5/5/2013 9:15:00 AM Unpaid debt adds up for Prescott Valley Event Center
It seemed like blue skies ahead during construction of the Timís Toyota Center in Prescott Valley June 10, 2006. The looming recession would soon cast a shadow over the event centerís future.
File photos courtesy The Daily Courier
Events center agreement details
The 2005 four-party development agreement that set the stage for the Prescott Valley Events Center consists of 83 pages of background, legal descriptions, maps, and legal requirements.
Among the agreement's basic points:
The developer shall be responsible for obtaining financing for 100 percent of the cost of constructing the PVCEC (Prescott Valley Convention and Events Center), potentially including initial reserves for operating expenses...and debt service during construction and potentially during other portions of the PVCEC financing period.
The developer (through Global Entertainment or one of its subsidiaries) will define and collect contractually obligated income.
Operating revenue of the PVCEC shall be applied: first, to pay the center's operating expenses; second, to pay the base amount of Global Entertainment's management fee; third, to pay all current debt service on the PVCEC financing.
The agreement adds: "If the resulting net operating revenue is inadequate to pay all current debt service on the PVCEC financing, then any shortfall shall be paid first out of the funds held in the Fain Escrow Account, then from the Lockbox Account, and then from the Town Escrow Account."
"The town shall establish a separate account, segregated from its other accounts, called the 'Town Escrow Account.' The town shall credit quarterly to the Town Escrow Account (the sales tax from the events center building, and the sales tax from the surrounding entertainment district, amounting to 2 percent of the town's 2.33 percent sales tax)."
The agreement adds: "The funds in the Town Escrow Account shall be used to pay debt service on the PVCEC financing if the net operating revenues from the PVCEC, any funds from the Fain Escrow Account, and any funds in the Lockbox Account are insufficient to provide funds to pay the debt service in any month..."
If the funds in the Town Escrow Account equal or exceed the town's obligated reimbursement and debt service amounts, "the town may discontinue its credits to the Town Escrow Account and use the (obligated sales tax revenue) for any other lawful purpose."
This is the first installment in a series of articles on the financial status of the Tim's Toyota Center in Prescott Valley.
PRESCOTT VALLEY - As they contemplated plans for a multi-purpose events center back in the mid-2000s, Prescott Valley officials envisioned having a new source of sales tax revenue that would one day supplement the town's general fund.
It hasn't worked out that way, however.
Since the Tim's Toyota Center opened in the Prescott Valley Entertainment District in November 2006, the town has put about $10.4 million of its sales tax proceeds into paying off debt for the center, according to information from Prescott Valley Management Services Director Bill Kauppi.
At about $1.5 million this past year, the payment for the center amounted to nearly 14 percent of the town's overall sales tax revenue of $10,883,569 during the past fiscal year.
The payments have absorbed much of the sales tax money generated from three basic sources: sales from inside the arena, sales from the adjacent entertainment district, and sales from a "secondary credit area" along a section of Highway 69.
Although a 2005 multi-party development agreement stipulated that the debt would be paid by a combination of revenue from the events center (managed by Global Entertainment) and the town's designated sales tax, the center has failed to generate any net revenue in recent years.
That has left the town as the sole entity paying toward the $84 million in principal and interest on the center, including $35 million in principal and $49 million in interest (less about $3.3 million in capitalized interest).
Without the anticipated revenue stream from the center, the involved parties have consistently come up short in covering the debt service.
To date, the center is about $3 million behind in its debt payments. A notice that the town received on April 3 from Wells Fargo Bank indicated past due principal and interest amounts for 2010, 2011, and 2012. In all, the cumulative past due debt service totals $2,967,508.
And records show that the loan's heaviest years are still to come.
According to the amortization schedule that came with the 25-year bond issue, the debt requirements will gradually rise over the next 18 years - from $2.7 million in 2013, to a high of $3.8 million in 2030. Depending on the status of capitalized interest and reserve earnings, the bond will end in 2031 with a required payment of between $2.9 million and $6.2 million.
All of the remaining yearly bond requirements significantly exceed the $1.5 million or so that the town has been generating annually through its dedicated sales tax areas.
Hopes vs. reality
In 2004 and 2005, Prescott Valley was riding a wave of growth. New residential subdivisions were multiplying, and long-term plans for a downtown entertainment district were coming to fruition.
It was in that heady atmosphere that the town looked ahead to a multi-purpose arena.
Town officials viewed the arena as an anchor that would lead to exponential sales tax growth.
Along with the additional sales from concessions and tickets inside the building, the town was anticipating that the center would draw new businesses, which, in turn, would attract new customers.
"If there's a hockey team playing 33 times in the arena, there would be thousands of people in the downtown," Economic Development Manager Greg Fister said, referring to the projections relating to the center's home team, the Arizona Sundogs.
To some degree, he and others say the predictions were accurate. Fister says sales in the entertainment district have increased by about 32 percent since the events center opened. In addition, the center has helped to attract new businesses, such as Hampton Inn.
In the early days of the center, Fister said, the crowds materialized. "Back in 2006 or 2007, try getting into a downtown restaurant before a Willie Nelson concert. You couldn't," he said.
But no one disputes that the center and the surrounding businesses have fallen short of revenue expectations. And virtually everyone involved points to one major factor: the faltering economy.
"What we did not anticipate is the biggest recession since the 1930s," Town Manager Larry Tarkowski said.
Brad Fain, managing partner of Fain Signature Group, offered a similar view. "What nobody could predict was this thing we all call the Great Recession," he said.
Using projections from a 2005 feasibility study, the town had anticipated that the center would raise enough net revenue (income after expenses) to make up the bulk of the debt payments, with Prescott Valley's sales tax covering any shortfall.
Tarkowski said the town viewed the arena as a source of new sales tax revenue that it could put aside, and eventually dedicate to other projects in its general fund.
"We thought there would be a surplus, and (the bonds) would not be reliant on the town's sales tax," he said.
Rick Kozuback, president and CEO of Global Entertainment, agrees that revenue from the center was expected to make up a portion of the debt payments.
"There were certain buckets of money that were supposed to pay the debt service on the bonds," Kozuback said, adding that the net income from the center itself "was a revenue stream, for sure."
But, because the center "hasn't performed," Kozuback said, there has been virtually no revenue - only losses. He said the company has taken no profits or commission and estimates that Global has put more than $2 million into the center's operations to cover those losses. "We have to; otherwise the building would have shut down," he said.
The basis for the center was a complex development agreement that involved four major parties: the Town of Prescott Valley; Global Entertainment Corporation; the Prescott Valley Event Center LLC; and Fain Signature Group.
The 83-page document, along with an 11-page amendment, goes into minute detail on the various responsibilities of the involved parties.
The gist of it makes the developer (through Global) responsible for acquiring the loan for the center, while the debt would be paid back through an intricate system that tapped into various sources.
The first source going toward the debt, said Kauppi, was the net income from the center.
Then came a "lockbox" account, a Fain escrow account, and a town escrow account. Kauppi said the lockbox was initially intended to hold the sales tax money generated through the construction of the center, while the Fain and town escrow accounts were intended to contain the sales tax generated from the entertainment district.
"At the very beginning, that was supposed to be enough," Kauppi said of the entertainment-district sales tax money, in combination with the income from the center. Ultimately, the agreement added a "secondary credit" area, which Kauppi said was included to get a better interest rate for the bond.
Fister describes the secondary credit area as the retail along a portion of Highway 69 in the area of Tim's Used Cars.
The town was adamant right from the beginning that it would not take on responsibility for the bond, Tarkowski said.
To that end, he said, the town's response to initial proposals on the arena was: "If you are looking for the Town of Prescott Valley to do a traditional arena deal, the answer is 'no.' We were not willing to sell bonds to build an arena, bottom line."
The result of all of the negotiations and agreements was limited exposure for the town, Tarkowski maintains.
"Those bonds are not our debt," he said. "We have done a good job of quantifying and limiting our exposure."
Since 2009, the finances for the center have been the topic of a multi-party lawsuit that Allstate Life Insurance Company filed in U.S. District Court, claiming that the involved parties inflated the center's revenue projections in order to get a better rating for the bond.
To date, the lawsuit has generated nearly 800 filings, and is still ongoing. Until resolution of the suit, the question on the unpaid debt service remains unanswered. Meanwhile, the town's sales tax money is failing to cover even the interest on the debt.
Despite the problems the center has experienced, officials say it has done its part in molding a desirable downtown.
"It's helped shape the identity of the community," Tarkowski said, adding that he often poses a question to groups he speaks to: "What would Prescott Valley be like without (the center)?"
Fain says the center has been an effective anchor in the entertainment district.
"I truly believe it's a community asset," Fain said, adding that the center has been important in efforts to attract new business and industry to the Prescott Valley area, along with providing previously unavailable leisure opportunities. "You can be in a small town and still have all of that level of entertainment."
Fister, who came on board just as the town was firming up its events center plans, said the town had a number of goals for the center. Prominent among them was the enhancement of recreational and cultural activities in the area.
"We look at it as cities and towns are more than roads and water and sewer," Fister said, maintaining that the center is "an area amenity that enhances the quality of life."