The SCC Proposal is Unhealthy for the Financial Health of Scarsdale

Dear Scarsdale 10583: The Scarsdale Community Center's ("SCC") proposal for an indoor pool and the Village of Scarsdale to provide a $16 million bond is a potential financial disaster that the Village of Scarsdale should avoid. Approval of the SCC's proposal and $16 million bond is an asymmetrical risk that financially binds the entire Scarsdale community for the benefit a minority interest group that desires a luxury indoor pool. The SCC co-president Ed Morgan said it best, "We're asking the whole village to assume the financial responsibilities of this project, whether they will use it or not." Additionally, a decision of this magnitude that gravely affects the entire Scarsdale community should be done by public referendum and only after thorough due diligence at the expense of the SCC, not the Scarsdale's tax payers.

It is bewildering why the SCC believes an indoor pool and fitness center is necessary in a six square mile town when there are so many gyms and fitness clubs (JCCs, YMCAs, Equinox, NY Sports) in each of our surrounding communities which would become direct competition to the SCC facility. Also, many Scarsdale residents have home gyms or use fitness centers near their work.

Since Scarsdale is now contemplating going into fitness center business with the SCC, we need to ensure the accuracy of SCC's projections and their ability to construct and successfully operate the proposed Scarsdale Community Center. The financial consequences on our community are critical and long lasting. The SCC projections and assumptions should be evaluated and validated by an expert before any approval by the Village of Scarsdale. If the SCC projections are flawed, it will be Scarsdale and all of its citizens funding the ongoing operating losses and capital requirements at the SCC indoor pool facility which will be in addition to the ~$1.2 million annual projected bond debt service. Similar to business applying for a business loan, the SCC's projections need to be questioned and tested for realism and a downside scenario to see if the SCC can operate profitably and generate sufficient cash flows to fund the operations of the indoor pool facility and service the debt Village of Scarsdale is asked to assume.

The SCC's projections assumptions are highly optimistic with regard to membership, revenues and profitability levels. The SCC projections assume 1,600 founding members, or a 48% membership increase over the 1,080 remaining active members of the SCC. These 1,600 members (75% of the indoor pool's total projected membership) are projected to remain members of the SCC indoor pool throughout the five year projected period. Is this a realistic assumption given the SCC has already lost 10% of their original 1,200 founding members and these remaining families have yet to pay the $1,219 annual dues. This membership retention assumption is also flawed by the fact that families move away from Scarsdale and membership decisions change as children grow older, children move away or as interests change. New membership is projected to grow from zero to 394 by year five with net membership increasing in all five years. Within the health club industry other firms experience a high level of membership loss. For example, Lifetime Fitness ("LTM") and Town Sports ("CLUB"), the operator of NY Sports Clubs, experience approximately a 40% membership loss per annum.

The SCC projections also assume a level of operating profitability well in excess of both Lifetime Fitness and Town Sports. Is it reasonable that the SCC can achieve a level of profitability well in excess of for profit sports clubs and sports club management? The SCC projections assumes an average cash operating profitability (before interest and rent expense) of 58% of revenues compared to 30-35% for Town Sports and Lifetime Fitness. Assuming a 45% level of operating profitability at the SCC ( ~50% higher than the public companies), the SCC's annual cash flow is negatively until year four.

While I am not in support of moving forward with an indoor pool and fitness complex and believe that any approval should be subject to a public referendum, the Mayor and Trustees should not lose sight of the fact Scarsdale owns the intended land for the complex and controls the credit rating that the SCC wants to support the project. As such, if the Village of Scarsdale decides to move forward with the SCC on the indoor pool facility, the Village of Scarsdale should negotiate a better deal than the one on the table with the SCC. Scarsdale should require the SCC to raise a greater amount of funds from its membership. Additionally, will the SCC founding membership stand up and be accountable for their projections by having the founding members commit in writing to maintain their SCC memberships until the SCC achieves a projected positive cash flow of $830,000 after debt service and 10% contingency expenses as projected in year five? If not, then how can we be comfortable that the SCC projections are accurate? Scarsdale should not sign up to a financial transaction where heads the SCC wins and tails the entire community loses

Michael Goldberg
26 Broadmoor Road