Louisville’s Billion Dollar Basketball Arena

Photo Credit: Jamesmac96, CC BY 3.0

I was conveniently in Louisville the day this Courier-Journal article I was quoted in about the KFC Yum Center came out. So much of the writing about the boondoggles of publicly financed sports venues focuses on stadiums. But this piece shows that arenas can be plenty expensive too. Including interesting, Louisville spent $1 billion on a new arena – for a college basketball team.

I spoke to the reporter a while back and gave some general context about other arena projects, but much of the specifics around the financing of the KFC Yum Center was new to me. And quite eye-popping.

The arena’s total cost, including debt repayment, is estimated around $1 billion. And unless the debt is paid off early, the taxpayer subsidies will keep coming until Yum Center is 37 years old. “There is more public subsidy of the arena than was intended at the beginning or that anyone believed would happen,” said Pam Thomas, senior fellow at the Kentucky Center for Economic Policy. She called the arena a “cautionary tale” about the need to vet costs and benefits of big economic development projects.
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Keeping Yum Center afloat now costs Louisville Metro nearly $11 million per year — more than three times the city’s annual budget for such emergency equipment as fire trucks and ambulances. Over the next 30 years the city is expected to pay more than $300 million toward the arena. The state, with its own budget issues, also has pledged hundreds of millions more in taxpayer dollars over the life of the debt and has lifted a cap originally set at $265 million.
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“It’s one of the major local scandals in recent history,” said Wayne, who was a member of the Legislature’s capital projects and bond oversight committee as the arena project moved forward. In 2008 he voted for the bond issue but still expressed reservations about the finances and the volatility of the credit market. “It’s what happens when a power elite tries to impose something in kind of an autocratic way,” Wayne said.
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Civic leaders were confident the arena would pay for itself, even after choosing a waterfront site in 2006 that was criticized as $114 million more expensive than a smaller downtown alternative. In 2007 they killed an on-site hotel designed to provide more income, saying it would cut into the plaza space and wasn’t needed. With the exception of $75 million from the state, the arena was largely financed with bonds – a form of debt much like a home mortgage….Goldman Sachs called the arena financing a win for Louisville, even putting out a slick video touting how it would help revitalize downtown in 2011.
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To help compensate for the TIF’s poor performance, arena officials began raiding a maintenance fund to make debt payments. Metro Louisville in 2012 also bumped up its $6.5 million annual subsidy to $9.8 million, the maximum then allowed under the agreement with the arena. But debt payments and other expenses still exceeded what the arena was generating. In 2013, U of L agreed to a three-year cap on its share of Yum Center advertising revenue, freeing up an estimated $1.5 million the arena could use for debt payment. And the authority tried a fix that seems counter-intuitive — shrinking the TIF to two square-miles as a way to remove some areas in decline. TIFs capture changes in revenue from the base tax year. That usually means revenue goes up, but change can cut both ways. When Boland Maloney Lumber Co.’s downtown lumber yard closed in 2008, for instance, the TIF lost value.

Adding to the arena’s money woes were escalating annual debt payments. In 2013, annual debt service was nearly $21 million. By 2022, it would exceed $31 million. Cox became the authority’s fourth chairman in a decade in 2016 and said he quickly learned the arena faced a bond default within a few years. “We were so far behind what everyone expected,” Cox said. “To me, that was overwhelming.”

One area that deserves further scrutiny is how the University of Louisville was able to secure an almost NBA-style lease on the new arena.

As the Yum Center’s debt struggles became commonly known, U of L’s lucrative lease became the subject of debate. The lease, which originally ran through 2044, gave U of L 88 percent of private suite revenue; half of net revenue from merchandise sales, whether the school was playing or not; half of net concessions during U of L events; and other revenue. In recent years, the men’s basketball team made about $20 million from ticket sales, concessions, premium suite rentals, advertising and other revenue. In 2016-2017, the program paid the arena a net settlement of $1.36 million.

This exceptionally lucrative lease, which former arena board member Todd Blue says allowed the university to “commandeer” a community asset, was part of what made U of L the biggest money-making basketball program in the NCAA.

Part of how U of L did this was by threatening to build their own arena on campus. City officials wanted a downtown arena. I question whether the university’s threat to build a campus arena was credible. The state likely would not have given them the money. Meaning that if the university wanted to build a super-lucrative money maker with luxury suites and such, it would have had to directly borrow the huge amounts of money needed to do it – meaning most of the revenue would be pledged to debt repayment. I doubt they would have netted anything nearly as much out of their own arena.

As reporter Allison Ross points out, conflicts of interest suggest this negotiation with the university may not have been all that it seemed:

Denis Frankenberger, a Louisville businessman and outspoken critic of arena finances, questioned whether there were conflicts of interest in the original contract negotiation, noting that several of the arena’s board members have ties to the university. They include former U of L basketball star Junior Bridgeman and Jim Patterson, for whom the U of L baseball stadium is named.

Given what we know about Louisville’s basketball program, some kind of shady situation can’t be ruled out. There should at least be some sort of forensic investigation into this to find out exactly what transpired.

In any case, don’t think that stadiums are the only sports projects that can suck up huge cash. Arenas can also be far more expensive than you might think.

Click through to read the entire article in the Courier-Journal.

from Aaron M. Renn
http://www.urbanophile.com/2018/07/16/louisvilles-billion-dollar-basketball-arena/