By Paul Myers @PaulM_SGN
LINDSAY – Lindsay’s plan for profit sharing with McDermont has paid off so far. About $16,000 worth.
And last month Lindsay council and staff discussed the good, and the bad to the current state of McDermont the building and McDermont X the operation. Ultimately city staff says they are better off now than in the past, and it is better to have McDermont X than to not. But it would be best if they could sell the building and wipe it from their books all together.
Earlier this year McDermont X, formerly the McDermont Field House, realized they eeked out a small $32,000 profit in their first year in the private sector. While owners of McDermont Ventures Inc (MVI) Clint Ashcraft, Deici Avila and Alfredo Velasco were striving for more, they are happy to be surviving in the first year they struck out on their own. Before, as a public recreation facility they were hemorrhaging dollars, often around $300,000 per year.
MVI assumed operations at McDermont on Jan. 1, 2018 under a new name and with a new contract with the City of Lindsay. Lindsay, without operating McDermont assumed the landlord role, dropping almost all of their most expensive responsibilities. Also in the contract with MVI, the City received 50% of the net profits amounting to $16,000.
As the City of Lindsay found, having McDermont operations out from under their purview and out on its own is a major win. Last month, at the March 26 Lindsay City Council meeting, finance director Bret Harmon noted in a presentation that McDermont on its own is both good and bad.
Profit sharing is a clear-cut advantage for the City. Better yet, for MVI, once they reach $100,000 in profit the 50% they pay the City would then become a payment to buy the building. A move that could not be more welcomed by Lindsay brass. Removing the building from their books would be a feat all together.
Harmon noted in his presentation to the Council last month that the City had a debt service of $1,835,000 before they could own the building outright. As of December 2018, they have a balance of $1.2 million. In both interest and principal payments Lindsay will make a $161,606 total payment by December of this year, and then make gradually larger payments until December 2026. Their last total payment by that year is projected to be $190,781. Unless they can sell it before then.
It was long believed around Lindsay City Hall that the City would not be able to sell the McDermont building. According to Harmon’s presentation, Lindsay was warned by the California Department of Housing and Community Development (HCD) that they would be unable to sell the building due to Community Development Block Grant funds used for, or at the facility. However, Harmon says he may have found an excerpt from two HCD document binders that would allow them to put the building up for sale.
“If the City of Lindsay chooses to sell the property and or the business within 5 years, future lease agreements for the companies to access the infrastructure should be converted to a loan to the purchaser,” the document stated.
“They’re saying hey, if you sell this, whoever buys it needs to accept a loan for the funds that came from CDBG and they need to pay the City through program income,” Harmon explained.
BENEFITS AND RESPONSIBILITIES
Dropping operations from the City’s books saved the City a “minimum of $400,000 annually.” Harmon noted in his presentation that McDermont X’s take over essentially lifted major parts of the City’s recreation program. Paired with profit sharing, the City saw a benefit of $416,000 in their budget in McDermont X’s first year.
Before, when the City was in charge of the litany of costs from accounting to workers comp, they instead assumed landlord responsibilities. Under their contract effective January 2018 Lindsay is responsible for structural maintenance, debt service and appraisals. Meanwhile, they still reap the benefits of general community health. Community health is often associated with a reduction in gang participation, reduction in crime and a safer environment for children, youth and families.
McDermont X, much like when they were the McDermont Field House is continuing to reach out to younger groups. In 2018, 195 groups amounting to 18,060 children visited McDermont X as a part of field trips. When it comes to the Get Up and Move (G-U-M) program, 1,031 seventh and eighth graders visited the facility. Expanding the program to third, fourth, fifth and sixth graders, McDermont expects to have approximately 3,100 participants this year.
THE GOOD AND THE BAD
Harmon outlined in his presentation the “Good” and the “Bad” of the time before MVI, now with MVI and if MVI were to leave. Most of the negative aspects of McDermont before MVI took over as McDermont X have been well documented. Harmon noted the enormous cost overruns, unsustainable vision, damages to the City’s finances, negative response from some in the public, the negative response from the press, obstacles to provide other City services and then the enormous debt service they are still paying today.
However the good, as Harmon outlined it, was that McDermont provided a positive benefit to the youth in the community, improved health and wellness, provided jobs and prevented blight on Lindsay’s main thoroughfare. Now with McDermont, Harmon noted that the bad for the City is they need HCD’s permission to sell, they still have the debt service and they are the landlord.
During the March 26 meeting, city manager Bill Zigler said HCD agents are waiting on Lindsay to sit down and create a dialogue over selling the building. Harmon did not respond to emails from the Sun-Gazette over whether any additional discussions have taken place between Lindsay and HCD. Councilmember Rosaena Sanchez asked about MVI’s profits and how the City knows that McDermont X is actually making what they say they are making. Zigler responded by noting that it is in MVI’s best interest to reach the $100,000 benchmark to begin making payments on the building so they can own the property outright in the future.
Harmon said in an email with the Sun-Gazette that he reviewed MVI’s financials and tax returns prepared by their certified public accountant and confirmed their earnings.
The good with having MVI run the operations, as Harmon outlined was the same as having McDermont under the City’s control except with the additional benefit of lifting a burden off the City’s budget, and facilitating a financial recovery.
Without MVI operating McDermont, Harmon says there is almost no benefit that is inherently provided by having the rec facility. He noted the lone positive as potentially divesting the facility. If MVI were to leave McDermont, the City would still have debt service, Lindsay would incur heavy blight and lose an economic driver in the community. Meanwhile the City would lose the revenue of lease payments through profit sharing they currently receive.