Business plan for profit on a city project: built it and pray
By Michael Lewis
A report this issue reveals exactly why Miami's government should quit playing with developments that claim to profit taxpayers.
The development itself is innocuous: a clubhouse and restaurant at Melreese Golf Course, where the ribbon was cut two weeks ago. The quality seems good and users should be happy.
The problem, however, is not quality but the city's business proposition — and we say "business" loosely.
The city's idea is this: it's losing $200,000 a year on its golf course. So to plug the gap, it spent $4.6 million to build a clubhouse and restaurant whose profits are to fund the course losses.
So, how much will the clubhouse complex profit? What will sales total?
The city hasn't the faintest idea. It never tried to figure out how much the clubhouse might earn or lose. The business plan is merely the sports mantra "build it and they will come" — "they" in this case being not people but profits.
"We expect to generate additional revenues but don't have a sense of what that dollar figure is going to be," says parks and recreation head Ernest Burkeen. The sales goal, he said, is to "no longer subsidize the course."
Since the clubhouse for years has been in trailers, he explains, it's hard to guess revenues from a real clubhouse.
Generally a new building does replace something smaller, or less adequate, or nothing at all. But any plan to build a profitable enterprise must nonetheless forecast earnings carefully.
The city could have probed how clubhouses do elsewhere. Do they really land big profits consistently? How much? What percentage on sales? The city could have learned how much it must charge to profit when it leases out its banquet room overlooking the course and two large pavilion areas.
It might even have learned from the get-go that a clubhouse would be a loser.
With no business plan, however, no matter how the parks department does — even if it loses its shirt — it won't be over budget, if only because there is no budget.
Developing Melreese has been a city game for years.
It began to seek a private developer for a four-star hotel there in 2004. It even got three bidders, but when two dropped out, City Manager Joe Arriola started the bidding over. Then there were none.
One problem: the luxury hotel opposite Miami International Airport "would be standing right along the path of the airport's landing pattern," one early bidder wryly noted, not the recipe for hotel success.
So the city sought bids again, looking, it would seem, for whatever it could get, four star, three star, anything — develop at all costs.
Thus the city commission voted in April 2006 to seek a development "that shall include a golf course, hotel, club house, pro shop, and other related golf and hotel amenities and may include recreational, entertainment, educational and/or conference facilities, hotel timeshares, retail, offices and parking."
What, no steel mills? No nuclear plants? This city was willing to take almost anything else on its green golf course as long as it was a development. Guess that's green development.
Again, the business plan was to build it and see what happened.
That may be good enough for the city, but not for entrepreneurs. Despite the chance to fill a public golf course with buildings of every manner, the city got no takers from developers, who need a better plan than build it and pray.
So last year the city broke ground on its own dollar — actually, $4.6 million, about half of it borrowed.
If that money costs say 4.4% a year, either in direct interest or interest paid when the city could instead have used cash elsewhere, true cost will be $202,400 a year. So even if the clubhouse "profits" enough on sales alone to exactly the cover the course's $200,000 losses of today, the city could be losing more than ever because of true interest.
And if, by chance, the entrepreneurial city cannot run its clubhouse profitably? Annual losses then become $200,000 on the course, $202,400 on the cash invested plus whatever the city loses running banquet and other operations in the airport's flight path.
Not to worry: lacking a business plan, any losses will meet that nonexistent budget.
No expectations equal no failures — unless by chance you happen to worry about the taxpayers' money.
Don't worry: the city doesn't.