Sunday’s lead editorial in the OC Register’s Commentary section was by Brian Calle, who replaced Steven Greenhut on the OC Register’s editorial board.  His column stems from an interview he had with Guy Lemmon, the Chief Operating Officer of Facilities Management West (FMW) and the Fait Family Trust.

Mr. Lemmon met with me and his next appointment was with the OC Register’s editorial staff.  So he is jumping into the “public” arena and making the rounds.  It was a fun meeting and I greatly appreciate the time we spent together.

My opening salvo was something like, “I want to wish you much success, but I don’t think this will be a financially profitable venture for you and your company.  Would you please convince me that I’m wrong?”

Since it’s been some time since my last OC Fair Update—Mr. Calle and I have not had any recent substantive discussions on this topic, but he invokes my name in his column below—allow me to provide my perspectives.

     1) I believe FMW is paying too much for the opportunity to run the fairgrounds.  The original auction, which found FMW with the highest opening bid—but froze when two other bidders weighed in—could have finished this process with the highest bid in the low eight-figure range.  Now they’re willing to pay some $96 million plus an annual lease to the city of Costa Mesa.  The Governor (the gentleman who was elected in a recall to address a $20 billion budget deficit seven years ago) was not amused with the mid-eight figure result of the auction.  So that exercise was rescinded.  The Governor, for whatever reason, became fixated on selling the property for $96 million ($40 million more than the highest bid).  The Governor’s office tried to get Costa Mesa and the County of Orange to agree to that price. Our fiscal review of the fairgrounds found that any price over $25 million was too high.  Paying four times that amount was out of the question.  That’s why the OC Board of Supervisors dropped out of the deal.
 

     2) FMW is acquiring the right to run the fairgrounds with a payment stream that resembles a debt.  California can then sell that income stream at a discount and use the net proceeds against the state’s budget deficit.  FMW is also paying a lease payment to the city of Costa Mesa, who will be the owners of the property.  Using a debt structure will require FMW to generate significantly higher net revenues out of the property and do it with ever increasing success in future years.
 

     3) This contrived transaction will address less than one-half of one percent of the state’s current $20 billion shortfall.
 

     4) To increase net revenues, FMW will have to implement a number of interesting “business” maneuvers:

• Consider increasing the ticket price to the annual fair
   
• Add additional “fairs” on the site during the remaining eleven months of the year
   
• Provide an ongoing concert venue during the remainder of the year
   
• Add buildings that would allow for a “convention-lite” opportunity for venues too small for the Anaheim Convention Center and too large for any available hotel in the county
   
• Decrease the current staffing
   
• Negotiate a new contract or approach to the “swap meet” venue on the weekends
   
• Find other “rentable” opportunities for the facilities
   

     5) Let’s be very clear.  The fairground is just a rental property.  Unfortunately, it doesn’t have one, single long-term tenant, it has multiple new short-term tenants every weekend.  The potential for revenues is quite limited.  The Barrett-Jackson deals of the world are few and far between.  It’s great to be optimistic, but, when you set the bar so high with the debt/lease arrangement, you are more likely to fail than succeed.  In the meantime, the impacts on the city of Costa Mesa will be dramatic.  My Certified Public Accounting firm, Balser, Horowitz, Frank & Wakeling, had its office in the Mesa del Mar neighborhood, directly north of the fairgrounds, while I was practicing.  I was a beneficiary of the noise and traffic during the Nederlander (the amphitheatre contractor) days.  How ironic it will be that when the residents rise up in outrage over the intrusive impacts, they will find that their very own city is the landlord!  And this landlord will have to accommodate almost every venue request in order to receive its annual lease payment.   Oops.
 

     6) There are financial guarantees involved.  But, I’ve given a lecture on “presumption” in a prior Update.  If the city of Costa Mesa does not receive its annual lease payments, it will survive.  If FMW does not remit its payments to the state in full, then the city may have to pick up the slack.  This would be untenable at this time in the city’s history.  If FMW chokes on this deal and walks, then the residents of Costa Mesa will have to deal with this alligator.  An alligator, in real estate terms, is a property that consumes more in debt and operating payments than it spins off in rental income.

That’s how I see this transaction.  I’m a little tired of being the “doom and gloom” person, but I would expect this transaction to fall apart within ten years.

That’s what happens when you have a desperate deal, with a desperate Governor, at a desperate time.  And I’m not optimistic that our Governor will wake up in time to stop this madness.

I want to, again, wish Mr. Lemmon much success.  But I’m not interested in buying any stock in FMW anytime soon.  (You can’t purchase stock in FMW, but this is a line that I shared with Mr. Lemmon to make a point.)

My prayer?  I hope that I am wrong.