Monday, January 12, 2009

Fairways Lease Credits Private Business Expenses Toward Capital Improvements

Prepared Comments Made to
January 12, 2009

On December 8, 2008, this council body voted on legislation authorizing a lease of The Fairways of North Canton to R & S Properties, Inc. The legislation, Ordinance No. 119-08, was passed on “an emergency” and passed with a unanimous vote of council.

The original term of the lease with R & S Properties was for a three year period with provisions to extend the lease for two three-year periods. Under the terms of the lease, the lessee is to pay rent totaling $100,000 per year as well as monthly payments to the city to cover annual property taxes totaling $49,311.74.

The lease also requires for the Lessee to pay a Benchmark of $80,000 per year of capital improvement investment pursuant to Exhibit B. My comments tonight are in regards to line items detailed in Exhibit B.

Exhibit B details seventeen areas for capital expenditures and is a budget for capital expenditures over each year of the nine years of the lease. The areas listed for capital improvements itemized in Exhibit B are the following: Carpet, Paint, Bar and Flooring, Tee Program, Air Conditioning & Heating, Cart Paths, Kitchen Equipment & Coolers, Clubhouse Roof Repair, Out Buildings Roofing, Parking Lot, Pool Paint, Fence & Gas Tanks, Pavilion Removal, Basketball Courts, Sidewalks, Course Equipment, and Golf Carts. There is a dollar amount budgeted for the various areas over the term of the lease.

Expenditures for many of the areas noted above are worthwhile capital improvements and are certainly needed given that capital improvements were ignored by the previous lessee. Two of the areas listed in Exhibit B are highly questionable.

I am at a loss as to how Course Equipment and Golf Carts can be considered capital improvements. The budgeted amount for Course Equipment and Golf Carts represents seventy-two percent of the total $89,000 budgeted for capital improvements for 2009. If one were to recalculate the percentage each of those two line items represent using the Benchmark of $80,000 required by Article 4.1.1 of the lease, the percentage increases to nearly eighty percent of the required Benchmark.

Why there is a conflict within the lease itself is unexplainable. Exhibit B details an annual capital improvement budget figure averaging $89,000 per year while Article 4.1.1 of the lease mandates an $80,000 Benchmark figure. The conflict between the budgeted figures in Exhibit B and the stipulated Benchmark figure stated in the lease introduces confusion and ambiguity.

It is not very hard to satisfy the required Benchmark of $80,000 per year of capital improvement investment when one includes business expenses of the lessee in the tally of expenditures. Allowing credit for business expenses toward the Benchmark of $80,000 per year of capital improvement investment pursuant to Exhibit B undermines the very purpose of requiring the lessee to make capital improvements while in possession of the property.

A footnote included in Exhibit B describes the capital improvements listed in Exhibit B as “…the ongoing commitment for modification and improvements made by the lessee for the benefit of the lessor.”

How are the profit motivated business expenditures of a private business of any benefit to the taxpayers of North Canton?

Article 1.6 of The Fairways lease defines “Capital Improvement” as “…the addition of a permanent structural improvement or the restoration of some aspect of a property that either enhances the property’s overall value or increases its useful life as recognized under generally accepted accounting principles.”

Crediting lease payments for Course Equipment at $24,500 per year and lease payments for Golf Carts at $39,000 per year as “Capital Improvement” does not satisfy the very definition stated in Article 1.6 in The Fairways lease.

In year nine of the lease, the budgeted expenditure of $75,000 for Course Equipment and Golf Carts is eighty-five percent of the average yearly expenditure of $89,000 budgeted in Exhibit B. If one calculates the budgeted expenditure of $75,000 in year nine of the lease for Course Equipment and Golf Carts against the Benchmark of $80,000 per year of capital improvement investment pursuant to Exhibit B, those two expenditures alone qualify for nearly ninety-four percent of the required “Benchmark” required by the lease.

In other words, those two business expenditures alone, which are not capital expenditures, will qualify for nearly all the capital improvements required by the lease with no actual capital improvements being made on the property.

What was the purpose in creating this illusion that the City of North Canton is actually receiving $80,000 of “Capital Improvements” when in reality it is all smoke and mirrors and puffery. The true level of capital improvements made under the budget figures detailed in Exhibit B is about $20,000 per year.

Why not report the actual capital improvements that the lessee would be required to make under the lease? Capital improvements that meet the very definition under the lease? Capital improvements that truly address maintenance of the facility and the infrastructure.

In news coverage of The Fairways lease, the press has reported that R & S Golf Properties is to spend at least $80,000 per year on capital improvements to the property. City officials who have given this information to the press have used the media to mislead the public. How sad for the taxpayers of North Canton.

The cat is out of the bag. The citizens of North Canton know that the purchase of Arrowhead was not a prudent decision. Ownership of Arrowhead is a financial burden on the city. No amount of spin or misinformation will change that. Was there a deliberate plan to dress up this new lease and make something appear that really is not there? Who is responsible for misrepresenting the merits of the lease?

Maybe council members should have looked over Exhibit B and questioned whether leasing Course Equipment and leasing Golf Carts qualify as capital improvements.

Oh, I forgot, the legislation had to be passed on an “emergency.” I guess there was no time for questions since council and the administration was dealing with an “emergency.” But there was time for fabricating creative financing of capital improvements by city leaders.

Taxpayers and the public can only hope city leaders will do better on the next piece of legislation passed on an “emergency.”

Thank you,
Chuck Osborne
City of North Canton