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Memorandum Cherry Lane Recreation 10-03-1978interoffice MEMORANDUM To: Meridian City Council From: William. F. Nichols Subject: Golf Course Date: September 29, 1999 Wm. F. Gigray, III asked me to review the Golf Course Lease Agreement dated October 3, 1978, the NuPacific Agreement dated October 3, 1978 and the Memorandum of Understanding dated December 23, 1977, all related to the Golf Course. I was specifically asked to review these agreements and make recommendations regarding any ongoing responsibilities that the City has under any of these agreements. Review of Lease In reviewing the Lease Agreement I noted the following unusual items or provisions. Section 4(b) requires that the golf course lessee make specific provisions for youth programs for "entertainment, instruction, and social" purposes. Section 8 requires the lessee to perform all of the city of Meridian's obligations contained in the city's agreement with NuPacific. Section 11 requires the lessee to indemnify the City from any damages, it mentions insurance, but does not contain any provisions requiring a specific amount of insurance. Section 16 gives the city the ability to review, but not determine, the amount of greens fees charged by the course. Section 15 contains the very unusual lengthy options to renew the lease. The lessee has exercised its first option to renew the lease for an additional term of 30 years thereby extending the lease through the year 2033. Near the end of that extended term, the City will need to negotiate with the current lessee, if the lessee expresses an intent to renew the lease for another ten Mayor and Council Page 2 May 12, 2004 years, and determine what the terms and conditions of the new lease will be. The current language of the lease limits negotiation. The only limit that will be in place when it comes time to renegotiate the lease near the end of the extended term, will be an obligation to negotiate in good faith. Therefore, at that time, terms such as the amount of rent to be paid, how the course is to be managed, and any other issues that will be important to the City at that time will be appropriate for negotiation into the new lease agreement. The City will not be bound to continue the lease on the same terms and conditions as the current lease. The agreement with NuPacific is an important part of the current lease arrangement because of the tie-in between the NuPacific agreement and the current lease. The City's obligations under this agreement are fairly extensive. For example, on pages 4 and 5, the City is obligated to maintain and manage this particular course in a manner typical to municipal public courses nationwide. It also requires at least an annual review of operations of the course with the possible requirement for hiring an outside consultant to advise the City with regard to these issues. Merely entering into a lease like the one with Cherry Lane Recreation, Inc., does not excuse the City from performing according to the terms of the NuPacific agreement. This is a "nondelegable" provision. The City does not want to get into a position where it has to hire an outside consultant in order to satisfy the terms of the Nu Pacific agreement. A few years ago, the City of Ontario, Oregon, spent a considerable amount of money hiring professional golf consultants to advise the City on the operation and maintenance of the Ontario municipal course. Page 6 of the NuPacific agreement contains a requirement that the City provide NuPacific with certified copies of insurance policies that cover the golf course. If these have not been provided in the past, it is possible that NuPacific may be willing to waive this requirement in writing. The term of the agreement with NuPacific has no definitive ending date. It specifies that the Agreement continues in effect as long as NuPacific or any transferee from NuPacific owns property in the Cherry Lane Village development. It can be terminated by mutual agreement of the parties, but otherwise it continues. It is also important to note that this particular agreement does not contain a standard "successors and Mayor and Council Page 3 May 12, 2004 assigns" clause which would make that particular agreement binding upon the successors and assigns of either party. Closely connected to the term of the agreement is the right on the part of NuPacific to re -purchase the golf course property from the City for its fair market value as determined by a bona fide offer from an unrelated third party or a certified appraisal. This ability to repurchase the golf course property continues through the term of the agreement and for an additional 15 years after the agreement is terminated. The default provisions under the Nu Pacific agreement are very strict. If the City failed to remedy a default after having been given 30 days written notice, specifying the default, then NuPacific could demand that the City deed the property back to NuPacific. Recommendations I have several recommendations to make regarding the golf course lease and the NuPacific Agreement. 1. Lease Monitoring One department in the City needs to be designated to monitor the lessee's performance under the lease. That monitoring should include an ongoing review of youth programs at the course, an annual review of greens fees, annual verification of insurance coverage, annual review of golf course management which would include the condition of the course, utilization, and financial matters, including capital improvement expenditures, repairs, and preventive maintenance. Also included would be marketing and promotions, and even perhaps employment policies. 2. NuPacific Agreement The City should also designate a department or person to make contact with NuPacific to determine if an early end to the agreement can be negotiated. If NuPacific has sold all of its property within the development, then they typically would not have any interest in continuing with this agreement since it would serve no purpose for their company. Negotiating an end to the agreement would have the advantage of starting the 15 year repurchase time so that it would run out prior to the time that the extended lease will expire. More importantly an early termination of the agreement would cut off the possibility of a claim for reversion of title to NuPacific on the basis of some sort of claimed default. Mayor and Council Page 4 May 12, 2004 Conclusion and aoals The advantage to monitoring the lease and seeking early termination of the NuPacific agreement are closely tied to the public purpose of having the golf course in the first place. The golf course lease provides very little funds to the City, but does provide citizens of the community with a public golf course which in turn likely brings additional commerce to businesses in the community and brings the City additional tax revenue from increased property values of those homes located near the course. It is a community asset and certain terms under the lease agreement give the City the ability to ensure that it continues to be a community asset. Since the renewal option has been exercised, and the lease will expire at the extended term in the year 2033, as stated before in this memo, the lease will be up for complete renegotiation including a reasonable rental payment. If for some reason or another, the current lessee chooses not to renew the lease in the year 2033 or if a new lease cannot be negotiated, then the City must be prepared to operate and manage the course or solicit other qualified lessees to operate the course. Conducting a program of ongoing monitoring over the next 34 years will best position the City to be prepared to: 1. Negotiate with the current lessee; 2. Find a new lessee if unable to reach agreement with the current lessee; 3. Operate the course as a City run enterprise; and 4. Ensure that the course is kept in top notch shape and does not deteriorate near the end of the extended term.