University of Louisville officials have made something of a gesture to the Louisville Arena Authority in the form of a small revenue concession.
But at this point, there are no big changes coming to the lease arrangement for KFC Yum! Center.
Louisville Arena Authority Chairman Larry Hayes and Board Member Jim King revealed at the authority’s monthly meeting today the authority had negotiated for two months with the U of L about arena signage revenue.
The deal potentially gives the arena authority a bigger cut of revenue from advertising signage and digital boards through 2015. The changes are projected to put an additional $1.5 million toward Arena Authority debt payments over the next three years, Hayes and King said.
But Hayes said the talks were exclusively about clarifying the structure of the signage revenue deal between U of L, the Arena Authority and marketing agent Jefferson City, Mo.-based Learfield Communications.
Under the deal, U of L was entitled to $1 million for 2013, but deferred $250,000 to the Arena Authority. For 2014, U of L’s signage revenue will be capped at $850,000, then $900,000 for 2015, with the Arena Authority getting the overage.
“The university didn’t have to do this,” King said.
In an email response to a query, Kenny Klein, U of L’s senior associate athletic director for Media Relations, stated:
Jim King on the Arena Authority board approached us about helping in the short term and we agreed to do so as good partners. We have worked closely with KFC Yum! Center officials since its opening, including clearing dates for other events around our men’s and women’s basketball schedules and capping revenues from our share of sponsorship revenue for three years from 2013-15.
Technically, U of L and the Arena Authority are not “partners.” U of L is the tenant for the $238 million arena, the Arena Authority the landlord.
U of L doesn’t pay “rent” per se, but a percentage of ticket revenue, luxury suites revenue and concessions to the Arena Authority, according to the lease signed in July, 2008. In essence, U of L keeps about 90 percent of revenue from U of L Men’s Basketball games.
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 season.
According to a 2012 Forbes Magazine Article, U of L supplanted the University of North Carolina as the most valuable college basketball team in the United States, with the team generating about $20 million for the University of Louisville Athletic Association. Fees and contributions for luxury boxes generated a significant portion of that revenue, according to Forbes.
At the same time, KFC Yum! revenues including events revenue, sponsorships and a special taxing district came up about $6 million short of covering the annual $22 million Arena Authority debt obligation, with the City of Louisville required to make up the difference.
In the past, Hayes, who is also chairman of the Kentucky’s Cabinet for Economic Development, has been the only official brave enough to say the authority would have to approach U of L officials about amending the lease. But today, he said there are no plans to do so and the negotiations with U of L were only about the signage revenue.
“The original (signage) agreement left a lot to be interpreted,” Hayes said. The new agreement clarifies who gets what in the 22,000 seat arena, part of “developing a relationship for how we do business going forward.”
Former LAA Chairman Jim Host was involved in the negotiations, Hayes added. “He helped us talk (to U of L officials) because he knew how the original agreement was supposed to be structured.”
The agreement sent forth in the lease is relatively technical. Section 7 of the lease, “Additional Proceeds From Revenue,” section g., Signage and Sponsorship is almost three full pages and contains particularly dense verbiage.
Landlord will pay to Tenant … 50% of all revenue received by Landlord from the sale of Signage inside and outside the Arena (excluding, however, (i) any Signage inside or outside the Arena that is part of the 10 percent of Permanent Signage reserved for Tenant as provided in Section 7.1 (g)(l), as to which tenant will have the exclusive right to market, sell and retain 100 percent of the revenue and (ii) the video boards outside the Arena, as to which Tenant’s share of the revenue will be governed by Section 7.1(g)(3)).
In the case of any Signage inside or outside the Arena that is used to acknowledge a Naming Rights Sponsor, Landlord and Tenant will mutually allocate a reasonable portion of the total amounts paid by such Naming Rights Sponsor to revenue received by Landlord from sale of Signage for purposes of the preceding sentence.
For August, the arena lost $150,000, but that was less than the $236,000 budgeted loss.
The arena is projected to generate a $1.3 million “profit” above operating costs for fiscal year 2013/2014.
Dennis Petrullo, KFC Yum! Center manager for AEG Facilities, the Los Angeles-based arena manager, emphasized the arena is attracting more top acts. Many of those acts, such as country music star George Strait, are selling out.
But Petrullo also acknowledged that sales are soft for some acts.
Former Disney Channel star-turned-singer Selena Gomez is on pace to sell about 5,000 tickets for her concert later this month, with “Margaritaville” cult singer Jimmy Buffet on track to sell about 10,000 tickets in the 22,000-seat arena at the end of November.
“The issue is not the building,” Petrullo said. “It’s the ticket … the brand.”
For reference, here’s how the 2012 debt schedule is structured:
There are three main revenue streams: money from the TIF district, money from arena operations and a guarantee Louisville Metro Government will pay up to $9.8 million to cover any bond-service shortfall.
The total debt service of $22 million on the bonds due in 2012:
• TIF revenue $ 3.5 million (projected to be $8.2 million at the time of the bond issue in 2008)
• Naming rights and sponsorship revenues 4.5 million
• Suites/premium seating 1.4 million
• The city 3.3 million (above its minimal legal obligation of $6.5 million)
• Interest income .7 million
• Event revenue 0 (net of event expenses through June 30, 2012. Projected to be $7 million)
Next year, event projections remain at $7 million while the TIF projection rises to $10 million, then to $12 million in 2015.