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Updated: Denis Frankenberger: 'KFC Yum! Center ultimately will default under the current U of L/Arena Authority lease'

by Terry Boyd

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(Editor’s note: This story was updated at 1 p.m. on January 31 with additional reporting at the end of the post.)

Denis Frankenberger doesn’t have an issue with KFC Yum! Center per se.

“I’m all for it,” said Frankenberger, a Louisville businessman. “I love it. I think Louisville deserves it.

“But it doesn’t have to be a financial albatross.”

Which is what his numbers tell him it is, said Frankenberger, the former president and CEO of Advance Machinery Co.

Frankenberger as become one of the highest-profile critics of the Louisville Arena Authority and its deal with the University of Louisville to lease KFC Yum! Center.

A deal he argues ultimately will result in a default as losses grow too large to be covered by state and local governments.

The seeds of financial destruction were planted during the beginning of the project, he said. Overly optimistic projections that were part of the bond prospectus, along with what he sees as an overly generous lease terms for U of L, precludes any chance of the arena generating sufficient revenue to help pay the debt obligation, Frankenberger said.

In that initial bond prospectus, revenue projections for the Tax Incremental Financing district created to help service arena debt, forecast an aggregate increase of 297 percent between 2010 and 2018, Frankenberger said.

Instead, TIF revenue has not reached 50 percent of 2008 projections. (See accompanying chart.)

Denis Frankenberger

“What it appears to me happened is that in Frankfort, they calculated what they needed to get to that (debt service) number, then just worked backward.”

In a 38-page “white paper” Frankenberger just authored and will present at a news conference this morning, he uses somewhat unorthodox accounting methods to prove his points.

For example, in his research, Frankenberger estimates that KFC Yum! Center costs $92,000 per day to operate.

Obviously that’s far more than salaries and the light bill.

Frankenberger builds into his calculation the negative amortization of servicing the debt on the downtown arena, which wouldn’t be the case in actual accounting practices.

But Frankenberger insists that’s the real cost of doing business there: “Listen, I ran a business for 33 years, and I had to figure in interest as an expense.”

He sold Advance Machinery Co. in 1997 to G.E. Capital, the financial services subsidiary of General Electric Co. He has since been involved in public issues, including the sale of the Drummond Estate and the East End Bridge project.

Frankenberger says he brings a business owner’s sensibility to trying to figure out how the finances for the 22,000-seat arena turn out for taxpayers, who have covered revenue shortfalls since 2010.

Except using Frankenberger’s research, the total bill over 40 years comes to $839 million, a figure he quotes from the original bond prospectus for the arena. (See the data from all the bond tranches above.)

Much of the white paper cites earlier reporting from the Courier-Journal and Insider Louisville as sources.

Frankenberger says his somewhat unorthodox layout of the arena’s financial picture is an effort to put it in “now I get it” terms that the public has yet to see.

Some key numbers (which aren’t calculated in the same fashion as others we have reported earlier) in his report include his findings on the arena:

• Lost more than $50,000 per day during 2011

• Lost more than $37,000 per day during 2012

• For each U of L men’s game the Arena Authority incurred a $33,235 loss

• For each women’s game the Arena Authority incurred a $87,624 loss

• For each “Other U of L sponsored event” the Arena Authority incurred a $ 87,624 loss

• For 2011, Frankenberger calculates an $18 million loss.

For the record, we scanned Frakenberger’s math and found some of his calculations hard to follow, particularly in how actual TIF revenues factor into his projections. But as I wrote earlier this month, I find most of the accountancy around the arena issue muddled at best.

In his paper, Frankenberger’s recommendations include Kentucky and Metro Louisville governments requiring the lease be renegotiated by a reconstituted Arena Authority board and University of Louisville Athletic Association.

Update:

At his press conference this morning at the Marriott Hotel Downtown, Denis Frankenberger presented findings from his White Paper including his conclusion that the KFC Yum! Center and the surrounding taxing district are unlikely to service the bonds issued to finance it. Frankenberger elaborated on the origins of his concerns about arena finances, saying it started when Moody’s downgraded the arena debt to junk status in May, 2012 despite the optimistic reports from the mainstream media. When he began his own research, he said, he had difficulty getting access to Louisville Arena Authority financial documents, documents he believes should be public domain. But Frankenberger quickly found that arena officials believe the authority and the arena are private business entities. “I sent a letter to (Metro Council President) Jim King asking the city mandate the arena have more transparency. He replied that would have no lawful effect on the board. That it is a private company.”

 

Recent Stories from Terry
  • Stunoland

    The accuracy of the toll revenue projections for the Ohio River Bridges project are just as inflated as the arena TIF district projections. Unfortunately the stakes are much higher. The people responsible for the backwards and regressive ORBP are fully aware of this fact and have included provisions that dismantle the inevitable financial time bomb. The Beshear/Daniels memorandum of understanding specifically allows for tolls on the Sherman-Minton bridge as well as any other points deemed necessary.

  • Stunoland

    The accuracy of the toll revenue projections for the Ohio River Bridges project are just as inflated as the arena TIF district projections. Unfortunately the stakes are much higher. The people responsible for the backwards and regressive ORBP are fully aware of this fact and have included provisions that dismantle the inevitable financial time bomb. The Beshear/Daniels memorandum of understanding specifically allows for tolls on the Sherman-Minton bridge as well as any other points deemed necessary.

  • Cruke Duise

    No one has yet to explain how reworking the UofL lease (presumably to attract an NBA team) will solve the arena finances. If you look at similar sized NBA cities (i.e., New Orleans, Memphis), the tenant pays nothing. I get the nebulous benefit of attracting an NBA to to market Louisville as an international city. But how does that solve the finances?

    I suspect the short answer is, it won’t.

    I’ve read that to solve the Yum Center problems, the UK/UofL pettiness would have to be put aside. I agree. And that is exactly why it won’t be solved. You cannot only blame UofL and its supporters on this because UK and its supporters are equally complicit in the matter. UofL has undoubtedly surpassed UK in terms of athletic performance. Instead of improving, UK and its supporters seem intent on trying to bring UofL down.

    My experience is that most objections to the lease with UofL is predicated on the local government’s perceived “support” of a program that those objecting do not support. Of course, those objecting to the arena lease seem less outraged about the economic benefit UofL and its athletics provide to the community. They also do not seem to have a problem with UK’s deal with the city of Lexington for Rupp Arena, or the historical support the Commonwealth of Kentucky, the poor state that it is, has given to UK athletics. But I digress.

    The arena is built, and is going nowhere. UofL is in the driver’s seat. I’ve seen commentary by UK fans to the effect that UofL’s preclusion of UK playing in the Yum Center has driven some of their angst. But if Calipari, UK, and their collective superiority complex would quit insisting UofL doesn’t exist (which is ironic given the fact that UofL is by any measure a more successful athletic department), I would imagine UofL’s attitude toward UK might be different.

    So, until someone can come up with a realistic plan to shore up the Yum Center’s finances (and I am extremely suspect that landing an NBA tenant would do anything on that front), it would be wise to quit poking the one entity that does contribute to its finances in its eye.

  • Cruke Duise

    No one has yet to explain how reworking the UofL lease (presumably to attract an NBA team) will solve the arena finances. If you look at similar sized NBA cities (i.e., New Orleans, Memphis), the tenant pays nothing. I get the nebulous benefit of attracting an NBA to to market Louisville as an international city. But how does that solve the finances?

    I suspect the short answer is, it won’t.

    I’ve read that to solve the Yum Center problems, the UK/UofL pettiness would have to be put aside. I agree. And that is exactly why it won’t be solved. You cannot only blame UofL and its supporters on this because UK and its supporters are equally complicit in the matter. UofL has undoubtedly surpassed UK in terms of athletic performance. Instead of improving, UK and its supporters seem intent on trying to bring UofL down.

    My experience is that most objections to the lease with UofL is predicated on the local government’s perceived “support” of a program that those objecting do not support. Of course, those objecting to the arena lease seem less outraged about the economic benefit UofL and its athletics provide to the community. They also do not seem to have a problem with UK’s deal with the city of Lexington for Rupp Arena, or the historical support the Commonwealth of Kentucky, the poor state that it is, has given to UK athletics. But I digress.

    The arena is built, and is going nowhere. UofL is in the driver’s seat. I’ve seen commentary by UK fans to the effect that UofL’s preclusion of UK playing in the Yum Center has driven some of their angst. But if Calipari, UK, and their collective superiority complex would quit insisting UofL doesn’t exist (which is ironic given the fact that UofL is by any measure a more successful athletic department), I would imagine UofL’s attitude toward UK might be different.

    So, until someone can come up with a realistic plan to shore up the Yum Center’s finances (and I am extremely suspect that landing an NBA tenant would do anything on that front), it would be wise to quit poking the one entity that does contribute to its finances in its eye.

  • Kyle Nichols

    I’m confused. What does this have to do with UK? UofL negotiated a great lease with the Arena Authority and they should be applauded for that. Sadly, those terms they negotiated were not favorable for the arena’s finances or in the taxpayers best interests. As a taxpayer, I just want this arena to be successful and help the downtown area grow to it’s potential. As it stands, the terms will not accomplish that and UofL refuses to renegotiate those terms. Where at any point is UK or Calipari involved in this matter?

  • Kyle Nichols

    I’m confused. What does this have to do with UK? UofL negotiated a great lease with the Arena Authority and they should be applauded for that. Sadly, those terms they negotiated were not favorable for the arena’s finances or in the taxpayers best interests. As a taxpayer, I just want this arena to be successful and help the downtown area grow to it’s potential. As it stands, the terms will not accomplish that and UofL refuses to renegotiate those terms. Where at any point is UK or Calipari involved in this matter?

  • Cruke Duise

    I’m just sharing my personal experience on the discussion – as to who is on what side and why. The reasons I’ve seen stated for a position and whatnot. The UK/UofL pettiness that permeates this state, and Jefferson County in particular, is absolutely an undercurrent in the entire discussion.

  • Cruke Duise

    I’m just sharing my personal experience on the discussion – as to who is on what side and why. The reasons I’ve seen stated for a position and whatnot. The UK/UofL pettiness that permeates this state, and Jefferson County in particular, is absolutely an undercurrent in the entire discussion.

  • Fox_Trot

    Mr Jurich served his employer well and negotiated a superb contract. I laud him for that. Too bad for we taxpayers that our elected officials did not look out for our interests with equal vigor.
    The reason an NBA team would help is not the tenant revenue, but the Occupational Tax and State Income taxes taken in from the visitors payroll. Whether it would be sufficient to make up this shortfall, I do not know. Whatever it may be would be better than we have now.

  • Fox_Trot

    Mr Jurich served his employer well and negotiated a superb contract. I laud him for that. Too bad for we taxpayers that our elected officials did not look out for our interests with equal vigor.
    The reason an NBA team would help is not the tenant revenue, but the Occupational Tax and State Income taxes taken in from the visitors payroll. Whether it would be sufficient to make up this shortfall, I do not know. Whatever it may be would be better than we have now.

  • TheIzzone

    I love the Yum Center and have been there multiple times to watch the Cards play. As a Michigan State fan living in Kentucky I do hear about this and some of the problems. What I have heard and I do not know if all true is that UofL has a lot of the power when it comes to dates the Yum Center can use like they have to approve events on the day before and after a UofL event like a basketball game. Also, if the Yum Center has a concert UofL gets a pretty good percentage of all the profit for all even non UofL events. So while the Yum Center is going under UofL is making record profits. I think that is what most people are concerned about.

    Then as with Rupp and Uk getting money from the State of Kentucky you may have some facts incorrect. I do not know everything but UK does not have as much say in what goes on in Rupp Arena and UK does not make a profit off Lexington taxpayers for every event at Rupp. In short the contracts with UK and Rupp are completely different and do not burden the tax payer in Lexington. Then also, the state of Kentucky does not give UK any more money than any other public university. For example the new Commonwealth Renovations is all Athletic department funded and will not take one cent from the tax payers of Lexington or Kentucky.

    Finally, with an NBA team coming to Louisville I do not know if it will
    completely fix the financial situation but I do know it could not hurt. I do
    not see how another 40 events a year would not help at least the city of
    Louisville and the Yum center. Also I would like an NBA team is because where I live the nearest NBA team is either Indiana or Atlanta and I would really like to go to multiple games every year. Maybe even an NBA team in Louisville could bring the two fan bases together and show why the state of Kentucky does have some of the most passionate basketball fans.

  • TheIzzone

    I love the Yum Center and have been there multiple times to watch the Cards play. As a Michigan State fan living in Kentucky I do hear about this and some of the problems. What I have heard and I do not know if all true is that UofL has a lot of the power when it comes to dates the Yum Center can use like they have to approve events on the day before and after a UofL event like a basketball game. Also, if the Yum Center has a concert UofL gets a pretty good percentage of all the profit for all even non UofL events. So while the Yum Center is going under UofL is making record profits. I think that is what most people are concerned about.

    Then as with Rupp and Uk getting money from the State of Kentucky you may have some facts incorrect. I do not know everything but UK does not have as much say in what goes on in Rupp Arena and UK does not make a profit off Lexington taxpayers for every event at Rupp. In short the contracts with UK and Rupp are completely different and do not burden the tax payer in Lexington. Then also, the state of Kentucky does not give UK any more money than any other public university. For example the new Commonwealth Renovations is all Athletic department funded and will not take one cent from the tax payers of Lexington or Kentucky.

    Finally, with an NBA team coming to Louisville I do not know if it will
    completely fix the financial situation but I do know it could not hurt. I do
    not see how another 40 events a year would not help at least the city of
    Louisville and the Yum center. Also I would like an NBA team is because where I live the nearest NBA team is either Indiana or Atlanta and I would really like to go to multiple games every year. Maybe even an NBA team in Louisville could bring the two fan bases together and show why the state of Kentucky does have some of the most passionate basketball fans.

  • Kyle Nichols

    No doubt the UK/UofL rivalry is an undercurrent of this entire discussion due to UK fans making light of the YUM’s finances or Jurich’s supreme reign over the Louisville media. But I don’t think it should be the deciding factor of someone’s opinion. You can be a Louisville fan and still be opposed to the current arena leasing terms with UofL. Even if Mr. Frankenberger’s numbers are off by 25%, it’s still a massive debt that will never be paid off with the current agreement in place. The taxpayers got screwed and Louisville now has the most profitable athletic department in the country.

    The question everyone should be asking is where is the media? Only insiderlouisville and some UofL and UK fans sites are covering this. It is 12:45pm and nowhere on courier journal, WLKY, WAVE3, WHAS11 websites is an article about the new Louisville arena report. Tom Jurich is literally the best athletic director in the country.

  • Kyle Nichols

    No doubt the UK/UofL rivalry is an undercurrent of this entire discussion due to UK fans making light of the YUM’s finances or Jurich’s supreme reign over the Louisville media. But I don’t think it should be the deciding factor of someone’s opinion. You can be a Louisville fan and still be opposed to the current arena leasing terms with UofL. Even if Mr. Frankenberger’s numbers are off by 25%, it’s still a massive debt that will never be paid off with the current agreement in place. The taxpayers got screwed and Louisville now has the most profitable athletic department in the country.

    The question everyone should be asking is where is the media? Only insiderlouisville and some UofL and UK fans sites are covering this. It is 12:45pm and nowhere on courier journal, WLKY, WAVE3, WHAS11 websites is an article about the new Louisville arena report. Tom Jurich is literally the best athletic director in the country.

  • Cruke Duise

    I suggest you look at some of the leasing arrangements NBA teams require. For example, in Memphis the Grizzlies control the dates at the FedEx Forum, the Pyramid, and the MidSouth Colliseum. New Orleans has to guarantee an average attendance of (I believe) 14,000 for Hornets (now Pelicans), or make up the difference. Attracting an NBA team can hurt – a lot. Cities the size of Louisville do not get to dictate the terms to an NBA team. It is just the opposite. That is why I’m skeptical that an NBA team solves any problem. It could just as easily add gasoline to the fire.

    And I agree that the Commonwealth does not give UK athletics any funding now. But that certainly has not been the case historically. Thus, I used the word “historical”.

  • Cruke Duise

    I suggest you look at some of the leasing arrangements NBA teams require. For example, in Memphis the Grizzlies control the dates at the FedEx Forum, the Pyramid, and the MidSouth Colliseum. New Orleans has to guarantee an average attendance of (I believe) 14,000 for Hornets (now Pelicans), or make up the difference. Attracting an NBA team can hurt – a lot. Cities the size of Louisville do not get to dictate the terms to an NBA team. It is just the opposite. That is why I’m skeptical that an NBA team solves any problem. It could just as easily add gasoline to the fire.

    And I agree that the Commonwealth does not give UK athletics any funding now. But that certainly has not been the case historically. Thus, I used the word “historical”.

  • John Whitney Jr.

    “What it appears to me happened is that in Frankfort, they calculated what they needed to get to that (debt service) number, then just worked backward.”

    It was a cynical con right from the beginning. And we’re stuck with the bill.

  • http://www.facebook.com/john.j.whitney.1 John Whitney Jr.

    “What it appears to me happened is that in Frankfort, they calculated what they needed to get to that (debt service) number, then just worked backward.”

    It was a cynical con right from the beginning. And we’re stuck with the bill.

  • http://uoflcardgame.com Charles Springer

    One of the recommendations would remove UofL’s rights to okay uses of the center, i.e., UK.

  • http://www.facebook.com/people/Charlie-Springer/1619307259 Charlie Springer

    One of the recommendations would remove UofL’s rights to okay uses of the center, i.e., UK.

  • http://uoflcardgame.com Charles Springer

    The university would have had many more benefits from an on-campus arena. The best possible outcome would be for the arena to go into foreclosure. UofL would have first rights to buy it.

  • http://www.facebook.com/people/Charlie-Springer/1619307259 Charlie Springer

    The university would have had many more benefits from an on-campus arena. The best possible outcome would be for the arena to go into foreclosure. UofL would have first rights to buy it.

  • http://www.facebook.com/raymond.white.3760 Raymond White

    UL is wanting a free ride as usual they want the tax payers to foot the bill for them. they then have the nerve to boast publicly how rich they are. What a joke!

  • http://www.facebook.com/raymond.white.3760 Raymond White

    UL is wanting a free ride as usual they want the tax payers to foot the bill for them. they then have the nerve to boast publicly how rich they are. What a joke!

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  • Stunoland

    Ultimately, the best strategy for a fiscally solvent arena is a renegotiation of the contract terms and one or more casinos in downtown Louisville that offer pro-sports wagering.

  • Stunoland

    Ultimately, the best strategy for a fiscally solvent arena is a renegotiation of the contract terms and one or more casinos in downtown Louisville that offer pro-sports wagering.

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