Monday, April 28, 2008

North Canton's Purchase of Arrowhead Golf Course A Disastrous Financial Decision

Prepared Comments Made to
April 28, 2008

Today is the fifth anniversary of North Canton City Council’s 3rd and final vote to purchase the former Arrowhead golf course. While we generally celebrate past events that positively affect our lives, the purchase of Arrowhead is not one of them as is quite evident for many reasons.

The purchase of Arrowhead golf course was not a course of action I supported as a member of city council five years ago and my opposition to the purchase for $4.2 million is well documented in minutes of three sessions of city council held on April 14th, 21st, and 28th of 2003.

Five years ago, legislation to purchase Arrowhead was fast-tracked through council with three readings on three successive Mondays. Can you imagine expediting the expenditure of $4.2 million dollars that was not anticipated in the city’s budget for fiscal year 2003? Council expedited the three readings over a two week period by holding a special council meeting that was not discussed or agreed to by council in its first reading of the Arrowhead legislation. The notice of the intervening special council meeting was announced the Thursday before a Friday in which city hall was to be closed for a three-day weekend. Do you think there were forces working behind the scenes to manipulate this legislative process?

I did not stand alone in my opposition to spending $4.2 million for the purchase of Arrowhead. In the minutes of the first reading to purchase Arrowhead on April 14, 2003, Finance Director Julie Herr stated:

“…I’m not overly excited to spend 4 million dollars on something that we’re not going to see a return [on] ... With the current economic situations and the fact that next year we’re going to have to budget for at least a 2 million dollar payment for [the] Hoover Company – because of the settlement agreement, that’s something that we’re going to have to address in the budget next year. And with paying back 4 million dollars, that debt service is just money that’s going to come off the top of capital projects. So that means less money to do different projects within the city….this is going to have a financial impact down the road. I just want to make everyone aware that there is going to be a financial impact for the city for the next year and years to come.”

Finance Director Herr’s comments were quite prophetic even though the city ultimately only financed one half of the purchase price. The city paid half of the purchase price in cash from city’s reserves. That $2.1 million in cash would come in very handy at the present time.

For the entire term of the Arrowhead lease, lease payments to the city have been far short of debt service and it is robbing the city of needed funds just as the city’s finance director warned. Even with debt service requirements for Arrowhead that are one half what was anticipated, debt service has still greatly exceeded lease revenue.

In 2004, the first year of the lease, Arrowhead debt service was $326,177 while lease revenue, including a $50,000 infrastructure payment, totaled $145,000, a shortfall of $181,177.

In 2006, Arrowhead debt service was $358,338 while lease revenue, including a $50,000 infrastructure payment totaled $159,500, a shortfall of $198,838.

In 2007, Arrowhead debt service was $389,002 while lease revenue including a $50,000 infrastructure payment totaled $159,500, a shortfall of $229,502.

For 2008, the finance director anticipates debt service of $362,825 while lease revenue totals $159,500, a shortfall of $203,325. There was no shortfall in 2005 because the city did not make a principal payment on the outstanding bonds that year.

Over the five years of the Arrowhead lease, debt service on the bonds to finance merely half the purchase price of Arrowhead has exceeded revenues from the lease by $721,422.

If one were to add the lost interest on the $2.1 million cash that was removed from the general fund, called opportunity cost, there is an additional loss to the city of $334,476.

The cumulative burden on the city for Arrowhead over the past five years of the lease totals $1,055,898.

There is a reason why debt service exceeds revenue from the lease at Arrowhead golf course and it boils down to the fact that the current lease calls for lease payments far below market lease rates. According to respected life-long operators of upscale public golf facilities, a fair market lease rate for Arrowhead golf course is ten percent of the valuation of the property. The purchase of Arrowhead golf course for $4.2 million would require a fair market lease rate of $420,000 per year. I tried to make that point in comments to council on January 29, 2007, and my message fell on deaf ears.

After this year’s $300,000 principal payment on the Arrowhead bonds, the city will still owe $900,000 on the debt. Can the city continue to subsidize The Fairways golf course under the current lease rate and payment schedule? This will result in a continued burden on the city in excess of a half a million dollars over a three-year period.

Five years ago, professional operators of golf courses advised me that facilities such as Arrowhead golf course were valued at two and one half times their gross revenues. In spite of being refused the financial records for Arrowhead, I was able to conclude from collecting financial records from Good Park in Akron, the Legends in Massillon and other golf courses that Arrowhead generated around one million dollars in annual revenue, thus a fair market value for the purchase of the property would have been approximately $2.5 million dollars. Bob-O-Link golf course, nearly identical in size, had recently sold for development for $2.45 million.

Unfortunately, the huge overpayment paid by the city for the Arrowhead property has come home to roost and the situation has continued to deteriorate.

In spite of lease rates that are substantially below market rates for an asset that cost the taxpayers of North Canton $4.2 million, Mr. Kevin Larizza, the lessee of the golf course, renamed The Fairways of North Canton, advised the city in a letter received November 2, 2007, that he wants to cut his losses and terminate his lease with the City of North Canton effective November 1, 2007. Mr. Larizza states that the golfing industry across Ohio and across the state has seen a decline over the past few years.

In the minutes of the April 21, 2003, meeting, the second reading to purchase the golf course property, I read into the record from the April, 2003 PGA Magazine, titled Wake Up Call, excerpts from the article that reported the golf industry was in a decline and that this translated to a “loss of revenue across the board – green fees, lesson and caddy fees, golf cart revenue, ball equipment and merchandise sales, food and beverage, hotel rooms at golf destinations, etc.” This independent information from the golf industry also fell on deaf ears.

In a November 2, 2007, Mr. Larizza’s new management team, Golf Pro Scott DeMuesy and Course Manager Rob Purcell, describe in a letter to the city that The Fairways was “in dire need of a strong management Team…” when they met with Mr. Larizza early last year to discuss a management agreement.

In a subsequent letter, dated November 9, 2007, DeMuesy and Purcell advise city council that “…Mr. Larizza has essentially ceased financial support of the entire operation, leaving the business in a day to day turmoil.”

In the same letter is a list of items that DeMuesy and Purcell feel need to be addressed, presumably in the very near future. The list includes a need for golf course equipment, a repair of the clubhouse roof, a need to replace the clubhouse carpet for safety reasons, a need to lease new golf carts and fertilizer & chemicals to improve the appearance of the golf course marked with a disease called Dollar Spot.

A tally of these needed expenditures approaches $400,000. There was no mention of what it might cost to repave the parking lot or replace the sprinkler system which was a problem before the city took over the property, or the many other infrastructure improvements that may need attention.

Can the City of North Canton continue to fund a facility such as this and continue to drain city coffers that have already run dry? Should the City fund a facility that is such a huge drain on very limited resources?

At the present time, not only is the city leasing a facility far below market rates that continues to drain away funds needed for basic city services, the city is also now financing the operations of The Fairways. The lessee of The Fairways, Mr. Kevin Larizza, who is operating the golf course for commercial gain, has failed to render to the city, per the lease, his January 1, 2008, lease payment of $110,000.

North Canton’s purchase of the Arrowhead golf course was a disastrous financial decision that has burdened the city from the beginning and has accelerated the city’s financial decline. It cannot be blamed on the loss of the Hoover Company.

The City of North Canton must relieve itself of the financial burden as continued ownership is beyond the budget of city taxpayers.

Five years ago, I urged that the city simply purchase the development rights to the property to prevent unwanted development. That course of action was not followed. Today, continued ownership of the golf course by a city with projected budget shortfalls for as far into the future as anyone dares to look is not prudent and is patently unfair to taxpayers who rightly expect services for their tax dollars, not subsidies for a golf course.

I urge that the city sell the golf course property but withhold the development rights to the property. The city will have paid much more for those development rights than it would have five years ago, but at least it will come away with something to show taxpayers that the purchase was not entirely in vain.

Thank you,
Chuck Osborne
City of North Canton