City of Kingston Report to Council Report Number

Transcription

1 To: From: Resource Staff: City of Kingston Report to Council Report Number Mayor and Members of Council Date of Meeting: Subject: Executive Summary: Lanie Hurdle, Commissioner, Community Services Luke Follwell, Director, Recreation and Leisure Services SMG Canada ULC Contract Extension Rogers K-Rock Centre Management The management contract for the Rogers K-Rock Centre was established in 2012 with SMG Canada and runs to the end of This contract was the second term 5 year agreement between the City and SMG Canada. The contract includes a clause that requires the City to seek to negotiate an extension with SMG in good faith prior to making a decision to go to the open market. In the past months, staff has reviewed information related to SMG s past contracts, previous performances and also other facilities management arrangements in order to try to secure the best terms for the City. Staff took into consideration a number of factors including ongoing involvement with community partners, connection to the City s tourism objectives, but mostly, the financial benefits and security to ensure that there is an ongoing operating surplus creating the annual profit that will continue to contribute towards the construction cost of the facility. Based on this review, it is clear that there are two main companies that have the expertise to manage this type of entertainment facility: SMG and Spectra (formerly Global Spectrum). This creates a limited competitive market. It is also clear from the research that financial guarantees that the City has enjoyed during the 2013 to 2017 term are not the norm in the industry. Kingston is one of the two that have a financial guarantee. Based on this same information, SMG is understood to be the only company offering a financial guarantee. The current contract is based on SMG Canada providing a guarantee of $700,000. In the last four (4) years, SMG has been able to generate over $700,000 in profit twice, including It should be noted that The Tragically Hip event in 2016 contributed to generating much higher operational revenues than expected. SMG has had to finance/subsidize its guarantee over two Council Meeting 03 32

2 Page 2 of 9 (2) years. This is not sustainable in the long term and private sector companies will not want to engage into contracts where they have to pay the municipality in order to operate an entertainment centre. The average yearly profit remaining after operating costs have been paid for the last four (4) years has been slightly lower than $660,000. Staff recognize that in the absence of a management fee paid to the facility operator, it is necessary for any company to be able to generate some type of profit from the operation of an entertainment facility. Accordingly, staff have worked to secure the continuation of the financial guarantee at a lower level than the previous contract, while providing a share of net revenues as profits rise. The following terms for a contract extension are being proposed: 1. 5 year contract term; 2. Financial guarantee with shared profits above the guarantee. Based on information reviewed, this is not a common contract structure for the management of entertainment facilities; 3. Continued investment in capital elements as well as an Event Development Fund. The event development fund helps to create a number of events that are integrated in tourism. Staff has also taken into consideration other factors which have implications in terms of the management of the facility as well as the potential yearly revenues. These factors include a new contract for the naming rights of the facility and the 10 year anniversary of the facility. Naming rights is critical as it has generated average revenue of $190,000 per year to the facility operations over the past 10 years. Any reduction in future naming rights contract or inability to secure a naming rights contract would have an impact on the facility revenues which would translate to loss of revenues to the City. Currently, a commission of 15% is paid annually to the naming rights agent. SMG is offering to act as the agent for the City for half that rate. Based on information collected as well as negotiations with SMG, staff is recommending that the Rogers K-Rock Centre management contract be extended with SMG Canada under the following general terms: 5 year contract term from January 2018 to December Guaranteed payment of $550,000 using the following financial structure: % to City % to SMG $0-$550, % 0% $550,000 - $625,000 10% 90% Above $625,000 65% 35% Investment of $200,000 in capital improvements/upgrades at the discretion of the City. Investment of $100,000 to an event development fund to be used for the purpose of developing new events that will contribute to attracting tourists to Kingston. Council Meeting 03 33

3 Page 3 of 9 Attract and manage the naming rights company for 7.5% commission fee. Increase in qualitative incentive from $25,000 to $50,000 based on the City s evaluation of SMG s performance in areas already detailed in the contract. This qualitative incentive is in part associated to SMG s work related to reaching out to various groups, such as students, and working with key stakeholders in the community to increase tourism content. The financial guarantee ensures that not only will the tax payers not be responsible for subsidizing the operations of the facility should there ever be a loss, but that there will also continue to be a minimum yearly profit of $550,000 reinvested to contribute towards the long term debt related to the construction of the facility. Recommendation: That Council endorse the contract extension from January 2018 until December 2022 with SMG Canada ULC, with the terms outlined in Report , for the management of the Rogers K- Rock Centre; and That Mayor and Clerk be authorized to execute the extension of the contract in a form satisfactory to the Director of Legal Services. Council Meeting 03 34

4 Page 4 of 9 Authorizing Signatures: Lanie Hurdle, Commissioner, Community Services Gerard Hunt, Chief Administrative Officer Consultation with the following Members of the Corporate Management Team: Denis Leger, Corporate & Emergency Services Jim Keech, President and CEO, Utilities Kingston Desiree Kennedy, Chief Financial Officer & City Treasurer Not required Council Meeting 03 35

5 Options/Discussion: Page 5 of 9 Management Agreement and Current Contract SMG Canada (formerly through Arcturus/SMG partnership) has managed the operations of the Rogers K-Rock Centre since its opening in February The first 5-year term of the management agreement ( ) contained financial terms that provided for a fixed management fee remuneration of $125,000 annually adjusted by inflation. The current contract ( ) which was negotiated with SMG in 2012, subsequent to a Request for Proposal (RFP) process, is based on an annual SMG guarantee of $700,000 with an incentive-based fee formula beyond that level based on the sharing of the net income from operations. When $700,000 in profits in excess of expenses is not generated, SMG must remit the difference between the amount realized and the minimum to the City from its head office. As part of the agreement, the City was able to negotiate and obtain from SMG a onetime $200,000 capital investment fee, a $140,000 event development fund and an increase in food and beverage commissions of 2%, which based on the last two years of gross food and beverage revenues amounts to an extra $30,000 per year. Based on recent negotiations, SMG has indicated that it will continue to implement the terms of the existing contract and will provide the $700,000 financial guarantee in 2017 as per the existing contract. Net Income from Operations/Management Fees ( ) The Rogers K-Rock Centre has been profitable since its opening in February 2008, generating the following annual net income from operations. The information below also indicates the respective operator fees paid, including the qualitative incentive fees earned: $25,000 per year for the years inclusive: $133,064 profit; $107,040 operator fee $694,372 profit; $128,250 operator fee $511,114 profit; $129,917 operator fee $414,028 profit; $132,374 operator fee $588,615 profit; $135,418 operator fee $730,551 profit; $36,456 net operator fee $585,382 profit; ($89,618) net operator subsidy $563,978 profit; ($111,022) net operator subsidy $757,541 anticipated profit; $46,577 net operator fee In the years that net income has not achieved the $700,000 threshold; SMG has had to pay a subsidy payment to the City, net of the $25,000 that it received as a qualitative incentive fee. As a result, the return SMG has received under the two systems of payment has been significantly reduced during the second management term starting in Council Meeting 03 36

6 Page 6 of 9 In the first year, SMG was able to marginally exceed the threshold covered by the financial guarantee and in that year it earned $36,456 ($25,000 qualitative incentive fee and 37.5% of $30,551 the amount over the financial guarantee threshold). In the 2014 and 2015 calendar years, SMG earned the $25,000 qualitative incentive fee which is a charge to operations, but has had to pay $114,618 (2014) and $136,022 (2015), the amounts that fell short of the financial guarantee. In 2016, a profit of $757,541 is anticipated, due in part to The Tragically Hip event. With this anticipated profit, SMG should collect $46,577, including its $25,000 qualitative incentive. Payment Structures in Other Facility Contracts Research of management arrangements from comparable Canadian facilities has resulted in two key factors for consideration: There are only two leading companies that are best qualified and generally manage entertainment facilities of this size in Canada and the United States: SMG and Spectra. Only two Canadian SMG contracts, including Kingston, include a financial guarantee. Spectra does not provide any financial guarantees in contracts researched. It is important to note that not all details of the contracts were available, but the information collected is sufficient to provide an overview of what type of contract structures are available in the market. Most contract structures include a base management fee and an incentive, which is the contract structure that the City had with SMG between 2008 and The base management fee is paid regardless of the facility financial performance. The table below focuses on Canadian entertainment facilities of similar size. Facility Name City Province Contract Structure SMG Hershey Centre Mississauga Ontario Base fee and incentive Medicine Hat Regional Medicine Hat Alberta Base fee and incentive Event Centre Meridian Centre St. Catharines Ontario Base fee and incentive Moncton Arena Moncton NB Guarantee Rogers K-Rock Centre Kingston Ontario Guarantee Spectra Abbotsford Centre Abbotsford BC Base fee and incentive Budweiser Gardens London Ontario Profit sharing Encana Events Centre Dawson Creek BC Base fee and incentive First Ontario Centre Hamilton Ontario Profit & Loss (sharing after a threshold) Council Meeting 03 37

7 Page 7 of 9 Facility Name City Province Contract Structure Tribute Communities Oshawa Ontario Base fee and incentive Centre WFCU Centre Windsor Ontario Base fee and incentive Recommended Contract Extension Terms Staff have reviewed other contract structures and have determined that should Council want to secure profits to be reinvested in paying for the construction of the facility, it is best to extend the contract with an amended financial guarantee. Considering that only two companies, SMG and Spectra, have the demonstrated expertise to manage entertainment facilities of this size, staff recognize that there is limited competition in the market. Staff have also considered the fact that Spectra does not incorporate financial guarantees in any contracts researched; therefore, the City would have to establish a contract with SMG to secure a financial guarantee. Based on information collected as well as negotiations with SMG, staff are recommending that the Rogers K-Rock Centre management contract be extended with SMG Canada under the following general terms, while the structure of the contract remains the same: 5 year contract term from January 2018 to December 2022 with a requirement to discuss renewal. Use of a guarantee-based model with the following revenue sharing structure: % to City % to SMG $0-$550, % 0% $550,000 - $625,000 10% 90% Above $625,000 65% 35% Investment of $200,000 in capital improvements/upgrades at the discretion of the City. SMG will make recommendations towards the use of funds such as food and beverage equipment upgrades and support for the facility s 10 year anniversary. Investment of $100,000 to an event development fund to be used for the purpose of developing new events that will contribute to attracting tourists to Kingston. Rogers K- Rock Centre is a partner in supporting the development of events that attract tourists to Kingston. This fund will help support a number of events initiated by SMG in partnership with other stakeholders. Attract and manage the naming rights company for a 7.5% commission. Current commission to the naming rights agent is 15%. This will represent a 50% reduction in commission from the current contract. Securing a naming rights contract is critical as it currently represents on average $190,000 in yearly operational revenues. The loss of such revenues would have an impact on yearly profits. The current naming rights contract Council Meeting 03 38

8 Page 8 of 9 expires on February 19, 2018 and allows for notice and intent to negotiate the renewal of the contract 180 days prior to the expiry of the agreement. Increase in qualitative incentive from $25,000 to $50,000 based on the City s evaluation of SMG s performance in areas already detailed in the contract. This qualitative incentive is in part related to SMG s work related to reaching out to various groups such as students and work with key stakeholders in the community to increase tourism content. Other Considerations Supporting SMG Renewal a. Tourism and Partnership Development During the current term, SMG has worked successfully with Tourism Kingston to routinely attract various sport tourism opportunities to pursue with their marketing manager. In addition to the 2015 Skate Canada National Figure Skating Championships, SMG and partners also secured World Junior team training camps (2009, 2014 and 2016), 2013 Scotties Tournament of Hearts and the Canadian Open Fishing Event. SMG also worked constructively with the Kingston Accommodation Partners to program contests around concerts and family events, giving visitors the chance to win tickets and premium experiences. Co-promotions regularly occur with BIA members, promoted through the DK! Ambassador Program and through RK-RC and DK! social media. b. Outreach to Student Population SMG has developed a peer to peer plan to drive venue and specific event information directly to students. Student outreach elements include concepts and topics to engage on-campus opinion leaders, communicate general venue information and establish methods to develop venue followers. Event specific marketing programs are developed when the event appeals to a student audience. These programs would take place during the academic year. Social media is the most popular medium to reach students and provide them with information on upcoming events in their area. SMG will continue to enhance their presence on popular social platforms (i.e. Facebook, Twitter, Instagram), while also working with event promoters in order to allocate the dollars needed for effective student-specific campaigns. SMG has been and will continue to provide a number of co-op placements and internships with both St. Lawrence College and Queen s University. Notice Provisions: Not applicable Accessibility Considerations: Not applicable Council Meeting 03 39

9 Financial Considerations: Page 9 of 9 The Rogers K-Rock Centre is one of the few municipal sports and entertainment facilities in Canada to not only generate revenue to pay for all operating costs but also generate a significant surplus which is paid against capital construction costs. A contract extension with a financial guarantee of $550,000 with profit sharing is being proposed for the next 5 year term. Contributions of $200,000 into capital improvements and $100,000 for an event development fund are also proposed. The recommendation also includes an increase in the incentive fee from $25,000 to $50,000. Contacts: Lanie Hurdle, Commissioner, Community Services extension 1231 Luke Follwell, Director, Recreation and Leisure Services extension 1815 Other City of Kingston Staff Consulted: Alan McLeod, Senior Legal Counsel, Legal Services Exhibits Attached: Not applicable Council Meeting 03 40