Archive for May, 2009
How Good it Gets for the Lerner Family
Posted by Roldo Bartimole in Economic Development, Media on May 29, 2009
Here’s a case where Cleveland people subsidize one of its wealthiest families. The reverse philanthropy has gone over the $100-million mark so far. And yet, so long a way to go.
I asked the City of Cleveland for an accounting of how much the city has paid to bondholders for the Browns Stadium since 1997. The total came to $102,823,948.58, according to the Finance Dept. documents.
The city faces financing costs of another $160,367,109.48 in bond payments to be made until November 15, 2027, according to a refinancing done in 2007.
The Browns Stadium – a property tax free facility – is used almost exclusively used by the team owner. That means Randy Lerner and his family. Randy – worth a billion and a half dollars – is the son of Al Lerner. Al ironically was the principal person who helped Art Modell move the team to Baltimore. Not only will the stadium never pay property taxes but the lakefront land was donated free by the city.
Randy Lerner also owns an English football team from Birmingham. He paid some $100 million pounds for the team. He’s got the team name, Aston Villa, tattooed on his right ankle, it has been reported.
Really endearing.
This exclusive stadium use by the billionaire Lerner family means there are maybe 10 games a year. Ten days a year when Cleveland likely makes a little money from visitors who make purchases.
Now who would make that kind of investment except our sports-minded public officials with the help of our civic leaders? You would have to be a sucker. Oh….
This represents a puny return on a huge city investment. The city says that the cost to construct the stadium was $287 million. However, many believe that the cost was well more than $300 million. There was a strong belief that Mayor Michael White used city resources to cover extra costs. White had said at the time something to the effect “Let me drive this sucker.” He drove it.
He didn’t pay for it however. Now we pay.
The taxes to pay this money come from, of course, the “sin” tax, which was extended for 10 extra years, and Cleveland taxes – an 8 percent parking tax, a 2 percent increase in admission tax for all events in the city; and a $2 fee on motor vehicle rentals. Passed by City Council in 1996.
The Lerner family pays $250,000 in rent for its near exclusive use of the Stadium. The minimum rent doesn’t ever increase over the 30 year lease. Thanks Fred Nance. The city has the right to use the stadium less than 10 times a year but hasn’t much taken advantage of this economic opportunity.
By the way, the latest financing was counseled by Squire, Sanders & Dempsey. Would you expect anyone else? Yes, the game is rigged.
Browns Stadium, of course, has no naming rights. Just as well. However, that means NO income for the city.
However, Al Lerner did a dance around that issue. He put up two huge electronic signs that freely used the MBNA signal. MBNA, his credit card company, was the base of the Lerner family fortune. The large electronic signs face east and west as Shoreway drivers see every day. Free publicity.
This is the way the bond document describes the original funding for construction of the stadium…
Funding for the construction of the Stadium was provided by the City, the NFL and the Browns, the State of Ohio and by in-kind contributions of the City Department of Utilities as well as the Northeast Ohio Regional Sewer District and the RTA. The City’s contribution totaled approximately $190 million (not counting interest) generated by City cash contributions together with public issuance of various obligations paid by the City and County contribution. Approximately $10 million of the above total was originally lent by the Cleveland Development Partnership and subsequently refinanced in 2004 by the City. The NFL and Browns contributed nearly $64 million to the initial construction and the State of Ohio contributed nearly $37 million.
The city alone pays the debt incurred for the Stadium.
It doesn’t stop there.
The city is also required to feed the capital repair fund for major repairs to the Stadium. The payment schedule is as follows: From 2008 to 2020, the city deposits $850,000 annually; in 2021, $5.9 million; 2022, $6.3 million; in 2023, $6.7 million; in 2024, $7.1 million and finally in 2025, $7.5 million.
Do we think the city will be able to keep this burden?
That’s another $44.55 million cost that the city has to pay.
The city ran into a little trouble when the interest rate recently jumped to 12 per cent. A number of cities, including Cleveland, had been in the auction rate bond market. Bloomberg.com reported that the “auction rate market is now backfiring on hundreds of borrowers as fallout from the collapse of the subprime mortgage market threatens credit ratings of the world’s largest bond insurers, deterring investors from even the safest bets.” It named Cleveland among those cities using these tax exempt bonds for stadiums.
A city representative said that the interest rate rose to 12 percent for Cleveland. However, that lasted, she said, only about two weeks as the city refinanced its debt.
Of course, the city doesn’t share in the revenue from tickets sold, usually 72,000 attendance, the 8,000 club seats or the loge revenue, food concessions, parking or advertising in the stadium. All that revenue goes to the needy Lerners.
You might notice that the Browns get a lot of media attention.
However, you never see Jim Donovan jumping up and down reporting about the financial aspect of the Browns, or the Cavs, or the Indians. No spastic reporting that might do us some civic good.
The Plain Dealer seems to be able to devote lots of space to our sports teams. Front page? We’ll give you it all. But neither the news section nor the business section ever seems to touch upon the financial aspects of the teams. When it comes to the financial burden on citizens, especially for an impoverished city as Cleveland, there’s a news blackout. Silence.
It’s out of bounds. Foul ball. Yes, foul. But in another way.
Who Owns the Q Arena, Who Takes the Profits?
Posted by Roldo Bartimole in Economic Development, Media, Politicians on May 29, 2009
As a matter of fact, Dan Gilbert, owner of Quicken Loans and the Cavs, doesn’t own Quicken Loans Arena. Therefore it would be rather difficult for him to sell a share or the Chinese investors to buy a share.
It’s not his to give; not theirs to take.
The New York Times wrote recently that…
“The deal that may give a group of Chinese investors a minority stake in the Cleveland Cavaliers and its arena signals the first significant investment in a major American sports franchise by investors from China.”
The Q, as it is known, is owned by the Gateway Economic Development Corp., a non-profit organization set up to operate both the arena and Progressive Field.
Most of the cost of both sports facilities has been borne by the taxpayers of Cleveland and Cuyahoga County.
So, I for one resent that Gilbert can sell a portion of the Q arena to anyone.
But the fact that sticks in my craw and should anyone else’s is that Gilbert and the foreign investors sort of do OWN the place that we paid for and operate.
That’s because in the sweetheart lease the owners of the team have full use of the arena even when the Cavs are not playing. So every other event and its profits go to the owners, not the taxpayers.
So since the Q draws some two million customers at some 200 events, a lot of money that should go to the owners – us – goes to the sports franchise owner.
For more information than you probably ever wanted to know about the Q, go here: http://basketball.ballparks.com/NBA/ClevelandCavaliers/index.htm
The Times quotes Mark Rosentraub, a member of the Gateway board and former Dean of the CSU School of Urban Affairs (he’s now headed to the University of Michigan), saying…
“This is another example of Dan Gilbert trying to appeal to LeBron (James) and building the case for why he should re-sign.” He added, “And as the Cleveland economy suffers, like many other cities are right now, the Chinese investors give the team a hedge because they have deep pockets to take losses. If you are selling fewer luxury suites, the investors can help take the blow.”
The financing of the arena always has been a problem. Even now, the teams pay all ordinary expenses of Gateway’s operations. However, in the deal worked out, the team owners have taken over the income from the naming rights. Of course, the Cavs use Gilbert’s business as the arena’s name.
The naming rights, which started at less than a half-million dollars price per year, increased to nearly $1 million annually. So the naming rights income was substantial. But lost to Gateway.
I often get accused of being obsessed by Gateway. I’m not obsessed but I think a study of this era in sports tells a societal story. Now that we are building Billion Dollar stadiums even the cost of Gateway’s three sports facilities seems small. However, along with Baltimore’s stadium, Cleveland’s early venture into sport facilities construction pushed others into “having” to have a new stadium or arena.
However, now instead of hundreds of millions of dollars they cost more than a billion.
The Q, formerly Gund Arena (named after George and Gordon Gund, still minority owners of the Cavs) came in over-budget. There was a great fight over the cost overruns.
What follows is a piece I wrote in August 1995, for the Free Times. I believe it tells a lot more about how we operate as a community – how wealth combines with philanthropy, with honored civic organizations and with the news media to manipulate the public. See how elites talk about using the PD and its boss to advance their private interests.
The piece was entitled, “Gunds Sandbag Politicians”…
“Two startlingly blunt memos by Cleveland Cavaliers owner Gordon Gund and his chief counsel Richard Watson reveal strategies to place the blame for the $22 million overrun at Gund Arena on politicians and to shift the cost to the public.
“The leaked memos reveal cynical strategizing by the Gunds to manipulate public opinion in an effort to avoid making any significant payment.
“We all know that there is a major tug-of-war going on behind the scenes over the $28 million Gateway owes contractors. Who will pay for it? Who is responsible? Gateway or the Gund brothers – Gordon & George? (Some mistake this $28 million as the overrun. It is merely what Gateway can’t pay; the Gateway overrun actually amounts to more than $100 million! The final cost estimate was supposed to be $344 million while the actual cost is some $462 million, not counting interest.)
“The Cavs memos, brought to surface by Carl Monday and researcher Mark DeMarino of Channel 8, have been anonymously circulated. The Gunds’ memos suggest withholding information and shifting blame for the overrun costs to county and state officials.
“That’s gratitude for you. Mayor Mike White, County Commissioners Tim Hagan and Mary Boyle delivered riches beyond the ordinary person’s imagination to the Gunds. Now Gordon wants them sandbagged.
“What are instructive about the two memos are comments about the use of supposedly philanthropic organizations in the defense of the Gunds’ private business.
“Gordon Gund evidently wants assistance from the Gund Foundation. A nonprofit which often uses its fund to seed projects that then cost hundreds of millions of public dollars; Cleveland Tomorrow (now Greater Cleveland Partnership), a powerful corporate group that pushes politicians to siphon off tax dollars to special interests; and from Alex “The Snake” Machaskee and The Cleveland Plain Dealer editorial board.
“The mention of Machaskee (Gund spelled it Machaski, which should be a blow to The Snake’s ego) is extremely important. As Plain Dealer publisher and a member of Cleveland Tomorrow, Machaskee controls the most important outlet of information here, while sitting on the leading corporate-civic board.
“The Pee Dee has had several reporters working on Gateway finances for at least two months, but the paper has possibly been withholding vital information. This information, during this period of tense negotiations about responsibility for the $22 million owed on Gund Arena, could play a crucial role in how the $22 million problem is solved and who pays: the Gunds, who are blamed for making demands for more luxury than originally planned at the arena, or Gateway (which means the public). News delayed, in this case, is news denied.
“For instance, the Pee Dee knows about a secret luxury apartment built within Gateway for the Gund brothers at a cost of hundreds of thousands ($600,000 eventually revealed). Further, the Pee Dee has not examined the $2.3 million upscale restaurant, Sammy’s, built for the Gunds, or the $1,443,800 spent for furnishings for the 50 offices (30,000 square feet fully furnished, which at $38 a square foot would be worth some $34 million in rent over the length of the Cavs’ lease.) Further, none of this is on the tax rolls since it has been abated. The Gunds were also given three free loges (worth some $320,000 a year) and 1,700 free parking spaces for thirty years and a $10 million fee to compensate (them) for parking revenue at the Coliseum (where the Cavs played before Gateway).
“Almost untold at all is the $6 million deficit at Jacobs Field, where Gateway built a $7.2 million office building and a $5.2 million, 900-seat restaurant, gave three loges and hundreds of parking spaces free to Dick Jacobs who hasn’t lifted a finger to help erase the debt owed contractors there. The Pee Dee again has failed to put any of this in context for the public.
“If this information were published by the major newspaper in town, it would be a public relations nightmare for the Gunds and Jacobs – two of the most wealthy families in Cleveland and would play a role in the negotiations with Gateway.
“The first memo from Watson, attorney for the Gund brothers and co-managing partner of Speith, Bell, McCurdy & Newell, to Gordon Gund and others suggests a deal where the Gunds would shell out, at the most, $2,138,000 in discounted money toward the $22 million owed. Gateway would have to borrow $20 million more under this plan.
“The Gunds originally tried to have sales tax money tapped for payment of the debt. The Watson memo to Gund mistakenly identified sales tax again as a means of generating income when Watson means admissions tax as a way of paying off the debt. The admission tax is split under a complex agreement, but what’s clear is that public finances would bail out the deficit, leaving the Gunds’ wealth relatively untouched.
“Gordon Gund’s memo reveals consultation and the exchange of advice with David Bergholz, director of the Gund foundation and whose wife writes a column for The Plain Dealer.
“This raises a serious question about the use of a tax exempt organization bearing the Gund name for the profit-making enterprises of the Gunds. The Internal Revenue Service needs to examine the connection between the Foundation and private interests of the Gunds.
“In Gund’s memo, Bergholz is quote extensively analyzing a position paper on the deficit done for Gund and a letter from Watson to Tony Garofoli of Climaco, Climaco, Seminatore, Leftkowitz & Garofoli, who helped negotiate the original arena and stadium leases for Gateway. The position paper, Bergholz tells Gund, is ‘very defensive in its tone and does not deal with why the overruns actually occurred and who is responsible for them, if we are not.’ Bergholz describes the Watson letter as ‘very good in most respects, highly analytical and clear.’ But Bergholz, according to Gund, says Watson ‘begs the question’ on where responsibility lies for the overrun and he says that ‘discussion of the sound system – the way it is presented – is meat for the media.’
“The comments suggest that Gunds’ advisors were having trouble pinning the blame on others and are concerned about the cost of the sound system for the arena.
“Bergholz ‘strongly recommends we do nothing in the way of furthering public or even private discussions of our position until these negotiations (with Garofoli and Gateway) have come to a conclusion one way or the other. He believes that, of course, the best outcome would be for us to reach a mutually satisfactory solution with Tony et al, and jointly present that publicly with finality.’
“However, if the negotiations aren’t successful, Bergholz has another plan. Bergholz suggest Gund reach out to Cleveland Tomorrow, the most powerful corporate agency made up of the chief operating officers of the top fifty Cleveland corporations.
“Quoting from the Gund memo, the suggestion is ‘to do nothing publicly and to reach certain of the leadership of Cleveland through an audio presentation to Cleveland Tomorrow. This could be arranged by asking Joe Roman (Cleveland Tomorrow director) to put us on an upcoming Cleveland Tomorrow meeting, where Alex Machaski (sic) would be present in a membership capacity, along with other members… In addition David (Bergholz) also suggests there might be a time to have a meeting with the editorial board of the Plain Dealer.’
“As a second recommendation, Bergholz suggest ‘to attack those who are responsible – Gateway, the county, the city. He believes that if we are to do this, we must be sure we can succeed with it. He cautions that this involves substantial risk,’ says the Gund memo.
“Gund goes on: ‘David readily acknowledges that the county and city (very definitely including the mayor) are scapegoating us….’ Gund, whose families worth more than $2 billion, laments that ‘they do not know this is a business, not the George Gund Foundation, and (they) read of my family’s wealth in Forbes magazine and believe we are the logical people to pin this problem on and to have solve it.’
“The logical reason to pin the over-run on the Gunds is clear: they were in a position to demand anything they wanted from Gateway, which was facing a $10 million damage payment proscribed in the lease for not finishing the arena on time. The Gunds used their very significant leverage to get what they wanted. Now it’s time for them to pay up and stop whining.”