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September 29, 2009
Is the Sprint Center really making money?
The Wichita Eagle looks at a report in the Kansas City Star (by our old friend Kevin Collison) that that city's new Sprint Center is making money, and wonders whether that might be good news for Wichita's soon-to-open Intrust Bank Arena, NCAAs or no NCAAs.
Only one problem: While the Sprint Center is indeed turning a profit, that's only an operational profit — in other words, it doesn't count the cost of paying for building it in the first place. Kansas City essentially handed over the building to arena managers AEG after it was complete, and told them to deal with the expense of running the place and allowed them to keep most of the proceeds; the fact that K.C. will see any money at all, in fact (estimated at $1.8 million this year), is an indication that AEG is doing a good job, since according to its lease it doesn't need to share any profits at all with the city until it's making a 16% return itself. Given that K.C. is on the hook for $10-15 million a year in arena bond payments (guesstimating here — that information doesn't seem to be online anywhere [UPDATE: It is now, and I was — ahem — on the money]), there's almost no way it will actually turn a profit on building the Sprint Center.
That said, it's still better for AEG to be running a profit than running a loss, especially since the Sprint Center still doesn't have a major-league sports tenant. And AEG seems to be intent on using its success with concerts to drive a hard bargain with any sports teams looking to move to Kansas City: AEG president Tim Leiweke told the Star, "The economic model of this building is quite successful. The last thing we or the city want to do is throw away that model and make the arena a loss leader with another tenant. It's a tougher scenario with a professional team. I'm sure we wouldn't be able to write a check to the city for $1.8 million." In other words: As predicted, they're not going to be no pushovers for, say, the Islanders.
It is impressive they turned a profit on operating revenue (although that might be a honeymoon effect). The funny thing is that it is they are making money on concerts and the facility is constructed for sports. So, how much money could they have made if the built a large concert hall instead of an arena?
Also, we'll see how closely they hew to their current stance on not giving a hockey or basketball team a sweetheart deal should one come calling. Given recent trends, and that one of the primary reasons the Islanders want out of the Nassau Mausoleum is precisely because they have a lousy (for them) lease deal, somehow, I wouldn't be surprised to see AEG change its toon here if things don't work out for the Islanders in Uniondale.
The one reason AEG might not change their tune: They don't give a fig whether Kansas City has a hockey team, they just want to make money. So if it's a choice between giving a sweetheart deal to the Islanders or continuing to charge reasonable rates to concert performers, they might just choose the unsexy but more lucrative option.
The AEG lease on the Sprint Center doesn't look all that great for the city - AEG only put in like $50 million, and gets virtually all the profits, though they risk any losses as well - but if you're going to build an arena on spec, getting management out of the hands of the local electeds does have its benefits.
@Floormaster: We are also building a large concert hall, so we may find out. The Kauffman Center for the Performing Arts, however, isn't meant for Britney Spears and the Eagles.
@Tom: KC already gave a sweetheart deal to the Penguins. KC will bend over backwards given the right chance.
@Neil deMause: The arena is paid for by a car rental and hotel tax, so it is mostly tourists who are funding the arena.
Actually, it's a fallacy that car rentals are mostly made by tourists - in most places the majority of car rental taxes are paid for by locals.
And, of course, tax money is fungible. So whatever the logic of levying higher car rental taxes, K.C. could have taken the money and spent it other ways.
Neil: excellent point, I did completely forget we were talking about a private company and not the local and state governments. That brings us, however, to Bobby's comment, and if KC could do it once, they could do it again. What I'm wondering now is how the city of KC could, say, guarantee the Islanders or another team the benefits of a sweetheart lease deal with the arena effectively in private hands. Does KC still technically own the arena, and could they do something like guarantee a certain amount of revenue to a team, the same way that municipalities will sometimes guarantee a certain amount of ticket sales?
I'm pretty sure AEG controls all the revenues under its lease. If KC wants to subsidize a team to move there, they'd have to do something like pay the team's rent to AEG. Which, come to think of it, I could totally see happening, especially if the surrounding developers keep griping about the lack of an "anchor tenant."
Neil, you're right about not letting the KC government run the arena. They're screwed up enough as it is. All the business models for other large arenas in the past have always been based on an anchor team. KC may have found accidently that does not need to be the case. The one thing people forget though, even when the "newness" wears off with Sprint Center, AEG still manages a lot of the arenas that concerts play so they can "induce" them to play at Sprint Center. Basically, you don't play KC, you don't play LA.
Get your facts straight. The Sprint Center was paid for with a tax that was added to hotel rooms and car rentals. The city did not pay to build it. The bonds are paid for from the tax.
Um, who do you think levies taxes? The taxation elves?