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AMENDMENT TO THE SMG OPERATING AGREEMENT TO INCLUDE THE DOWNTOWN MARINA AND EXTEND THE TERM
recommended action
RECOMMENDATION
It is recommended that the City Council adopt a resolution:
1. Authorizing the execution of an Amendment to the Agreement with SMG (C-11-093 NP, Resolution 11-0022) for the operation of the event venues to
• Add the Marina Operation to the Agreement.
• Extend the term to 2026 with a 5-year extension option through 2031.
• Amend the incentive structure of the Agreement.
2. Authorizing the City Manager, or his designee, to take all the necessary and appropriate actions to carry out the purpose and intent of this resolution.
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Summary
The Downtown Stockton Marina underwent a major renovation in 2009 and was operated by a third-party contractor, Westrec, Inc. (Westrec), until November 2016. Following Westrec’s departure, City staff and temporary agency employees have operated the Marina. In April 2017, an RFP was issued for marina management and a proposal from SMG, the current operator of other City event venues, was the only proposal received. At that time, SMG offered a stand-alone operating agreement for the marina operation in response to the RFP. As an alternate, they offered an amendment and extension of the current SMG contract (Attachment A - Resolution 11-0022 Authorizing SMG Facilities Management Agreement) for other event venues, to include the marina. If included with an extension, SMG is able to offer a capital investment for the venues of $1,000,000 over ten years, ($500,000 for each additional 5-years) of its current event venue operating agreement. The current SMG Operating Agreement began in 2011 and is scheduled to end in 2021. The current amendment will extend the term to end in 2026 and add an additional extension option through 2031.
It is recommended that Council amend the current SMG Operating agreement to 1.) include the Marina operation; 2.) extend the current operating agreement term to 2026 and include an additional 5-year extension option; and 3.) amend the incentive structure of the current agreement to include performance benchmarks for the Marina along with the Arena, Theater and Ice Rink. The incentive structure will change from improvement on revenues to an overall net operating improvement to align more closely with Council’s direction to limit subsidies. When SMG surpasses budgeted performance, both SMG and the City will benefit.
DISCUSSION
Background
In 2009 the Downtown Stockton Marina underwent a $27 million renovation, which included a $10.8 million loan from the Department of Boating and Waterways (DBAW). Upon completion of the marina renovation, a RFP was issued for day-to-day management, and Westrec was selected. As part of the Bankruptcy negotiations, the City entered into a settlement agreement with DBAW that eliminates all interest on the original loan but requires debt service payments only if the City receives net revenues from the marina operations.
In November 2016, Westrec terminated its operating agreement with the City after losing two other accounts in the surrounding area and citing security concerns. The City assumed the day-to-day operations and made improvements in security, policy, maintenance, and operations. Long term, it is expected that permanent staffing of the marina with City staff will be more expensive than contracting with a third-party.
In April 2017, a RFP was issued for marina and management services to fill the gap created by Westrec. Three companies were represented at the mandatory Marina walk through, however SMG was the only firm to submit a proposal to operate the marina. The other interested parties cited concerns over budgetary constraints, and City contractual requirements as factors in their decision to not continue with the proposal process.
In discussing the proposal with SMG, options were presented to either enter into a stand-alone agreement for the marina or amend the current SMG venue agreement to include marina operations. The amendment and extension option includes a capital investment from SMG of $1,000,000 over ten years, to be used within the facilities included in the agreement. SMG’s current operating agreement expires in February 2021. This Amendment will extend the current term to June of 2026. The Amendment also allows for an additional 5-year extension that would expire in June 2031. The capital investment payments are directly tied to the term or extension that is exercised. Therefore, the City will receive the first $500,000 payment within 60 days of the execution of this amendment, roughly June 2018. By June of 2026, the City will have completed the current term and therefore owe SMG nothing. If at that time, the City chooses to execute the additional 5-year extension through June of 2031, SMG will pay a second $500,000 capital investment within 60 days. Should the City choose not to extend this agreement beyond 2026, then SMG would not pay the second $500,000 investment, and the City would not owe SMG any of the initial investment.
If the event venue operating agreement with SMG expires in February 2021, it is unlikely that the Marina will be viable as a stand-alone operation for SMG without the remaining venues. Therefore, should the City choose the stand-alone agreement option, it is possible that the City could once again find itself looking for a Marina operator in two years, in addition to going through the RFP process for overall event venue management. The Event Venues RFP process, if necessary, should begin in late 2019 to ensure sufficient transition prior to February 2021 termination.
Meanwhile, SMG is in good standing with the City and continues to increase events and facility use dates. While still requiring a subsidy, combined revenues have grown 26% over the past three years, while expenses have grown by 10%. Due to the increase, the amount of the subsidy has remained consistent over the last three years, despite increased costs such as minimum wage and utilities. Both the Arena and the Bob Hope Theater are expected to have their highest combined revenue year in 2017/18 and ice time at Oak Park Ice Rink continues to be busy between youth hockey and figure skating, as well as new adult curling leagues. Total Visitors to the combined SMG event venues in Stockton reached 600,000 in FY 2017/18. SMG’s ability to create and promote events at the Marina exclusively or in conjunction with the surrounding event venues has the potential to create an atmosphere that draws visiting boaters to the area and increases revenues not only for these facilities, but those of surrounding businesses as well.
Present Situation
On December 4, 2017, considerations for the future Marina operation were brought before Council. At that time council suggested that negotiations ensue with SMG with emphasis placed on accountability for the future performance of the Marina and other event venues. Additionally, Council directed staff to reach out to the State to inquire about its interest in taking over Marina operations and releasing the City from responsibility.
The matter of the State operating the marina was discussed with DBAW senior officials. The State was not interested in taking over Marina operations. As an alternative, SMG remains a willing and viable operator. Though SMG’s experience in the Marina industry is light, its dedication to the City, maintenance of facilities and equipment, and safety of patrons/visitors remains consistent. SMG has a robust infrastructure to support the Marina including a financial/accounting department to support customer accounts, engineering team to oversee equipment maintenance, a marketing team to promote events and activities, and personnel resources to staff the Marina, as appropriate.
SMG is interested in the Stockton Downtown Marina as a means of breaking into the marina industry. To minimize the City’s risk in partnering with a company new to the marina industry, the Amendment requires SMG to hire a seasoned marina professional, suitable to the City’s standards. Additionally, the incentive structure ties the Marina’s performance, along with most of the other event venues, to SMG’s ability to increase patron/visitor use and revenue.
Specifically, the proposed amendment includes the following:
• The Marina has been added to the list of venues/facilities to be operated by SMG, with language that identifies Marina- specific operating responsibilities;
• The Agreement has been extended by five years with one additional five-year extension option;
• SMG is required to make a Capital investment of $1,000,000, paid by SMG to the City ($500,000 at the time of amendment execution and $500,000 when the additional 5-year extension is executed). If the additional extension is not executed, then the additional $500,000 will not be paid, and the City will have no outstanding liabilities to SMG for the original $500,000 investment;
• The incentive structure for SMG has been amended to include Marina revenue and use net operating performance along with the Arena, Theater, and Ice Rink; a change from increased revenues. This change is intended to minimize the City’s risk in liability for additional incentive fees, without an overall improvement and lessened amount of subsidy. The incentive fee will now be based on improvement of overall operational net whereby SMG (25%) and the City (75%) will share in the improvement.
• Additional Insurance requirements for the Marina property and staff have been added.
FINANCIAL SUMMARY
Under the current operating Agreement, SMG is scheduled to receive a management fee of $300,000 for the 2018-2019 fiscal year (subject to CPI fluctuations annually). Under the proposed Amendment, SMG would receive $355,000 for the same fiscal year, of which $50,000 will be for marina operations.
The proposed Amendment will change the way SMG qualifies for a performance incentive payment not only by including the Marina’s performance, but also by changing the criteria from an increase in revenue to an improvement in the net operating result. The proposed incentive change allows SMG to receive a bonus for good operating performance when both revenues are increased and expenses are contained. The City will receive 75% and SMG will receive 25% of the improvement above the benchmark, however the incentive fee for SMG may never exceed 75% of the of the annual management fee. This change to the incentive method sets the emphasis on decreasing the City’s subsidy to the venues, including the Marina. The subsidy for the Event Venues (excluding the Marina) has been $3,445,000 in FY2015/16, 2016/17, 2017/18, and is proposed to be the same in FY2018/19, despite rising expenses such as the State increase in minimum hourly wage and utilities. SMG has been able to improve the overall revenue over that period to offset increases in operating expenses that are outside its control. While it is anticipated that a subsidy will continue to be required, the incentive structure is better aligned to encourage SMG to decrease the required subsidy. The subsidy only relates to the specific operating costs of the venues themselves. Any sales tax, property tax, transient occupancy tax and parking revenue generated by the impact of the event venues activities are not included in the annual subsidy allocation.
The Marina has required an annual subsidy ranging from $160,000 to $220,000 over the past five years. Areas such as security have been found to be inadequate under the operation of Westrec and as such, caused the expense budget to increase. Revenues have stabilized with new policies and accounting practices implemented since the City took over marina operations. In FY 2017/18, additional fund balance beyond the $212,000 subsidy was required to balance the operating year. FY2017/18 adopted budgeted used as much as $114,000 in addition to the $212,000 subsidy. Current Year-end expenditure projections are better than budgeted, by approximately $65,000, largely in part to no additional insurance being procured and no operating management fee. In the foreseeable future, it is projected that the subsidies will need to continue and the City contribution will likely need to increase over the next few years by between $50,000 to $75,000 under the new contract to maintain current security levels, increased insurance requirements, and to meet the increased minimum wage costs.
Over the next 3-5 years, revenues are anticipated to grow at a rate that will outpace the current costs. It is projected that the Marina will continue to need some subsidy into the future. However, it is expected that by year three, the subsidy will be on a declining path as revenues grow stronger from events, guest docking, and monthly slip rentals. The increase in subsidy is consistent with projections included in the City’s Long-Range Financial Plan (L-RFP) and would not be an added cost during the term of the agreement.
All event facilities and the Marina have capital needs that are difficult for the City to fund, such as replacing the Ball Park Score board and Ice plant replacement and infrastructure upgrades at Oak Park Ice Rink. The option to extend SMG’s current agreement in the range of 5-10 years would include a capital investment of $500,000 for five years and $1,000,000 for the full ten years, which could assist in improving the City’s event assets. Capital investment dollars are only available to the City with an extension of the larger event venue agreement and may only be used at the facilities covered by this agreement. Upon receipt of the capital investment, $100,000 of the proceeds shall be placed in the Marina fund for needed upgrades to electrical and access control equipment, among other equipment needs. The remaining $400,000 and any additional capital investment from future extension proceeds shall be placed in the Entertainment Venues fund for future appropriation as projects are identified.
Attachment A - Resolution 11-0022 Authorizing SMG Facilities Management Agreement