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Sources: Arena Authority feeling pressure to seek KFC Yum! Center lease changes from U of L

by Staff

KFC Yum! Center

KFC Yum! Center

(Editor’s note: Terry Boyd and Curtis Morrison contributed to this post.)

Sources are telling Insider Louisville pressure is building on Louisville Arena Authority officials to seek a reset on KFC Yum! Center.

Lease terms for the arena have been criticized even by Arena Authority members as overly generous to the tenant, the University of Louisville Athletic Association, at a time the projected revenue needed to service the $342 million bond debt hasn’t materialized.

Arena Authority Chairman Larry Hayes said through Hollie Spade, office of legal services executive director, there are no plans “at this time” to ask for lease changes.

The next Arena Authority meeting is scheduled for Monday, July 16.

As arena authority attorney, Ed Glasscock said he couldn’t comment. Glasscock also is a member of the U of L Athletic Association, the quasi-autonomous U of L entity that oversees the university’s sports finances.

Our sources insist negotiations may focus on scheduling rather than revenue sharing, though they declined to discuss the changes in detail.

“That is where the discussions have to start,” said one source.

The issue has been building within the Arena Authority, our sources say. Last September, when other members brought up the possibility of approaching university officials about changing the lease, then-Arena Authority Chairman Jim Host was adamantly opposed.

Host slammed his fist on the table  for emphasis, telling members that if they wanted to pursue changes, they could find someone to take his position, according to multiple sources at the meeting.

He announced last December he was leaving the Arena Authority board.

In an interview, Host denied he left because of the possibility of altering U of L’s lease, saying new business ventures in Lexington, Ky. were demanding more of his time. Host maintained the lease is fair to both the university and to the Arena Authority.

Louisville-based businessman Todd Blue argued before leaving the Arena Authority that the revenue split with U of L is overly generous.

At the time, Blue was quoted in media reports as saying, “Those millions of dollars are going to U of L. And I’m just saying: Why is that not on the table to talk about?”

Blue did not return calls for comment.

Success has a thousand fathers ….

Insiders say changing scheduling rights is an obvious place to start.

The 2008 lease specifies that under most circumstances, U of L not only has the right to use all the arena for the entirety of games days, but also for practice days. On practice days, the lease stipulates, that includes “portions of the arena not included in ‘Leased Premises,’” eliminating all potential revenue sources, with a total of at least 48 practice dates and game dates in the 2011/2012 basketball schedule.

Just changing those lease terms could generate millions in annual revenue, our sources argue.

The lease has become a point of contention because it appears tax payers may end up covering the difference between revenue shortfalls and what it costs to service the bond debt.

Last month, Moody’s Investors Services downgraded the bonds issued to build the KFC Yum! Arena to a high-risk”junk” rating, because it increasingly appears tax revenue generated by a tax increment financing district will not meet projections for years.

So far, the TIF has generated $2.1 million in tax revenue, far short of the $6.7 million projected for the 2011 bond payment.

Covering the principal and interest of the bond issues costs about $19 million a year, with projected shortfalls of about $7.5 million for 2012 and 2013.

Under the terms of the agreement, the Arena Authority will have to exhaust all alternative funding sources before asking the city to cover any gap, a point confirmed by Chris Poynter, spokesman for Louisville-Jefferson County Metro Mayor Greg Fischer.

The city is responsible for a maximum of $9.8 million annually to cover any arena bond shortfall, Poynter said.

If the shortfall exceeds $9.8 million, the state would then be obligated to cover the remaining debt-service gap.

In cities such as Kansas City, where ambitious publicly funded projects failed to cover bond issues, government officials have had to consider cutting services.

Meanwhile, U of L’s men’s basketball program is one of the biggest money pumps in college sports. For 2011, The Business of College Sports website ranks U of L as the 21st most profitable in the nation.

U of L’s program generated about $16.8 million profit on total revenue of $26 million.

The deal between the Arena Authority and U of L for the KFC Yum! Center lease essentially allows U of L’s Athletic Association to use the arena for minimal costs and maximum profits, critics say.

U of L doesn’t pay “rent” per se, but a percentage of ticket revenue, suites revenue and concessions to the Arena Authority, according to the lease signed in July, 2008. But U of L keeps about 90 percent of revenue from big events such as U of L Men’s Basketball games while keeping a lock on the days the arena can be used for other purposes that could generate additional revenue.

Kentucky Fair Board spokeswoman Amanda Storment told Insider Louisville earlier this year that KFC Yum! Center booked a total of 209 events in 2011.

U of L pays about 10 percent of all admission receipts less taxes, or a minimum of $10,000 per game, according to the original lease. The typical ticket revenue not including luxury suites would be a minimum of $500,000, so U of L would keep at least $450,000, or 90 percent per game times 24 dates  for the 2011/2012 men’s season.

For women’s games and other non-revenue producing sports, U of L pays the arena authority 5 percent of ticket receipts, or at least $5,000 per game fee.

From the audited financial statement completed by BKD CPAs and Advisors:

Annual lease payments were equal to the greater of 10 percent of gross ticket sales or a minimum lease amount of $5,000 per game and annual
lease payments for private suites are 9.75 percent of the first $35,000 of gross rental income
and 25 percent thereafter. Total lease expense during the years ended June 30, 2011 and
2010 amounted to approximately $55,000 and $1,493,000, respectively.

The big money for U of L comes from television rights and 88 percent of net private suite revenue, according to the contract. U of L keeps all the money from premium seating and side-court VIP seating, according to the lease. U of L also keeps 50 percent of concession sales. The university pays no rent or fee for either Ramsey’s luxury suite, or the suite of Athletic Director Tom Jurich.

The suites injected more than $11 million into U of L Athletics’ operating budget for 2011.

Our sources say Arena Authority members believe U of L officials may be more receptive to changing the terms if they think U of L ultimately could be blamed for the arena inflicting financial stress on the city, or even for an eventual default that would downgrade the city’s credit rating.

Overall, adding more concerts during the basketball season could lead to $500,000 more in revenue, while more efficient staffing could save at least $600,000 a year, according to an audit released in April.

Louisville businessman, 86-64 co-founder, and former mayoral candidate Tyler Allen questions whether Louisville’s maximizing the KFC Yum! Center’s potential to cover the debt obligation.

“Just look at Pepsi Center in Denver or Staples Center in LA,” Allen said. The Lakers (NBA), Clippers (NBA) and Kings (NHL), with at least forty home games each, all share the Staples Center, he noted.

“Last month during the playoffs, all three teams played on the same weekend. In fact two games were on the same day. And remember, the Kings play on the ice,” Allen said.

“I would love to see the scheduling and revenue sharing agreements they have in place.”

And that’s where we stand just four years into a 36-year lease agreement.

For the record, here is the annual amount the U of L Athletic Association is required to pay through 2044. Payments are in thousands.

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