Questions on the arena financing plan

I've been asked to list the details of my questions regarding the financing proposal for the new arena. I covered these points when I was guest-hosting on WSPD, but since they don't make their shows available for download, I'll document them here. I'll apologize in advance for such a long post.

First, let me reiterate that I'm in favor of a new arena. I'm one of the few, if not the only, elected officials who's actually purchased season tickets. I realize that many people still want the arena on the east side, but to me, the location is less important than the fiscal plan. I don't mind the proposed location because of the ability to take advantage of some savings by linking it to the convention center.

I have no problem with the available parking estimates, even though I think people are less willing to walk during the winter than they are during the summer, so that needs to be considered. I'm even somewhat okay with the size. Some will say it needs to be larger, optimistically taking the position that if we build it, they will come. Some will say that the market survey included with the report doesn't support an 8,000-seat arena for the major tenant, so much of the space will be wasted. Considering the strong opinions on both sides, it appears that the proposed size will work for the recommended space.

I'm still researching the proposed governance structure, although I would be against the suggestion that the County Commissioners purchase a franchise.

The major concerns I have are about the financials. They say that the devil is in the details and that's certainly true of the plan that we've received. Primarily, the only private money that is being proposed for the construction is in the naming rights. The revenue from suite sales and premium seats is included as part of the yearly operating budget. The plan does not suggest that a franchise or team put any of their own money into the construction of the arena. My opinion is that the private funds should be the first in and be the majority of the money used to build and then operate any arena. The financing plan we've been given suggests only 17% private funding and 83% public - and that's a problem.

The arena is estimated to cost between $79 -84 million, so the figure used throughout the report is $81,850,000. Page 30 of the Action Plan states:

"The preliminary estimate for construction costs for the Superior site, including both hard and soft costs, is estimated at $86,561,981 for the 9,000-seat option, and $81,802,970 for the smaller, 8,000-seat option. If efficiencies can be achieved through the combined use of the heating and cooling capacity of SeaGate and if the arena relied upon SeaGate's food preparation facilities, the cost might be reduced to an estimated $84,611,981 for the 9,000-seat option and $79,967,970 for the 8,000-seat option."

The sources of revenue are listed below and then each is analyzed:

* $42,500,000 from an increase in the hotel/motel tax - assumes 1) tax is increased 2 percentage points, 2) City of Toledo and other municipalities contribute their share of the tax revenue, 3) enabling legislation is passed by the state, 4) bonds have a term of 30 years.

* $1,200,000 savings from retiring the current SeaGate center bonds

*$12,250,000 from the Ohio Cultural Facilities Commission (estimated at 15% of the development costs)

* $14,000,000 naming rights for the new arena and the SeaGate Convention Center.

* $2,000,000 Federal transportation grant for TARTA, similar to the one received for 5/3 Field.

* $9,900,000 Revenue bonds...County-backed bonds guaranteed by the estimated yearly income of $702,000 from the operations of the arena.

Of these, the TARTA grant and the savings on the SeaGate Center bonds are probably achievable.

So let's look at each of the other revenue sources...first, the Hotel/Motel tax.

Revenue from an additional 2 percentage points on the lodging tax is estimated to produce $43,700,000, of which $42,500,000 is counted as revenue for the arena. The current lodging tax in Lucas County is 8%, with 2% being dedicated to support of the Convention and Visitors Bureau for promotion of the area. Of the remaining 6%, most of what is collected goes to the County to pay off the SeaGate bonds. Municipal jurisdictions can impose 3% of the 6% and collect that themselves. Currently, Toledo, Oregon and Sylvania impose their 3% and dedicate that to the County. The City of Maumee, the Village of Holland and Springfield Township impose their 3% and keep it. The proposal for revenue assumes that these municipalities will begin to "contribute" their lodging tax for the arena.

The 2 percentage point increase (which is a 25% increase) would also require a change in the state law. While Columbus often takes the position of supporting 'permissive' taxation, any organized opposition by the Hotel/Motel industry would be a significant problem, especially in an election year.

But the biggest problems will be the opposition from local hotel/motel owners - and for good reason. Taxes on rooms include the lodging tax AND the sales tax. Total tax rate in Lucas County right now is 14.75%. Increasing this 2 percentage points will mean that our overall tax rate will be 16.75% which puts us FOURTH HIGHEST in the country. (I mistakenly said sixth highest on the radio.) Cincinnati is at 17.5%, Houston is at 17%, Kansas City MO is at 16.99% and Columbus/San Antonio/Toledo would be tied at 16.75%.

More importantly, Perrysburg is only at 9.5% total. So our nearest competition is only about 10 minutes from downtown and you could save 7.25% on every night's stay by NOT staying inside Lucas County. And any subsequent development would be more likely to take place next to where people are staying...meaning that we'd be more likely to have people commute into the arena and then leave.

I don't know that Lucas County can afford to increase our taxes (especially ones paid by visitors) and not have any negative consequences of doing so. As one person at the Community Voices forum said, "The last impression our visitors will have is of the third highest tax in the country - not good." So even if Lucas County does increase the lodging tax, we need to balance the projected increases from the increased tax against the estimated reduction in room rentals likely to occur from an increased price.

And the whole purpose of a lodging tax is to help put "heads in beds." I've not seen anything in the report to indicate that such a tax will actually put more "heads in beds."

State support is estimated at $12,250,000 which is 15% of the project costs. This money would come from the state's capital budget through the Ohio Cultural Facilities Commission. In the past, this commission has provided support for sports facilities, along with other projects. Their website shows they have supported such facilities at between 8-13% of the project costs. The arena already has $5.5 million from previous state budgets committed to the project. But I do not think it is realistic to expect 15%, especially with the other projects that are requested within Lucas County.

However, even if we could get 15%, the 15% ONLY applies to the project LESS PROPERTY ACQUISITION. The cost of acquiring the property is estimated at $7,750,000. Subtracting that from the total cost of $81,850,000 gives us a project cost of $74,100,000. This means that 15% from the state would only be $11,115,000 or $1,135,000 short of the estimated revenue.

Naming rights presents another challenge. According to namingrightsonline.com, getting $14 million for our new arena - even if combined with naming rights for the convention center - would put us third highest in the country. While I'd LOVE to have someone walk in and plop down a check for $14 million to name the arena, prudence tells us that such a company would do their research and know what naming rights are going for and make an appropriate offer.

And that leaves us with revenue bonds. The revenue bonds are county-backed bonds that are paid for from operating income - profit - from the arena. Part of the revenue includes $293,000 in parking income. However, the report does not identify WHERE the parking income comes from. There is nothing in the report to indicate that parking spots are going to be built as part of the arena. So this means that current owners of lots would be expected to share their profits with the arena. One of my colleagues phrased this as "giving back" to the arena, although I'm not sure what the parking lots owners would be 'returning'....

So the first challenge would be getting an agreement with parking lot owners to turn over a portion of their profits to the arena. Absent such an agreement, the potential profit would be reduced by $293,000.

The total profit for the arena is estimated at $702,000 (which is the lower number in the two scenarios in the report) which would support bonds of $9.9 million. However, from this gross profit amount, the consultants recommend that $188,000 be set aside for capital reserve funding. This is prudent and I support it, but it leaves a net profit of only $514,000. If we use the actual profit, we'd only be able to support bonds of $6,853,000. This means that there is currently a gap of $3,047,000 million in bonding ability. And if you exclude the revenue from the parking spots, you reduce the net profit to $221,000 which can only support $2,950,000 in bonds - a gap of almost $7 million.

Further, you'd have to leave some room for not achieving your revenue projections - or for having some expenses exceed your budget. So no matter what the projected profits are, you could not rely upon having ALL of those profits available to finance bonds.

The problem with not having solid numbers for the revenue bonds is that the County (meaning you and me) would be on the hook for meeting any shortfall between actual revenue and the debt payments for the bonds that do get issued.

These are my concerns about the financial plan that has been presented. There are other concerns as well - such as:

* should we go forward with site acquisition without having a signed tenant?
* should we be putting more focus on private funding versus public funding?
* should we go forward with any other part of the plan prior to having the state law changed to allow us to collect the additional hotel/motel tax (which counts for over half the funding)?
* if this project makes financial sense, should this be the major priority of the county, or should we be focusing more on such capital items as a new/renovated jail or shovel-ready properties for development?

I don't raise these questions to stop the project or, as I'm often accused, of trying to delay or be an 'obstructionist.' I raise these questions because 1) no one else seems willing to and 2) because they need to be answered!

There are serious financial risks and the only way that we can face such risks is to first know what they are. We, as a community, may decide that these are risks we're willing to take, but we cannot make an informed decision if we negate them or refuse to face them. And I don't abide by that old "trust me - we'll take care of the details later" approach.

I again encourage you to read the report and then participate in the public hearings that will be scheduled.