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Archive for July, 2009

In the last posting we discussed a few ideas for self-operation of municipal golf courses. If you have now come to the point where some form of privatization is imminent , one idea to consider in lieu of the big management company is a concession agreement. This form of agreement is similar to a lease agreement, although a concession agreement usually involves granting a license to operate a portion of 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 in some form at many municipal golf courses around the country. The second most typical concession agreement would be for the Pro Shop, and include revenues from carts, merchandise, lessons, and driving range. Concession agreements are popular because they are usually easier to cancel than leases or full service management agreements, are frequently for a shorter term, and contain more controls. Concession agreements are usually granted for properties in “as is” condition and seldom require the concessionaire to make major physical improvements to the facility. Payment to the municipality for a concession license is usually a flat fee plus a percentage of gross receipts.

Concession agreements can come in several types or combinations, the most common include:

a)      Self Operate Maintenance and Contract for Pro Shop (may or may not include Food / Beverage) Operations involves direct municipal control of maintenance while contracting for management of pro shop and food / beverage operations.

b)      Self Operate Pro Shop (may or may not incl. F & B) operations and Contract for Maintenance involves direct municipal control of pro shop and food / beverage operations, while contracting for maintenance.

c)      Multiple Concessions would involve creating multiple contract agreements for separate entities for each facet of the golf operation (pro shop, food / beverage and maintenance).

Advantages of Concession Agreements

  • The municipality is removed from the day-to-day operation in exchange for green fees and a pre-determined percentage of other gross receipts.
  • Concession agreements can provide more direct control than an operating lease or a full-service 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. Anything that negatively impacts revenue will still leave the municipality with a shortfall (operating risk remains with the municipality).
  • The municipality would be responsible for all major capital improvements.
  • There are likely to be fewer highly qualified management firms interested in a short-term concession agreement. Management firms frequently prefer to put their resources into projects that have longer terms and have the potential to be more financially rewarding.
  • Contract compliance – municipalities often have to manage multiple contracts.

Case Study A: Maintenance-Only Contracts

In this case, the pro shop and food & beverage operations would operate under separate concession agreements, or by the municipality, but the municipality would privatize the maintenance function to another private entity. This model is in place at numerous municipal golf courses throughout the United States.

General Discussion – 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. Therefore, golf course maintenance typically offers public sector golf course owners the greatest potential for savings and increased efficiency.

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 Golf Course Maintenance, OneSource, and International Golf Maintenance (IGM). Maintenance companies are usually able to offer maintenance cost savings due to several reasons, foremost of which is the ability to employ cost-effective manpower and scheduling strategies, which most public agencies 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. Be careful not jump to this solution when maintenance expenses have already been reduced due to budget cuts. In many cases of “lean” maintenance operations, a private maintenance vendor may not be able to reduce expenses in a municipal golf operation. Make sure to study the consideration thoroughly as already lower-than-average golf maintenance budgets are not good candidates for maintenance-only contracts.

Advantages of Maintenance Contracts

  • Fixed-fee outsourced maintenance contracts with reputable companies will usually result in savings on labor expenses, especially when taking on public sector courses that were self-maintained.
  • Maintenance contracts relieve the municipality from a number of accounting functions such as accounts payable for maintenance vendors, vendor sourcing, and other responsibilities.

Disadvantages of Maintenance Contracts

  • Adherence to maintenance standards can be hard to enforce if the contract is not comprehensive, or if it does not address contingencies and extraordinary events.
  • The private fixed-fee maintenance company has its profit margins built into the contract price, and has no revenue incentive. Also, higher profits result for the maintenance company if it spends less.
  • These arrangements can lead to conflicts between the management of the golf course and the maintenance company if the two parties are at cross-purposes (over maintenance conditions, for example).
  • The maintenance contract is not helpful to municipalities already operating on reduced maintenance budgets that are utilizing and cost saving techniques.

Thanks for your attention. I sincerely hope the information is useful. In the next postings we will discuss full-service management agreements and comprehensive leases as a path to improving the fiscal condition of municipal golf courses.

See you down the road.

Richard Singer

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