HomeMy WebLinkAboutSS2 - Management of Income Producing AgreementsCITY OF NEWPORT BEACH
CITY COUNCIL STAFF REPORT
Study Session
Agenda Item No. SS2
September 23, 2003
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Administrative Services Department
Dennis Danner, Administrative Services Director, 644 -3123,
ddanner @city.newport - beach.ca.us
SUBJECT: Management of Income Producing Agreements
ISSUE:
Should the City improve management of income producing agreements, and if so, what
is the most effective way of doing so?
DISCUSSION:
Background:
Executive Overview. The action recommended by this Staff Report grew out of an
analysis of the City's handling of revenue generating leases and agreements that
followed the discovery of losses of potential revenue from some of these agreements.
These agreements cover a variety of relationships, and their respective structures are
largely I acking i n c onsistency o f format. S ome of t hem a Iso I ack a ssential p rovisions
and /or have other substantive shortcomings.
The City receives more than $10 million annually from approximately 130 different
leases (mostly real estate), franchises, and other income producing agreements. These
agreements collectively generate a cash flow constituting the City's third largest
revenue source, but it is a revenue source that is unique in several ways.
• The agreements originated at different times and for different reasons.
They are (mostly) within the exclusive purview of the City, as opposed to
involving shared authority with other government entities, as is the case with
property tax and sales tax.
Management of Income Producing Agreements
September 23, 2003
Page 2
• The formats and contents of the agreements are inconsistent, and many of them
are quite complex. Attachment A provides an indication of the variables that need
to be tracked.
• Many contain provisions that require the City to perform certain administrative
functions; and most contain CPI, insurance coverage, or other adjustment
provisions.
• They each need to be re- negotiated periodically.
The City's handling of these agreements has varied over the years, but it has been
largely decentralized. Various aspects of the function have been the additional
responsibility of several staff members, but the overall program has never been the
primary responsibility of any one person or office. The opportunity for errors and
oversights in this situation is unacceptably high, and staff has discovered omissions that
have resulted in potential and actual revenue to the City being lost. In addition, the staff
time required to correct problems of this type after the fact is often substantial.
In short, this aspect of the City's affairs is of sufficient magnitude and complexity to
require more structured management focus than it has received in the past.
Background. For division of labor purposes, there are two separate aspects to
managing these agreements: a) the policy setting and negotiation level; and b) the day -
to -day administration level. The negotiations come up much less frequently, and they
require the input/supervision of senior staff members for whom any one agreement is
not a major part of their respective responsibilities. The day -to -day administration
involves contract monitoring, compliance enforcement, and initiation of required
adjustments /changes. This is generally done within the Revenue Division, but that has
not always been the case. Here is some information to help put the current situation in
historical perspective.
• Responsibility for negotiation and compliance management of most of the City's
income agreements previously fell within the scope of duties of an Assistant City
Manager position, but that position was left vacant for a time in the mid - nineties;
then subsequently re- established and restructured.
• At the same time, some of the management responsibility for these agreements
resided (and still resides) within individual operating departments.
• Another fairly recent change is that the more mundane aspects of month -to-
month billing activity and clerical administration of the agreements were
consolidated from various City Departments into the Revenue Division of
Administrative Services a few years ago.
Management of Income Producing Agreements
September 23, 2003
Page 3
In short, to the extent that responsibilities for management of income agreements were
previously connected to specific staff positions, those connections were lost during the
reductions and reorganizations of the nineties, especially with regard to the previous
Assistant City Manager position.
Current Situation. Things have now evolved to where the administration of income
generating leases and other agreements can best be described as being not-too-
clearly-defined additional duties for several different staff members. No one really has
"ownership" of the overall program. Coordination of effort and management of the
detailed requirements of these agreements is lacking, and mistakes are being made.
Once executed, many of the income agreements are fixed, straightforward, and require
little attention (e.g. the Girl Scout Hut). Most, however, are dynamic and complex,
requiring significantly more oversight (e.g. the Balboa Bay Club lease). Moreover, many
of the income agreements are of types and formats that have not been incorporated into
the City's financial management systems, making confirmation of most provisions of
these agreements (e.g. timely and accurate payments) very difficult. Revelations
relative to the Newport Pier concession agreement, as well as issues that have arisen
regarding the Harbor Island and Beacon Bay leases, demonstrate the need to increase
management attention to these revenue - generating agreements.
Once the problem was identified, the consensus among those involved was that the
Administrative Services Department should coordinate the staff effort to re- establish
appropriate administrative control of this overall program. Attachment A contains a
preliminary working document developed during this initial analysis that lists the various
agreements at issue and the fields of information to be abstracted, in summary form,
from each.
After this preliminary analysis, the Revenue Division initially proposed a supplemental
budget item to fund a new position that would have responsibility for compliance
management and overall coordination of the City's income property related agreements.
Although there was no disagreement that improved oversight of these income producing
agreements was necessary, the City Manager directed that the Department obtain cost
comparisons for outsourcing the proposed work as a possibly less costly and more
efficient alternative. Two companies, Bendetti Management Group (the City's
management company for Marina Park) and Jefferson Wells International provided
proposals to produce an analysis of each agreement (abstract), and conduct ongoing
compliance review /management of approximately 130 income property agreements.
Proposed Scope of Services. Following several meetings with both companies, a
proposed scope of services and cost estimate was eventually submitted by each of
them. Both were provided details on the desired nature of work, a listing of income
agreements, and copies of several of them. Both companies represented that a
thorough analysis (abstract) of each agreement would be an essential element of the
Management of Income Producing Agreements
September 23, 2003
Page 4
project. At the City's request, each of their cost estimates separated pricing for the
abstract work and pricing for management of the agreements.
Bendetti included a preliminary abstract of the Balboa Bay Club lease with their
proposal. This abstract, when compared to the previous abstract efforts conducted by a
variety of clerical and temporary City staff over the years, was far more comprehensive.
Moreover, it highlighted the complexities of the agreements, clarifying both lessee and
lessor obligations and rights. It also evidenced the need for a more current and
thorough abstract effort. Staff is convinced that a similar one -time abstracting of all the
leases, franchises, and agreements, as listed in Attachment B, would provide uniform
information valuable in ensuring compliance by a II parties to these agreements. This
task should be undertaken regardless of the decision regarding ongoing management of
the agreements. This process has begun with the assistance of the City Attorney's
Office.
After abstracting the agreements, both the Jefferson Wells and Bendetti proposals
include providing the following services:
• Generation of statements
• Collection of payments
• Accounting of all financial transactions
• Maintenance of insurance and bond documentation
• Financial and performance auditing
• Enforcement of lessee obligations
• Facilitation or satisfaction of City obligations
One of the problems this list of services highlighted is that the City has not done well in
some areas, but it is quite proficient in providing most of them. The shortcoming is with
regard to administration and oversight of the leases themselves, but our capability to
efficiently generate statements and post payments that interface with the City's general
ledger, create dunning notices, perform financial audits, and manage accounts in
collection is well established. We discussed with Bendetti and Jefferson Wells the
merits of the City providing those services we currently perform and contracting for just
those services that need to be supplemented. Both firms indicated that splitting the
tasks along any conceivable lines would not be a practical solution for either the City or
the consultant. So the contracting out issue essentially comes down to an all or nothing
decision with regard to the above list.
Costs. Bendetti has proposed to provide an abstract of each agreement at a cost of
$140 per hour. The estimated cost for Bendetti to abstract the 130 agreements is
approximately $55,000. Bendetti also proposed the annual cost of providing the
management described above for the income agreements would be 5% of the gross
revenues derived from the agreements. That cost, based on fiscal year 2001 -02 income
Management of Income Producing Agreements
September 23, 2003
Page 5
agreement revenues, would be $438,746. (This figure is actually low, since the figure
reflects the temporary loss of revenue due to the Balboa Bay Club renovation.)
Jefferson Wells estimated the costs for abstracting the income agreements at $64,000
plus travel, lodging, and administrative expenses. Thereafter, their estimate for
providing the ongoing agreement management is $325,000.
Copies of the Bendetti and Jefferson Wells proposals, which are fairly lengthy, are
available from Administrative Services if /as requested.
Outsource vs. In- house. As previously indicated, the Administrative Services
Department currently performs many of the processes proposed by the two private
contractors offering proposals. Outsourcing the billing and administrative work specific
to these activities would not generate a sufficient reduction of in -house effort to enable
elimination of a staff position to help offset the additional consultant costs of
outsourcing. In fact, outsourcing the billing and related activities might actually increase
the workload in coordinating receivables, payables, and fund accounting activities with
an outside contractor.
A survey of about a dozen California cities with property management related positions
revealed that cities with fewer properties and less related revenue than Newport Beach
have full -time positions d edicated to this work. T he average a nnual base salary with
benefits for those cities surveyed ranged from $74,114 to $95,840. Staff believes that a
paralegal or similar orientation is called for since the responsibilities of this position are
more contract administration and enforcement oriented, than property management
oriented.
With regard to the initial abstracting project, the City Attorney's Office has part -time
attorney who is extremely well qualified for this type of work, and she has already
provided examples of her abilities. We estimate that the in -house cost of abstracting all
of the agreements at issue would be about $30,000. Also, Mayor pro -tem Ridgeway
and Council Member Heffernan have suggested a variety of property management
software that would be well suited to assist in the management of these agreements. It
is estimated that the cost for such software and training will be $10,000.
With these figures in mind, the total first -year (12 months from approval) estimated cost
for performing the proposed income property management work in -house is $136,000.
During subsequent years, after the initial abstracts and other start -up work is completed,
the cost will be limited to additional employee compensation of approximately $96,000
(salary and benefits).
Expanded Income Property Opportunities. Although it is unlikely that the City will
want to take advantage of all of them, opportunities to expand revenue generated by
Management of Income Producing Agreements
September 23, 2003
Page 6
City owned property come up fairly frequently. Siting of telecommunications facilities,
beach vehicle marketing, sole vendor sponsorships, and potential franchising changes
are a few of these. A staff member designated as the point of contact and
coordinator /administrator (though not the policy setter or major decision maker) for all
such functions would enhance consistency and continuity.
Conclusion. The City's handling of Income Producing Agreements needs more
managerial attention than it is currently getting.
It is more appropriate (and affordable) for this attention to be provided by in -house staff
than by an outside contractor, for the following reasons:
• It will be less costly.
• The broad scope of work proposed by Bendetti and Jefferson Wells does not fit
efficiently with the way the City is currently structured to accomplish several
aspects of the function. In light of the nature of their respective businesses, both
vendors expressed reservations about defining a more restricted scope of work,
due to concerns about delineating and coordinating overall program
responsibility. Staff shares those reservations.
• The function itself is of sufficient significance that staff should be giving it more
direct attention, as is the case in several other Cities with similar levels of activity
in this area.
A copy of the job description for the proposed new position is available from
Administrative Services if /as requested.
Funding Availability:
Unappropriated fund balance and /or unanticipated revenue. Based on what we have
learned to date, staff believes that prevention of revenue losses as well as reducing the
time spent by the City Attorney and City Manager Offices, and other City staff in
resolving the results of failings in this area will more than cover the additional
expenditures for program management.
Alternatives:
1. Make no changes and attempt to improve performance with existing resources.
2. Outsource both the development of the abstracts and ongoing management of
broader aspects of the program.
3. (Recommended) Use in -house staff time (mostly part -time attorney) to complete the
abstract work. Create a new paralegal /contract management position responsible for
ongoing program management.
Prepared by: 4�1�
GI erroad
Revenue Manager
Richard—
Deputy Administrative Services Director
Management of Income Producing Agreements
September 23, 2003
Page 7
Submitted by:
Dennis Danner
Administrative Services Director
Attachments: Sample listing of Agreement Aspects
Initial copy (draft form) of working document being established to identify
and track income producing agreements and variable provisions of
each
Attachment A
Lease Abstraction
Guideline to be used for extraction of terms and conditions of leases executed.
Tenant
Type of Contract
Type of Use
Contract Execution Date
Premises
(a) Location
(b) Square Footage
Term
(a) Initial Term
(b) Commencement Date
(c) Expiration Date
(d) OptionTerm(s)
(e) Fiscal Year
Rent
(a) General
(b) Base Rent
(c) Due Date of Base Rent
(d) Penalty for Late Payment of Rent
(e) Percentage Rent
(f) Payment of Percentage Rent
(g) Payment Due Date of Percentage Rent
Periodic Adjustments in Base Rent
Reconciliation of Annual Rent
Reporting Requirements/Reports of Sales
Tenant Maintenance Obligations
(a) General
Use
(a) Permitted Use
(b) Restrictions on Tenants Use
(c) Exclusive Use Clause
Other Tenant Responsibilities
Taxes and Assessments
Capital Repairs and Replacements
Tenant Insurance Obligations
Events of Default
Termination Clause
Notices
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