MOORLACH UPDATE — OC Fair — July 18, 2010

Yesterday’s lead editorial in the OC Register’s Commentary section was by Brian Calle, who replaced Steven Greenhut on the OC Register’s editorial board.  His column stems from an interview he had with Guy Lemmon, the Chief Operating Officer of Facilities Management West (FMW) and the Fait Family Trust.

Mr. Lemmon met with me and his next appointment was with the OC Register’s editorial staff.  So he is jumping into the “public” arena and making the rounds.  It was a fun meeting and I greatly appreciate the time we spent together.

My opening salvo was something like, “I want to wish you much success, but I don’t think this will be a financially profitable venture for you and your company.  Would you please convince me that I’m wrong?”

Since it’s been some time since my last OC Fair Update—Mr. Calle and I have not had any recent substantive discussions on this topic, but he invokes my name in his column below—allow me to provide my perspectives.

1.       I believe FMW is paying too much for the opportunity to run the fairgrounds.  The original auction, which found FMW with the highest opening bid—but froze when two other bidders weighed in—could have finished this process with the highest bid in the low eight-figure range.  Now they’re willing to pay some $96 million plus an annual lease to the city of Costa Mesa.  The Governor (the gentleman who was elected in a recall to address a $20 billion budget deficit seven years ago) was not amused with the mid-eight figure result of the auction.  So that exercise was rescinded.  The Governor, for whatever reason, became fixated on selling the property for $96 million ($40 million more than the highest bid).  The Governor’s office tried to get Costa Mesa and the County of Orange to agree to that price.

Our fiscal review of the fairgrounds found that any price over $25 million was too high.  Paying four times that amount was out of the question.  That’s why the OC Board of Supervisors dropped out of the deal.

2.       FMW is acquiring the right to run the fairgrounds with a payment stream that resembles a debt.  California can then sell that income stream at a discount and use the net proceeds against the state’s budget deficit.  FMW is also paying a lease payment to the city of Costa Mesa, who will be the owners of the property.  Using a debt structure will require FMW to generate significantly higher net revenues out of the property and do it with ever increasing success in future years.

3.       This contrived transaction will address less than one-half of one percent of the state’s current $20 billion shortfall.

4.       To increase net revenues, FMW will have to implement a number of interesting “business” maneuvers:

·         Consider increasing the ticket price to the annual fair

·         Add additional “fairs” on the site during the remaining eleven months of the year

·         Provide an ongoing concert venue during the remainder of the year

·         Add buildings that would allow for a “convention-lite” opportunity for venues too small for the Anaheim Convention Center and too large for any available hotel in the county

·         Decrease the current staffing

·         Negotiate a new contract or approach to the “swap meet” venue on the weekends

·         Find other “rentable” opportunities for the facilities

5.       Let’s be very clear.  The fairground is just a rental property.  Unfortunately, it doesn’t have one, single long-term tenant, it has multiple new short-term tenants every weekend.  The potential for revenues is quite limited.  The Barrett-Jackson deals of the world are few and far between.  It’s great to be optimistic, but, when you set the bar so high with the debt/lease arrangement, you are more likely to fail than succeed.  In the meantime, the impacts on the city of Costa Mesa will be dramatic.  My Certified Public Accounting firm, Balser, Horowitz, Frank & Wakeling, had its office in the Mesa del Mar neighborhood, directly north of the fairgrounds, while I was practicing.  I was a beneficiary of the noise and traffic during the Nederlander (the amphitheatre contractor) days.  How ironic it will be that when the residents rise up in outrage over the intrusive impacts, they will find that their very own city is the landlord!  And this landlord will have to accommodate almost every venue request in order to receive its annual lease payment.   Oops.

6.       There are financial guarantees involved.  But, I’ve given a lecture on “presumption” in a prior Update.  If the city of Costa Mesa does not receive its annual lease payments, it will survive.  If FMW does not remit its payments to the state in full, then the city may have to pick up the slack.  This would be untenable at this time in the city’s history.  If FMW chokes on this deal and walks, then the residents of Costa Mesa will have to deal with this alligator.  An alligator, in real estate terms, is a property that consumes more in debt and operating payments than it spins off in rental income.

That’s how I see this transaction.  I’m a little tired of being the “doom and gloom” person, but I would expect this transaction to fall apart within ten years.

That’s what happens when you have a desperate deal, with a desperate Governor, at a desperate time.  And I’m not optimistic that our Governor will wake up in time to stop this madness.

I want to, again, wish Mr. Lemmon much success.  But I’m not interested in buying any stock in FMW anytime soon.  (You can’t purchase stock in FMW, but this is a line that I shared with Mr. Lemmon to make a point.)

My prayer?  I hope that I am wrong.

Future of the O.C. Fairgrounds

Fair deal – maybe

Costa Mesa’s plan to take over the OC fairgrounds with the help of a loan from the state and a private partner has powerful adversaries in Sacramento

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Ever since Gov. Arnold Schwarzenegger revealed a year ago his desire to sell high-valued state assets, including the Orange County Fair & Event Center, the fate of the fair has been in limbo. The road has been bumpy, and the process for finding new ownership for the iconic 150-acre fairgrounds has been, to put it bluntly, a convoluted mess.

The governor’s office has a tenuous agreement to sell the site to the city of Costa Mesa, which surrounds the fairgrounds. To afford the deal, the city has partnered with a local company, Facilities Management West. While not ideal from my perspective, the deal is the best we are going to get in this contentious situation.

There is, however, a long way to go before the deal is inked. The state Legislature must approve the agreement, and that is where things are going to become even stickier. Public employee unions seeking to preserve the jobs of 82 state workers at the fairgrounds doubtless will try to thwart or manipulate the deal. Also, Democratic lawmakers angry at Costa Mesa for declaring itself a "rule of law" city regarding illegal immigration have threatened to block the sale in retribution. 

For me, one of the promising aspects of the whole deal is how the Facilities Management group plans to invigorate the fairgrounds. Chief Operating Officer Guy Lemmon outlined for our editorial board last week just what they have in mind. The business plan is a crowd pleaser – right up there with pancake-batter dipped ice cream. Of course, I’d also make the point that if the land were simply sold to the highest bidder, Orange County would see its highest and best use, driven purely by market demand.

To understand where it all stands and Lemmon’s prospects for success, let’s revisit the year-long fairgrounds saga.

In July 2009, Schwarzenegger authorized the sale of the fairgrounds, along with several other high-value state properties to help close the huge state budget deficit. (How little things have changed in a year; we are still facing a $19 billion budget deficit.) The governor’s idea to sell the fairgrounds was a good one. The state has no business running a recreational facility.

In October, the state Department of General Services sent out a formal request for bids on the property, which had been valued to about $90 million to $180 million.

At the auction in January, held at the fairgrounds, Facilities Management West bid $55 million. Advanced Real Estate Services Inc. bid $56 million, and the winning bidder, outlet developer Craig Realty Group, offered $56.5 million. The high bid was eventually rejected by Gov. Schwarzenegger’s office as too low, given the state’s assessed value for the land. But the governor remained committed to selling the asset.

Meanwhile, back in Costa Mesa, Mayor Alan Mansoor, the City Council, Orange County Supervisor John Moorlach and local community leaders and activists opposed the sale of the fairgrounds to a private company. They contended that the fair is a county tradition, a public asset and, basically, should stay under the control of local government. So much for conservative principles, such as letting the market set a price or putting property to its highest and best use.

The coalition of local elected officials and community activists did everything from staging protests to making trips to Sacramento to meet with legislators in an effort to hinder the process. They also manufactured a Costa Mesa ballot initiative, Measure C, to restrict the usage of the property, essentially forcing it to remain a fair in perpetuity. The measure passed overwhelmingly on June 8.

Knowing the governor was resolute about selling the fairgrounds, Costa Mesa officials quickly mobilized to negotiate with Schwarzenegger about procuring the property. The city interviewed private companies to act as quasipartners in the endeavor – to bankroll the $96 million purchase and operate the facility.

The Costa Mesa council June 22 voted 4-1 to approve a Memo of Understanding selecting Facilities Management West as the city’s partner. Under the terms of the agreement, the state would finance a loan for Costa Mesa to purchase the fairgrounds. Facilities Management West is responsible for making the payments on the loan and paying the city an annual lease fee in exchange for an exclusive 55-year lease to operate and manage the property. At the end of the 55-year period, the city will own the fairgrounds, ostensibly without taxpayers having to pay for it.

This public-private partnership is hypothetically a win-win. Taxpayers are off the hook. Voters keep their fair. Investors turn a profit. The city generates new revenue. The state gets $96 million to offset its budget deficit. Everyone wins except, one might argue, those of us ascribing to a limited government philosophy. It would be preferable for FMW or another private company to buy the land outright without any government meddling. But in this case, the partnership between Costa Mesa and FMW is probably the best outcome.

This scenario, of course, depends on the success of Facilities Management West’s business plan and whether it can sustain and/or increase revenue from the property. They will insist on operating control to achieve those ends.

Regardless, the property will be better served in the hands of people committed to enhancing its uses. Lemmon spoke to us about making capital improvements and rethinking concert, retail (like the swap meet or the recent Barrett-Jackson car auction) and restaurant uses. FMW aims to "knock down the walls" among various current enterprises to encourage collaboration "to enhance people’s experiences" at the fairgrounds. FMW also plans to pursue more collaboration with nearby institutions, such as Orange Coast College. FMW is motivated by making their investment work, skin in the game if you will, so it has a vested interest in making the facility more attractive to Southern Californians. State employees currently running the property may have a passion for the fair and dedication, but overall lesser incentives to make big strides to improve its usages. Where the fair itself is a draw for consumers during the summer, Lemmon and his company see options for expanding offerings at the property all year around. In general, the market demographic vision is the same as ever – provide low-cost family entertainment. "This will be the common message, brand, over 150 acres," he says.

Before FMW can try its hand at making money with the fairgrounds, the sale must clear its biggest hurdle: the Legislature and the special interests pulling political strings. Legislation to approve the deal is expected to face a vote in Sacramento in the next few weeks.

The California Latino Legislative Caucus already has indicated it may attempt to block the sale because the Costa Mesa council voted in May to declare illegal immigrants not welcome there. The vote followed Arizona’s enactment of its law allowing police in some circumstances to check the immigration status of people stopped for questioning. Mayor Alan Mansoor, a Republican candidate for state Assembly, said the move had nothing to do with Arizona.

Even if the assembly legislation survives the opposition of some Latino lawmakers, getting past state employee unions seems more daunting. If the sale were to go through there may be 82 unionized government employees without a government paycheck. I would expect a massive effort to stall or impose union protections in the bill.

If the arrangement is approved, it looks like it will work out for taxpayers, at least for the short term, and, if things go as planned, for the long term as well. But the process would have been much smoother, more profitable and more beneficial for local residents in the hands of the private sector and free of government meddling and bureaucratic red tape.

Sadly this scenario is a perfect local example of the failings of big-government philosophy and the problems it creates. Local elected officials used political power to hamper the market. Some special interests encouraged them to do so. Voters implored legislative solutions. Government picked economic winners and losers. Private business played ball and kowtowed to government whims.

What falls by the wayside is a constitutional-government approach that dictates free markets and responsible, unfettered business and private solutions, as opposed to government impositions.

If the whole, year-long sale process, riddled with bureaucratic minutia, has not yet made your head spin, just wait until debate starts on the fairgrounds legislation in the next few weeks. It’s not over yet, folks.

bcalle@ocregister.com or 714-796-7823

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