During a prior installment of Glendale City Council Throws Money At The NHL, Glendale sought to issue bonds to raise $116MM to fund some aspect or another of the plan that was in place at that time. In the course of doing so, they issued a preliminary bond statement (link goes to AZCentral story which has link to bond statement), setting out the conditions of the bond and how it was to be repaid.
One of the things that Glendale pledged towards repayment of the lease was the parking revenues that it would generate from parking spaces that it was going to purchase from the arena operator. You can’t estimate the value of the parking rights without having some idea how many cars will park. In order to estimate how many cars will park at the arena, you need to have some idea about how many people will come there which requires having some idea about how many events there will be and what the attendance at that those events will be. As was set out in the preliminary bond statement, the City obtained some reports from experts quantifying the net present value of the parking rights. It summarized their findings in the preliminary bond statement:
The City has investigated the feasibility of charging patrons at Arena events for parking and has received estimates of the value of the Parking Rights. A report from Walker Parking Consultants, dated January 24, 2011, a copy of which appears in Appendix I of this Limited Offering Memorandum, indicates that over 30 years, depending on various factors including attendance at Arena events, the City could realize net parking revenues ranging from $141.2 million to $166.2 million.
A “Market Valuation Report of Arena Lease and Management Agreement, the Use and Non-Relocation Agreement and Agreement of Assignment, Reconveyance, Modification and Abrogation of Rights Regarding the NHL Coyotes Hockey Team and Jobbing.com Arena,” dated January, 2011, issued by CBRE Consulting, a subsidiary of CB Richard Ellis (the “Market Valuation Report”), a copy of which appears in Appendix H of this Limited Offering Memorandum, states that the fair market value of the Parking Rights and the Renegotiated Rights being acquired by the City is between $169.6 million to $179.9 million on a present value basis.
The City believes that the price it has agreed to pay for the Parking Rights and the Renegotiated Rights is proper and satisfies all legal requirements under Arizona law. Further, the City believes the Arena Manager Fee is fair compensation to manage the Arena.
The Walker Report and the CBRE Report both contained sections detailing how they arrived at their estimates. Both reports were included as appendices to the preliminary bond statement. For our purposes, the estimates of events and attendance at Jobing.com Arena are notable.
Future Arena event projections and assumptions were provided for this report by CSL International (Convention Sports and Leisure, International). CSL was retained to study the Jobing.com Arena and project future performance by one of the groups seeking to purchase the Coyotes.
Based on historical attendance records, the Arena had its best year (in terms of total attendance) in 2005 at roughly 1.15 million attendees and 95 events. The CSL projections show the Arena recovering back to that attendance number by 2013/2014, with a roughly three year recovery period from the low point in 2010. The CSL projections continue to grow with stabilization at 1.24 million attendees.
These event assumptions are presented below and discussed on the following pages.
The Walker Report then includes the following table:
The CBRE Consulting Report references various reports that the authors reviewed and makes the following statement:
The report that was relied upon most heavily in developing this Report was the Walker Study. After review and consideration, we accepted the projected number of events, paid attendance and parking fees for the first five years as reasonably conservative assumptions.
I’ve done a supplementary table that breaks down the non-hockey events that CSL projected would be held at Jobing.com Arena between 2011-12 and 2015-16.
Effectively, what Glendale was saying in the bond documents is that the experts at Walker and CBRE Consulting viewed an estimate of 48 non-hockey events, rising to 81 non-hockey events 2014-15, as being appropriate. In the language of the CBRE Consulting Report, these were “reasonably conservative assumptions.” They see about a 30% increase in people attending ticketed non-hockey events between 2011-12 and 2014-15. Keep that 30% in mind.
This information is of some importance to people considering buying the bonds, as they need to assess the likelihood that they’ll be repaid and Glendale was pledging the revenues that they were going to receive from the parking rights to repayment of the bond. Obviously, in determining how much revenue is going to be available, you need estimates of how many events there are likely to be and how many people are likely to be at those events. There are rules about what you put into bond offering documents.
Fast forward to 2012. The 2011 bond offering has failed. Another installment of Glendale City Council Throws Money At The NHL is taking place. The deal’s different this time – Glendale isn’t going to buy parking rights but will instead pay a management fee to have an entity controlled by the group purchasing the team manage the arena. Arizona’s constitution bars the payment of subsidies to a private business and so Glendale City Council obtains a legal opinion as to whether or not the proposed agreement violates the constitution.
The law firm that’s been retained to provide the opinion is provided with a financial analysis prepared by Elliott Pollack of Elliott D. Pollack & Company. According to a memorandum that he delivered to the Glendale City Council, Pollack’s company was asked to analyze two proposals relating to the operations and sale of Jobing.com Arena: one, in which the agreement before City Council was implemented and the other, in which the agreement before City Council was not implemented. His memorandum is not without filler and includes the following:
Finally, there is a certain status associated with an arena that is home to a professional sports team. This noteworthy standing in the community and sports world would be lost and would be difficult, if not impossible, to recapture at a later time.
This has nothing to do with what the analysis he’s doing and isn’t a matter for expert opinion but it’s there. Perhaps he felt that four paragraphs and seven bullet points has a certain heft that three paragraphs and seven bullet points lacks. The memorandum is a study in opacity and provides virtually no explanation for the assumptions that are made. He concludes that the Jamieson deal provides an average annual cost, using a 6.5% discount rate, of $7.9MM and that the average annual cost if the team vacates the arena will be $8.8MM.
This, of course, requires making some assumptions. His report includes the following table, summarizing the number of non-hockey and hockey events in the past few years:
You will note that the average of non-hockey events is considerably lower than the figure that Glendale used when it was going into the bond market, looking to sell bonds backed in part by parking revenues. Regrettably, Pollack does not make clear how many non-hockey events he is assuming for the sake of his analysis. We can make some pretty good guesses though.
Pollack has prepared two tables: “CURRENT DEAL::ARIZONA HOCKEY” and “OPERATING COSTS FOR CITY OF GLENDALE WITH NO TEAM PRESENT.” I’ll call them AH (Arizona Hockey) and NT (No Team). I’ve copied the following from the two tables:
There’s little in the way of explanation as to how he has derived these numbers. The great thing about Excel is that you can fiddle around and suss out how numbers have been calculated. It’s pretty easy to figure out how he has estimated the total attendance in the AH table: he’s simply applied a flat 1% increase annually, compounded. 886,640*1.01=895,325, 895,325*1.01=904,278, etc. After that, it’s straight multiplication to come up with the revenue numbers.
The NT section there is a bit tougher to figure out. If you divide $1,089,880 by $2.75 (the amount of the surcharge referred to in the AH chart), you come up with 396,320 people passing through the Glendale doors. I think that’s what Pollack did, because it passes the sniff test on a couple of different levels. First, if you subtract 396,320 from 886,460, you’re left with 490,140 fans attending hockey events. This is within 5,000 fans of their average regular season attendance per ESPN.com over the past few years, which suggests to me that that’s what he’s done.
Second, you’ll recall that I put up a table above summarizing the non-hockey projections that were relied on by both experts cited in the bond proposal. This one, remember?
In year one, they figured that 48 non-hockey events would produce 435,100 attendees at Jobing.com. Although he doesn’t explicitly say so, Pollack appears to be working with an average of 40 non-hockey events. 396,320 fans attending 40 events produces an average number of fans per event that’s reasonably similar to the amount produced by 435,100 fans attending 48 non-hockey events.
The precise calculation that Pollack’s performed on the NT proposal isn’t really relevant, although it irritates me that I can’t figure it out. (As an aside: the NT analysis has a lot of other question marks associated with it. There doesn’t seem to be any revenue other than a straight ticket surcharge, which strikes me as odd – surely Glendale doesn’t just intend to give use of the building to people and then collect a ticket surcharge. There will be some revenue. It’s also a bit of a knife edge thing; if the expense is $11MM a year with the same annual increase as Pollack calculated, the deals are basically neutral. If it’s $10MM a year, Glendale’s better off with no team on Pollack’s numbers.)
What is important is that Glendale seems to be working off of a completely different set of assumptions now than those which were included in the preliminary bond statement about the number of events at the arena. Even if there’s some sort of theory that the number of non-hockey events at the arena would only increase dramatically if there was a hockey team at the arena (which doesn’t make any sense to me, given the constraints in terms of schedulin g that the presence of a professional sports team creates), we don’t see an increase in attendance in the analysis of the AH proposal that is remotely commensurate with what Glendale and its experts were telling the bond market that they expected last year.
Do things change? Sometimes, sure. Does new information arise that makes old estimates less valid? Sure. This sort of expert work is an imprecise art at best. With that said, it smells bad when Glendale presents two diametrically opposed sets of estimates in the course of fifteen months or so, one of which serves to assure the bond market of the massive increases in attendance that are coming and the other that shows low growth and serves to permit City Council to get a legal opinion that the deal conforms with the gift clause. At the very least, it’s awfully convenient for Glendale. It cries for some sort of an explanation. On the surface, it all looks sort of results oriented.
To be exceedingly clear: I’m not saying that any of the experts involved here have done anything wrong. The lawyers who prepare the Gift Clause opinion work with the information presented to them. It would be interesting to know how Pollack came up with his numbers – in many cases in litigation, persons with the expertise required to perform the mathematical calculations will work off of assumptions dictated to them. The real question here is where the assumptions came from and why they’re so different now from a year ago. If this deal ends up getting litigated, I suspect that might come up.