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On May 8, 2016, County of Westchester (the “County”) signed an agreement with Standard Amusements, LLC (“Standard”) for the operational management of Playland Amusement Park (the “Agreement”). At that time, the County and Standard entered a “co- management” period. During the “co-management” period, the County manages the day-to-day operations of the park and has sole decision making authority. During the co-management period, Standard’s role is to monitor and complete their due diligence.

The co-management phase converts to the management phase when the following condition is met:

The November 1st following the point in time that 50% of the total capital bonding amount approved by the Board of Legislators has been expended by the County for projects identified in Schedule K (the “50% Threshold”). (The funding total for the Schedule K projects totaled $33.1 million, plus an additional $9.5 million for the pool.)

Separate and apart from the co-management requirement, Standard was required to spend

$5 million at Playland; of which $3 million was to be spent towards new rides or other tangible improvements, by June 1, 2017.

There was an initial non-refundable payment of $500,000. Standard was required to pay the County an additional $1.75 million: $250,000 upon signing and $1.5 million (to be held in escrow) by June 15, 2016, unless the time was extended by mutual agreement. Between the signing of the Agreement and December 31, 2017, the County and Standard signed five (5) extension letters.

 

Extension Letter 1

  • The letter dated July 21, 2016 acknowledges that Standard has extended the deadline to authorize the pool project to September 30, 2016. The date for Standard to pay the County the $1.5 million balance of the Second Initial Payment to be deposited in a special reserve account is also extended to September 30, 2016.

Extension Letter 2

  • The letter dated September 30, 2016 acknowledges the Article 78 proceeding brought by City of Rye (the “Rye Art. 78 Proceeding”.) The letter extends the date for the Pool legislation passage to December 31, 2016. The letter extends the date for Standard to pay the $1.5 million to a date that is 60 days following the date of resolution of the Rye Art. 78 Proceeding. The date for mutual agreement of the construction schedule for the capital projects is extended to December 31, 2016. The date for Standard to spend $3 million for new rides out of the $5 million is extended to a date that is one year from the date of a final determination or resolution of the Rye Art. 78 Proceeding. The date for Standard to spend the

$2 million of the $5 million is extended to December 31, 2017.

Extension Letter 3

  • The letter dated December 26, 2016 extends the deadline for the pool legislation to March 31, 2017. The letter further extends the deadline for the delivery of the construction schedule by the County to March 1, 2017.

Extension Letter 4

  • The letter dated May 5, 2017 acknowledges that the County has delivered the construction schedule to Standard on February 28th and Standard approves the schedule. Standard agrees to extend the pool legislation deadline to December 31, 2017. This letter acknowledges that Standard has agreed to pay $750,000 of the Second Initial Payment as a non-refundable payment 60 days after a final determination of the Rye Art. 78 Proceeding. The balance will be placed in a special reserve account and only paid if the County adopts the pool legislation.

Extension Letter 5

  • The letter dated December 20, 2017, acknowledges that Standard has expended

$3,559,266 of the Manager’s Investment, exceeding the $2 million requirement. No audit or thorough review was completed to determine that this figure is justified. The letter further acknowledges that the Rye Art. 78 Proceeding, dismissed by the Supreme Court, is now the subject of appeal. Standard will pay the County $250,000 of the $1.5 million balance of the Second Initial Payment prior to March 31, 2018. Standard will pay the County $500,000 of the Second Initial Payment on a date that is 60 days following a final determination of the Rye Art. 78 Proceeding.

The balance of $750,000 shall be paid to the County on or before the date that is 60 days after the Rye Art. 78 Proceeding determination (the “Article 78 Payment Date”) and will be held in escrow if the 50% Threshold requirement is not met, otherwise it is non-refundable. The 50% Threshold date is extended to January 31, 2019. The date for Standard to expend the $3 million in new rides is extended to the later of one year after the Article 78 Payment Date or 90 days after the County has satisfied the 50% Threshold.

Financial

A. Capital Investments

Prior to the release of the RFP, the County estimate for state of good repair capital investments at Playland was approximately $75 million, exclusive of the pool. As negotiations with Standard evolved, the decision was made that the County would be responsible for $33 million plus pool reconstruction. This amount is included in the Agreement as the Schedule K projects. Standard is responsible for $27.5 million in investment, $14 million of which is for rides. Section 2-a of the Agreement requires the County to make additional investments for the maintenance of the park. When the Latimer administration came into office in January, the Director of Operations directed DPW/T and Parks to complete the assessment of capital needs at Playland. That estimate is complete and as of April 1, 2018, the state of good repair estimate is $125 million including the pool. Since those investments were not detailed in the Agreement, but would be the County’s responsibility per Section2-a, we believe the County could be responsible for an additional $65 - $95 million depending on investments made by Standard.

B. Expenses

The County will retain certain expenses, risks and obligations after the “Management Commencement Date” which includes:

  • There are currently 24 County employees budgeted at Playland and 6 at the Playland Beach and Pool. An MOU between the BOL and the CE guarantees County employment for these employees. The salaries of these employees totals $1.9 million per year not including fringe benefits.
  • Section 11 of the Agreement provides that if Standard utilizes any County employees that they reimburse the County 100% of salary plus 30% for fringe benefits. The County’s average fringe rate is now 75.6%.  This is an average, for a lower paid employee (many at Playland are on the lower salary scale), the fringe rate is much higher than the average.
  • The Agreement (p. 14, Section 2 H.) provides for reimbursement of $400,000 for County police and seasonal park rangers until the date the County has expended 70% of the capital bonding amount (70% Threshold Date) approved by the BOL for Schedule K. The current cost for these services is $655,000, resulting in a $255,000 shortfall. The reimbursement increases to $600,000 upon meeting the 70% Threshold Date.

On the August 31 immediately succeeding the 70% Threshold Date, Standard pays the County $300,000, annually, escalated at the greater of CPI or 2%. This is not sufficient to cover our retained costs.

C. Revenue Sharing

Standard shall pay to the County profit share of net income as follows:

Years 1-10 =8%

Years 11-20 = 10%

Years 21-30 = 12%

However, the County receives nothing until Standard has fully recouped its Initial Payments ($2,250,000) and Manager’s Investment ($27,500,000).   Standard’s pro forma from its 2010 proposal assumed the County would not be receiving any profit share until 11 years after Standard took over management of the park. Since revenue share is based on a net income number, Standard is able to pay a higher rate to their investors or pay themselves a higher management fee.

We also believe that Standard’s revenue and attendance growth assumptions are overstated. Attendance at Playland in 2016 was 505,000. Standard’s pro forma assumed doubling this number to 1 million by the fourth year, 2020. Standard assumes revenue growth of 33%, 35%, 24% and 19% in years 1-4, respectively. Again this is a very optimistic and likely unrealistic assumption. Additionally, there is no market survey to substantiate these projections.

Financial Summary

I. Payments received to date include $500,000 received in 2015, $250,000 received in 2016 and $250,000 received in 2018. The balance of the second Initial Payment of $1.25 million has yet to be received. According to the Agreement these payments are non-refundable. However, should the County default or not meet certain threshold requirements these would need to be refunded.

II. We project that the County will need to invest an additional $65-$95 million in capital for state of good repair projects.

    We project the County will be responsible for $1.5 - $2.5 million in personnel costs and fringe benefits for up to ten years.

Because of the Standard payment recoupment provisions and the fact that this is a net revenue agreement, it would be minimally eleven years before the County would receive any revenue share beyond the $300,000 flat fee. Based on the language in the Agreement, it is possible that the County would never see any portion of revenue sharing, based upon the overly optimistic assumption of attendance and growth in gross revenue.

Issues

Agreement modifications entered into by former County Executive without approval of Board of Legislators.

The final extension letter, dated December 20, 2017 (the “December 2017 Letter”), was entered into by the former County Executive and Standard. This letter reversed the order of the County’s and Standard’s obligations. It extended the County’s time to fulfill its 50% Threshold obligation to 1/31/19. But it also purported to change Standard’s obligation to invest $3 million in new rides to 90 days after the County satisfies the50% Threshold or one year after the final determination of the Rye Art. 78 Proceeding whichever is later. This is likely a material change in the Agreement.

Previously, Standard was required to invest $3 million in new rides before the County expended the 50% Threshold. The Rye Art. 78 Proceeding had been dismissed in the Supreme Court prior to the December 2017 Letter.

Standard’s counsel has taken the position that all these extensions were valid based upon an opinion by the prior County Attorney relating to the prior version of the Agreement (before it was amended and restated). Standard requested an extension of its right to terminate that Agreement from October 16, 2015 to March 31, 2016. Standard’s request was based upon its representation that it had not completed its due diligence. The prior County Attorney opined that the County Executive had the authority to agree to the extension because the BOL Act and the A & C Board Resolution approving the Agreement stated that the County Executive or his authorized designee were “authorized and empowered to execute and deliver all instruments and take all action necessary and appropriate to accomplish the purposes hereof.”

This provision likely does not authorize the County Executive to agree to non-ministerial items that change the parties’ obligations without BOL approval. Further, the opinion related to an extension of time for Standard to exercise its right to terminate the Agreement. The opinion did not apply to the various letters in which extensions of payment and other obligations were agreed to without BOL approval

Professional Management

Standard’s obligation to utilize professional management in operating Playland and “in particular the services of Jack T. (Jack) Falfas” is expressly stated to be material. The only individual identified as “key personnel” in the Agreement is Jack Falfas, an amusement park executive from Ohio. Jack Falfas is apparently no longer employed by or affiliated with Standard. The Agreement provides that no replacement shall be made to key personnel until Standard notifies the County that the replacement has better or similar qualifications than the incumbent. No replacement has been named. This represents a default on the part of Standard.

Financial Reviews

Under Section 18A of the Agreement, upon request of the County, the Manager shall conduct an annual financial review at its own costs and expense. The review shall be provided to the County. The Finance Commissioner has the right to conduct an annual financial review following receipt of Standard’s reviews.

By letter dated December 29, 2017, the Finance Commissioner and Parks Commissioner requested the annual financial review. Standard’s financial review was required to be submitted within 90 days of the letter on March 28, 2018. The County has not received this financial review. The letter also indicated that the Parks Commissioner will conduct an audit of the Manager’s performance under Section 18B of the Agreement.

Standard is in breach of Article 18A because it has not provided its financial review as requested by the County within the time frame required.

A second letter reiterating the request for a financial review for 2016 and requesting a financial review for 2017 was sent on April 20, 2018.

Changed Circumstances /inaccurate estimates

It is evident that considerably more capital improvements are required to place Playland in an appropriate physical condition to attract increased attendance. As stated above, far more capital investment is needed than the original $33.2 million of the Schedule K projects which have already been increased by an additional $9.54 million for rehabilitation of the pool.

This estimate was found to be significantly understated when the County’s design consultants performed an assessment of the cost of the Schedule K projects. The estimated amounts of Schedule K projects were a material aspect of the Agreement.

Standard’s interference with the planning and design process of the Schedule K projects and other projects at Playland

We have been advised that Standard’s personnel have been aggressive in making demands on the County that would increase the costs of Schedule K projects and other rehabilitation projects and park improvements. Standard has required County design consultants to redesign certain projects causing increased cost to the County. Standard has retained its own design consultants, incurring unnecessary costs which are likely being included in its Manager’s Investment.

The Agreement does not give Standard the right to dictate the design of projects or to cause an increase in the cost of projects. Standard’s interference with the design process has, according to County personnel, resulted in delays in the County’s ability to move forward with the Schedule K projects.

As noted above, under the Agreement, the County has “sole decision making authority to manage, operate, repair, maintain and make improvements and have responsibility for costs and liabilities for Playland.” The County may have a valid argument that Standard’s interfered with the County’s rights.