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Redistribution of wealth: KFC Yum! Center makes U of L the nation’s richest basketball program while taxpayers cover arena debt

by Terry Boyd

This has to be the most dramatic case of redistribution of wealth in Louisville history.

A glowing Forbes Magazine post about the University of Louisville’s basketball team notes that U of L’s men’s program now is valued at $38.5 million, up almost 10 percent from 36.1 million in 2012 – America’s most valuable college basketball team.

Why?

Because of KFC Yum! Center.

From the Forbes post:

The team’s financial success is largely tied to the KFC Yum! Center, the waterfront arena that opened in 2010. The new arena had an immediate impact, driving ticket sales up 28% to $14.2 million and generating over $20 million in contributions to the team, an 84% increase from the prior year. Income from program sales, concessions, parking and other sources also increased by more than $2 million. And the financial impact is a lasting one. Contributions to the team are still up, reaching $20.4 million last year, as is revenue from concessions and parking. Ticket revenue was down slightly, but Louisville played one fewer home game and has little reason to worry about the future – the Cardinals have ranked third in average home game attendance every year since the arena opened.

The financial impact is a lasting one, alright.

For 2012, the Louisville-Jefferson County Metro government picked up a $9.8 million tab for the shortfall between what we collectively owe on the $349 million debt maintenance on the arena, and the revenue from arena operations and the taxing district.

Arena operations and the Tax Incremental Funding District were supposed to finance the arena, but have not.

Under the terms of its lease, U of L got somewhere in the neighborhood of $16.8 million not counting contributions by fans vying for the most expensive tickets.

In turn, U of L pays about 10 percent of all admission receipts less taxes, or a minimum of $10,000 per game, according to the version of the lease we were able to get.

The typical ticket revenue not including luxury suites would be a minimum of $500,000, so we calculate U of L kept at least $450,000, or 90 percent per game times 24 dates for the 2011/2012 men’s season.

U of L gets about 90 percent of arena revenue as a tenant while the city is legally obligated to pick up the debt servicing shortfall.

We don’t know exact numbers because no officials will agree to explain what happens when the deficit on the arena exceeds the $9.8 million maximum the city is contractually required to pay each year.

Forbes staff writer Chris Smith goes on to say the U of L program stands to only grow in value and revenue as the basketball Cards move into the Atlantic Coast Conference with Duke University and the University of North Carolina.

That won’t alleviate the taxpayer’s burden.

What happens to U of L only matters in the arena debt calculus if the program stops attracting fans and generating revenue.

Same with big concerts and events.

Because of the way the debt servicing was structured, with TIF revenues always projected to be at least three time what they’ve turned out to be, the only thing that truly matters is what happens to our city inside that 6-square-mile taxing district.

Two bad things already have happened.

First, Louisville’s downtown office vacancy rate is skyrocketing, with at least two office towers – Meidinger Tower and the Kentucky Home Life Building – in foreclosure.

Second, there are too many taxing districts.

Metro Mayor Greg Fischer told WHAS Radio talk show host Mandy Connell that all the concerns about the arena debt are unfounded because Beam, the giant Chicago-based spirits company, is moving a significant part of its operations to Fourth Street Live.

Wrong.

What Fischer seems to have forgotten is that Fourth Street Live has its own TIF, as do 21C Museum Hotel, the Kentucky International Convention Center, Nucleus and almost every big downtown project of the last decade.

Meanwhile, the amount due each year on the arena bill will increase dramatically as we go from interest-only on the arena bonds to paying the principal and interest.

Click to see full size.

If you want to see something to temper your March Madness, check out the arena debt schedule at right.

Note that the annual debt payment obligation almost doubles from about $21 million this year to a peak of $37 million by 2029.

To be fair, good things related to KFC Yum! Arena are happening. Los Angeles-based AEG has dramatically exceeded the booking performance of Harold Workman and the Kentucky Fair Board crew since AEG took over managing the arena last July.

One great act after another. One sellout concert after another.

But here’s reality: AEG officials have acknowledged repeatedly during Louisville Arena Authority meetings that after basketball season ends, the concert business also goes into the summer doldrums.

There’s little we can do about the TIF district. It is what it is. State officials refuse to even discuss revenue projections.

So the key to KFC Yum! Center not turning into a black hole for taxpayers is getting U of L officials to acknowledge they need to pay at least a slightly larger percentage of their annual windfall to service the debt on an arena that makes the university’s athletic association so flush … and the city so poor.

 

 

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  • Wiseguy0204

    Well, if it all goes to hell in a handbasket (i.e. a bankruptcy), bondholders would get (1) possession of the Yum Center, (2) the city’s rainy day fund (as I believe it was used as collateral) — but (3) the contract with UofL (and with everyone else for that matter) would likely be voided, leaving UofL without a contracted venue and certainly no Plan B. UofL would be left without a good BATNA in renegotiating the new contract with the bondholders-now-owners of the YUM! Center, and the new owners would stick it to them, as they should (being the responsible fiduciaries that they most certainly are).

    The only real sane option would be to refinance the bonds or renegotiate with current bondholders to extend the current maturities and soften the amortization-whammy (probably with a revenue participation or a coupon sweetener). Or the city could go “prime time” and issue omnibus bonds retiring all of the TIF insanity that’s been created over time. The only completely unprotected party in a melt-down scenario is the city, so it better get off its duff and figure it out.

  • Wiseguy0204

    Well, if it all goes to hell in a handbasket (i.e. a bankruptcy), bondholders would get (1) possession of the Yum Center, (2) the city’s rainy day fund (as I believe it was used as collateral) — but (3) the contract with UofL (and with everyone else for that matter) would likely be voided, leaving UofL without a contracted venue and certainly no Plan B. UofL would be left without a good BATNA in renegotiating the new contract with the bondholders-now-owners of the YUM! Center, and the new owners would stick it to them, as they should (being the responsible fiduciaries that they most certainly are).

    The only real sane option would be to refinance the bonds or renegotiate with current bondholders to extend the current maturities and soften the amortization-whammy (probably with a revenue participation or a coupon sweetener). Or the city could go “prime time” and issue omnibus bonds retiring all of the TIF insanity that’s been created over time. The only completely unprotected party in a melt-down scenario is the city, so it better get off its duff and figure it out.

  • John Receveur

    Terry, would be interesting know what similar tenant arrangements around the country look like, and where UL’s contract stacks up against those. Just a thought.

  • http://twitter.com/johnreceveur John Receveur

    Terry, would be interesting know what similar tenant arrangements around the country look like, and where UL’s contract stacks up against those. Just a thought.

  • http://twitter.com/benwathen63 Ben Wathen

    It’s very clear that Mr. Boyd should be criticizing those that are responsible for bringing revenue producing businesses to the TIF district. It’s not U of L’s fault that they negotiated generous terms on their lease. Who’s supposed to recruit tenants within the TIF district?

  • http://twitter.com/benwathen63 Ben Wathen

    It’s very clear that Mr. Boyd should be criticizing those that are responsible for bringing revenue producing businesses to the TIF district. It’s not U of L’s fault that they negotiated generous terms on their lease. Who’s supposed to recruit tenants within the TIF district?

  • Msradell

    Seems like the bottom line is, UofL is very smart, economically, and Metro government (as well as the fair board) are very dumb financially! Of course the general public is even dumber for believing the politicians’ projections that show the YUM center would make a profit.

    I believe the contract is written that if the YUM goes into default or bankruptcy on the bonds, UofL has the 1st priority for purchasing the building. I’m not sure of the terms, but I believe even after they bought it Metro government could have to pay a significant amount of money to retire the bonds!

    Maybe Mr. Boyd should look into the political side of this issue instead of criticizing the UofL who seemingly is the only smart participant in this entire issue!

  • Msradell

    Seems like the bottom line is, UofL is very smart, economically, and Metro government (as well as the fair board) are very dumb financially! Of course the general public is even dumber for believing the politicians’ projections that show the YUM center would make a profit.

    I believe the contract is written that if the YUM goes into default or bankruptcy on the bonds, UofL has the 1st priority for purchasing the building. I’m not sure of the terms, but I believe even after they bought it Metro government could have to pay a significant amount of money to retire the bonds!

    Maybe Mr. Boyd should look into the political side of this issue instead of criticizing the UofL who seemingly is the only smart participant in this entire issue!

  • ulfinancialplanner

    You are naive if you don’t believe everyone involved in the contract knew this was going to happen. Slick Jurich had a good plan on being the 1rst right to refusal. UL most profitable Athletics in the country yet the YUM center will be paid for on the Taxpayers dime. Jerry Abramson continues to show how dumb he really is and how dumb the voters were to keep voting for him. I Love how UL is cashing in on the profits from the YUM but wont take care of the lease. Maybe they should cut the pay of the whole Jurich family that is employed by UL.

  • ulfinancialplanner

    You are naive if you don’t believe everyone involved in the contract knew this was going to happen. Slick Jurich had a good plan on being the 1rst right to refusal. UL most profitable Athletics in the country yet the YUM center will be paid for on the Taxpayers dime. Jerry Abramson continues to show how dumb he really is and how dumb the voters were to keep voting for him. I Love how UL is cashing in on the profits from the YUM but wont take care of the lease. Maybe they should cut the pay of the whole Jurich family that is employed by UL.

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