October 02, 2009

AEG's sweetheart Sprint Center lease: the breakdown

After all the confusion over exactly how arena managers AEG and Kansas City are splitting money from the Sprint Center, Justin Kendall of K.C.'s alt-weekly The Pitch was kind enough to send over the actual section of the lease that spells this out. And it's an eye-opener, as much as any document that includes phrases like "All Prior Fiscal Years' Six Million Dollar Amortization Payment Cash Flow Deficiency" can be said to open anyone's eyes.

I'm no contract lawyer, but if I'm reading this correctly, here's the way all profits from the Sprint Center are disbursed:

• The first $347,000 a year goes to pay back the six million dollars in cost overruns that AEG and Kansas City rang up for the arena, split 80/20 between the city and AEG, plus an interest rate of 4%.
• The next $6.7 million a year goes to pay back AEG's $50 million share of the pre-overrun arena cost. AEG, however, gets paid back at an interest rate of 12%.
• Next, AEG gets enough money to earn it a guaranteed 16% return (including those interest payments on its $50 mil) on its initial investment. As an added bonus, if there wasn't enough to earn it a 16% return in some prior year, AEG can take out extra in subsequent years.
• After that, $3 million (total, not annual) is put aside for a Capital Reserve Fund. And finally, if there's anything left, it's split 50/50 between AEG and the city. Little wonder that AEG president Tim Leiweke called this a "throwaway provision," and said his lawyers predicted they'd never earn enough to have to pay it.

What's missing here? Well, while AEG gets a guarantee of being made whole on its $50 million investment, plus 12% interest, plus 4% more in profit on top of that, the city of Kansas City is on the hook for $216 million in arena bonds — amounting to $13.8 million a year in bond payments, K.C. budget director Troy Schulte tells Kendall. While an occasional $1.8 million windfall, as the city got last year when the Sprint Center had an exceptionally good year, is nice, it's still a drop in the bucket on that debt.

In other words, AEG may have been an excellent choice for an arena manager, one that has used its clout to fill the Sprint Center with plenty of concerts. But in landing someone to run their new barn, Kansas City gave away the farm.