A good deal gone bad?
A Minneapolis developer signed an agreement a few years back to build and operate the Sears Centre Arena in Hoffman Estates, Ill., a suburb of Chicago. The city provided “about $55 million in bonds” to finance the project. Here are some of the facts, as reported in the Minneapolis Business Journal:
Under the development agreement, MadKatStep was required to repay the bonds and interest at a rate of about $3.9 million a year over a period of 26 years. Ryan, which built the arena and holds a majority stake in MadKatStep, guaranteed the first four years and has made all of the necessary payments…
Hoffman Estates officials said the sides remain far apart. MadKatStep wants the city to take on about $7 million in loan obligations and operating debt, in addition to the roughly $89 million in bond payments remaining over the next 22 years, they said…
Since opening in October 2006, Sears Centre has fallen short of financial projections and failed to turn a profit. It had an operating loss of $512,635 in 2008.
The arena hosted 84 events last year, including eight concerts. A 2005 feasibility study projected the facility would host 140 events a year, about 20 of which would be concerts.
The venue has two small anchor tenants: the Continental Indoor Football League’s Chicago Slaughter and the Lingerie Football League’s Chicago Bliss. It used to be home to minor league hockey, indoor lacrosse and indoor soccer, but those teams have since folded.
That’s a pretty big operating loss. The arena’s construction costs are sunk, so someone might be able to make a go of it when the economy gets better. The report notes that city is negotiating with AEG and others to take over operations of the arena, but how far they can wiggle off the financial hook remains to be seen.
An interesting project for an undergrad or masters student might be to look into the financing agreements that were put in place in 2005, prior to the opening of the arena, and the politics of how this was sold to the community.
Here’s another piece from last month, which suggests the tendency to overstate when selling public projects was at work:
[A]n official from the firm brought in to operate the arena on an interim basis after MadKatStep leaves says the Ryan Companies inflated the 11,000-seat venue’s moneymaking potential when it convinced the village to give it a $55 million construction loan.
“I think they were caught up in the (potential) success of the arena,” said Joseph Briglia, vice president for International Facilities Group.
But Smith noted the projections from 2005 were based on two reports, one commissioned by Ryan and the other by the village.
He acknowledged those studies “were wrong.”
A feasibility called for the Sears Centre to book 140 dates per year. But it’s averaged less than 100 annually.
40% off, eh? If I were a taxpayer in Hoffman Estates, I might be asking questions of my elected officials.** The stories in the press suggest that they’re putting the blame on the developer, but it takes two parties to sign an agreement.
**Update: some did, from the outset (see here, near the end).
Thanks to James Blakey for the link!