As has long been speculated by many, Moody’s finally downgraded the Louisville Arena Authority’s debt to junk bond status last month. It wasn’t just a one-notch downgrade, but a double-notch downgrade from Baa3 to Ba2, two rungs below prime. The decision was due mostly to the limited arena revenue streams and the repayment model.
With the stark realization that the KFC Yum! Center business model ain’t cutting the mustard, the Louisville Arena Authority (LAA) is meeting today to try and figure out what’s next. They had better come up with something good as the city of Louisville is facing a serious dilemma because the city is ultimately responsible for repayment of the $349 million in bonds used to pay for construction of the arena. When interest is added to the principle, the bondholders are owed $573 million. Either Louisville pays this amount or defaults on the bonds, which really isn’t an option as it would destroy the city’s credit rating. However, reduced city services to make up the shortfall could be a real possibility.
Cutting costs and re-negotiating the arena lease with the University of Louisville Athletic Association (ULAA) is a start. As Insider Louisville first reported back in March, Global Spectrum may be in negotiations to replace the incompetent Kentucky State Fair Board as arena manager (Leo Weekly publicly aired the dirty laundry surrounding the Fair Board’s incestuous dealings last month).
Becoming more efficient and cutting costs would be a very good thing for the KFC Yum! Center, but this is not just a bottom line issue. The city and LAA must figure out how to grow the top line.
With the ULAA getting the majority of arena income, the LAA was supposed to get its revenue to repay the bonds from the tax increment financing district (TIF) in the area surrounding the arena, which in actuality is most of downtown as the TIF creators were very generous in stretching out the TIF. Despite this generosity, the arena TIF district generated only $2.1 million in 2011 versus the forecasted $6.7 million. Add in operating costs double what were forecasted and arena finances are perilous by any sense of the definition.
Obviously, increasing revenues generated from within the arena TIF district is the key, and the success of the TIF is directly tied to the tenancy of the arena.
The area surrounding the arena already has the foundation of a fantastic entertainment district. Pre-arena places like Bearno’s by the Bridge, Connection, Harley’s Main Street Tavern, Prime Lounge, Stevie Ray’s and Devino’s Deli have been joined by the likes of Bluegrass Brewing Co., Doc Crow’s, Hillbilly Tea, Impellizerri’s, Jeff Ruby’s, Patrick O’Shea’s, Sol Aztecas and Troll Pub Under the Bridge. This is exactly the type of organic growth anticipated as the result of building the new arena downtown.
Unfortunately, there hasn’t been enough of it. And it’s not the fault of local business owners. There simply haven’t been enough events in the arena to justify opening more places within the arena TIF district. These aforementioned pioneers and early investors in the arena TIF district have been thrilled with sales on game and concert nights, with tables and bar stools filled and lines of customers waiting the enter. However, many of these establishments after the lunch rush resemble ghost town saloons when there are no evening events at the arena.
AEG has done a great job of booking major concerts into the arena and both the UofL men’s and women’s teams have drawn extremely well, but the LAA needs to figure out how get more events in the arena bowl that, in turn, will drive more people into the arena district that, in turn, will increase the TIF revenues used to pay down the bonds. Seems pretty simple.
So how can the LAA schedule more events into the arena? An NBA team would certainly make a nice co-tenant with UofL. The ULAA needs to realize that sharing the arena is not a zero-sum proposition. An additional 40+ nights per year with 22,000 fans spilling into the arena district could very well be just the impetus for a second wave of organic investment in the burgeoning arena entertainment district.
A season’s worth of NBA home games at the KFC Yum! Center would provide a critical mass of somewhere between 800,000-1,000,000 fans spilling into the streets before, during and after games between October and June. With this scale of potential customers, a lot of the stalled development activity downtown would resume and new concepts imagined and opened. The Whiskey Row block and other properties in the arena TIF district are screaming for redevelopment and are perfectly suited for bars, restaurants and/or nightclubs.
Within years, one could imagine disparate downtown activity centers converged into a single urban streetscape connecting Fourth Street Live to Main Street, through Whiskey Row and the arena district, on down to Slugger Field and into Butchertown and Nulu as development in these various districts synergizes. With this type of scale, downtown Louisville would become an entertainment center in and of itself— an entropic incarnation rather than master planned. Based on early investment in the district, most of the places would be locally-owned establishments as opposed to national chains, which would keep more of the money spent in the district in the local area all while filling the arena TIF coffers.
Is this possible, possibility city notwithstanding? Many will claim it is not and merely pure fantasy. It is possible, but it begins with tenanting the arena with more than 20 men’s college basketball games, 20 women’s college basketball games and whatever concerts can be squeezed in between UofL games and practices. Regardless of how one feels about the NBA or having a team in Louisville, having a team at the KFC Yum! Center is the single most logical solution to a serious problem befalling the city. The arena business model is already broken. The solution is simple: more events mean more fans spending money in the arena TIF district and more arena revenues, which will close the frightening gap between projections and performance of the TIF.
Logistically, it’s easy—yes, easy. The Staples Center in Los Angeles hosted four NBA playoff games and two NHL playoff games over a period of four days last month. If the Staples Center can pull that off, there is absolutely no reason that the KFC Yum! Center could not accommodate both an NBA franchise and UofL.
Many will counter that driving people into the arena TIF district will simply shift discretionary entertainment spending from one area of Greater Louisville to another. While this is true, it is also a fact of life. Government decisions ranging from highway exit ramps to bridge locations cause the same shifts in discretionary spending, not to mention grand government schemes such as urban renewal. Our very own Colonel Harlan Sanders knew a thing or two about this.
The fact of the matter is that paying back the arena bonds depends squarely on the revenues generated by the arena TIF district. While it may not be a very comfortable bed, it is the one Louisville had made for itself.
With or without an NBA team sharing the arena, the ULAA will eventually have to come to the realization that this lease is unsustainable for the city of Louisville and can choose to either participate in the solution or obstruct it. UofL deserves their fantastic new home, but it needs to be paid for. With regards to their home court, the ball will soon be in their court.
As for finding an NBA tenant, that’s a whole ‘nother story. The city needs to decide to either go for it or maintain the status quo and hope the LAA can pull a rabbit out of a chicken bucket.