Louisville Arena Authority Offers Bizarre Reassurance

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Louisville Arena Authority Chairman Larry Hayes expressed confidence in arena finances today relying on a bizarre strategy of primarily maintaining the status quo, according to a WHAS11 report by Joe Arnold.

According to Arnold’s report, he told the Louisville Arena Authority members that he’s “excited about the future” and has “every reason to believe” that the arena tax increment financing (TIF) district revenues will be substantially better.

Keep in mind that 2011 TIF revenues came in at $2.1 million—only 31.3% of the expected $6.7 million in revenues.  And according to original financing projections, 2012 TIF revenues were projected to be $14.9 million, but according to Insider Louisville are now projected to bring in less than $6 million—less than 40% of plan.  Of course Hayes is only expecting a substantially better increase as opposed to actually meeting financial projections.  So how does this inspire excitement, Mr. Hayes?

The only way to drive TIF revenues is to increase the number of events in the arena thereby driving more traffic into the bars and restaurants surrounding the KFC Yum! Center.  An NBA team would be an ideal fit as a co-tenant with UofL.  Pretty simple stuff here.

The LAA would apparently rather have the KFC Yum! Center sit empty than try and make it work with both UofL and a potential NBA team.

In his defense, he does answer his own hypothetical question regarding a potential NBA team in Louisville.

Would an NBA team be great to have in Louisville, Kentucky?  Sure.

But he then goes on to shoot down the idea.

I don’t know exactly what that number is, but I suspect there are not enough (open arena dates) to be able to support 50-60 game or whatever it would schedule for an NBA team.

The NBA has had a 41-game home schedule since 1967-68, not 50-60 games; playoff games would be six weeks after UofL’s home season ends.  It would be much more comforting if he didn’t “suspect” things and actually did his homework.

He continued.

We happen to have an anchor tenant that has sold every ticket for every ballgame since the early ‘70s.  It’s called the University of Louisville.

Again, a bit of homework might be in order here.  According to the 2011-12 Louisville Basketball Media Guide, after Freedom Hall was expanded to 18,865 seats prior to the 1984-85 basketball season, UofL averaged 100% attendance in 16 of 26 seasons; prior to the expansion, UofL never averaged 100% attendance in the smaller 16,664-seat Freedom Hall.  This is by no means a knock on UofL as the Cardinals have ranked in the top five in NCAA attendance every year since 1983-84, and in the NCAA top ten every year since 1976-77.  In their two seasons at the 22,000-seat KFC Yum! Center, the Cardinals have averaged 21,832 and 21,503 fans per game–over 98% of capacity and third nationally both years.

These attendance numbers are phenomenal, but to claim that every ticket for every ballgame since the early ‘70s is more than just a stretch, it’s either misinformation or disinformation.

Let’s be perfectly clear:  The University of Louisville deserves its fantastic new home.  Without a doubt, the Cardinals program has been one of the top ten college programs in the country since the early 1970s, if not earlier.  But do they have the right to keep other potential tenants out of a publicly-owned building?

According to Hayes, yes, because it’s good business.  Based on his discussions with numerous investment banks, he claims he was told that a commitment from an NBA team is worthless to said banks when it comes to financing arenas.

Goldman, Citibank, JP Morgan, they all said the same thing.  If your anchor tenant is an NBA team, you have a situation where if the people don’t come to support it, if the owners aren’t happy with how the arrangement is working our for them, they have mobility and can leave.

This is patently absurd and breaking news to the rest of America as arenas across the nation have been financed with NBA teams as primary tenants, who provide far more dates and revenues than the most successful college program ever could.

So according to Hayes, the arena could only be financed if UofL agreed to be the anchor tenant and, as such, UofL negotiated a sweetheart deal to serve as said anchor tenant.  Despite the fact that the arena financial model is now obviously unsustainable, he sees no need to revisit the lease.  Is this more Wall Street advice?

As for NBA teams having unfettered mobility, this is even more ridiculous.  Teams only have mobility at the end of their leases as early departure penalties are routinely negotiated into arena contracts.  For example, take two franchises with currently hazy ownership situations that would be very difficult to relocate.  The Memphis Grizzlies are tied to the FedEx Forum until 2021 unless they want to pay a $63.2 million escape penaltyThe Atlanta Hawks have even harsher conditions as they would have to pay off the remaining $123.5 million in arena bonds plus a $75 million early departure penalty to leave Philips Arena before 2019.  And just how much is that?  To put it in perspective, according to Forbes magazine, the average value of an NBA franchise in 2012 is $393 million.  Leaving an arena after a few years would be financial suicide for almost any franchise.

The idea that NBA teams come into town, raid the arenas of revenues and then move on is ridiculous.  Given that only four NBA teams have relocated since 1985,  Hayes’ argument sounds of disinformation.  Then again, given the generous terms the Louisville Arena Authority gave UofL, perhaps the LAA would not have the foresight to negotiate and early departure penalty in a potential lease with an NBA team.  Their track record certainly does nothing to warrant any such confidence.

To wit, Hayes labeled raiding the arena maintenance fund as “prudent” over borrowing money to meet debt payments.  While true, a more comforting answer would have been a long-term plan to fix the revenue problem, not support of the status quo.

Metro Council President Jim King weighed in and told folks not to worry.

The maintenance fund is just an arbitrary number that was picked and no one ever did the math and said, ‘This is what we’re going to need to do and this is what we’re going to need to repair.’  It was just a nice round number that was picked.

He actually said that.  Thank goodness, no one likes math anyway.  However, most people–math haters or not–thought that the maintenance fund was actually for…maintenance.  Given that Mr. King is a banker and experienced in due diligence, this is a bizarre statement of reassurance.

Oddly, despite all this excitement and reassurance, the arena’s Chief Financial Officer explained the arena is still operating at a net income loss.

Council President King went on to explain that things were not set up correctly when the arena opened.  Now that AEG has replaced the Kentucky State Fair Board as arena manager, things will be all hunky dory.

I don’t think there is any question that there will be more events and more concerts and more dates here because we have set up a model where the operator of the arena has incentive to accomplish that.  They make more money if we make more money and that’s the way it should have been set up to begin with.

Glad you noticed that two years into operation as opposed to during the financing stage of planning.  However, Arnold quickly points out that the way the arena was set up to begin with leaves little if any room for an NBA team.

Fortunately, Hayes responds that Freedom Hall is available.

So instead of two teams sharing a state-of-the-art arena as is done in 14 other cities, Hayes would rather have an NBA team play in Freedom Hall–which would be in need of $80-100 million in upgrades to bring the venerable arena up to NBA standards–than the KFC Yum! Center where NBA fans would be filling up bars and restaurants before, during and after games generating revenues within the TIF district to pay down the bonds used to construct the arena, as per the arena financing plan.

So, in a nut shell, Hayes and King have admitted that the original arena financing plan was not well thought out and did not provide incentive to maximize revenues.  Yet they are both confident things will get better by making minor tweaks to the management of the arena while hoping for the best with regards to TIF revenues.  All while acknowledging that an NBA team would be good for the city, just not at the KFC Yum! Center–the facility that is in most need of another anchor co-tenant.

For some odd reason, none of this seems to generate excitement or reassurance.