city auditor's office mcdowell mountain golf course lease€¦ · mcdowell mountain golf...

CITY AUDITOR'S OFFICE

McDowell Mountain Golf Course Lease September 1, 2017 AUDIT REPORT NO. 1709

CITY COUNCIL Mayor W.J. “Jim” Lane Vice Mayor Suzanne Klapp Virginia Korte Kathy Littlefield Linda Milhaven Guy Phillips David N. Smith

TABLE OF CONTENTS

AUDIT HIGHLIGHTS ......................................................................................... 1

BACKGROUND ............................................................................................... 3

Figure 1. McDowell Mountain Golf Club ......................................................................... 3

Figure 2. McDowell Mountain Golf Course Agreements and Amendments ................................ 4

Table 1. Loans and Related Recoveries as of July 1, 2017 ................................................... 6

OBJECTIVES, SCOPE, AND METHODOLOGY .............................................................. 7

FINDINGS AND ANALYSIS ................................................................................... 9

1. While current contract administrators have appropriately managed the contract, past requirements have not been documented. ....................................................... 9

MANAGEMENT ACTION PLAN ............................................................................. 11

An audit of the McDowell Mountain Golf Course Lease was included on the City Council-approved fiscal year (FY) 2016/17 Audit Plan. The audit objective was to evaluate compliance with terms and effectiveness of controls for the City’s golf course lease with White Buffalo Golf LLC.

In December 1996, the City entered into a Golf Course Concession Agreement for a private company to develop and operate an 18-hole golf course and clubhouse facility, now known as the McDowell Mountain Golf Club. The facility is located on land that the City uses through a land use agreement with the federal Bureau of Reclamation (BOR).

In April 2011, White Buffalo Golf LLC (Licensee) assumed the rights and responsibilities for golf course operations under the multi-year Concession Agreement.

The Concession Agreement, as amended, requires the Licensee to pay the City 3% of its Gross Sales as a Use Fee. In addition, the Licensee pays for the Basin Management Fund another 4% of its Gross Sales plus a $1 surcharge for each 9-hole round played. These fees are required to be used, with BOR approval, “… to develop, operate, maintain and/or improve the … lands for public recreation.” To fund certain approved capital projects, the Licensee also collects an added $1 surcharge per 9-hole round played.

AUDIT HIGHLIGHTS

WHY WE DID THIS AUDIT

BACKGROUND

McDowell Mountain Golf Course Lease September 1, 2017 Audit Report No. 1709

WHAT WE FOUND While current contract administrators have appropriately managed the contract, past requirements have not been documented.

The 2011 golf course improvements agreement required the Licensee to provide in-kind improvements with an estimated value of $251,000. However, City staff did not obtain documentation to support the value of the Licensee’s in-kind improvements that reduce the amount to be paid back to the Basin Management Fund.

WHAT WE RECOMMEND We recommend the Public Works Director ensure Real Estate staff obtain documention of the value of the required Licensee in-kind improvements.

MANAGEMENT RESPONSE The Department director responded that he has provided Real Estate staff with the list of in-kind improvements and their individual values as agreed upon in 2011. No further detailed records were retained by Public Works staff.

City Auditor’s Office City Auditor 480 312-7867 Integrity Line 480 312-8348

www.ScottsdaleAZ.gov

Audit Report No. 1709

McDowell Mountain Golf Course Lease Page 3

BACKGROUND

In December 1996, the City entered into a Golf Course Concession Agreement (Concession Agreement) for a private company to develop and operate an 18-hole golf course and clubhouse facility, now known as the McDowell Mountain Golf Club. In April 2011, White Buffalo Golf, LLC (Licensee) assumed the rights and responsibilities for golf course operations under the multi-year Concession Agreement.

As shown in Figure 1, the golf course is located southeast of the Thompson Peak Parkway and McDowell Mountain Ranch Road intersection and north of the Central Arizona Project canal. The City uses this land through a 50-year Cost-Sharing and Land Use Agreement with the federal government’s Bureau of Reclamation (BOR Agreement).

Figure 1. McDowell Mountain Golf Club

SOURCE: 2015 aerial obtained from the City’s Land Information System (LIS).

The Concession Agreement’s term was defined as the remaining period of the City’s BOR Agreement. The original BOR Agreement would end in July 2032; however, Amendment 3 provides an option for a 25-year renewal, which would end in July 2057.

The Concession Agreement has gone through a number of amendments and associated contracts, the most recent approved by Council in June 2012. (The original agreement, amendments and related agreements are summarized in Figure 2 on page 4.)


Source: Auditor analysis of Contract No. 1986-299-COS, Amendments 1 – 3, and other related agreements.

Figure 2. McDowell Mountain Golf Course Agreements and Amendments

•City Council adopted Ordinance 2632, authorizing a surcharge of $1 per 9 holes of golf played on all City-owned golf courses.

•BOR Agreement 5th amendment requires the City to maintain fees in a separate fund and that they be spent only, with BOR approval, "to develop, operate, maintain, and/or improve the WestWorld facility and lands for public recreation."

July 1994 - City Ordinance

•Golf Course Concession Agreement signed between the City of Scottsdale (Licensor) and Capital Reality Corp. Scottsdale (Licensee) for the Licensee to develop and operate a public golf course.

December 1996 - Original

•The 1st Amendment restated and amended the Golf Course Concession Agreement with BOR-directed changes, including clarifying that it is subject to terms of the City's BOR Agreement.

•The 2nd Amendment allowed Licensee to obtain commercial financing for constructing and operating the course for a maximum of $8 million while providing protection for the City in the event of a default.

May 1998 - Amendments 1 & 2

•White Buffalo Golf LLC (Licensee) assumed all rights and obligations of the Golf Course Concession Agreement having acquired the rights, title and interest from RP Sanctuary LLC, which was successor in interest to Westworld Golf Course LLC, as successor in interest to Capital Realty Corp. Scottsdale, the original licensee.

April 2011 - Assignment of Interest

•City Council approved a $1.2 million course improvement project, with Licensee to pay $200,000 and loan $500,000. BOR approved the City paying $500,000 from the Basin Management Fund and Licensee adding a $1 per 9-hole round recovery surcharge.

•Licensee retains $2 per 9-hole round (existing plus added) surcharges until its $500,000 loan is repaid.

•Then the $1 added surcharge reimburses the Basin Management Fund for its $500,000 plus the diverted $1 existing surcharge ($250,000) less Licensee's required in-kind improvements ($251,000).

July 2011 - Course Improvement Agreement

•City Council approved $1.5 million for clubhouse improvements, to be financed with Municipal Property Corporation (MPC) bonds. Licensee will pay $353,000 and loan $500,000 toward the estimated $2.3 million cost.

•After the Basin Management Fund is repaid for the Golf Course Improvement project, Licensee retains the $1 added surcharge to recover its $500,000 loan for this project.

•Licensee pays increased Use Fee (from 2% to 3% of Gross Sales) for 20 years. Also, BOR approved use of 4% Basin Management fees to pay MPC debt service estimated at $120,000 per year.

June 2012 - Amendment 3


Gross Sales

“…any and all receipts, Use Fees, credits, payments in kind, amounts collected or billed, invoiced or attempted to be collected, accounts receivable, tuition, complimentary goods or services provided, amounts rebated and other amounts collected of every description or sources of revenue or other benefits of every description received directly or indirectly from any and all transactions, business or activity conducted at or from the License Area … pursuant to this Agreement.”

Financial terms

The original Concession Agreement requires the Licensee to pay the City 2% of its Gross Sales as a Use Fee. In addition, the Licensee pays to the City for the Basin Management Fund another 4% of its Gross Sales plus a $1 surcharge for each 9-hole round played. The City’s BOR Agreement requires that these Basin Management Fund fees be used, with BOR approval, “… to develop, operate, maintain and/or improve the … lands for public recreation.”

The Concession Agreement defines Gross Sales as all amounts collected or billed or other direct or indirect benefits from all activity conducted pursuant to the agreement. Further, it also specifically excludes from Gross Sales any sales, transaction, privilege or similar taxes and returns or refunds.

Golf course improvements funding — In July 2011, the City Council approved a separate contract with White Buffalo Golf LLC for $1.2 million of golf course improvements, including path and maintenance road access and drainage. The BOR approved the City using $500,000 from the Basin Management Fund for these improvements, while White Buffalo Golf paid $200,000 and loaned the remaining $500,000 to the project. Further, the BOR approved an added $1 per 9-hole round surcharge to help reimburse the Licensee and the Basin Management Fund.

To recover its $500,000 loan, the Licensee was allowed to retain the $2 per 9-hole round played (existing plus added) surcharges. Once that loan was repaid, the $1 added surcharge goes into the Basin Management Fund to repay its $500,000 project funding plus the $250,000 for the $1 existing surcharge being used to repay White Buffalo Golf’s loan less the Licensee’s in-kind improvements valued at $251,000.

The Licensee loan was repaid by March 31, 2015; the Basin Management Fund is still owed approximately $354,000 as of July 1, 2017. These amounts are summarized in Table 1 on page 6.

Clubhouse improvements funding — In June 2012, the City Council approved a Concession Agreement amendment providing for a clubhouse expansion and renovation project estimated at $2.3 million.1 White Buffalo Golf contributed $353,000 and loaned another $500,000 to the project. The Council authorized up to $1.5 million in Municipal Property Corporation (MPC) bonds for the remainder; the City later financed only $1,440,000.

The BOR declined the City’s request to use $500,000 from the Basin Management Fund for the clubhouse project, but agreed to the City paying the estimated $120,000 per year debt service from the course’s annual Basin Management fees.

White Buffalo Golf agreed to pay, for the Basin Management Fund, the greater of 4% of Gross Sales or $140,000 per year to pay the City’s debt service with the remainder going to the fund. As well, White Buffalo Golf agreed to increase the City’s Use Fee from 2% to 3% of Gross

1 This amount excluded clubhouse design costs and furnishings, which were paid for by White Buffalo Golf.


Sales for 20 years (2013 through 2032), estimated to provide $45,000 additional income per year.

The BOR further agreed that after the Basin Management Fund has been repaid for the prior golf course improvements, the Licensee can retain the added $1 per 9-hole round surcharge until it has been reimbursed for the $500,000 clubhouse project loan.

Table 1. Loans and Related Recoveries as of July 1, 2017

Golf Course Improvements Clubhouse Improvements

White Buffalo

Golf Basin

Management Fund White Buffalo

Golf Basin

Management Fund MPC

Bonds 1

Amounts loaned $ 500,000 $ 500,000 $ 500,000 0 $1,440,000

Paid by: Licensee in-kind improvements 0 (251,000) 0 0 0

$1 existing surcharge (250,000) 250,000 0 0

$1 added surcharge (250,000) (144,513) 0 0 0

4% Basin Mgmt fees 0 0 (195,000)

Balance owed $ 0 $ 354,487 $ 500,000 $ 0 $1,245,000

1 – Principal amounts are shown for the 2013B (McDowell Mountain Clubhouse Project) bond. Based on the bond debt service schedule, interest will total approximately $694,875, of which $251,025 has been paid by Basin Management fees as of July 1, 2017. Actual debt service payments total less than the $120,000 BOR limit, ranging from $103,825 to $108,325 per year.

SOURCE: Auditor analysis of Lease Payment Reports.


OBJECTIVES, SCOPE, AND METHODOLOGY

An audit of the McDowell Mountain Golf Course Lease was included on the City Council-approved fiscal year (FY) 2016/17 Audit Plan. The audit objective was to evaluate compliance with terms and effectiveness of controls for the City’s golf course lease with White Buffalo Golf LLC (White Buffalo Golf). To gain an understanding of the City’s contract administration of the McDowell Mountain Golf Course Lease agreement, we interviewed Public Works and Community Services’ personnel, including the Senior Real Estate Manager, a Real Estate Management Specialist and a Parks & Recreation Manager. In addition, we interviewed City personnel from the Accounting department and the Controller and Director of Operations from White Buffalo Golf. We reviewed recent audit reports issued by this office relating to contract compliance, administration and lease agreements. We also reviewed Administrative Regulation (AR) 215 Contract Administration to gain an understanding of authoritative policies. To gain an understanding of the agreement, we reviewed the concession agreement, contract no. 960215, three amendments, the assignment to White Buffalo Golf, the golf course improvement agreement, contract no. 2011-072-COS, and associated council action reports. We also reviewed the Bureau of Reclamation (BOR) agreement, contract no. 2-07-32-L0793 and associated amendments. To assess compliance with the terms of the City’s agreement with White Buffalo Golf and evaluate whether the City has adequate controls to ensure effective administration of the agreement, we:

• Assessed whether appropriate revenues were included for the rent calculation in accordance with lease agreement terms by reviewing White Buffalo Golf’s chart of accounts and trial balance reports.

• Compared White Buffalo Golf’s trial balance reports to annual reports provided to the City.

• Reviewed White Buffalo Golf’s quarterly and annual reporting to the City. Specifically, we reviewed:

o Select annual financial statements, annual reports and managing partner certification.

o Quarterly Lease Payment Reports and supporting documentation for fiscal years 2014/15, 2015/16 and 2016/17 through March 2017.

o The Independent Accountant’s Report on Applying Agreed-Upon Procedures for Proper Calculation of the Liability of the Basin Management Fund and Proper Calculation of the City of Scottsdale Use Fee and Basin Management Fee for calendar years 2014, 2015 and 2016.

• Recalculated select Lease Payment Reports and the application of Use Fee and Basin Management Fee rates to ensure the total due to the City was calculated correctly.


• Determined if quarterly payments and related quarterly and annual reports were received timely.

• Selected a judgmental sample of five days and compared source documentation to the reported Basin Management Fee surcharges to verify complete and accurate reporting of each 9-hole round of golf played.

• Selected a judgmental sample of five days and reviewed detailed transactions and supporting documentation to verify complete and accurate reporting of gross sales.

• Determined compliance with the terms of the BOR Cost-Sharing and Land Use Agreement related to rates and fees.

• Evaluated whether the certificates of liability insurance and evidence of property insurance provided by White Buffalo Golf complied with the agreement.

• Reviewed key contract documents to determine if the contract files, including payment documentation, were reasonably maintained and if the contract administrators had an active role in identifying and resolving issues with the contract’s terms and conditions. We also confirmed the City’s Contract Administrators Academy training was completed.

Our audit found that while current contract administrators have appropriately managed the contract, past requirements have not been documented. We conducted this audit in accordance with generally accepted government auditing standards as required by Article III, Scottsdale Revised Code §2-117 et seq. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Audit work took place from May 2017 to August 2017.


FINDINGS AND ANALYSIS

1. While current contract administrators have appropriately managed the contract, past requirements have not been documented.

The Real Estate group, in the Capital Projects Management area of the Public Works Division, shares responsibilities for contract administration with the Parks and Recreation department of the Community Services Division. The Real Estate group tracks requirements of and compliance with contractual terms such as financial reporting and fee payments. The Parks and Recreation staff monitors course operations and quality, fees charged, and compliance with other Bureau of Reclamation requirements.

The Licensee, White Buffalo Golf LLC, has appropriately reported its revenues and Basin Management Fund surcharges collected and paid its resulting Use fees and the surcharges in accordance with terms of the Golf Concession Agreement, related contracts and amendments.

In accordance with Administrative Regulation 215, the contract administrators generally maintain detailed documentation, such as the contract, related agreements and amendments; correspondence with the Licensee staff; financial reports, reconciliations and payment information; and related correspondence with the Bureau of Reclamation. However, supporting documentation is needed related to certain in-kind improvements made by the Licensee.

The 2011 golf course improvements agreement required the Licensee to pay for up to $200,000 of the improvements and provide certain other items or work valued at an estimated $251,000 (referred to as its “in-kind” improvements). The Licensee was also required to pay up to an additional $500,000 for improvements, which would be repaid through an existing and an additional surcharge on golf rounds played.2

However, City staff did not obtain documentation to support the value of the Licensee’s in-kind improvements. Repayment to the Basin Management Fund includes $500,000 for golf course improvement expenses plus the existing surcharge fees used ($250,000) to repay the Licensee loan. These amounts due were to be reduced by the value of Licensee in-kind golf course improvements. The agreement estimated these in-kind improvements would total $251,000, but that value has not been verified.

Recommendation:

The Public Works Director should ensure Real Estate staff obtains documentation of the value of the required Licensee in-kind improvements.

2 The Licensee retained a total of $530,000 as the Bureau of Reclamation approved using Basin Management Funds to pay for an additional $30,000 in costs.


MANAGEMENT ACTION PLAN

1. While current contract administrators have appropriately managed the contract, past requirements have not been documented.

Recommendation:

The Public Works Director should ensure Real Estate staff obtains documentation of the value of the required Licensee in-kind improvements.

MANAGEMENT RESPONSE: Agree

PROPOSED RESOLUTION:

Public Works Director has provided Real Estate staff with the list of the in-kind improvements and their individual values that total $251,000. The value of each item was confirmed by the Public Works Director and agreed upon between the Public Works Director and White Buffalo management in 2011, although, other than the itemized list, no further detailed records of the value of these in-kind improvements was retained by Public Works staff.

[Auditor’s comment: We reviewed the list provided to Real Estate staff, which was the same list of estimated values with no further information than was in the contract amendment.]

RESPONSIBLE PARTY: Public Works Director

COMPLETED BY: 8/16/2017

City Auditor’s Office 7447 E. Indian School Rd., Suite 205 Scottsdale, Arizona 85251 OFFICE (480) 312-7756 INTEGRITY LINE (480) 312-8348 www.ScottsdaleAZ.gov/auditor

The City Auditor’s Office conducts audits to promote operational efficiency, effectiveness, accountability, and integrity.

Audit Committee Vice Mayor Suzanne Klapp, Chair Councilmember Virginia Korte Councilwoman Kathy Littlefield City Auditor’s Office Kyla Anderson, Senior Auditor Lai Cluff, Senior Auditor Cathleen Davis, Senior Auditor Brad Hubert, Internal Auditor Sharron Walker, City Auditor

city auditor's office mcdowell mountain golf course lease€¦ · mcdowell mountain golf...

Documents