A Communication Via E-Mail to the Board of Recreation and Park Commissioners
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A communication via e-mail to The Board of Recreation and Park Commissioners from: Steven Spickard <[email protected]> to: [email protected], [email protected] cc: [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], Alex Hodges <[email protected]>, David Green <[email protected]>, [email protected], [email protected], Gene Krekorian <[email protected]> date: Wed, Oct 22, 2014 at 2:26 PM subject: Greek Theatre Comparative Financial Analysis mailed-by: comcast.net signed-by: comcast.net Dear Ms. Patsaouras and Honorable Commissioners, We are transmitting to you the attached Memorandum Report, prepared at the request of Nederlander Concerts by the consulting team of Pro Forma Advisors, LLC, and Land Economics Consultants, LLC, which compares the two proposals for Operation and Management of the Greek Theatre Concession. Sincerely, Steve Steven E. Spickard, AICP, LEED AP Managing Principal LAND ECONOMICS CONSULTANTS, LLC 7 Nace Ave., Piedmont, CA 94611 Voice: (510) 407-3161, Fax: (510) 550-7892 [email protected] Memorandum Report To: Board of Commissioners of the Los Angeles City Department of Recreation and Parks CC: Los Angeles City Council – Arts, Parks, Health Aging and River Committee From: Steven E. Spickard, Principal, Land Economics Consultants, LLC Gene P. Krekorian, Principal, Pro Forma Advisors, LLC Date: October 22, 2014 RE: Financial Comparison of Proposals for the Operation and Maintenance of the Greek Theatre Concession ___________________________________________________________________________________ INTRODUCTION In 2011, the City of Los Angeles (City), Department of Recreation and Parks (RAP), issued a “Request for Proposals for Consultant to Conduct a Best Business Practice Study of the Greek Theatre Concession.” RAP then selected Strategic Advisory Group, LLC (SAG) headquartered in Duluth, GA, as their consultant and awarded them a contract of $257,400 to conduct a multi-phased scope of work that included research into general background conditions of the music concert industry in North America, recommendations for best practices to incorporate into the Greek Theatre Concession, development of a request for proposals for concessionaires, administration of the RFP process, and finally, providing an evaluation panel and writing a summary report to RAP and its General Manager with recommendations for award of the new Concession Agreement. In June of 2014, RAP issued the Request for Proposals (RFP) “For the Operation and Maintenance of the Greek Theatre Concession.” RAP received two proposals: one from Nederlander-Greek, Inc., the incumbent operator of the Greek Theatre, and AEG Live, LLC, a joint venture (Nederlander-AEG); and a second proposal from Live Nation Worldwide, Inc. a wholly owned subsidiary of Live Nation Entertainment Inc. (LYV) (Live Nation). In their final set of services to RAP, SAG conducted an evaluation process, ranked the two proposals, and recommended the new concession contract be awarded to Live Nation. The City must now decide whether to follow their consultant’s recommendation to switch to an entirely new operator team, or sign a new lease with the City’s existing Greek Theatre partner, Nederlander-AEG. THE CONSULTANT TEAM Nederlander Concerts has retained a consulting team composed of Land Economics Consultants, LLC (LEC) and Pro Forma Advisors, LLC (PFA) to conduct an independent financial comparison of the two proposals received by RAP. The two principal analysts conducting this work have over 30 years’ experience working together while at Economics Research Associated (ERA) on projects that include analyses of similarly sized concert venues, development of complex financial pro formas, and advice to municipalities managing public facilities through concessionaires, including previous analyses of concessions for the City of Los Angeles Department of Recreation and Parks. Mr. Spickard graduated Magna Cum Laude from the University of California, Berkeley, with a BA in economics, and has a Master’s degree from Berkeley in City and Regional Planning. Mr. Krekorian has a B.A. in mathematics- economics from Pomona College, and an M.S. in Economics from UCLA’s Graduate School of 722 1st Street, Suite F Hermosa Beach, CA 90254 Phone: 310.616.5079 Fax: 888.696.9716 proformaadvisors.com Los Angeles Greek Theatre Analysis October 22, 2014 Page 2 Management. Additional qualifications of this consultant team and C.V.s for Messrs. Spickard and Krekorian are presented in the Appendix to this Memorandum Report, but key project experience conducted by these individuals for the City of Los Angeles includes the following. Evaluation of Palisades and Cheviot Hills Tennis Center concession bids on behalf of Los Angeles Department of Recreation and Parks. Analysis of Los Angeles City Golf System Cart Concession bids on behalf of Los Angeles Department of Recreation and Parks. Evaluation of Sepulveda Golf Complex Pro Shop Concession bids for the City of Los Angeles Department of Recreation and Parks. Pre-bid evaluation of other City of Los Angeles Recreation and Parks concessions: o Rancho Park, Woodley Lakes, Hansen Dam, Encino-Balboa Pro Shop Concessions o Pershing Square Parking Concession o Cabrillo Bath House Concession o Sepulveda Family Entertainment Center Independent financial analysis of the proposed redevelopment of Ports O’Call Village for the Port of Los Angeles. AN IMPORTANT DECISION FACES THE CITY OF LOS ANGELES It is important to note how SAG described the outcome of the RFP solicitation process in their Overview of Proposals: “Both Live Nation and Nederlander-AEG’s proposals met and exceeded the RFP minimum requirements as well as brought in significant increased guaranteed revenue to RAP. Both proposals committed to capital investment, preventative maintenance and community engagement plans. Both proposals presented new operational approaches in food and beverage as required in the RFP. Both proposers expressed their support in the interviews for the new direction that had been established in the RFP.” The LEC/PFA consulting team has found that the last set of services performed by SAG, the panel evaluation and recommendation, are potentially misleading. SAG’s recommendation of one proposer over the other for Concession award was apparently based on the scoring conducted by the outside evaluation panel, which appears biased towards that which could be easily quantified. For example, the grid comparison, found on page 5 of the September 25, 2014 SAG report, summarized every City objective in what are essentially financial measures, and inappropriately combined dissimilar financial flows to reach inflated totals under a heading titled “Minimum Guaranteed Proposal Value”. These measures were apparently based on each evaluator’s interpretation of complex financial pro forma data projected over periods of 10, 15 and 20 years. It appears evaluators did not question many of the top line numbers presented to them, and did not conduct the due diligence required to illuminate details and nuances of complex proposed terms. There are multiple ways to compare such financial flows, and the remainder of this memorandum report presents alternative ways to value some of the key financial tradeoffs. Los Angeles Greek Theatre Analysis October 22, 2014 Page 3 COMPARISON OF PROPOSED TERMS IN TWO CONCESSIONAIRE BIDS RAP’s RFP defined four major objectives for the new concession agreement. Those four objectives and the topics LEC and PFA have analyzed are as follows: 1. Financial Performance Proposed Rent Capital Improvements Capital Improvements – 10-Year Term Capital Improvements – Two 5-Year Option Periods Value to the City of Rent vs. Capital Investment Rent Abatement Pro Forma Projections 2. Asset Management/Concession Improvement Plan Preventative Maintenance 3. Event Activity Guaranteed Show Count 4. Community Partnership Plan Community Partnership Plan Community Trust Fund Existing Community Partnership Programs 1. FINANCIAL PERFORMANCE PROPOSED RENT The RFP calls for rental payments equal to the greater of an annual guaranteed minimum or a percentage of gross revenues generated at the venue. The bidders proposed the following: Live Nation: An annual minimum rental payment of $3.0 million, with no provision for escalations over the initial 10-year term or two 5-year extension periods. The percentage rent is proposed at 8.0 percent of total gross revenue (essentially unchanged from the current percentage rent paid at the Greek Theatre). Nederlander-AEG: An annual minimum rental payment of $3.5 million, with escalations of $250,000 every five years, such that the minimum guaranteed annual rent in the second option term would be $4.25 million. The percentage rent is proposed at 10.0 percent of total gross revenue (i.e., 25% higher than that proposed by Live Nation). Los Angeles Greek Theatre Analysis October 22, 2014 Page 4 The pro forma gross revenue projections prepared by both bidders are nearly identical for the initial operating years, which appears reasonable since the level of capital improvements is basically the same. Based on the proposed rental terms, projections of minimum guaranteed and percentage rent over the full 20-year term (assuming the two 5-year extensions are granted) are analyzed. For analysis purposes, in addition to “baseline” revenue projections,