I’ve tried to write this post five times.
Five times, I’ve had to pause because I can’t make sense of the muddled finances of the KFC Yum! Center.
And I like finance and numbers well enough to have earned a pretty fair living over the years as a business reporter.
I can only imagine how confused the public at large must be by the confounding numbers regarding the Yum! Center that are seeping out of the Louisville Arena Authority.
At the Jan. 14 Louisville Arena Authority meeting, AEG Facilities executives called November – the latest reporting period available – a successful month, with a significant increase in revenue due to sellout concerts and resumption of University of Louisville basketball.
All good, right?
There’s just one problem:
No one at AEG, which manages KFC Yum! Center, could project whether the arena will turn an actual profit this year because the Kentucky State Fair Board hadn’t sent its financial documents to AEG. (The Fair Board relinquished management of the KFC Yum! to AEG last year amidst reports of expense overruns and operating losses.)
When I asked AEG executive Dennis Petrullo if state officials have submitted a financial report since AEG took over arena management from the Kentucky State Fair Board in July, he said, “No. They haven’t produced it.”
Asked why, Putrello, the general manager for the arena, shrugged.
I followed up with a call to Petrullo’s office, and an AEG employee confirmed the company is “following up on trying to get those materials.”
Later, Amanda Storment, Fair Board vice president of public relations, told Insider Louisville that as far as she knows, that agency has turned over all financial documents to AEG.
Petrullo confirmed that Storment called his office after Insider Louisville’s query.
After our call, Petrullo said, AEG received 10 boxes of documents. But Petrullo added that AEG had no arena financials from the Fair Board from January through December 2011.
It was at this point that my head really started to hurt. But the epiphany I had from the migraine was this: Under the current contract with U of L, it will take Lady Gaga playing KFC Yum! Center every night to make the arena itself a significant contributor in paying down the arena debt.
According to the debt-service schedule posted briefly on the Arena Authority website, the amount due Dec. 31, 2012 was $20.3 million. This is effectively the mortgage payment on $348 million in bonds issued, and guaranteed, by the city to construct the lavish downtown arena.
The amount due Dec. 21, 2013 is about $21 million.
In a conversation late last week, Petrullo said independent of the Fair Board files, he knows his numbers on arena operations since AEG took over last July. AEG officials project a net operating profit of $1.35 million by June 30, 2013, the end of the fiscal year.
The Fair Board had operated the arena since it opened in 2010.
AEG’s 10-year management deal requires the Los Angeles-based global management firm to guarantee a “profit” from arena operations of at least $1 million every year. For November, AEG reports, KFC Yum! Center turned a net operating profit of $712,000. That’s an increase of about 60 percent over the October reported net revenue of $451,000.
All sounds pretty good, at least from the AEG side. Except no one is saying definitively how those 10 boxes of Fair Board documents will ultimately impact the bottom line for arena operations in calendar year 2012, the first half of which was spent under Fair Board management.
Moreover, a submission from Louisville-based accounting firm Deming Malone Livesay & Ostroff, the arena authority’s outside accounting firm, suggests that the arena will lose about $700,000 for 2012. (You can see the form and Insider Louisville’s follow-up conversation with Jerry Hurt, a director at DMLO and an Arena Authority board member, in the image to the right.)
The DMLO statement lists a loss of more than $1 million on operations under the Fair Board, and projects a net gain of about $300,000, at least in the neighborhood of AEG’s own projections for the second half of calendar 2012.
(For the record, it’s not clear how much communication there is between the Louisville Arena Authority, which “owns” KFC Yum! Center, and state Fair Board officials. Insider Louisville reported last March that Arena Authority officials were considering ending their management contract with the Fair Board, three months before they indeed terminated the contract. In that post, we reported that AEG and a Philadelphia-based firm, Global Spectrum, were candidates to take over the arena. When we called for comment, Fair Board Chairman Ron Carmicle said then he would be “surprised” that a plan or plans to replace Fair Board management were in the works: “I can almost assure you … well, I’ll just say I know of no such plan.”)
Whatever the case, best-case revenue under the present agreement with the University of Louisville Athletic Association makes the amount of money generated by the arena fairly trivial when you look at the total due each year to service the bond debt.
Money to pay for the arena bond issue comes from two sources:
1)The tax increment financing, or TIF, district around the arena.
2) Revenue generated directly by the arena itself, which breaks down to events fees, sponsorships and naming fees, and vendor sales, all managed by AEG.
Arena Authority officials had projected 2012 TIF revenue– almost all of which is earmarked for bond retirement – of $14.9 million but will likely take in $5.5 million, slightly more than half that projection. (The arena TIF district generated $2.1 million in 2011.) Event-driven spending at businesses around the arena has simply lagged behind what now appear very aggressive projections, and so have corresponding tax revenues.
The authority anticipates being about $10 million short for 2012, with the shortfall covered by the coffers of Louisville-Jefferson County Metro Government.
Meanwhile, U of L’s men’s basketball program is one of the biggest money pumps in college sports. For 2011, U of L ranked as the most lucrative basketball program on the country, according to numbers compiled by The Business of College Sports website, clearing more profit than all but 20 football programs, where the big money really is. U of L hoops generated about $16.8 million profit on total revenue of $26 million. Overall, U of L athletics tallied more than $87 million in 2011, according to a database maintained by USA Today, up more than $20 million from the year prior, coinciding with the opening of both the Yum! and a major expansion at Papa John’s Cardinal Stadium.
Why does all this matter?
Because though AEG has both boosted concert and events revenue and cut expenses, I’m having a difficult time seeing how KFC Yum! Center can ever produce significant impact when it comes to servicing the arena debt.
That’s especially important because arena revenue is one of the two sources that go to servicing the $348 million in bonds, a debt that will cost the city and state somewhere north of $525 million over the 40-year life of the debt.
The first source, of course, is the TIF district, which as I’ve said was predicted to carry the main debt service load and is coming up short.
KFC Yum! Center revenue is the second income stream that services all that debt. But future revenues coming from the arena to pay the debt are limited by the arena’s deal with its primary tenant.
The 2008 lease between the Arena Authority and U of L gives the University not only 90 percent of game revenue, but also the right to block out both game days and practice days. On practice days, 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 each season. And that makes it hard to add concerts and conventions during basketball season.
(We’re not forgetting that under Harold Workman and the Fair Board management from the opening in 2010 until June 2012, expenses far exceeded area net income projections due to over-staffing. But at least for now, that situation seems to be resolved under the new management.)
AEG’s Petrullo said he’s aware of how important it is for KFC Yum! Center to increase events and revenue and to bolster the TIF district by bringing people downtown, people whose spending will boost taxing district revenue.
AEG executives are considering bringing more events including a three-on-three basketball tournament the management firm put on in LA.
“We’re working with U of L to bring NCAA tournaments. The events we bring will help increase revenue. It’s not like AEG doesn’t want to help … to work with groups to get ideas … to work with the Visitors and Convention Bureau to bring more conventions.”
From the first, AEG officials have brought top acts to Louisville starting with the Eagles, Katie Perry and Lady Gaga and Kid Rock to the current string of sellouts including Justin Bieber and Bruce Springsteen, Petrullo said.
Petrullo cited the Lieb Report, the 2006 revenue study that projected KFC Yum! Center would need 15 concerts and 99 events to break event. For 2012, AEG booked 21 concerts, and the arena had 130 total events.
But again, there’s not a lot of clarity.
Kentucky Fair Board spokeswoman Storment told Insider Louisville earlier this year that KFC Yum! Center booked a total of 209 events in 2011.
But Petrullo said the Fair Board number includes every non-revenue meeting and small civic group gatherings. Without a clear picture of the scale of the events that have been booked to date, it’s impossible for to even try to precisely calculate exactly how many huge events will be needed to cover that bond debt shortfall. More headaches.
Again for the record, we’re glad we’re not the only ones in the dark.
Chris Poynter, Mayor Greg Fischer’s spokesman, told us Metro Louisville CFO Steve Rowland and arena officials are in “constant contact, but we don’t have a detailed list of arena expenses and revenues. The numbers we (city government) receive each month are the same ones posted on the Arena Authority website and discussed every month at the monthly meeting. We do not receive TIF data.”
In late May, Moody’s Investors Services downgraded the arena bonds to a junk rating because Moody’s analysts doubt the tax increment financing district created to help pay for the facility will generate sufficient revenue.
What the numbers tell me is that under the current arrangement with U of L, if everything goes perfectly, TIF revenue grows and U of L basketball program never falters, we’ll come pretty close each year to servicing that $525 million debt.
If everything doesn’t go perfectly – if there’s another financial downturn or U of L has a string of subpar teams or Lady Gaga is booked elsewhere – whoever is Louisville mayor better have a very creative finance director.
Here are the last publicly available numbers from October:
- Gross operating revenue (all the money the KFC Yum! Center took in) came to about $2 million for the year to date, which beat budget projections by about $165,000. (These gross revenue numbers are tabulated after U of L takes its 90 percent share of game revenues and luxury box fees.)
- Event operating expenses were $787,498, about $36,000 more than budgeted for net revenue of $1.2 million, about $129,00 more than projected.
- Total operating expenses – which would include labor costs and other expenses – were $1.6 million, about $400,000 less than projected.
However, that year-to-date profit for KFC Yum! Center came out a $360,000 loss, though that’s less than half the projected loss of about $900,000.