Thoughts on Golf Article

[David Escalante]

Folks, this article is assigned to me.

This is just some thinking on what I might say next Monday, in no particular order and without a FinCom vote yet one way or the other...  Thoughts/edits are welcome, which is why I'm sending it out.  It will be revised to reflect our final vote, but I'm trying to lay out facts here and interspersing some opinions, but mostly get the facts I know of laid out.   I have no idea what the Selectmen did/decided last night -- I'm trying to puzzle the facts out for myself at this point, not negotiate based on the Selectmens' thoughts -- we can save that for tonight or Monday at 6.  Any replies, please make them individual, not "reply all".

• FinCom has been thinking about this article in terms of its financial impact, not in terms of conflicts of interest or other projects we'd like to see at that location, etc.  That said, the financial aspect is actually kind of interesting, certainly more so than I thought.
• This is a golf course article because per the Town Manager, there is only one other parcel that this bylaw change could conceivably apply to, so let's just treat it as what it is, a change to the Town's bylaws specifically for the golf course.
  
• We aren't sure [check Wed nite?] but we think the golf course has been there for 85 years.
• We aren't sure what the term of previous leases was, but the past several have been at or within 10 years [check Wed nite if anyone knows more?]
• Then we move to a series of financial questions
1. What uses are possible for the parcel, where there may be more (or less) lucrative uses than a golf course?
2. What is a fair price for the leasing of the land for a golf course?
3. How does the length of the lease affect the price -- that is, would a longer lease for the golf course, which is clearly what is contemplated, make the price more equitable for either the Town or the Golf Club?
4. Are there other financial issues that might come into play?
   
• Question 1. Per the Town Manager, due to various legal restrictions, it is Town Counsel's opinion that the land cannot be used for anything except (words may be wrong here) passive open recreational space.  The restrictions came about because (1) the Town originally acquired the parcel for water supply purposes, and (2) recent state legislation has limited the use of such land [need to read the laws and see if I agree]. Therefore, aside from a golf course, it's not clear what, if anything, the land could be used for except maybe additional playing fields.  Note that the DiNisco master plan, on page 2-8, in the site evaluation matrix, suggests that the golf course could be used for a middle school, elementary school, school administration, senior center, comm serv depts, or playfields.  It also says Ridge Hill can't be used for any of these except playfields, so clearly either DiNisco or the Selectmen or the Town Manager has some new info since November of 2006, since we as a Town are contemplating a senior center at Ridge Hill and nothing at the golf course site. :-)  At the moment, from the information given to FinCom, it is our belief that there is no serious use possible for the site besides a golf course.
• Question 2. A fair price has been suggested by Coleman & Sons Appraisal Group in a letter dated December 5, 2007.  As they note, the restriction on the land "greatly diminishes" its value, since it can't easily be subdivided for say residential development.  It is not clear if the Golf Club agrees with the appraisers, or has its own opinion or appraiser.  That issue will be resolved when the lease is negotiated, and will come before Town Meeting in May 2008.  The appraisers do not specifically address lease duration as a price factor, although they note it in passing.  Their table of comparative golf clubs, on page 3 of the letter, shows lease terms for golf clubs in other towns as follows in duration: 10 years, 30 years, 99 years, 3 years, 5 years, 35 years, and 2 years.  Clearly this is all over the lot, and a much shorter term than Needham has been using or a much longer term than the amendment even contemplates would not be unheard-of.
• Question 3. The appraisers appear to price the lease based on the value of the land and a fair return on investment on said value.  In their adjustments to arrive at a final price, they note, "We have found that the real estate market has had large swings in prices from year to year with prices rising in the early part of the decade through 2005 and prices starting to decline in 2006....."  So when it comes to determining the market value of land, to use their phrase, they state that land prices within a single decade had "large swings".  Then they tried to determine a fair rate of return on the rental, once the market value of the land was determined.  Here, too, they note "These rates are market sensitive with interest rates, risk, and duration having a role in selecting the proper rate." [emphasis mine] It appears to me, then, that the price basis for a lease is based upon 2 items which the appraisers note can swing significantly in short periods -- land value and interest rates.  If one wishes the lease to be fair to both sides, one would imagine that a shorter lease, rather than a longer one, could be more easily adjusted to compensate for unexpected changes to the pricing model.  Were a longer lease to be contemplated, one would imagine that the Town ought to receive a higher rate of return, much like a bank receives a higher rate of return at the outset on a 30 year fixed mortgage than a 5 year adjustable one.  The prospective lease appears to try to take this into account by inflating the rental payment based on the CPI.  The CPI, of course, is not linked directly to either land values or interest rates.  It is not clear why the Town would choose, or the golf club would agree to, an inflater that does not reflect the underlying valuation methodology.  That lies somewhat outside the discussion of the amendment, but not a lot, since the purpose of the amendment is to allow different lease terms, and the lease terms being contemplated are public, and the financial value of the lease is going to be tied to the inflater used.
  
• Question 4. What other issues might come into play?  (1) The Selectmen claim that re-negotiating the golf course lease is a troublesome process, and that the Town incurs financial costs and lost time dealing with the once-a-decade arguments that take place surrounding the renewal.  We do not have a price for those costs.  It is ironic that by objecting strenuously enough to the golf course, that its opponents are possibly therefore actually helping the golf course by it now potentially getting a lock-in for a longer lease so that they, the opponents, cannot possibly object to it in the future.  Perhaps those of you opposed to the golf course ought to mitigate the harshness of your attacks, and be more civil and reasonable in light of this concern of the Selectmen that has motivated this by-law change.  (2) One might imagine that a competitive RFP process could lead to some other group of investors wishing to operate the golf course, or even the Town operating it itself.  This is exceedingly unlikely in this case because the Needham Golf Club actually owns the land the clubhouse is on and part of 1 of the holes.  Were another bidder to appear, including the Town, it would have to operate an 8 hole course with no clubhouse/parking, or obtain an agreement to purchase or use that land from the Needham Golf Club. (3) Frankly, one can argue that the Needham Golf Club actually has the Town over a barrel here.  Were the Golf Club to simply "walk", the Town could not use the land for anything else, nor could it operate a functional course or find an alternate operator for a functional course.  This argues that the Golf Club ought to negotiate for a very nominal fee rather than hundreds of thousands a year.  We do not know if this line of reasoning has been suggested by the Golf Club, and that the by-law change allowing a longer lease is actually a condition of the Golf Club that the Town is acceding to in order to obtain a higher yearly fee.  It would be nice to know that, but at this point we don't.  On the other hand, were the Golf Club to play "Russian" negotiating tactics, the Town could walk, and not renew the lease.  This would leave the Golf Club with a clubhouse and no course, which would be untenable.  Likely the clubhouse plot would have to be liquidated for residential housing, and all possibility of a golf course in Needham would disappear for good.  Neither of these negotiation outcomes strikes me as desirable.
  

It seems to me at this time, then, that there is a symbiotic relationship between the Town and the Needham Golf Club.  One can argue that it should not be so, but because of various legal and plot ownership constraints, it exists.  Without the Town's lease, obviously, there is no Golf Club.  But without the Golf Club, the Town has a piece of land it can't use, and it loses the rent in lieu of taxes it receives from the Golf Club, which is a bad thing from a financial point of view.  Neither side can truly benefit without the other.  It is therefore in the interest of both to have a fair and equitable rent arrangement.  Neither side should be maximizing at the expense of the other.

At this time, prior to FinCom deliberations, given that the rent is apparently based upon real estate appraisals and interest rates, I would think that given that those 2 values do swing over a 30 year period, that the "fairest" thing to do would be to re-negotiate the lease relatively frequently, which argues for keeping the current 10 year limit.  That would give the Town and Golf Club a chance to respond to changes in market conditions for either of them and keep it financially fair for both parties.  I am not impressed by the "out" clause contemplated in the lease -- the Town is now arguing that it has no use for the land except a golf course, so what benefit does the "out" provide the Town?  And such an "out" clause is clearly not beneficial to the Golf Club, which could lose its lease at literally the next Town Meeting as the clause is written -- hardly a necessary condition if there is no other use for the land.  A counter-balance to all of that is that long-term stability has some value, and both the Town and the Golf Club, recognizing that it is exceedingly unlikely that there will be an alternate use for the land, might wish to just lock something down for the purpose of providing a sense of stability to the Golf Club and saving the Town the argument(s) when the lease comes up.  I don't think in this case, however, that stability has the value it might in some other cases because of the symbiotic relationship referenced above -- everyone knows now that we can't do anything else with the land, and haven't for the last 85 years anyway, so from a stability point of view it shouldn't matter if the lease is 1 year or 50 years.  Which means the lease duration is really a question of when you might want to re-price, which is a financial question, and therefore directly related to the FinCom.  And I come back to thinking that it's better to re-price at shorter intervals to respond to a variety of market conditions. 

So this all does end up being a financial argument, in the end, although it's not polished yet, just a bunch of bullets, and others may have excellent points I've missed, or we may choose to vote for a longer term lease for various reasons not yet considered.
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David

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David