CITY AUDITOR 345 6"1 Street, Suite 100, Bremerton, WA 983374873 Phone (360) 473-5369 August 20, 2018 To Audit Committee Members: Leslie Daugs, Audit Committee Chair and Council Member Deborah McDaniel, Audit Committee Vice?Chair and Citizen Member Pat Sullivan, Council Member Darryl Riley, Citizen Member Dennis Treger, CPA Re: Kitsee Centerenee Center Reeiew Dear Audit Committee Members: At your request and based on information reviewed to date, following are the results of my Kitsap Conference Center review. The KCC is owned by the City of Bremerton ("City") and is managed by Columbia Hospitality, inc. per the terms of an agreement that expires December 31, 2019. was asked to summarize certain financial information concerning KCC, compare KCC to other Washington government-owned conference or convention centers, and provide other relevant information to assist City Administration and Council in their decisions regarding the pending expiration of this contract. My work included the consideration and/or analysis of certain records including: KCC 2018 Business Plan prepared by CHI, dated September 1, 2017 KCC "By the Numbers, Segmentation and Overall Pace?, as of tune 1, 2018 KCC year-end Consolidated income Statements from 2005 through 2017 Unifocus reports summarizing KCC performance metrics from 2015 through July 30, 2018 FinancePius Revenue and Expenditure Comparison Reports for Fund 105, Parking FinancePius Revenue and Expenditure Comparison Reports for Fund 120, Conference Center Columbia Hospitality website 2016 condensed statements of revenue and expenses for the following convention centers: Beli Harbor (Seattie), Kennewick, Ocean Shores, Wenatchee, and Yakima 9. Lodging tax reports 10. Management Agreements with to manage the KCC 11. Other government-owned convention center management agreements, and 12. Miscelianeous research Kitsap Conference Center August 20, 2018 Additionally, I discussed the KCC background or operations with the following individuals: Lori Main, KCC General Manager DeWayne Pitts, Bremerton Finance Director sonseesnee CEtsi?eR initiate Witness In 1985, the Kitsap Mall opened in Silverdale, Washington, which shifted the retail core of Kitsap County from Bremerton to Silverdale. As a result, retailers including Sears, J.C. Penney, Montgomery Ward, Place Two Woolworth? s, and Rite Aid all closed their downtown Bremerton stores in the ?805 and '903. Downtown Bremerton was left with many large empty storefronts and a waterfront cluttered with parking lots. .- Along with the construction of the Norm Dicks Government Center construction of the KCC was one of the ?rst key revitalization projects1? undertaken in downtown Bremerton' In an effort to draw people and businesses to the {area and restore economic development. Construction of NDGC KCC and the adjacent Hampton inn was completed in 2004. Some other key revitalization projects that followed the construction of the KCC are summarized below: . .. .. . 2006: Anthonys restaurant opens 2006 Kitsap Credit Union building _I?s complete 2007: The Harborside Fountain Park and Puget Sound Naval Museum open. 2007: Harborside Condominiums are. 2008: A newly expanded marina with increased boat capaCIty Is compiete. 2009: A tunnel traversmg from the ferry terminal to Highway 304lBurwe i Opens. 2010: Fairfield Inn and SUlteS by Marriott opens nthe srte of the old City Hall building. 2011: Manette Bridge replacement opens. 2016: 606 Apartments are built 2016: Voters approve new tax for fast ferry serVIce between Bremerton and Seattle. 2017: Apartments are bUIit 2017: East ferry service between Bremerton and Seattle begins. Williams Teen Recreation Center is complete. 2018: "Roxy Theatre is renovated in addition completed ??"?ii?i?r01ects noted above there are multiple significant projects ucrrently' In various phases of development including several housing/apartment projects, a planned waterfront hotel with -retail, a pedestrian tunnel Quincy Square and more. The KCC was one of the ?early projects intended to spur development in Bremerton. Based on the extent of development completed and underway since the construction of the KCC, it seems reasonable to conclude that Bremerton is succeeding in accomplishing its goal of revitalizing downtown. Although the KCC isn?t the only project or event that spurred development downtown, many would agree it is one of several projects that served as a catalyst for a renewed Bremerton. 1 Preceding the KCC construction was a waterfront multimodal bus/ferry terminal completed in 2000. Page 2 of 15 Kitsap Conference Center August 20, 2018 WES An intertocal agreement dated July 28, 2003 between Kitsap County (?County?), Kitsap Public Facilities District and the City stipulates the terms for funding, developing, and operating the KCC. In summary, the funding was as follows: The City owned the land upon which the K00 was constructed. The County issued bonds to make $6.9 million available to the PFD to be used by the City for construction of the KCC. The PFD pledged to pay sales tax revenue to the County in the amount needed to repay the Bonds. The PFD also contributed excess sales tax revenue of $75, 000. The City was responsible for ali funding necessary to construct, furnish and operate the K00, other than the 975, 000 contributed by the, PFD In January 2002, the City Council unanimously approved an $1 .7 miilion 'revenUe bond issue to help pay for the project. The City expected parking revenue from the KCC parkIng garage to cover the cost of the bond. -- .. CHE assessment John Oppenheimer' Is the founder and CEO of CHI Accordth to a February 2015 Seattle Business Magazine article, "When John ,Qppenheimer- boldly put in his 1995 bid to operate the Port of Seattle' 5 new Belt Harbor international Conference Center, he did so despite never having run a facility before.? -.-- -- - On June 6, 2003, the ow and CHI Signed an agreement to have _Ct-ll manage the KCC. At that time, it appears the only propertIes CHI was managlng were the Port of Seattle' 5 Bali Harbor International Conference Center which they have managed since 1995, and (possibly) Friday Harbor House CHI 3 website indicatestt now manages or is under contract to manage 40 properties2 as summarized be -- conference centers 8 golf ciubs 4 distinctIve venues 3 reSIdenttal preperttes It shouid be noted that the Bremerton Cambria Hotei, slated to open in 2020, is one of the hotel properties that is _.__under contract to manage. Please refer to Schedule 1 for additional details of the propertles.n__ or under contract to be managed by In 2016, CHI was ranked by Puget Sound Business Journals as the 77th largest private company in Washington based on 2015 revenue of $89.43 million. The report indicates in 2015, employed 717 people in Washington and 1,266 people globally. Since 2015, has doubled the number of properties in its portfolio and was reported in 2017 to be one of the largest hospitality management companies based in the Northwest. 2 33 of the properties are in Washington; the others are in Arizona, Montana, ldaho, California, and Hawaii. Page 3 of 15 Kitsap Conference Center August 20, 2018 EREMERYQN Witt-?i Citt 80ERAYE WES The City did not select CHI through a competitive bid process. Although Sean Flannery of Municipal Research and Services Center stated MRSC recommends cities do a Request for Proposals Washington state law does not require competitive bids for professional services. The initial contract appointing CHI as manager of KCC was signed by City Mayor Cary Bozeman and Mr. Oppenheimer on June 6, 2003. The initial term was five years expiring May 31, 2008 with an automatic two-year renewal unless either party provided 90- day written notice Contractor compensation for operating years one through six was 000 per month plus 1 5 percent of gross revenue. . There were three amendments to the original contract: first two amendments provided some changes regarding insurance and clarification regarding other contract terms. The third amendment was entered into on June, 15, 2007 and added the Fountain Park Facilities to the list of facilities managed by CH 'and included a 000 Increase to the fixed fee paid to . - . A new agreement was entered on August 11,2016 with a term from June 1,2016 through December 31, 2019 This agreement provided that additions! renewais, if any, require mutuai agreement' In writing prior to the eprration of the contract and City Councii approval The 2016 agreement increased 8 fixed compensation from 000 to 500. CHI variable compensation remained at 1.5 percent, of gross revenue Annual compensation paid to for managing the conference center In 2017 was approXIrnately $108 000. E??n?mv .. -, A good measure of economic actIvrty is taxable sales, which is maintained in an oniine database by the Washington State Department of Revenue The data below summanzes taxable sales In, Bremerton from 2005 through 2017. The trend shows taxable sates economic activrty) In: Bremerton declIned censiderabiy' in 2009 and 2010, then began increasmg in 2011, with substantial growth from 2013 through 2017. Taxable Year Saies-Bremerton Cha nge BREMERTON TAXABLE SALES I Percent $050,000,000 2005 726,937,605 5 63.773873, .. 51000000000 2006 790,717,478 8. 2007 819, 771,680 29,054,202 5950009000 2008 809,372,462 {10,399,218} ?41.3% $000,000,000 2009 728,905,080 {80,467,382} -9. 9% $050,000,000 2010 685,256,563 {43,648,517} 6.0% 2011 722,985,872 37,729,309 5.5% 580930030? 2012 758,491,316 35,505,444 4.9% $750,000.000 2013 760,875,930 2,384,614 0.3% memo?m 2014 799,436,873 38,560,943 5.1% $550 000 000 2015 865,938,365 66,501,492 8.3% 2016 944,541,704 78,603,339 91% 560020002900 2017 1,022,133,109 77,591,405 8.2% 2095 190140? 4903 4.009 49?? 191? 19? ?.913 091? 09?? :91? ?.911 Page 4of15 Kitsap Conference Center August 20, 2018 KQQ Itcc The KCC revenue trend from 2005 through 2010 is simiiar to Bremerton?s economic activity/taxable sales trend during the same period as shown right: a period of growth foliowed by the recession in 2009/2010. . After 2010, the K00 revenue trend is relatively fiat compared to Bremerton's growing economy. 51.500.000 51.1.25? g, I 1'52: 1?3 WC1 10? 1?55 0-93 2005 was first full year of Operations. Annualrevenue from 2005 through 2017 averaged $1,255,290. Revenue was highest from 2006 through 20.09 when it averaged close to $1.4 million. Since 2010, revenue has remI ned fairly consistent at about $1.2 million per year. - CHl?s 2018 business plan for KCC identifies five primary market segments "that it serves. The table beiow shows the market segment and the percent of revenue ?derived from that segment. Assuming annual revenue $1.2 million; the Coiurnn on the right estimates the amount of KCC revenue by market segment - -. . Percent 01.5? Estimated 5 '3 -. .- rket CiatIonINonprofIt Organization Meetings 5'34 5 415000 Corporate - 29. 71% 357 000 Weddings/Recs 18.22% 219,000 Government 10.72% 129,000 ..Sociai events 6.77% 81,000 1000094. 5 1301900 Prior to 2014 CHI stated stagnant revenue was largely due to lack of breakout rooms. Hence in October 2013; the City signed?3-an agreement with Kitsap Transit to lease space for breakout rooms on the third floor of the :itsap Transit Building that iS adjacent to the K00. it appears breakout room construction completed early 2014. Although the breakout rooms were available during most of did not change significantly in 2014 or after. in June 2015, sixteen months afterthe third floor was completed, the Clearwater Casino Resort opened a new meeting and convention space and added 98 hotel rooms to its existing facility in Suquamish. The OCR and KCC reportedly compete for business on the Kitsap Peninsula. KCC annual revenue remained fairly unchanged following the 2015 opening of the CCR event space. According to Ms. Main, KCC recently lost some significant business: two clients became too large to have certain events at KCC and moved these events to larger venues; and one client was sold to an entity that did not sponsor certain events previously hosted by its predecessor. Page 5 of 15 Kitsap Conference Center August 20, 2018 Ms. Main stated the KCC continues to lose business due to lack of hotel accommodations. The local hotels seek the best rate available and sometimes the event planners have a lower per diem than the hotel is willing to accept. As previously mentioned, another hotel (Hotel Cambria) is expected to open adjacent to the KCC in 2020 and CHI is under contract to manage it. i438 8658211415238 When KCC obtains a signed contract for an event, the estimated revenue from the event is recorded as a booking. Tracking bookings is useful for managing business and forecasting. Bookings at the KCC increased 23 percent as of June 1 2018 compared to June 1, 2017. Bookings at KCC can be for events scheduled out 18 months to two years. The following booking amounts include actual revenue through May of the correspondmg year pius bookings for future events. . . . 2017 Description 2015 '3'53' Bookings at June 1: Association 5 405, 436 5 410 307 32.3, 528 416,150 Corporate 310, 557 182, 298 - 24 $12 227, 064 Social {non wedding) 78, 507 103,178 56, 858 81,263 Government I 871 96,649 g: 3, 996 79.000 Wedding 97 274 121, 733 153.1130 253 715 Total 5- 950145 $9141.63 8 862, 534 8 1,,062 192 . 56% '2.3 1% Ms. Main beiieVes the bookIng Increase is due _to ncreased busmess rather than a difference between estimating bookings com ared to her predecessor 3 nae assesses and semi ?ms 11.122 CHI prowdes the City profit and loss statements that summarize the month? and year to date activity. These profit and toss statements do not include certain expenses that are paid directly by the City," such as debt service, third floor expenses paid to Kitsap Transit, insurance water/sewer/stormwater grounds and maintenance costs, and other miscelianeous charges. The foliowmg comm'nts are based on the profit and toss statements provided by CHI. . During the 13-year 2005 through 2017 KCC lost $611,815, whichis an average of $47,063 lost per year. KCC had four profitable years in 2006 and 2008 through 2010 during which time it reported profits totaling $225, 245. From 2011 through 2017, KCC has reported seven consecutive years of losses totaling $777,821, an annual average of $111,117. The chart below depicts annual net income/toss from 2005 through 2017: 3 Ms. Main repiaced Arne Bakker as KCC general manager in August 2017. Page 6 of 15 Kitsap Conference Center August 20, 2018 KCC Net Income 2005?2017 $100,000 $50,000 [550.0001 {5100.999} {$150,000} {52032500} 7033 7021; 7.0111 20.112 70111; 7.908 2908 2009 7010 20.1 1 701?} 301 The table below summarizes KCC's revenue, expenses CHI compensation, and net income?: Qpe'ating Base Marm- 15-33-22! 1 . incentive Net Year Revenue Expenses ISI3I1t-0taf Fee fee Income 2005 1.122133 5 1.047.349 5 74,734 is . 72,000 5 1633251140481 . 1,334,545 1,153,939 20,013 37,539 1,292,132 19.553 1,314,500 33.355 1.423126 1.2211239 3"1-312385 97,501 1,257 393 1,152,929 19,954 1,900 1,156,535 12,901 {95,122} 1,202,731 17,781 (113,509) 1,203,448 . . 13.565 166.056} 31951290 . . 19,210 {124,255} 1,281,325,. (5,332] 74,000 19,412 (99,254} 1,202,520 92.500 17,354 017,502} 1,221,352 {23 392] 90,000 12,391 {195,439} 515313771 515630453 $638,318 $1,055,500 5 244,633 5(511,815} Ms. Main statad minimum wage increases have impacted profitability. in 2005, minimum wage was $7 35 per hour In 2018, Washington State has the second highest minimum wage in the United States at $11 50 per hour, yielding a 4. 34 percent annual average minimum wage Increase from? 005 to 2018. In comparison the Seattle-Tacoma?Bremerton Consumer Price Index (C )from 2005 to 20175 averaged 2. 6 percent growth However, the Washington hourly mi .. 0m wage rate did not experience a significant' Increase until 2017, when it increased 16.16 percent compared to 2016. Thus, it seems the lack of profits attribuetable to Washington?s minimum wage increases may be primarily applicable to 2017 and 2018. 4 Amounts exclude expenses paid directly by the City, including debt service, third ?oor expenses paid to Kitsap Transit, insUrance, water/sewer/stormwater, grounds and maintenance costs, and other miscellaneous charges. 5 2018 CPI data is not yet available. The average minimum wage increase in Washington from 2005 to 2017' Is 4.14 percent. 6 2018 budget" is for a toss of $137,000. Page 7 of 15 KitsapConference Center August 20, 2018 Although all Washington employers are faced with the minimum wage increases, Ms. Main stated it is a challenge to set menu prices that are both competitive and cover minimum wage increases. Another challenge Ms. Main cited in terms of competitive pricing is that some of competition have other revenue sources, such as gambling and/or lodging, that enable them to offer more competitive event pricing. Ms. Main stated the K00 also loses some business due to insuf?cient lodging accommodations, which should be alleviated in 2020 with the expected opening of the adjacent Cambria Hotel that CHI is under contract to manage. REVEMEJE nee E92 REQT The table below' Is sorted by net income (highest to iowest) as :a percent of revenue. The top portion of the chart shows the profitable years and the lower portion shows the loss years. Notably, annual average revenue in the pro?table $164, 000 greater than the loss years. Also worth noting is annual average darec't'c'05ts'which are primarily direct labor costs, are about six percent less In the pro?table years compared to the loss years. While the conversation for generating more pro?ts at the K00 frequently focusles on increasing revenue it appears a more in depth review of direct costs ?may also be warranted Costof Saies (senergl &Admin Netlncome Description Revenue (food, bev, etc} [direct Et . . {toss} Profitable years: 33.78% $613,217 6.85% 2009 1,423,126 2006 5 1,334,546 $487,301 6.55% 2003 5 1,459,725 2.53% 2010 1,257,593 ?$555,520 0.14% Average .- I $2,353,497 $564,422 4.05% Loss years $436,243 4.25% 1, 503, 549. $542,750 - 347% 239, 957 "190795 41.82% $551,013 . 5.33% 309 192295 $555,417 5.45% 16.69% I: 43.69% $504,635 773% 5 3,190,423, 16.11% 43.68% $596,164 -9.87% 5 1,135,923 20.11% 44.02% $543,903 40.0095 $1,141, 244 17.59% 45.55% $544,297 40.93% $2 I2, 192 755 159595 42.39% $683,228 45.64% Mirage 2 204 976 13.48% 42.63% $561,963 4.75% 5 31163522) 0.53% 5.73% 52.459 41.7995 QYHER REVENLEE ?023 In addition to operating revenue and expense reported by CHI, the City accounts for parking revenue and other City?paid expenses associated with the K00. In its funding discussions, the City expressed its expectation that parking revenue from the K00 parking garage would cover the cost of the bond. The KCC parking revenue (parking fees and estimated ticket revenue7) averaged $600,000 annually from 2015 through 2017. 7 Matthew Coyne, lmpark manager, estimated ten percent of the City's parking ticket revenue comes from the K00 parking garage Page 8 of15 Kitsap Conference Center August 20, 2018 Mr. Coyne stated approximately 10 percent of parking patrollers' time and 25 percent of the meter technician's time is spent in the KCC parking garage. Assuming 17.5 percent3 of total parking expenses is a reasonable estimate of parking expenses associated with the KCC garage, KCC annual average parking garage net income from 2015 through 2017 would be approximately $453,000. The average interest payment on debt service from 2015 through 2017 was $277,000, leaving approximately $155,000 per year on average to cover City-paid expenses, such as third floor expenses paid to Kitsap Transit, insurance, water/sewer/stormwater, grounds and maintenance costs, and other miscellaneous charges. City-paid expenses related to KCC from 2015 through 2017 averaged $141,000. Thus, during this time frame, the KCC parking garage revenue was more, than suf?cient to cover estimated KCC parking expenses, the interest portion of KCC deb service, and City-paid expenses associated with KCC operations 9 -. . Importantly, the KCC has two new expenses beginnIng In 2015 repayment of the funds used for the third ?oor improvements (approximately $95, 000 per year) and rent for the third floor (just over $100,000 per year.) When the City moved forward with the 2013/2014 third floor expansion, it was estimated that the expansidn would result In $500, 000 in increased annual revenue for the facility starting upon completion," which would _.generate sufficient profit to pay the third floor expansion loan and,? rent. However revenue remained flat _:g-and the KCC continues to have annuai losses. "jig-{The City is currently seeking other ways to pay these additional expenses, such as additio al lodging tax funds and revised lease terms KCC - - Foliowing each event a survey is sent to the meeting planner Inquiring as to their perception of the quality of service faculties value, focal,- and beverage Below Is a summary of ratings based on these surveys from 2015 through Juiy 30, 2018: 3 Average of 10 and 25 percent. 9 Based on the cited estimates, KCC parking revenue less parking expenses, less debt service interest, less City-paid expenses totaied $42,000 from 2015 through 2017. Page 9 of 15 Kitsap Conference Center . August 20, 2018 Rating As of Service 2015 2016 2017 7i30r'2018 Surveys processed 94 73 88 44 Overall 96.7 98.2 98.3 94.8 Food and beverage 99.2 97.6 97.0 89.0 Value for the price 91.4 92.0 94.6 88.8 Catering/event manager 93.1 98.7 NA NA Food quality 93.3 96.3 97.1 95.5 Banquet 100.0 97.8 95.8 Meeting facilities 95.3 98.2 94.9 Audio visual 92.5 93.7 Sales manager 958 97,4 598.6 93.7 Billing 96,6 97.2 968 Eve nt planning manage 963 98.7 92.6 Meal and break service 957 97.8 97.5 98.0? Banquet team 99.2 98.5 96.0 Banquet manager/captain 95.9. NA NA NA Average perreport 95. 6 94.4 Although there is a slight decline in customer ratings for the above metrics during the ?rst half of 2018 compared to the prior three years, KCC we consistent y. rated' In the mid to upper 908 by its customers from 2035 through July 2018 SEWER QWNEB A number of Washington cities own a convention or conference center. DeWayne Pitts and Mike Riley, stated it would, be, helpful _to include, information in this report regarding who manages_ the convention centers fees pad to the management companies, and the profitability of the other conventlon centers in addition i_ ._reViewed subsidies provided to these other convention/conference centers Other event centers considered in the review are the Three Rivers Convention Center (owned by, the Kennewick PFD), Convention Center (owned by the PFD.), Ocean {Shores Convention Center, Bell Harbor international Conference Center(owned rtof Seattle), Wenatchee Convention Center, and the Yakima Convention Center__ isianaeement Companies and Cemeensa?on The following chart name of the management companies at each of the aforementioned facilities the 2016 management compensation structure, and 2016 management fees paid: ?0 KCC revenue and expenses shown in this report section are based on the City?s income statements and include city expenses not reported on the CHI-provided income statements. Page 10 of 15 Kitsap Conference Center August 20, 2018 Annual Variable Fee 2016 2016 Total Fees as City Management Company Base Fee amount Comment Revenue - Fees 95 Revenue Bre merton Columbia Hospitality $82,500 15% gross revenue $1,191,102 $100,354 8.4% Lesser of 1} annual base fee and 21 15% of naming rights, Kennewick VenuWorks $93,000 display advertising fee, and $2,273,630 $197,779 8.7% sponsorship revenue, and 8% revenue. 40% Based on various SMG $120,000 Teasures? 60% $120,000 max $4,635,710 $2c0,000 52% based on pro?t - improvement year to year Ocean Shores City $0 $0 $258,043 $0 0.0% Norrnaily,15% Net Income if 3.5% Gross net anoome 15%gross Seattle/Bell Harbor Columbia Hospitality revenue revenue, otherwise 50. $6,241,442 $537,110 8.5% TemporaryMinlmum Assured Fee. NorthCoast Washington, aka 8% Gross revenue 3-5750 000 Contractor Wenatchee Coast Hotels 5 paid by contra orto City paysCity $79,477 k? Yakima Ya Ima al ey rotors and 5395000 $764,451 $395,000 51.2% Conve ntion Bureau The following points are worth noting: - . I The Ocean Shores Convention Center is fully operated by city employees-so there are no management company fees 0 At the Port of Seattle 5 Bell Conference Center, Ci-il is temporarily receiving a Minimum Assured Fee (from3?20_16 through 2018) in lieu of its Incentive Management Fee to mItIgate any shortfall the: "ay_._experlence during the redevelopment of the cruise terminal where the conference cents 3 located In 2016, this additional fee was $318, 660. From:2013 through 2015, nicentIve Management Fee (variable fee) averaged $208, 952. - The fees paid at thei?YakIma vention Center include $186, 000 management fee, $184,000 at Includes sales salanes and $25,000 consultant fee. Because some salaries are included In, at least one ofthe fees, this fee structure may not be comparable __other fee structures in this For example sales salaries at KCC are reported as expenses on the pron-mend loss statement I The baSlS for varIable fees at the different locations includes percent of revenue or net income, "ertain threshold, and performance measures and improvements. percent '0 .__-fre_venue over Of the seven event centeis .reViewed, the Port of Seattle 5 Bell Harbor lnternationai Conference Center Is the only one with profitable operations. The chart below summarizes 2016 revenue and expense from each facility, excluding subsidies such as lodging, sales, and rest estate excise tax: Page 11 of 15 Kitsap Conference Center August 20, 2018 Convention Center Convention Center Revenue Location Revenue I Expense Less Expense Bremerton 5 1,191,102 5 1,473,947 (282,845) Ke newi ck 2, 273, 630 3, 541, 101 (1, 267,471) nwood 4, 635, 710 5, 658,854 (1,023, 144) Ocean Shores 158,043 785,956 (627,913) Seattle Bell Harbor 6,241,442 6,069,904 171,538 We natchee 447,824 941,020 (493, 196) Yakima 764,451 1,641,685 (877,234) Notably, during the three years (2013 through 2015),- riIo'r'to Seattle?s cruise terminal redevelopment that began in 2016 Bell Harbors anno et Income averaged $1.2 million Also worth noting is that beginning In 2015, Wenatchee entered a new concession agreement that allows the management company, Coast Hotels to manage .and market the convention center as they see fit and return a percentage of; revenue back to the city for debt service and long term upkeep. Accordingly, the amounts shown above only include the City of Wenatchee? 3 portion of revenue and expense Please also note the amounts shown above for KCC exclude parking revenue and expense, and debt service. Bell, Harbor also excludes debt service. The remaining properties appear to have interest __f-debt service reported in the amounts shown The lodging tax Is a consumer tax on lodging charges for periods of less than 30 consecutive days for hotels, motels rooming houses pnvate.._campgrounds RV parks, and similar facilities The guiding principle for" the use of longng taxes, is that they be used for activities operations and expenditures. designed to Increase tourism. SpecrfIcally, lodging taxes can be used for: marketing; a Marketing and operationsII_ of spam! events and festivals designed to attract tourists, - Operatlons and capital expendltures of tourism- related facilities owned or operated by a munICIpaIIty or a public facrIItIeIs district or I Operations dr- tourIsm relateI facilities owned or operated by nonprofit organizations (RCW 67.28.1816). In addition to lodging taxes city-owned event centers receive subsidies from other taxes (sales) and the general fund. The following table shows how much lodging tax and other subsidy was provided to each event center In 2016: Page12 of 15 Kitsap Conference Center August 20, 2018 Convention Center Convention Center Subsidy Location Lodging Tax I Other I Totai Bre me rton 155,000 36,129 5 191,129 Kennewick - 1,790,020 1,790,020 nwood 1,160,061 1,696,558 2,856,619 Ocean Shores 595,479 30,000 525,479 Seattle Bel! Harbor - - - We natchee 1,145,514 - 1,145,514 Yakima 705,578 100,000 805,578 Total 3,761,632 3, 652,707 57,414, 339 Research indicates it was originaliy expected that theBeli Harbor Internationai Conference Center would need to be subsidized; however, Bell Harbor has been profitable and has not needed to be subsidized. As shown above, of the remaining event centers, KCC receives significantly less subsidy than the others Notably some conference centers pledged lodging taxes to fund the conference center; Bremerton ._uses KCC parking garage revenue to cover its debt service. A more complete analysis of conference center funding a?d subsidies can be performed at your request. -. The table below shows the 2016 subsrdIes In light of 2016 revenue and expense. As shown, subsidy as a percent of revenue, __is substantially less, than the other event centers: ?1 Convention Center Convention .ceIIter Revenue Conv. cu. Subsidy Expense Location .. Less Expense Subsidy . OfRevenue Includes Bremerton 5 1.19115; 5 1,473,945 51232345) 3 191 129 5 (91,115} 3% capital reserve Kennewick - 3,541,101 {1,267,471} 1, 790 ,020 522,549 78.7% Cap imp, deprec, debt service 4,535,710 2,856,610 1,833,475 61.6% Deprec, interest Ocean 158 043 62537.91?; (2,434) 395.8% lnterfund ioan expense I 171,538 0.0% 3% capital reserve 652,318 255.8% Capital outiay and debt service (877,234) 805, 578 {71, 656} 105.4% Underlying expense data unavailable In 2017, e; City was awarded, $345, 000 __by the Lodging Tax Advisory Committee for 2018, which Includes $250,000 for operatlons (versus the prior years $155,000) plus $95, 000 for debt service related to the ThIrd __Floor expansion. ?2 In 2018, Mr. Pitts and Ms. Main requested $200, 000 for debt serwce (in addition to the $250, 000 muiti year award for operations). The Longng Taxi 'dvisory Committee agreed to recommend 000 of the additional $200, 000 quested. The recommendation .Is currently pendIng City Counc? approval ?1 Amounts shown for Bremerton do not include City-paid operating expenses, debt service, or the parking revenue used to pay KCC debt service. 12 The $95,000 increase from $155,000 to $250,000 is a multi-year award for ?ve years. The $95,000 for debt service was awarded for 2018 only. Page 13 of 15 Kitsap Conference Center August 20, 2018 ?3;th RiGi?i?i?? . During an Audit Committee meeting, Darryl Riley, a citizen member of the committee, suggested the City consider teasing the naming rights to the KCC. it is not uncommon for a sports or convention center to tease naming rights. Noted local examples of sport facilities include CenturyLink Field, home of the Seahawks, and Safeco Field, home of the Mariners. in 2005, the University of Washington sold naming rights of its stadium to Alaska Airlines for $41 million over a ten year period the stadium is of?cially called Alaska Airlines Field at Husky Stadium. in Omaha, Nebraska, CHI Health, part of Catholic Health initiatives, bought the naming rights to the Omaha arena and convention center for $23. 6 a 20 year period. 13 The Interiocai Agreement regarding Funding, Development and Operation of the Kitsap Regional Conference Center? Section 13E cites, "The Conference Center shall be named the Kitsap Regional Conference Center unless other-wise agreed by the Thus, any name change would require agreement by the PFD err-tan. ??iritzEREitiCE SEWER. in @rogress Research indicates conference centers generally create. three measures of economIc impact: visitor expenditures, tax revenues, 'a created. spending includes lodging, food, shopping, recreation and rit?i-iix This in turn creates indirect Spending by the businesses frequented by the VISItors the busmesses purchase goods, materials, and equipment for Operations, and hire employees to serve the motors Having more employees in town creates another iayerof demand for _{goods andservrces The sum of these diff ent spendIng eferred to as the economic multiplier. The size of the economic multiplier Is iargeiy determined by the percentage of event attendees that stay In hotels and the structure of-z?thelocal economy The better situated the local economy is economy or visitors need _to purchase a reiatIveiy higher percentage of goods and services from outSIde areas, the ecOnomic multIplIer will likely be lower e. fewer doliars put into the iocal economy) -- .. . increased spending resuits in increased sales and lodging tax revenue, and job creation. A 2007 study estimated that for: every $101, 000' In expenditures in California, one job could be created. Ms. Main stated that? in h" .. xperience the economic multiplier is generally from 75 to 3.0 times conference center revenue. The higher end of the range is typically for multiple day events. Ms. Main stated she conservatively estimates the total economic multiplier for the KCC at 1.75. Based on KCC's historical annuai revenue average ot$1.2 million and assuming 13 In addition to the naming rights, CHI Health wili get to use the convention center for company events twice a year and one reception? for as many as 30 employees or business associations, as weli as a couple other perks. A CHI representative stated they would iike to the use the arena and convention center for health screenings, heaith education events and as a blessing for staff. Page 14 of 15 Kitsap Conference Center August 20, 2018 Ms. Main? 3 estimate is reasonable, 1? local economy could be benefitting from the K00 by an estimated $2 million per year. it'Access intelligence report Please contact me if you have questions or need additional information. Sincerely, Jennifer L. Sims CFE City Auditor cc: Mayor Wheeler City Council DeWayne Pitts, Finance Director Mike Riley, Assistant Finance Director ?4 Assessing the reasonableness of Ms. Main's estimate is beyond the scope of this report. As previously stated, the economic multiplier is significantly impacted by the percentage of event attendees who stay in hotels, a metric that is not tracked by the K00. Page 15 of 15