital improvements. Although the appeal of turning everything over to an outside agency may have a lot of merit, especially in terms of transferring operational risk, we should note that the basic issues that tend to drive municipalities into this option do not exist in Auburn golf operations. While there may be some inflation in its expenses and diminishment of the golf enterprise working capital fund, Auburn Golf is presently operating efficiently and working to increase revenue and reduce its expense structure in 2011, despite challenges from uncontrollable factors. Overall, it does not seem that the conditions in Auburn lend themselves to this sort of solution. Further, the City of Auburn will also have to consider other issues related to leasing that should be reviewed by City legal staff. NGF has noted the issues we find that commonly affect Cities National Golf Foundation Consulting, Inc. — City of Auburn Golf Operations — DRAFT Report — 49 considering leasing public sector -owned golf courses (some may also apply to management contracts): • Unionized Staff. The NGF review of Auburn Golf shows a unionized maintenance 15 staff that may have to be retained even in a lease agreement. If this is the case, the lease becomes less attractive to the private sector. • Bond Covenants. The clubhouse was funded through the issuance of a revenue bond that remains in place through 2025. The restrictive covenants in bond issues of this type typically prevent the "conveyance" of property in a lease agreement. • Park Property. Further, the Auburn Golf Course may be considered a "park property" that may also have restrictions on "conveyance" that may apply under a lease option. The key issue in this possible constraint is the definition of "conveyance," and whether a lease or some type of concession agreement would be considered a "conveyance." Option 5: Hybrid Management Contract A Hybrid contract blends many of the advantages of a lease with those of a management contract. Similar to a lease, the operations of the facility would be turned over to a privately owned company who would be responsible for all the operating expenses. Thus the management company assumes MOST of the risk. However, it is not a lease. It varies in a number of ways, including. • Term: A management contract is for a shorter period, typically three to five years. • Variable Payment: In most cases the payment to the management entity has a low fixed base, heavily weighted toward incentives on performance. • Capital Improvements: Typically, the City would still be responsible for all major capital improvements, although some management companies may be willing to include some of the capital improvement recommendations contained in this report in exchange for more favorable terms. • Flexibility: A management contract can include all or only parts of the operation. Advantages I Disadvantages The advantages and disadvantages of a Hybrid contract generally mirror the management agreement and leasing advantages and disadvantages, combining the best of both options for the benefit of the municipality. Discussion The NGF Consulting review of the various operational considerations for the Auburn Golf Course shows that two of the four options presented are probably not the best fit for the City of Auburn and can be eliminated from further evaluation: • Outright Lease. The NGF review of the lease option shows that leasing may not be fully allowable under various legal and City charter provisions. The most important of these are bond covenants, conveyance of park property and union issues. Further review of these issues will be required if the City is to consider a lease option, as there clearly are "gray" areas in these considerations. National Golf Foundation Consulting, Inc. — City of Auburn Golf Operations — DRAFT Report — 50 • Traditional Concession. This option will likely produce too many "working parts" that require attention and shift the City burden from managing golf courses to managing contracts. The City will likely still be responsible for covering losses and making capital improvements (retain risk). Thus the multiple concession option is not likely to bring the City into a more favorable economic position than it is at present. In light of this, NGF sees the continued self- operation (as -is), or some form of management agreement, as the two most appropriate options for the City going forward. However, NGF must also note that if the City opts to pursue a management agreement for the Auburn Golf Course, the key issues that must be addressed prior to making the evaluation include the issue of whether to include the food and beverage operation into the agreement, given that it is under contract through 2014. NGF Recommendation NGF recommends that the City of Auburn continue with its present operational structure, with a business - oriented Golf Facility Manager (as at present), continue with upgrades to its marketing (especially electronic), make some investment in the facility to improve 16 revenue, and make other modifications to operations, particularly food and beverage operations, over the next two years (through 2013) to better promote the facility as an ideal venue for tournaments, events and outings. As the new clubhouse was developed to become a community resource, in addition to an amenity to the golf course, some form of sharing of the total debt expense between City departments is also recommended and common in the golf industry. Further, NGF Consulting recommends the City of Auburn explore a management contract option only if action on these items still fails to improve net revenue by the end of FY2013. Public Policy Implication If the above items can be adjusted to ease the economic burden on the City Golf System, the continued self operation option becomes much more appropriate, and the privatization option much less appealing as the Auburn Golf Course would be in much improved fiscal condition. If the City is to seek a management company type of arrangement, NGF recommends that the agreement be entered into only if: • Hybrid Agreement. Includes a variable portion that helps spread the risk to the operator. • Include Some Capital Investment. Requires the private vendor to contribute capital to the properties, which would be in their interest given the recommended investments are designed to increase revenue. • Commit to Public Service. The selected vendor will have to commit to a program of service to the community by offering junior programs, high school access, senior /junior discounts, frequent tournaments, honor league commitments, and other activities presently employed by the Auburn Golf Course under self- operation. • Oversight: The contract should contain an oversight mechanism that allows the City to inspect the operation on a regular basis (such as twice a year) and have set standards that the contractor should adhere to. If the contractor is not performing to standards, then there would be financial consequences. (We further suggest that these inspections be carried out by a qualified third party). National Golf Foundation Consulting, Inc. — City of Auburn Golf Operations — DRAFT Report — 51 17 Pro Forma ATTACHMENT E g Opions VI: Golf Course Operating Options The following section presents a description and information regarding various forms of golf course operation and management available to the City of Lynnwood. Presently, Lynnwood Municipal Golf Course is self - operated whereby the City is responsible for golf course maintenance, golf operations and overall manage- ment, with the golf course food and beverage function provided under a concessionaire agreement with a third party concessionaire. There are four basic golf course operating options that are available to the City of Lynnwood: ► Current Self- Operation ► Facility Lease ► Full Management Agreement ► Hybrid Model Responsibility for the basic maintenance, operation and management functions for each of these operating models is summarized as follows: Self - Operation Facility Lease Management Agreement Hybrid City City Private Private City /Private Private Private Private/ Concession City/ Concession Private/ Concession Private Concession City Private Private City /Private In addition to the basic options outlined above, there are numerous other permutations which would create alternative hybrid models. These alternative hybrid models, discussed later in this section, combine some form of self- operation, concession agreements, and /or management/contract private party agreements. All of the operating options require City oversight responsibilities including contract monitoring, budget preparation and review, management oversight, and the like. The degree of City participation varies by operating model. Self- Operation Model Currently, the City of Lynnwood maintains and operates the golf course in -house using a combination of full - time/permanent and part time /seasonal City employees. The food and beverage function is the responsibility Pro Forma Advisors, LLC Page 34 PFAID: 10 -471 19 Pro Forma Ooera_ g C... p..CIons of a third party concessionaire. Under this model, the City receives all of the golf course revenue (including rent payments from the food and beverage concession), and is responsible for all operating expenses and capital costs. In addition, the City provides overhead support functions such as finance, human resources, legal, and other general and administrative services. Over the years, there has been a clear trend away from City self - operation, as there remain relatively few mu- nicipalities which continue to self - operate. Most municipalities have elected to lease their facilities, retained a professional management company, or entered into some combination of the lease management models (that is, some form of hybrid operation). This trend has been driven by several factors. First, the cost of pub- lic employees is higher than their private sector counterparts, primarily because of more comprehensive and costly benefit packages. Second, municipalities have increasingly attempted to eliminate the financial risk of self operation. Lastly, there has been a recognition on the part of municipalities that professional manage- ment generally can operate more efficiently, adapt more quickly to dynamic market conditions, and grow revenue. The principal advantage of the self- operation model is that the City retains full control over all policies and decisions regarding golf maintenance and operations. As well, the City is the sole beneficiary of any upside performance of the golf course. The model also allows the retention of a loyal and tenured staff. There are a number of disadvantages of the self - operation model, Labor costs tend to be higher than the private sector due primarily to higher benefit packages. There is a high level of financial risk as the municipal- ity bears all of the operating expenses and capital investment costs. The self - operation model typically con- strains management from implementing quick changes in response to changing market conditions. Golf Facility Lease Under this option, the golf course is leased to a private golf course operator who provides course maintenance, golf operations, and overall facility management services. The food and beverage operation may be included under the golf course facility lease or provided under a separate lease to a dedicated food and beverage operator. The operator's lease payments typically are based on a minimum rental payment versus a percentage of golf, merchandise, lessons, and food and beverage departmental gross revenue. Under a typical facility lease, the lessee receives 100 percent of the revenue and is obligated to fund required front -end capital improvements (if any), operating expenses, and a reserve for ongoing capital improvements. As such, the financial risk is largely borne by the lessee. The term of the lease is negotiable, although the length generally is related to operator capital improvement levels and rental payment terms. There are many examples of the facility lease model, although most of these leases were negotiated 15 -30 years ago, although it is much more common in California than in the Pacific Northwest. A survey of public golf courses in the State of Washington reveals only six of forty -three courses are leased, and the majority of these are in the eastern part of the state. There has been limited activity in recent years, and golf facility Pro Forma Advisors, LLC 20 Page35 PFAID: 10-471 Pro Forma Advisor Operai g Options leases have not been particularly well received in the past four -five years due to the softness of the golf mar- ket. In general, under facility leases, the golf facilities are leased to a management company with a minimum lease payment versus percentage rents. The contract specifies performance standards, required capital improve- ments and a range of contractual terms. The various terms of the leases are interrelated and the lease pay- ments must be considered in the context of all the terms of the lease. Lease Term. The term of the facility leases shown generally ranges from 15 -30 years. When front -end lessee capital improvements are required, which generally is the case, the term of the lease must be long enough to amortize these capital expenditures. The length of the term normally is a function of the level of capital improvements. Occasionally a short -term agreement (less than five years) is negotiated, but these are generally related to the continuation of an agreement with an operator where minimum capital improvements are required or where an option is exercised to extend the lease term. ► Minimum Rent. The minimum rent typically is established at about 75 to 80 percent of the expected "percentage rent" amount. The minimum often is adjusted annually to reflect about 80 percent of the average of percentage rents paid during the prior three to four years operation, but never less than the preceding minimum rent level. > Percentage Rents. Percentage rents vary by golf department, although often a composite rate is applied to greens fees, cart revenue, and driving range revenue. Merchandise, food and beverage, and other minor departments generally have lower individual percentage rents primarily due to the relatively small operating profit margins on these goods and services. The percentage rents are a function of the length of term, required capital improvements, utility sharing agreements, and the replacement reserve requirements. The rent percentage may increase over the term of the lease. The higher the capital expenditure requirement, replacement reserve, and costs associated with utilities and other course operations, the lower the percentage rent structure. Also, the market strength and potential profitability of the course strongly influence percentage rents. Fees and Operating Policies. Under most municipal facility leases, the lessor (City) retains substantial control over setting fees and establishing operating policies. As well, specific guidelines such as maintenance standards are in -place or negotiated as an integral part of the lease terms, While changes in fees and policies normally require City approval, in practice, the lessee has greater influence in modifying fees and terms which financially benefit the lessee. Moreover, regardless of the rigor of the lease agreement, a number of "gray" areas, such as level of course conditioning, generally remain which often are exploited by the lessee. Capital Improvements. Most facility leases call for capital improvements to be funded by the lessee. A list of improvements is specified and a time frame for their implementation is established. The capital improvements requirement varies widely, from less than $500,000 to over $2 million. Capital Improvement Replacement Reserve. Generally, some provision for establishing a reserve for ongoing future capital improvements is stipulated. The replacement reserve is normally a percentage Pro Forma Advisors, LLC Page36 PFAID: 10 -471 21 Pro Forma . iSO(S ce-an ! JI of greens fee revenue, with the percentage depending on anticipated future capital requirements, the age of the course, and the front -end capital expenditure requirement. Usually, the replacement reserve is in addition to percentage rents, but sometimes the reserve funds are credited against rent payments. r Utilities. Typically, the lessee is responsible for utility costs. However, in situations where utility costs are high, there may be some cost sharing of utilities, or some protection provided the lessee in terms of ceilings or caps on utility rate increases. For facility lease agreements, the market potentials, specific course maintenance requirements, areas of lessor /lessee responsibility, other contract terms, and overall economics must all be considered in establish- ing an equitable lease structure. Thus, while the experience of other courses can serve as a general guide- line, specific consideration should be given to the unique characteristics of a City's golf course, such as the location and market strength. Further, the overall objectives of the City will influence the structure of contract terms. The market for golf leases with municipalities has been substantially affected by the soft golf market condi- tions experienced over recent years. The number of qualified investor /operator groups which have an inter- est in such agreements has declined sharply, and the rent structure has generally been modified downward. In many instances, municipalities desiring leases are faced with the option of having to select groups with limited experience in exchange for the lessee's willingness to invest private capital and commit to reasonable rent payments. It also should be noted that with the softening of golf markets, there have been a number of initiatives on the part of lessees to renegotiate lease terms, particularly relating to courses which negotiated new leases in the 1995 -2000 period. In the cases where rent concessions have been granted by the lessor, rent terms have been modified by reducing base and percentage rent levels, often with significant increases in potential par- ticipation by the lessor in revenue above the current threshold. The primary advantages of the facility lease option include a guaranteed minimum rent payment to the City, potential benefits of professional golf management, limited required participation by the lessor (City), mini- mum financial risk to the City, and private capital improvement funding availability. The primary disadvan- tages of the facility lease option include waiving some control over operating policies and procedures, com- mitment to longer term agreements, and limited participation in upside financial performance. Moreover, de- pending on the strength of the golf market, a lease may not be economically viable to a private sector opera- tor. Management Agreement This option relates to a fee - for - service agreement with a Director of Golf, General Manager or an outside management company. Golf and food and beverage functions may be combined or separated, but the structure is the same. All functions would be under the authority of the contract golf director, General Man- Pro Forma Advisors, LLC Page 37 PFAID: 10 -471 22 Opera: g options ager or management firm. Under a typical management agreement, the facility owner (City) receives all reve- nues and is responsible for funding all capital improvements, operating expenses, and reserves for ongoing capital reinvestment. In addition, the owner (City) pays the operator a fee for management of the facility. In effect, the professional operator serves as the City's agent in managing, operating, and maintaining the golf facility. Management compensation typically consists of a base fee, plus performance incentives. Increas- ingly, public agencies are moving to a management contract approach to operations and maintenance. As previously Indicated, under this structure, the City receives all revenue and is obligated to fund all maintenance, operating and administrative expenses, including a management fee. The management fee is in addition to all on -site salaries and expenses. The basic terms and conditions of the agreements are dis- cussed below. Term Generally, management terms are five years in length, long enough to allow a firm to amortize its initial efforts to establish policies, procedures, and systems, and to ensure sufficient job security for key employees. Longer terms offer little advantage to the owner. The renewal of an agreement typically is for a period of three to five years. The terms may be influenced by conditions dictated by the financing instrument used such as tax - exempt bond IRS regulations (Internal Revenue Service Code Section 141). For example, the IRS has a number of stipulations imposed to ensure a management contract does not result in private busi- ness activity /use of a bond - financed facility. Among other things, the IRS restricts contracts which give the service provider an ownership or leasehold interest or provide compensation for services rendered based in whole, or in part, on a share of net profits from operations of the facility. Specifically, the IRS will allow agreement terms up to 15 years, but the structure of compensation is specific to the term. With 15 -year agreements, at least 95 percent of the total compensation must be fixed /guaranteed. At 10 years, at least 80 percent; and at 5 years, at least 50 percent must be fixed /guaranteed. As well, in accordance with IRS regulations, incentive compensation cannot be based, in whole or in part, on a share of net profits, and thus must be based on gross revenue or expense thresholds. The IRS also requires the management agreement to have an agreement cancellation option for the owner, typically at the end of three years. In cases where a cancellation provision is required by the financing authority, management companies have not objected. Compensation Structure For moderate volume courses ($2.0 -$2.5 million in annual golf /greens, carts, range) revenue, the base fee generally ranges from $100,000 to $140,000 per year. Compensation typically consists of a base, or guar- anteed fee, plus an incentive fee. For low volume courses ($1 million in golf revenue), the base fee generally ranges from $80,000 to $100,000 per year for 18 -hole courses. Incentive fees are structured such that ex- pected performance would result in additional compensation of $20,000 to $50,000. Total compensation, assuming budgets are met or slightly exceeded, for moderate volume 18 -hole public courses, generally Pro Forma Advisors, LLC Page38 PFAID: 10 -471 23 Pro Forma Advisors Opera r 0o-ions ranges from $130,000 to $160,000 per year, and $100,000 to $120,000 for low volume courses. While there are many ways of structuring incentive agreements, it is generally more effective to key them off of net operating income, or gross revenue above established threshold levels, with incentive payments equaling anywhere from 25 to 100 percent of the base fee, The compensation noted above relates to agreements where all management staff, including day -to -day ac- counting, are onsite, and there are no reimbursements for corporate support functions, marketing, or other normal offsite management services, including routine travel, The cost of some extraordinary services (e.g., legal, specialty agronomical consulting, etc.) may be borne by the golf course owner. Incentive compensation normally is triggered by performance which exceeds predetermined levels of net operating income (defined as "earnings before interest, taxes, depreciation, and amortization," or EBITDA) or gross revenue. Since expenses are reasonably predictable, incentive payments based on gross revenue ex- ceeding specified threshold levels often are workable. It should be noted that golf revenue (greens, carts, and range) has little associated variable cost, whereas merchandise and food and beverage have very high variable costs. Given this, each revenue category should be treated independently, such that incentive clauses should more greatly reward extraordinary golf revenue compared with merchandise, food and beverage, lessons, and other miscellaneous sources. Overall, total compensation for moderate and high volume golf courses should represent about 4 -5 percent of total gross revenue. The 4 -5 percent allowance is an industry standard which most professional golf man- agement firms utilize when allocating home office services for courses they own and operate. However, for low volume golf courses, the management fee will represent a much higher percentage of gross revenue, often 6 -10%. It is generally desirable for at least one - quarter to one -third of total compensation to be incentive - based. Again, the type of financing may influence the structure of the compensation and limit the portion which is incentive - based. Base Fee Adjustments In many agreements, the base fee is inflation - adjusted. This is a negotiable point, and typically relates to the structure of incentive compensation, which often serves as an inflation hedge, Management Services Offsite management services covered under the management fee include, although are not necessarily lim- ited to, the following functions: • Personnel /Human Resources ► Training ► Payroll and Benefit Administration ■ Procurement Pro Forma Advisors, LLC 24 Page 39 PFAID: 1G-471 Pro Forma ► Management Reporting and Accounting Systems ► Internal Audits ► Budgeting Support ► Marketing Support ► Agronomical Support Oper;� l inp Op ons Typically, all of these services are included under the management fee. If not, an accordingly lower manage- ment fee would be expected. While the management company provides these services, they do so, in effect, as the agent for the City. The City determines the fee structure, establishes policies, and has the right to approve compensation, employ- ment practices, and other similar items. Clearly, the management firms provide input and recommendations, but ultimately the City retains near -full control over all operating decisions. Other Provisions Daily accounting and management system reports are an integral part of the golf course operation. This daily function can be provided on -site by golf course administrative staff, or at the home office of the man- agement company. When provided by on -site staff, the expense is borne by the course like any other oper- ating expense. When provided off -site by the management company, there often is a separate charge to the City, in addition to the basic management fee. There may be other services provided by the management company which are reimbursed by the City sepa- rately from the management fee. Examples include travel expenses by home -office management staff, out- side agronomical evaluations, and the like. All of these elements of the management agreement are negotia- ble, and clearly, the overall compensation consists of the sum of the base fee, incentive fee, and reimburse- ments. The primary advantages of the management agreement structure include the benefits related to professional golf course management, lower wage and benefit structure related to private sector employment, shorter term contractual commitments, full control over the overall golfer experience and operations, and full partici- pation in upside financial performance. The major disadvantages of this form of operation include greater participation required on the part of the contractor (City), financial risk, and inability to attract private capital. Hybrid Model There are numerous alternative hybrids which consist of some combination of concession agreements and service contracts, and often such hybrids involve City - provided golf course maintenance. One alternative hybrid would retain golf operations and food and beverage concessionaires, with golf course maintenance responsibility retained by the City, as currently is provided. A similar alternative hybrid would retain golf op- erations and food and beverage concessionaires, with golf course maintenance responsibility shifted to a private landscape maintenance entity on a contract basis. The City would still be responsible for overall golf course management. Another alternative model would involve retaining a golf operations professional (indi- Pro Forma Advisors, LLC Paga40 PFAID: 10 -471 25 Opera ira Op ions vidual or firm) on a fee- for- service basis, who would also be responsible for overall golf facility management as well as the golf operations functions (reservations, starting, pro shop, range, carts). Under this alternative, golf course maintenance could continue to be provided by the City, or contracted to a private landscape maintenance provider. This option would provide the City with the professional operational oversight of a private operator. These services would include marketing and sales and revenue management. The City would receive all of the golf course revenues (greens, carts, range, merchandise) and bear most or all of the operating expenses, paying a fee to the contractor for their service. Generally, the agreement with the golf operations contractor has performance incentives structured in the compensation. Most of the benefits and constraints discussed under the full management agreement would transfer to this option, with a lower base fee. There are several firms which provide contract golf course maintenance on a fee - for - service basis. The con- tractors employ private sector employees, paying private sector prevailing wages and benefits, which gener- ally are well below the corresponding public sector wage /benefit scale. Maintenance is provided by a private landscape provider, such as Valley Crest or International Golf Management (IGM), on a fixed fee basis subject to standards and practices established by the public agency. The responsibilities of the concessionaire and the structure of the golf operations concession agreement vary considerably. Concessionaires normally pay rent to the City based on a percentage of gross revenue (percentage varies by revenue category). Sometimes, the rent categories are adjusted downward to reflect the concessionaire re- sponsibility for reservation, greens fees collections, and starting, but in other cases a separate fee is paid to the concessionaire by the City for these services. In these cases, the City receives rent from the conces- sionaire, and also pays the concessionaire a fee for services. Summary of Operating Options Strengths and Weaknesses The strengths and weaknesses of the four basic options are outlined in Table VI -1. Each option offers advan- tages and disadvantages relative to economic performance, the cost of payroll and employee benefits, city control, maintenance and influence on policy- making, more responsiveness of the operator, and efficiencies relating to one operating entity, required city involvement, and other factors. The current self - operatiion model, while having some benefits in terms of quality control, support from other City departments, and upside financial participation, has many deficiencies. There are higher costs associ- ated with public sector employment, financial risk, and absence of professional golf management "best prac- tices." The most significant disadvantage, at least in the current structure, is the City's inability to operate in a business- oriented, entrepreneurial manner which allows management to adapt and respond to dynamic market conditions. As well, the absence of an on -site manager with the authority to manage and coordinate the various functions provided by multiple providers is problematic, potentially resulting in lower revenues, less efficient operations and a diminished golfer experience. Pro Forma Advisors, LLC 26 Page41 PFAID: 10 -471 Pro Forma vlso.s...L Open inp Qpionn The strengths and weaknesses of a hybrid model would depend on the specific model. Contracting the maintenance function may offer cost savings, but must be considered in the context of the City's policies with respect to outsourcing jobs. Retaining a fee- for - service golf operations management entity /individual offers similar advantages and disadvantage associated with the "management model " -- principally offering greater City control and participation in upside revenues, while increasing operating and financial risk to the City. The turnkey facility lease often yields a reasonable financial return to the City and requires the least City in- volvement, but maintenance and golf operations service levels may be below those desired by the City. As well, the City typically relinquishes at least some control over golf practices and policies, much of which may be due to contract "gray" areas. A major advantage of the turnkey operation is that capital funds may be attracted from the private sector for course improvements, with the amount directly related to the length of the lease term. A fee- for - service management agreement offers many advantages such as maintaining greater authority managing the facility. Since the City would receive all revenues and expenses under this option, the financial return to the City may exceed that of a turnkey facility lease, but carries with it additional financial exposure. At present, service contracts are more prevalent in the private sector (management of daily fee golf courses). However, there is an emerging trend toward this option primarily as a result of cities seeking to maintain greater control without giving up the benefits of private sector management and operation. Pro Forma Advisors, LLC Page 42 PFAD: 10 471 27 Pro Forma rata ,„Thi Op do is Table VI -1: Strengths and Weaknesses of Golf Course Operating Options Self- Operation Facility Lease Management Agreement Hybrid'! STRENGTHS • Provides high level of City • Potentially provides some control over rates, policies, financial return to City practices, and overall golf • May produce guaranteed experience minimum rent payment to • Availability of City overhead City support functions • Minimizes financial risk • Strong participation in up- • Minimizes political influence • side financial performance with less direct involvement • Provides opportunity to of City with setting fees, • retain specialist in food and policies, and practices beverage • Offers potential benefits in • Preserves option to convert golf management expertise • to alternative operating option 1/ and specialized maintenance support serv- ices • • May provide private capital investment in facilities Potentially provides highest • financial return to City. Provides high level of City control Greater potential quality • assurance Opportunity to provide • shorter term contracts Potentially more compatible* with multiple operator op- tions Provides opportunity to • retain specialists in profes- sional golf management Captures benefits of private sector wage and benefit • structure Provides high level of City control over rates, policies, practices, and overall golf experience Availability of City overhead support functions Strong participation in up- side financial performance Potential benefits from lower private sector golf operations payroll /benefits Provides opportunity to retain specialists in golf operations and food and beverage Preserves option to convert to alternative operating option Management agreement for golf operations and overall administration, with City- provided maintenance. WEAKNESSES • Constrains ability of man- agement to adapt and re- spond to dynamic market conditions • Entails high level of financial risk • Involves higher public sec- tor wage and benefit struc- ture for maintenance /golf operations • Reduces opportunity to attract private capital due to reduced lessee control • Potential conflicts of multi- ple concessionaires • Relatively high City monitor- ing requirements • Minimum operational and quality control • May involve long -term con- tractual commitment • Minimizes financial upside, particular in current market • Current weak market for facility leases • Potential conflicts over capital reinvestment re- sponsibilities of contracting parties • Requires more City in- volvement than facility lease option • • Minimizes private capital investment in facilities. • Entails greatest level of City • financial risk • • Entails high level of financial risk May involve higher public sector maintenance wage and benefit structure Reduces opportunity to attract private capital due to reduced lessee control Potential conflicts of multi- ple concessionaires Relatively high City monitor- ing requirements Pro Forma Advisors, LLC 28 Page 43 PFAID: 10 -471