KFC Yum! Center Lease: Problems from 2011 Still Exist in 2012

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This article was originally written last year when there was some debate as to where a potential Louisville NBA team would play, at the new KFC Yum! Center or at a renovated Freedom Hall.  Unfortunately, unless the Louisville Arena Authority can re-negotiate the arena lease with the University of Louisville Athletic Association, everything in the article still rings true.

From February 16, 2011:  In the wake of J. Bruce Miller’s meeting with NBA Commissioner David Stern, there seems to be a lot of on-line and bar room chatter expressing disapproval of the current plan to house a potential Louisville team at venerable Freedom Hall instead of the new palatial digs of the KFC Yum! Center.

Folks, unless there are dramatic alterations in the current lease between the Louisville Arena Authority (LAA) and the University of Louisville Athletic Association (ULAA), it just ain’t happening; not a snowball’s chance.  Rest assured the pursuit team is not comprised of a bunch of dunderheads unaware of the new arena on Main Street, rather their hands are tied.  While the KFC Yum Center may well be the nicest basketball arena in all the land and an obvious choice to act as co-home to a professional franchise, UofL has a legal stranglehold on every revenue stream generated by the arena.  An NBA team simply could not be profitable under the current lease conditions.

Eric Crawford of the Courier-Journal was the first to point this out in a blog post right after the UofL lease was publicly released in July 2008.  Mark Story of the Lexington Herald-Leader also mentioned this in a blog post in November 2010 when the Kings-to-Louisville story was making noise.

Clearly, Tom Jurich is one helluva negotiator.  The sweetheart deal he secured on behalf of UofL is certain to keep an NBA team out of the KFC Yum! Center for the foreseeable future.

Between May 17-20 of this year, the Staples Center in Los Angeles hosted four NBA playoff games and two NHL playoff games.

Logistically, it could easily work.  Of 31 NBA franchises, 14 are co-tenants in their home arenas with either an NCAA basketball team or an NHL team, and in some cases both.  In Los Angeles, the Staples Center hosts two NBA teams and an NHL team.  But it won’t happen here.

The 48-page lease is publicly available on the Louisville Arena Authority website.  When you break it down, there are four massive roadblocks preventing an NBA team from co-existing with UofL at the KFC Yum! Center:

1) Section 3.2(c): Branding

The Arena will contain in appropriate locations ‘branding’ for the University’s athletic programs, including, without limitation, the Basketball Teams [UofL Men’s and Women’s teams]. Tenant [UofL] will approve all colors, logos, marks, Signage, and banners used by Landlord [LAA] inside and outside the Arena….Landlord will not take any action that is inconsistent with the “branding” of the Arena for the University’s athletic programs.

While the KFC Yum! Center may be owned by the Louisville Arena Authority and managed by the Kentucky State Fair Board, for all intents and purposes, it is a University of Louisville facility.  The lease dictates that all ‘branding’ of the arena be approved by UofL.  The LAA complied with this to the point of stitching and etching Cardinal logos onto seats, floors, walls and toilet stalls.

Last month, Forbes determined the average NBA franchise valuation to be $369million.  No NBA team—nor any half billion dollar company—would accept a lease that, in effect, prohibits it from branding itself inside and outside its home building.

2) Section 4.2(a)(b): Times and Use of Scheduling Priority

UofL does not have to submit its final schedule to the LAA until September 15th of each year.  The NBA releases its schedule in early August.  Additionally, UofL gets “priority to use” the arena for practice.  The LAA does not have “…any right to use the locker rooms, the training rooms or coaches’ offices at any time.”

Of small solace,

Landlord [LAA] may use the practice court area for NCAA purposes or other purposes, if approved in advance in each case by Tenant [UofL] in writing.

In addition to controlling the branding of the arena, UofL also controls the scheduling priority to a degree that would prohibit an NBA team from being a co-tenant.

3) Section 5: Private Suites and Party Suites

Except as provided in Section 5.1(b), Tenant [UofL] shall have the exclusive use and control of the Private Suites at all times during the term.

And what does Section5.1(b) exclude?  It excludes six of the 71 private suites, which are reserved for use by the LAA, albeit with some caveats—

Landlord [LAA] will reimburse Tenant [UofL] for the then-current license fees for all such reserved Private Suites used by Landlord, and Landlord will also purchase men’s basketball season tickets for all seats in such reserved Private Suites.

If suite licensees do not purchase tickets to non-UofL events, as per the lease, those suites must remain closed.

Of the four party suites, UofL will have “nonexclusive use and control during the Term.” However,

Landlord [LAA] shall decorate the Party Suites, but all decoration shall be consistent with the ‘branding’ of the Arena for the University’s athletic programs as provided in Section 3.2(c).

Even the suites not directly controlled by UofL will be branded as UofL suites.

Tenant shall have the exclusive right to market, license and assign the Private Suites to all individuals or entities, including Landlord [LAA], and all revenue generated in connection therewith shall be retained by Tenant [UofL].

Yep, you read that correctly:  UofL keeps all of the private suite revenue.  As is, UofL does not have to share any of the suite revenue with the LAA, yet alone another potential co-tenant.

4) Section 7(g): Signage and Sponsorship

There are lots of problems here for a potential NBA co-tenant. First, UofL gets

…10% of the Permanent Signage inventory inside and outside the Arena, for use by Tenant [UofL], in locations to be agreed upon by Tenant and Landlord [LAA], and the revenues generated from this Signage will not be shared with the Landlord.

So right off the bat, UofL controls 10% of all signage.

Of the remaining 90% of signage inventory, UofL will collect 50% of the revenues, excluding the exterior video boards of which UofL will collect only 33.3% of the revenues.  These are extremely generous terms given the fact that UofL also has

…exclusive right to market, sell and retain 100% of the revenue received from University-sponsored Event Signage and University-sponsored Event Sponsorships.

As if that were not generous enough, UofL also controls the gift shop.  In addition to “The University, its colors, themes, etc…” being the “central theme” for the gift shop, UofL receives 50% of all rental payments/commissions, as well as

…50% of any additional merchandise revenue received by Landlord [LAA] from any source other than the Gift Shop, including without limitation the sale of merchandise at concerts, NCAA events, ice shows, or other non-University-sponsored Events.

I’m no law dog, but that reads as though UofL just collected 50% of the LAA`s share of the Kid Rock t-shirt my friend bought.

The fine print of the current contract funnels almost all arena revenues to UoL.

What does this all mean?  In a nut shell, UofL makes a lot of money off of the arena, regardless of whether they are actually playing on any given night.  Again, while the Louisville Arena Authority may own the building and the Kentucky State Fair Board manages it, the revenue streams generally flow into UofL coffers.

Once again, it ain’t gonna happen at the KFC Yum Center for an NBA team, unless UofL decides to voluntarily play the role of a good community citizen and re-negotiate a more equitable co-tenancy lease.  Given AD Tom Jurich’s public statements so far, this is unlikely to happen.  And who could begrudge him from a purely business standpoint?  Head Coach Rick Pitino is even less inclined to be flexible here.

With that said, the tenancy of the arena is tenuous.  Both the UofL men and women are drawing extremely well right now with the men averaging 21,678 over 18 home games and the women averaging 11,058 over 13 home dates—including two games of 22,000+.  While the men’s attendance figure is expected, the women’s attendance figure is phenomenal considering UofL struggled to draw just a couple thousand to women’s games five years ago.  AD Jurich and Head Coach Jeff Walz deserve all kinds of kudos for this.  Are these figures sustainable?  Let’s hope so.  However, UofL has been very aggressive in selling women’s tickets at low prices (single-game tickets are currently listed on the UofL Athletics website at $7 and $5 per game).  Based on these prices, the revenues are not nearly as high as they might initially seem.

Can these figures alone sustain the debt service on the arena bonds?  That remains to be seen, especially considering the tax-increment financing district around the arena has produced only a fraction of the expected revenue.

Further keep in the mind that UofL pays the LAA only 10% of gate or $10,000 per men’s home game and 5% of gate or $5000 per women’s home game, whichever is higher.  Again, UofL earns the lion’s share of the revenue here.  Big-time national promoter AEG is contracted to bring in non-UofL entertainment and has brought in a handful of high-profile acts that have previously bypassed Louisville.  However, there must be many more events booked into the arena to increase revenues.

There are a lot of empty nights upcoming that do not produce any revenue at all.  It sure would be nice to have a third tenant playing 40+ dates per year in front of crowds of 22,000 a night.

While UofL must be exceedingly happy with their lease, what happens if the arena doesn’t generate enough money to pay the debt service?  The City of Louisville is on the hook.  The $339 million in bonds issued to build the arena results in total debt obligations of $573 million over the next 30 years.  It would behoove everyone, particularly the LAA and the City, to reconsider the terms of the lease and consider both the advantages of having a co-tenant and the disadvantages of not having one.

Given the public stance by UofL so far, the pursuit group must act on the assumption that the KFC Yum Center is not an option for an NBA franchise. Therefore, under the current scenario for bringing a franchise to Louisville, the ownership group would pay to refurbish Freedom Hall.  Once that’s done, it would be too late for an NBA team to come to the rescue should the KFC Yum Center falter financially.

And this lease runs through 2044.  Not good.

Again, this was from February 16, 2011.  However, unless the LAA can re-negotiate the lease with the ULAA, nothing has changed.  It is now known for certain that the current financial model does not work.  The arena TIF district needs to generate more revenue.  Tenanting is the solution to this problem.  And who would make an ideal co-tenant with UofL?  An NBA team.