By RYAN WEXLER
Control of one of our rare community-owned lakeside properties may be lost to a private developer. To fully understand the issue, we would be remiss if we didn’t start with a history lesson. Decades ago, the event center was a lakefront bowling alley. In 1979, through a bit of happenstance, the title to the facility landed with the North Tahoe Public Utility District at no cost. In fact, it came with a $250,000 bonus for rehabilitation. Also attached was a deed restriction, requiring that the facility be used only “for park purposes” and if not met, the property reverts back to state control. The arrangement appeared to be a great fit — it gave the community a rare commodity of a community gathering place in an accessible location on a lakefront plot directly in the center of town and the state was relieved of maintaining the parcel.
The facility has served as a home to community events like Thanksgiving celebrations, weddings, birthdays, memorials, and as a public civic center for local governance. However, like most of the NTPUD’s recreation resources, the event center runs at a net loss. Additionally, over the years the facility’s maintenance has been neglected and deferred maintenance has piled up.
Opportunity knocks
In January of 2016, as Laulima Partners, LLC was in the midst of closing a deal to purchase the Ferrari Crown Motel property, the company approached the North Tahoe Public Utility District with the idea of a public-private partnership to operate and maintain the struggling North Tahoe Event Center.
The NTPUD board called for special meetings to allow Laulima to present its idea. The board then issued a RFP and received bids from Laulima Partners LLC, Granlibakken Management Company, and Tahoe Biltmore, Inc. The district was seizing on an opportunity, but the idea was still in a formative stage. Would it be an operator-only arrangement or would the building be transferred in full? Along these lines, the NTPUD-issued RFP was ambiguous as to what it wanted. Laulima’s proposal included a 99-year lease where it would essentially take over the building including expenses, invest millions of dollars to renovate the facility, and compensate the NTPUD with varying revenue. Its bid was a high-risk, high-reward option. Granlibakken and Tahoe Biltmore’s bids put them in an operator-only mode where they simply ran the facility and paid the NTPUD either a percentage of their revenue or fixed payments. The commitment term they asked for was five and 10 years, respectively. The reward was not as impactful as Laulima’s proposal, but the risk was also comparably low. The board voted to negotiate exclusively with Laulima.
Despite public requests for transparency, the board kept the negotiations completely private, claiming this made for a strong negotiating position. This communication blackout period lasted over a year. In August of this year, the board announced that preliminary terms had been agreed upon and it would be an action item at the September board meeting. This timeline gives the public only 25 days to digest and weigh into a process that has taken 18 months.
The 90k pariah
Since this process started, the board has made a point to highlight the fact that the event center has lost $90,000 annually for a decade. Eliminating this loss has been presented to the public as a game changer. However, the $90,000 represents less than 15 percent of the overall recreation operating loss. Hence, while the money the event center loses is not insignificant, it is only a piece of the pie.
If we simplify the NTPUD operations and financials, it can be seen as divided into two components 1) sewer and water and 2) recreation and parks. The event center sits within recreation. While there is minor overlap, particularly in administration, they are essentially funded and treated separately. The sewer and water component is funded by a combination of the ratepayer utility bills and property tax. Recreation and parks is almost entirely funded by the Community Facilities District 94-1 (CFD) which is a property tax expressly designated for this purpose. The CFD increases annually by inflation. If you analyze the 2016/17 budget, the NTPUD expected to receive $612,000 in CFD revenue. Ignoring depreciation to keep things simple, the entire consolidated parks and recreation cost budgeted for 2016/17 is $634,000. The CFD covers nearly the entire operating expenses and reserves cover the remainder. The event center expected a net loss of $87,000, which represents 13.7 percent of the operating cost. The expected Tahoe Vista Recreation Area losses represent a little more than 10 percent of operating costs. Another large component to the cost is the annual Boys and Girls club donation, which is closer to 19 percent. The majority of the operating costs come from running the main park facilities on North National Avenue. The $90,000 the event center loses is not insignificant, but it’s just a slice of the whole.
Outside of operating expenses is deferred maintenance, which on the event center is a noteworthy expense. The budget indicates that the overall recreation financials are almost in balance, but this does not include the deferred maintenance, which is rather large. This is the reason why having a tenant come in and upgrade the facility on their dime is attractive. However, similar to expenses, the deferred maintenance on the event center only represents a piece of the pie and pales in comparison to that of the rest of the park facilities. So, solving the event center loss would only partly address the problem. Ratepayers should not be surprised if water and sewer rates must be raised in the near term to accommodate costs on the recreation side. As is, the NTPUD recently made several substantial transfers from the sewer/water reserves into the recreation side to prop it up. Continuing this practice and depleting the sewer and water reserves will eventually require for them to be refreshed and the ratepayers will be tapped to do so.
Could we make money?
The event center is clearly a unique property in a prime location. Everyone agrees it has room for improvement operationally. Yet it has been managed in the status quo for many years now. It is not even at 50 percent of capacity in terms of use. It is understaffed and under marketed. There is no regular weekend staff, making it difficult for potential renters such as wedding parties to evaluate it.
The recent multi-year Kings Beach Core Improvement construction period had a negative effect on business. Now, that it is completed, the event center sits in the center of a more attractive and revived business channel. Without any real operational changes, bookings are trending up since the construction has ended.
Between Laulima’s interest and the response of local hospitality companies to the RFP is itself indicative that industry people believe it can be profitable. This all adds up to a lot of untapped potential, but without trying an alternative approach to operations, we will never know the true revenue opportunity.
Should we make money?
Public resources generally run at a loss and are subsidized by the public dime. The event center is no different. The question the community needs to ask is whether this resource merits their support. The simple argument in favor is that not many small communities can boast a lakefront community center. The NTPUD’s recreation portfolio features a wide variety of facilities for activities common in Tahoe: trails, bike paths, fields, disc golf, beach activities, etc. While these facilities are more broadly used than the event center, they are also duplicated all around north lake Tahoe. The event center stands as the one unique facility in the NTPUD’s portfolio. It caters to different types of activities which are often overlooked by the standard Tahoe outdoor theme.
The other side of the argument is that it is underutilized and removing this cost may allow the NTPUD to push the needle enough to get a hold on the recreation finances. If so, then should this be a precedent? Should the NTPUD attempt to privatize all the facilities in the recreation portfolio, which are running at a net loss? Or should they just privatize the ones of least importance? If so, what is the litmus test for what is important and to whom?
Who is Laulima?
Laulima is a developer and more specifically the one who bought the Ferrari Crown property in Kings Beach and is turning the only Kings Beach lakefront hotel into condos.
It could also be said that “Laulima” is a broad prefix that refers to many businesses. There are quite a few Laulimas that we know of: Laulima Development, LLC, Laulima Consulting, LLC, Laulima Alexander Valley LLC, Laulima Partners, LLC, Laulima Kings Beach LLC and most recently Laulima Northstar LLC. So, before you can ask who is Laulima, the pertinent question is which Laulima?
It was Laulima Partners LLC who was the applicant to the RFP. The board’s action on the RFP was to award Laulima Partners LLC exclusive rights to negotiate. More than a year later, the board delivered a draft agreement with an entirely different company, Laulima Kings Beach LLC. The board views all these Laulimas entities interchangeable since it has overlapping members and management. This brings us to several problems. How do you vet them? The Laulima that the draft is with, Laulima Kings Beach LLC, was only formed during the initial proposal period in 2016 and has no history. What we do know of Laulima’s history is that it isn’t perfect. For instance, Laulima had a similar public private partnership in Sonoma County called Alexander Valley Resort that disastrously fell apart. Additionally, the agreement adds more complication by stipulating that the NTPUD can’t fully financially vet Laulima until after the lease is signed.
Compartmentalization of risk
An LLC protects its members/owners from liability and liability cannot extend past the entity. The logical reason why people would create so many LLCs is to compartmentalize risk. If LLC 1 is working on project A and LLC 2 is working on project B, then if LLC 2 fails, LLC 1 remains unaffected even if LLC 2 is left with unfulfilled liabilities. Similarly, locally, we see Laulima Partners LLC developing the Ferrari Crown project, while Laulima Kings Beach LLC is looking to develop the event center. If one fails, the other is not liable. So, while the NTPUD may treat these companies the same because they are represented by some of the same persons, it remains a liability nightmare for the ratepayers if something goes wrong.
The draft agreement leaves a lot of questions. Below are a few I have.
Tenant improvements
The draft agreement stipulates that Laulima commits a minimum of $5.6 million into renovating the facility. This would translate to significant renovations. Yet, despite the negotiation period extending for over a year, there are no architectural plans or even a basic drawing of the intended result. This leaves the public and the board without oversight and at a disadvantage when it comes to providing feedback or even understanding what we are getting.
Value
The lease stipulates rent will increase over time. When rent commences, it starts at $50,00 annually. Rent will increase with inflation. Initially, that calculates to less than 30 cents a square foot. This is extraordinarily low for a commercial lease in North Lake Tahoe. Another consideration is that rent commencement is subject to complex conditions and may not start until March 2020.
Term and termination
The term of the lease is essentially 70 years. It is a 30-year lease with two 20-year options Laulima can choose or not choose to execute. Seventy years is a long time; in essence this is a sale. As long as Laulima operates the facility in good standing, the NTPUD has practically no options to terminate.
The NTPUD does have the ability to terminate the lease and have the building revert back to their control if a major default happens such as bankruptcy, condemnation of the building, unrequited casualty losses, etc. The problem here is if something calamitous like this happens, then the NTPUD and thereby the public is likely left with a mess and potential financial liabilities or with a building in a state of disrepair.
Validation action
If the lease is signed, a hurdle that still needs to be overcome is the deed restriction. Recall that the deed restricts the property to park use only. Thereby, this lease and the new tenant are subject to approval by Placer County. A prescient question here is if a for-profit company takes over a building and invests millions of dollars into it, can Laulima meet its business goals while still also complying with the park use only deed restriction?
Assignment and subletting
One item in the lease that caught the public’s attention is the transfership option. This stipulates that the lease and building can be sold/transferred to another party. In some cases, the transfer elicits a vetting process, but there is an exception for “Affiliates.” The board considers all the Laulima LLCs as affiliates. This means it could transfer to one of these affiliates without full oversight of the board or public. One affiliate who caught the eye of the public is Laulima Northstar LLC. Is this a sign that Laulima plans to renovate and then upsell the building/lease to a Northstar affiliate to serve as some kind of private beach front resort? The more alarming question is, what about the affiliates who haven’t been formed yet?
Community access
One of the most poignant questions posed by the public was, “How will this benefit my 2-year-old child?”
The question hits home to whether the community gets the same access that they did before. The lease requires that space be allocated for some of the current community activities to continue in the building. However, it is hard not to assume that Laulima will rent the facility aggressively in order to maximize revenue. The lease was submitted with no proposed rates but in the original response to the RFP, Laulima indicated a cost between $1,800 to $8,000 per event. If we include a proposed district-resident 25 percent discount, the lowest end rental to the public is $1,350. This is significantly higher than the current lowest rental rate.
Change is inevitable
Even if nothing changes, the deferred maintenance will need to start being addressed. Lower risk options such as the Granlibakken or Tahoe Biltmore bids could be reconsidered. Alternatively, another less ambiguous RFP could yield more options to weigh. One objection to this process is the board has not prepared an alternative plan of the center remaining under the NTPUD’s control. The public requested that the board present one at the time of the RFP bids. It has also been suggested that a contingency plan be developed during the negotiation period. Neither requests were met.
This decision is a weighty one given the permanence of it. It could all work out. The building could be renovated, the public could end up with a beautiful facility that they retain access to. The NTPUD themselves would cite the Ropes Course in the park as an example of a public private partnership that succeeded. Of course, the scale is vastly different, but it should not be completely discounted either.
However, the deal seems to rest on a lot of hopes, dreams and good faith. Some say this is a case of too good to be true or that the complexity of the lease is a barrier for success. A lot could go wrong. The ratepayers could end up with a giant liability, litigation or an unfinished project. The story of a private developer who would swoop in with a can’t-miss project is not a new one in Tahoe. Past results have left the public weary of these would be saviors. One has to only look up the street at the Cal Neva for an example of a project that fell apart midway and was left to idle away with millions in unfinished renovations.
The NTPUD board has a tough decision to make. Is this opportunity too good to pass up or is it too risky to put on the backs of the ratepayers? Does the lease agreement appropriately mitigate the risk? Once this lease is signed, it’ll be much harder to change course. Much like a backcountry ski line, sometimes no matter how good it looks, you need to be willing to walk away if the risk is too high.
Want to let the NTPUD know how you feel? Attend the special board meeting on Monday, Sept. 18, at 5:30 p.m. at the North Tahoe Event Center. Contact NTPUD at (530) 546-4212 or ntpud@ntpud.org.
~ Ryan Wexler is a Kings Beach homeowner. A shorter version of this My Shot was published in the September print edition.
