Letters to the Editor

Letter to the Editor | Who’s responsible for operating expenses at Madrona?

In Part I, I addressed the situation between PenMet and the Tyson family.  In Part II, I addressed who’s responsible for capital improvements (which might have surprised some people).  In Part III, I discussed the power of Eminent Domain.  In this Part IV, I am addressing the distinction between an operating expense and a capital expenditure and sharing my belief about who’s responsible for operating expenses.

In the 1977 lease, the Tyson family (the “Tysons”) was responsible for the operating expenses such as salaries, routine maintenance, utilities, etc.  However, under the sublease between the Tysons and Stutsman, it became Stutsman who assumed responsibility for all operating expenses.  This did not relieve the Tysons from their responsibilities to PenMet as PenMet has noted in its Notices of Default.  If Stutsman fails to pay any operating expense, the Tysons would have to pay them to satisfy their obligation to PenMet.  The Tysons would then have the right to demand that Stutsman reimburse them.  PenMet was aware, by its consent to the Stutsman sublease, that the Tysons would be looking to Stutsman to pay the operating expenses going forward.

Let’s go back to the 1977 lease to see what is said about operating expenses in paragraph 10:

The Lessee agrees to keep and maintain the leased premises in good condition and repair, and at the expiration or termination of this lease, Lessee shall return the leased premises, together with all structures, facilities and improvements thereto, except business fixtures and equipment, to the City in good condition and repair, reasonable wear and tear and damage by fire or unavoidable casualty excepted.

All that follows is just my opinion.  As a general rule, any expenditure that meets the standard of keeping Madrona “…in good condition and repair…” would be a normal operating expense and Tyson’s responsibility.  However, that responsibility was assumed by Stutsman in his sublease with the Tysons.

Here are three questions to ask about every expenditure:

• Is an “asset” being acquired?  If “no, “then expenditure is an operating expense.  If a plumber repairs a toilet, there is nothing being “acquired” so there can be no “asset.”
• Is the “amount” material?  Even if an asset is acquired, if the cost is not material, then it’s an operating expense.  You wouldn’t capitalize a box of pencils.
• Is the asset’s “useful life” beyond the current accounting period?  If the asset will only last for a day, a week, a month, or a few months, then the cost is an operating expense.  You wouldn’t capitalize $500 of toilet paper if you expect to use it all before the end of the year.  “Useful life” is determined by assuming all necessary maintenance to achieve that useful life is being done.  If it’s not, then it becomes deferred maintenance.

With these questions mind, let’s look at the deficiencies:

For Trees, Tee Boxes, Fairways, and Fairway Aerification, there is no asset being acquired which makes all of these operating expenses.

New Cart Paths would be a new asset.  The existing surface needs to be removed, the tree roots addressed, and a new surface installed.

Better Drainage:  If the drainage system involves components, as opposed to moving dirt, then I would say this is a capital expenditure.

Bunkers:  If a new bunker is installed, then this is a capital expenditure.  If only existing bunkers are addressed, then it’s an operating expense.

Ponds:  If a new pond is installed, then it’s a capital expenditure.  If only the existing ponds are addressed, then this is an operating expense.

New Irrigation:  What’s contemplated is a large expansion of the existing system so I say this is a capital expenditure.

Clubhouse:  This depends on what is being done.  An entirely new HVAC system would be the acquisition of an asset and a capital expenditure.  If only existing structures or systems are being addressed, then that would be an operating expense.

Note:  The capital expenditures for PenMet’s acreage would be PenMet’s responsibility.  Capital expenditures relating to ZTM’s 14 acres would be ZTM’s responsibility.

Stutsman, by the terms of his sublease, needs to address the operating expenses which are, essentially, deferred maintenance.  The capital expenditures would be allocated based on where assets being created are located.  If they are on PenMet’s acreage, then PenMet should be paying for them.  If they are on ZTM’s acreage, then ZTM should be paying for them.  Important to donate that the Tysons have, effectively, donated the use of their 14 acres to Madrona.  There is no lease in effect that I am aware of.

Craig McLaughlin

Fox Island   

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