Monday, August 21, 2006

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.

11 comments:

Lisa Renee said...

Overall I don't disagree with your position, I would ask some of the same basic questions you are. I'd like more specifics more ironclad details than what we have right now.

It may be a small thing but if the SeaGate Center is re-named there will be costs associated with that. Even with including the SeaGate as a part of the naming rights process I think 14 million might be more than what we are going to get.

I also wonder what would happen if the Legislature doesn't approve the increase in the hotel/motel tax? What if the other communities who collect it decide to not turn it over to the County. What if hotel/motel owners don't support this? Since I was at the same Community Forum, quite a few people were nodding their heads in agreement when the statement was made about that increased tax being the last thing people remember about Toledo. That's not the way to get more visitors. "Come to Toledo one of the highest amounts charged in taxes per visitor" doesn't seem to be something we'd want on our welcome sign.

I also hope that people read the documentation on this and show up for the hearings. I'm glad you are asking questions, thank you!

Maggie Thurber said...

Lisa - great question about renaming SeaGate. I'll ask that question as well.

And thanks! Sometimes I'm around people who think I'm nuts because I ask such questions...it's nice to know that others think these questions are important, too!

Do said...

Generally, the idea/proposal of a new arena is overdue. That's a given.

As for where the money comes from.....I'm not so sure that we can count on those dollar amounts, in advance, when there have only been informal polls as to whether or not people would buy into the naming rights, season tickets, etc.

I would prefer to see Letters of Commitment from those that say they would bid on naming rights, or purchase season tickets when a new arena is complete, or purchase vendor spaces, etc. That would, IMO, give us a little better idea of how many are truly interested.

As for the 'built it and they will come' mentality....I don't know. In a perfect world? Maybe. But our situation in Toledo is not perfect and until there is some serious accounting done I'm not sure there should be anything started.

There are too many 'ifs' in this situation.

As for the hotel/motel tax? Why should one industry be expected to carry the burden for this project? Are they the only ones that will benefit from it? I'm not suggesting that all businesses/taxpayers foot the bill, but it seems unfair to expect one industry to take the hit on this one.

While the hotel/motel tax is not a deterrent to me when I travel, especially for a one night stay, it may well have a huge impact on those that want to come for a few days or longer.

There's got to be another way. I'm just not sure at the moment what it is.

-Sepp said...

I'm also glad that you would question these things and in a good position to do so. How will the decrease in Toledo's population effect the plan later down the line when we've lost even more people?

Maggie Thurber said...

-sepp...another good question that I will add to list. I hope to ask these questions as part of a presentation to the BCC, but if I cannot get agreement to have Mr. Chema present to the Board, I will make sure that these questions are asked at each of the public hearings.

Hooda Thunkit said...

Maggie,

I suppose it’s time for me to chime in on your questions and concerns with the arena financing ;-)

I believe you when you’re in favor of an arena, who wouldn’t be?

I agree with you about the parking situation. In my opinion, some sort of additional parking structure would be in order, if patronage in the winter months is in the plan, as I believe it is; you’re right about Toledoans not liking to walk a few blocks, especially when the snow blows.

Size matters, and should be carefully considered before this project is finalized. A frank and open discussion with the movers and shakers at U.T. is in order, before the final capacity is decided.

The County Commissioners should NOT entertain thoughts of purchasing a franchise now. The could later, although I doubt it.

As for the financials:

This project, if it is to be successful, should be privately driven; taxpayers should take a back seat on this project. But, that ain’t gonna happen because some small minority of politicians are flashing our tax money around like drunken sailors (I wonder where they learned that?). So, this project appears to be primarily driven by political egos, in lieu of any good and experienced business sense.

You have to love those “slippery” estimates and foggy numbers being tossed around; points to a complete lack of business acumen in the planning process.


And, the “revenue” numbers are pure fantasy!

* The hotel/motel tax increase, in lieu of neighboring rates, is counterproductive.

* The “savings” from retiring the SeaGate Center’s bonds is a sleight-of-hand debt switch, without the benefit of taxpayer approval.

* The money from the Ohio Cultural Facilities Commission, is highly optimistic, to say the least.

* The naming rights revenue (the only private money in the project) unprecedented, and unlikely to fully materialize.

* The Federal transportation grant for TARTA, is the most likely funding source to be realized.

* The revenue bonds are based on purely speculative numbers, which may never be realized, especially if UT gets into the arena business.

I could go on, but you’ve done such a very thorough job, there is no need for me to redo it.

Let me say that the fact that your co-commissioners votes indicate to me that this is, first and foremost, a political decision, as any thinking individual would have to have serious reservations with the proposal, as presented.

With a project of this scope and size, with such heavy taxpayer involvement, and with such speculative “revenue” numbers, one would expect all of the Commissioners to have cautious reservations and LOTS of very detailed questions before buying in, which doesn’t appear to be the case.

As one lone taxpayer, I would like to personally thank you for your intense interest, scrutiny and reservations about this highly speculative project.

If it were up to me, I too would have to say no. To do otherwise would be to deny what my senses were telling me…

Does anyone else besides me see this as a giant house of cards?

Maggie Thurber said...

I received the following via email and am posting it per the author's request.

Maggie....I was having trouble posting on your blog so I thought I would jot
you a note directly

While I agree all of your questions on the financing are valid, I think that
the one item I got out of reading the report was that the attendance figures
used for the primary tenant the hockey team were in my view very
conservative.

We all agree that Ned Skelden Stadium was politely put a quaint farmers
viewing stand. It at least had charm to those that went and in general was
not the primary reason that people stayed away from Mud Hens games. It was
able to provide a level of family entertainment that has been greatly
improved at Fifth Third Field and attendance has improved significantly.

The Sports Arena on the other hand can not be classified as generously.
It's a toilet and anyone with a family would refuse to take their children
there. It's as dank and disgusting as a lot of the people that attend the
games with a constant barrage of obscenities from fans that have kept my
family away for years. This report suggests only a slight increase in
attendance. With a properly maintained and managed facility the increase in
attendance would be much more significant. No report of this type should be
that optimistic, but I think it lends some reason for faith in the project.

Another revenue source is Fifth Third Field itself. Each year the Hens have
been paying back their portion of the debt at an advanced rate. While some
may not support the transfer in funds, most would if the same board operated
both teams.

The movie Field of Dreams quote "build it and they will come" has been used
sarcastically to oppose this project. It is so overdue that I believe
people will come. More tours would come instead of skipping the market all
together, especially if a national arena manager is used that could leverage
the rent of a number of facilites to attract tours here. More people would
attend hockey games and other events would be created.

Government is there to provide infrastructure. This facility would be a
needed compliment to our convention center and provide life to another
section of downtown.

We have to get together and find a way to get it done, not just by coming up
with questions but suggesting alternatives.

Keep up the good fight..the county will miss you when you are gone

Michael

Maggie Thurber said...

Michael...I agree - the attendance figures are not what I would have expected from a new arena, especially in light of the attendance at 5/3 Field.

But the figures are based upon average attendance at other arenas, some of which are relatively new. Even if the attendance estimates are low, there's plenty of room for growth between the estimated 6,000 attendance and the 8,000 seat availability. And design options could be considered which would allow for easy expansion in the future if desired.

The Mud Hens have been very successful and the stadium is EXTREMELY well managed. I have a lot of confidence in the management staff and the Mud Hens board. The additional revenue that the Mud Hens have produced is being used to help budget the general fund for the County. There appears to be some different interpretations of their contract. While the Mud Hens have not fought the County's use of the additional revenue in such a way - primarily because of the financial situation of the County over the last several years - I believe their interpretation is that such additional funds should be used to pay down the principle on their stadium debt.

If (and that's a big 'if') the Mud Hens were to purchase a franchise AND they were to retain the additional revenue, the County would have budgetary problems. While that's NOT a reason to oppose such an arrangement, it is an issue to be considered and addressed as part of the discussion.

I'll add your question about the attendance estimates to the list! thanks!

Kate said...

After having looked over the material I was reminded of one of my favorite memories :-)

My little Tommy. He and his little friend wanted a lemonade stand. After a couple of hours in the sun - his friend disappeared. After a few more hours I tried coaxing Tommy inside - finally I said, what do you want to earn money for? I can give you some money...

He said 'Mommy I want to buy you a car like we saw at the fair'. I'd ooh'd and aah'd over a red convertible on the fairgrounds just days prior to this.

Thinking about the anticipation of someone plunking down 14 mmmmmmmmmmillion dollars to name 8 or 9,000 seat arena in Toledo, Ohio makes me think about that summer day. When little minds think big....isn't it cute though?

Really?

Somebody go get my camera....

loafer65 said...

Maggie......I have asked many questions of our Commissioners regarding the new Arena project, better known, in my mind as "Gerken's legacy." At times I am not sure who is President of the Commissioners, him or Tina. At any rate, out voters said no to the Convention Center twice, I believe. They still built it, and for years the taxpayers subsidized it to the tune of about $500,000 a year. Today I wonder if we still are. My questions to Gerken et al is if the Arena does not pay for itself, what then happens? Do the taxpayers, once again, get stuck for the bill to subsidize it? Will it not compete with the Valentine, Stranahan, a renovated Savage Hall and other venues within driving distance, for big shows etc.? If it is 8-9000 seats what makes us think big shows will come? Savage Hall is 9000 seats now and was too small when they built it. Gerken wants the basketball team to come downtown to play their home games. They average about 4000 people at their games now, INCLUDING season ticket holders who do not show up. What makes him think the students will travel downtown to see the program? Nothing that has been said makes me think this will be a success. In fact, when I ask Commissioner Gerken about things such as these questions he ignores me. But, how does that surprise anyone? All we hear are the R's have run our State for too long, but no one locally says a word about the D's, and what they have done over the past decade, to our City.

Maggie Thurber said...

Loafer - first, a clarification...The Convention Center doesn't get $500,000 per year anymore. It's only been $150,000 for the last several years. But I believe you're more right than wrong on the other points - especially about a new arena being in competition with other venues in the area.

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