• The Annotated Paul Marcaccio

    by  • July 29, 2010 • Uncategorized • 14 Comments

    If you aren’t reading Andy Grabia’s fine new website, “Why Downtown?” you should be. Andy’s doing some good work there and will, presumably, end up cutting the cost of concrete slightly when his corpse is used for filler in the foundation of the new arena. It will be his final service to the taxpayers of Edmonton. This is his transcript of Paul Marcaccio, EVP & CFO of Katz Group speaking to Edmonton City Council.

    “Thank you, Ted, and good afternoon everyone.

    I will be making some brief comments, which touch on two critical issues, sustainability and funding.

    Now, there’s a lot of talk, and from our perspective much concern, about the long-term sustainability of the Oilers in Rexall Place.1,2 This stems primarily from the revenue model which we are currently subject to. NHL hockey teams earn Hockey Related Revenues, and non-Hockey Related Revenues.3 The Oilers Hockey Related Revenues are limited, primarily because they play in the second oldest and second smallest arena in the National Hockey League, where revenue opportunities are lower than other NHL teams, and they’re effectively capped. The Oilers are located in the smallest media market in the National Hockey League.4 Size of market determines the pricing for broadcasts, advertising, and sponsorship revenue opportunities. Non-Hockey Related Revenues, which includes revenues from concerts, entertainment events, and other arena-based activities, which are ancillary to those generated by the anchor sports team tenant.

    Not only do the Oilers earn no, non-Hockey Related Revenues, they are the only team in the NHL that does not receive the non-Hockey Revenues from the facility in which they play. For sake of a close to home comparison, in Edmonton, non-hockey revenues go to Northlands. In Calgary, they do not go to the Calgary Stampede Inc., they go to the Calgary Flames organization.5

    It is for these reasons that we find ourselves talking about the Oilers long-term sustainability in Rexall Place. Currently, Daryl Katz has had to subsidize the team by several million dollars in each of the past two years in order for the team to break even. Under the Oilers current operating model at Rexall Place, a model in which we do not control the non-Hockey Related Revenues, that trend will likely continue in each year between now and 2014.6 Sustainability can only be addressed by a new arena, and having the same operating model as the Calgary Flames and all of the other NHL teams.

    Now let me make a few comments on funding. We believe a new downtown arena can be funded with a mix of public and private investment in a manner that benefits the city of Edmonton without an increase in property tax rates as a direct consequence.7 What we hope to do is build on what you have heard from the city administration, and to communicate our optimism that, starting with their proposed funding model, and having the opportunity to work through the various elements with the city administration, we will arrive at a workable solution.

    Picking up on Daryl’s comments, the Katz Group would invest $100 million dollars directly into the construction of a new arena that would be owned by the City of Edmonton.8 We agree with the city administration report that an additional amount of funding can be financed by the City of Edmonton using a CRL, with all of that amount being repaid over time.9 We hope to have the opportunity to assess and to agree with city administration on what this amount can be, based on all of the new development in and around the proposed arena district.10 The prospects of success for the CRL would be greatly enhanced by Katz Group’s plans to lead the development of the district, for which we have earmarked a minimum of an additional $100 million dollars of investment over time.10

    We understand Mayor Mandel’s belief that there should be some element of user-pay, or a ticket-tax, in the funding model, and we are prepared to have that discussion with city administration, though for the reasons I touched on earlier, there is natural limits to what we can agree to as relates to revenue streams.11 The balance of funds, including funds for related infrastructure, would come from other sources, including federal and provincial governments.12 In summary, we are aligned with the direction set by city administration, subject to reaching agreement on the various financial estimates inherent in that structure, and the specific business terms of the arrangement. We believe this can work for everyone.

    Thank you, and I’ll ask John to complete our closing remarks.”

    1. Pat LaForge was lying when he was quoted, four months after Katz bought the team, saying: ‘”Revenue sharing, at the time you write the cheque, is painful — and we’ve written some big ones in the last two, three years. I see it as a compliment to our business. We’ve come from the red to being in the black and we need to look at it as a point of pride. The CBA has been good for us, the [Canadian] dollar has been good to us, the fans have been good to us. Some sharing is required.’”

    2. Until this moment, I hadn’t heard anyone talking about it. Now I hear the people who burdened the team with a hundred million or so in debt saying so. Did someone screw up the pre-deal analysis? Or did you neglect to mention that Daryl Katz, proud Edmontonian, decided to play roulette with the future of Edmonton’s most significant cultural asset?

    3. Funny. I remember arguing during the last lockout that the owners of hockey teams use those teams to generate revenue outside of hockey and that, if the owner of a specific team thinks that investing in that team will pay dividends for his empire as a whole, there was nothing wrong with that. You couldn’t find an NHL owner who would say that then. Now, non-HRR (or, as the owners classified it when they did their deal with the players, “money that has nothing to do with hockey”) is revenue that hockey teams have. Congrats to the players by the way: the CBA completely destroys the incentive of the owners to actually grow the hockey business, where the money is taxed at a 57% rate by the players. The Oilers have little interest in growing that business by, say, hiring competent hockey executives or finding new revenue streams because you get a cut of that money.

    4. Mexico City has a “media market” of 8.5MM people and no NHL team. Maybe it’s the size of the hockey consuming media market that matters? Is Edmonton the smallest there?

    5. I can already see the Flames presentation to Calgary City Council in 8 years: “So Edmonton has a billion dollar pharmaceutical empire as part of their non hockey related revenue. Will you buy us one? We just want to be competitive with Edmonton! You’re as good as Edmonton, right? Right?”

    6. I guess they don’t have any faith in Tambellini and Lowe getting the Oilers to the playoffs before 2014 either.

    7. This is undeniable. It could also be funded by Daryl Katz without any city money and the city would still reap any of those benefits that are something other than smoke emitted by people who want to suckle at the public teat for a while.

    8. I’m a lawyer and even I have to admire their use of the word “owned” here. I’m willing to enter into a deal with someone whereby they get to own a condo in downtown Toronto to which I contribute a small percentage of the purchase price and am entitled to all of the revenue generated from it. We’ll buy a $500,000 condo, I’ll throw in $20K for the downpayment, you throw in $80K and pay the mortage and I’ll rent it out. For thirty years. At which point we’ll do the deal again. What? How will you profit? Umm…we’ll rent it to someone creative. I have a theory that they make property values skyrocket. No evidence of this but it’s a cool theory. Look, I don’t care if you already have a place that you’re making money off of. It’s north of the 401. I’m talking DOWNTOWN. Email address is on the sidebar – act fast.

    9. “We agree that you can make money in taxes to give to us.”

    10. That’s right. Katz is willing to invest an extra $100MM, provided that all of the property taxes from it are used to fund his empire. He’ll put in $100MM and the city will use the revenues it generates from the tax collected on this investment to benefit him.

    11. This whole thing is so disgusting on the part of the Oilers. It’s extortion. There’s no way to square “We won’t play in Rexall beyond 2014″ with anything other than a threat to leave town. You know what’d be fantastic? If the City did the whole thing, did a lease with Katz, made a deal on whatever terms he wants to make…and then, once a Phoenix type lease is signed, with like a billion dollars in penalties if the Oilers leave town, announced that they were imposing a tax on Oilers tickets, equal to the amount of the payments that the City is required to make. I honestly don’t know if cities are allowed to sign contracts preventing them from imposing taxes in the future, although it seems sort of contrary to public policy to me. This process is awful, even by the abysmal standards of the Oilers. Lock them in and then impose punitive taxes!

    12. This is, I would guess, news to the federal and provincial governments.

    About

    14 Responses to The Annotated Paul Marcaccio

    1. Deano
      July 29, 2010 at

      Up until last year, Sportnet West carried many more Oilers games than Flames games. I think this was an indication that, due to the 80′s team, the Oilers home media market was prairie Canada, while the Flames home media market was southern Alberta.

      Last season 80 of the Oilers games were televised, 40 nationally on CBC and TSN and 40 locally on Sportsnet West. Only 69 games of the Flames were televised, only 23 nationally on CBC and TSN and 46 locally on Sportsnet. Looks to me like the TV revenues for the Oilers should be larger than the Flames. Maybe Lowetide can comment on how that schedule should translate revenue-wise.

      For those of you interested, the 140 questions are here:
      http://sirepub.edmonton.ca/sirepub/cache/2/au0e1tunoqwcsr2skfgx2l55/5492807282010035026570.PDF

    2. RiversQ
      July 29, 2010 at

      This deal stinks to high heaven. It only gets worse the longer you look at it. The fact that the Oilers basically feel entitled to all arena based non-HRR in the entire city just boggles the mind.

      If the city paid the freight but got the Oilers to sign a lease for the life of the building (30 years?) with an inflation adjusted $250-300 MM buyout (or whatever number is equal to the city’s outlay in this agreement), would that be reasonably palatable?

      I generally find it repugnant to hand over a money making machine to Katz, but it seems even crazier for taxpayers to get essentially nothing for the investment. Promise the team and you’re getting somewhere.

      Even that still makes me squirm though. It’s a massive expenditure for the city to make on an entertainment company that generates about $100MM/yr in revenue, offers about 100 direct jobs, and watches the majority of the 57% chunk of revenue leave the city with the hockey players for about half the year. The bang for the buck in those terms is pretty crappy.

    3. RiversQ
      July 29, 2010 at

      OK, I suppose it would be significantly less than half the year if the hockey operations group could manage a playoff appearance.

    4. Schitzo
      July 29, 2010 at

      I honestly don’t know if cities are allowed to sign contracts preventing them from imposing taxes in the future, although it seems sort of contrary to public policy to me.

      Not according to the SCC.

      http://csc.lexum.umontreal.ca/en/2000/2000scc64/2000scc64.html

      All of PNI’s attempts to transform its case into a claim for compensation cannot hide the fact that it is demanding compensation precisely because the City exercised its legislative powers in a particular way. … a municipality may engage in business and proprietary contracts, but it cannot agree to terms that fetter its legislative power.

    5. Schitzo
      July 29, 2010 at

      That should say “they’re not allowed to restrict future taxes”. You’re correct about the public policy thing.

    6. Tyler Dellow
      July 29, 2010 at

      Excellent work Schitzo! I’m going to start just posting random legal questions here and hoping a commenter will do my research for me.

      Looks like we’ve got this wrapped up then. Do a deal with Katz on whatever terms he is demanding and then, once a location agreement is signed, start taxing his operation such that the users bear the cost.

      OK, what’s the next problem?

    7. Chris Cziborr
      July 29, 2010 at

      “This is, I would guess, news to the federal and provincial governments.”

      Apparently, local media aren’t interested in investigating this point. Instead, they’ve been content to parrot Katz’ bizarre claims that these funding sources are a lock.

      Unbelievable.

    8. July 29, 2010 at

      I think this was an indication that, due to the 80’s team, the Oilers home media market was prairie Canada, while the Flames home media market was southern Alberta.

      From what I’ve been able to determine (mostly from cab drivers in the respective areas), after the Jets left Winnipeg there was originally an effort to show Phoenix games on local TV… that didn’t go over all that well. In a short time, Winnipeg residents got over the pains of 1983/1984/1985/1987/1988/1990 and ended up throwing their support more or less behind Edmonton.

      In much the same way that if a Notre Dame QB speaks out against vanilla ice cream USC would create a Vanilla Appreciation Society hours later, as Winnipeg goes Saskatchewan….goes the other way: the Flames apparently starting making big inroads in southern Saskatchewan about the same time. Saskatoon and points north, however, tend to go more Edmonton. Next time you watch an Oilers or Flames game on Sportsnet West, watch where the Safeway Score & Win winners tend to be, you’ll see this seems to have some validity.

      If true, this clearly makes Edmonton the larger media market, though I’m sure saying this DK will announce that since so many Edmonton fans aren’t City of Edmonton taxpayers it clearly means that he doesn’t have enough of a local fan base to build an arena without public support.

    9. tazemazey
      July 29, 2010 at

      It’s been a few years since my logic and rhetoric courses in university, but it seems to me there’s a plain old fashioned non-sequitor in Marcaccio’s argument:

      Definition of the problem:
      “Not only do the Oilers earn no, non-Hockey Related Revenues, they are the only team in the NHL that does not receive the non-Hockey Revenues from the facility in which they play…. It is for these reasons that we find ourselves talking about the Oilers long-term sustainability in Rexall Place.”

      Definition of the solution:
      “Sustainability can only be addressed by a new arena, and having the same operating model as the Calgary Flames and all of the other NHL teams.”

      If the problem is: “we don’t earn non-hockey money” then the solution should be: “change your operating model so that you DO earn the non-hockey money.” (Work something out with Northlands, maybe buy out Rexall Place or something, I don’t know.)

      But it’s disingenuous to sneak in the “need” for a new arena when they haven’t justified it.

    10. Chris Cziborr
      July 30, 2010 at

      Tyler, just wanted to compliment you on what a bang-up job you’ve been doing writing these posts. You’re on a roll, man! Keep up the great work! We appreciate your efforts.

    11. NewAlgier
      July 30, 2010 at

      “I think this was an indication that, due to the 80’s team, the Oilers home media market was prairie Canada, while the Flames home media market was southern Alberta.”

      Like the sports team from my area? http://www.theonion.com/articles/you-will-suffer-humiliation-when-the-sports-team-f,10804/

    12. July 30, 2010 at

      It might be, interestingly enough, that the NHL’s revenue model as a whole is falling apart?

      http://latimesblogs.latimes.com/sports_blog/2010/07/chicago-blackhawks-stanley-cup-raise-ticket-prices-.html

    13. Quain
      July 30, 2010 at

      I don’t trust any owner or manager claiming fiscal distress unless I can see their (audited) books. There is zero incentive to disclose positive revenue information as an NHL team.

    14. Mike W
      July 30, 2010 at

      I agree with Chris Cziborr…

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