Monday, August 24, 2009

Shortcomings of Arrowhead Lease Adds to North Canton’s Financial Distress

Prepared Comments Made to
August 24, 2009

Last fall, in a Committee of the Whole meeting held on October 20, 2008, there was an item on the agenda for discussion under the Finance & Property Committee regarding the collection of delinquent city income taxes. The agenda request had been made by Finance Director, Alex Zumbar. In a memo to council, dated October 17, 2008, Mr. Zumbar states “…The collection of these delinquent taxes is of great importance to the City.” Fortunately, for the city, there is a legal process that allows for the collection of delinquent income taxes and this was explained to council by Law Director, Randy McFarren.

Finance Committee members have advised me that delinquent income taxes owed to the City of North Canton total as high as $150,000 and that these are delinquencies that have accumulated over a number of years and are owed by hundreds of debtors.

Tax collections are significant for every community and given North Canton’s current financial plight, collection of city taxes takes on added significance. Equally important is fairness in tax policies. Everyone must pay his fair share.

My topic of concern tonight is the delinquency of a specific account and how the city has found itself with little or no means to collect on this delinquent account.

I am referring to a debt owed to the city by the former lessee of the Fairways of North Canton. According to city documents, the city is owed $104, 311.74. Despite numerous letters from the city, the earliest dated October 7, 2008, the city has not received payment.

City records indicate that the overdue amount is comprised of $55,000 in past due lease payments and $49,311.74 is property taxes for 2008. Under the triple-net lease with the city, the lessee was obligated to pay property taxes. To prevent a delinquency on the property taxes for 2008, the city paid the taxes to the county directly and is now attempting to collect from the lessee, Larizza Management Group, LTD.

In contrast to the delinquent income taxes discussed above in which the city has legal standing to force collection, it appears that the City of North Canton has little or no legal basis to force the collection of this debt of over $104,000.

It is not my intention to embarrass anyone at this time but there should be a public understanding of how and why the city has found itself facing an economic loss of this magnitude should the former lessee continue to ignore demands for payment. Steps should be taken to prevent repeating the same mistakes in the future.

The seeds for the predicament that North Canton now finds itself originate with the contract to lease the Arrowhead Golf Course property, signed on December 31, 2003, by former Mayor Tom Rice.

The handicap facing the city today arises from the fact that the city required no performance bond, received no security deposit, and failed to require the lessee to sign the lease contract both as a corporate officer and personally. Kevin Larizza signed only as President of Larizza Management Group, LTD, which allows him to shield himself personally from any legal obligation to honor the contract with the city.

ARTICLE IX of the contract to lease the golf course specifies a $50,000 security deposit to be collected in two $25,000 installments. The first installment was to be paid within the first six months of the lease and the second installment was due no later than eleven months into the lease. No security installment was ever collected.

Mayor Held, as city administrator at the time, why were no lease payments ever collected?

In minutes of an August 26, 2003, Board of Control meeting to authorize the Mayor to enter into a Lease Agreement for the premises known as Arrowhead Country Club, City Administrator Held asked Law Director Roy Batista if Batista preferred a $500,000 performance bond over a security deposit. Law Director Batista replied “….I really would want both.”

On August 19, 2003, a Repository story titled, “North Canton agrees to lease Arrowhead,” reports “….the lessee will have to sign a $500,000 performance bond to protect the city if Arrowhead is damaged or neglected while leased.”

Mayor Held, the record begs the obvious question of why was there no requirement for a performance bond as urged by Law Director Batista and reported to the public in the newspaper?

On August 28, 2003, a Repository story titled, “Chippewa offered city most bang for its buck,” reports “The city is paying a leasing consultant from Texas for its advice on the seven proposals and has hired Addison Law Firm of Dallas, Texas, which specializes in golf course management contracts and leases, to formulate the final lease agreement with Chippewa.”

City records document that North Canton paid the Addison Law Firm of Dallas, Texas, at least $4,200.15 for their legal services. The identity of the leasing consultant or the costs to the city for their services could not be located.

Mayor Held, why did the city have to retain a law firm located a thousand miles away at an added expense to the taxpayers of North Canton to draft a contract to lease property when North Canton had not one but two law directors already on the city’s payroll?

In your opinion, did the city benefit from the use of outside legal expertise in the drafting of this lease?

Further, Mayor Held, was there any thought given to requiring Kevin Larizza to sign the lease contract as an individual as well as in his capacity as an officer of the corporation?

The minutes of the Board of Control meeting dated August 26, 2003, referenced above, have former Mayor Tom Rice stating, “I never enter into a contract before it’s been approved by the law department….”

However, a search of all city records related to the Arrowhead Golf Course property fails to show that the lease was ever reviewed by the North Canton City Law Director. Failing to have the city’s law director review and approve the lease for form and content is a violation of state law under ORC 705.11.

The statute states in part “[The city director of law] shall indorse on each [contract] approval of the form and the correctness thereof. No contract with the municipal corporation shall take effect until the approval of the …city director of law is indorsed thereon.”

I urge this council to pass legislation codifying this requirement under the laws of North Canton as added protection against economic loss to the city and its taxpayers in future contracts.

Lastly, I would like to speak to another aspect of this sad saga that resulted in a contract that has failed to protect the City of North Canton and exposed the city to economic loss. Council minutes along with Board of Control minutes clearly reveal city council’s failure to provide oversight of the Rice administration and City Administrator Held who are ultimately responsible for the failed contract.

At a special council meeting held on August 18, 2003, city council voted, on an emergency, to give the former Rice Administration total authority to negotiate the lease contract.

I was on city council at this time and after I was prevented from speaking out against the lease in the proceeding Committee of the Whole meeting, I refused to vote on the measure and excused myself from participation in the vote. The remaining six members of council voted to authorize Mayor Rice to enter into a Lease Agreement for the premises known as Arrowhead Country Club for a term yet to be negotiated.

Whatever happened to the idea of checks and balances in government and of the fiduciary responsibility city council has to their constituents?

The potential economic loss of over $104,000 facing any municipality is nothing to brush aside, and given the devastating financial distress now facing the city, any loss in revenue is devastating.

Mayor Held, I realize that less than a month after the Arrowhead lease contract was signed you were removed as city administrator and that might explain why the security deposit was never collected by you.

But you did return to the city as mayor two years later in 2005. For the last three years of the lease you did have an opportunity to collect the long overdue security deposit. It is unfortunate that your city administrator, Earl Wise, also has not thought to collect the security deposit in his nearly four years at city hall. And I might add, neither did former City Administrator Michael Miller who served during the first two years of the lease and made modifications to the lease that expanded the definition of capital improvements.

The potential economic loss that the city finds itself facing is the result of what one might call a “perfect storm.” First, city council gave blanket approval for the Rice Administration to negotiate the lease contract and never asked to review the terms negotiated; second, the contract was signed within the first ninety days of a change in city law directors; third, there was a change in city administrators thirty days after the lease was signed; fourth, there was a failure to have the North Canton City Law Director review the lease contract as required by state law.

I urge this council to commence an investigation into all the shortcomings that apparently have now put the city at a great disadvantage in pursuing the collection of these badly needed funds and conceivably could result in a sizeable economic loss to the city.

Clearly, the city’s law director needs to review all contracts as state law mandates. I will wait to see what other recommendations this council elects to put in place after their study is completed.

Thank you,
Chuck Osborne
City of North Canton