October 02, 2009
AEG's sweetheart Sprint Center lease: the breakdown
After all the confusion over exactly how arena managers AEG and Kansas City are splitting money from the Sprint Center, Justin Kendall of K.C.'s alt-weekly The Pitch was kind enough to send over the actual section of the lease that spells this out. And it's an eye-opener, as much as any document that includes phrases like "All Prior Fiscal Years' Six Million Dollar Amortization Payment Cash Flow Deficiency" can be said to open anyone's eyes.
I'm no contract lawyer, but if I'm reading this correctly, here's the way all profits from the Sprint Center are disbursed:
- The first $347,000 a year goes to pay back the six million dollars in cost overruns that AEG and Kansas City rang up for the arena, split 80/20 between the city and AEG, plus an interest rate of 4%.
- The next $6.7 million a year goes to pay back AEG's $50 million share of the pre-overrun arena cost. AEG, however, gets paid back at an interest rate of 12%.
- Next, AEG gets enough money to earn it a guaranteed 16% return (including those interest payments on its $50 mil) on its initial investment. As an added bonus, if there wasn't enough to earn it a 16% return in some prior year, AEG can take out extra in subsequent years.
- After that, $3 million (total, not annual) is put aside for a Capital Reserve Fund. And finally, if there's anything left, it's split 50/50 between AEG and the city. Little wonder that AEG president Tim Leiweke called this a "throwaway provision," and said his lawyers predicted they'd never earn enough to have to pay it.
What's missing here? Well, while AEG gets a guarantee of being made whole on its $50 million investment, plus 12% interest, plus 4% more in profit on top of that, the city of Kansas City is on the hook for $216 million in arena bonds — amounting to $13.8 million a year in bond payments, K.C. budget director Troy Schulte tells Kendall. While an occasional $1.8 million windfall, as the city got last year when the Sprint Center had an exceptionally good year, is nice, it's still a drop in the bucket on that debt.
In other words, AEG may have been an excellent choice for an arena manager, one that has used its clout to fill the Sprint Center with plenty of concerts. But in landing someone to run their new barn, Kansas City gave away the farm.
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.