This is the fourth and final installment in a series on the financial status of the Prescott Valley Convention and Event Center.
Throughout much of its existence, the Prescott Valley Convention and Event Center has been embroiled in a mammoth lawsuit that questions the basic premises of the financing for the center.
The suit, which has drawn in dozens of plaintiffs, defendants, counter defendants, third-party defendants, and cross-claimants, has generated nearly 800 filings in U.S. District Court to date.
At issue: Whether the developers of the Prescott Valley Events Center engaged in securities fraud by artificially inflating the center's revenue potential.
At stake: $27.4 million.
The lawsuit's primary defendant, Allstate Life Insurance Company, maintained in its 2009 original claim that the Town of Prescott Valley, Global Entertainment, the Fain Signature Group and a number of other involved parties withheld important information about the $35 million bond sale that financed the construction of the Events Center.
The lawsuit states that the defendants "failed to disclose material factual information that indicated the Event Center could not generate sufficient operating revenues and sales tax revenues to make the project economically feasible."
The complaint goes on to contend that the center's developers knew they needed a bond rating to make the center financing viable, and accordingly tweaked projections on the number of events the center would attract, as well as the number of people who would attend.
"Allstate, reasonably believing it was buying investment grade securities, purchased the bonds in reliance upon false and misleading representations..." the complaint stated.
The company reportedly made three separate bond purchases, totaling $26.4 million. The initial claim lists $27.4 million as the demand from Allstate.
Throughout much of the complaint, Allstate compares the numbers from two feasibility reports that it claims were related - a 2001 analysis that was prepared when the City of Prescott was considering an event-center partnership with Global; and a 2005 feasibility analysis for the Prescott Valley Event Center.
Prescott ultimately opted out of the project. A March 2002 article in the Daily Courier reported that the Prescott City Council chose to indefinitely table a decision on whether to spend $15,000 to $20,000 on the next phase of the study.
In June 2006, as the Prescott Valley Event Center was preparing to open, Global President and CEO Rick Kozuback told the Daily Courier that Global chose Prescott Valley over Prescott because of increased political support. "The enthusiasm and the motivation versus 'wait-and-see,'" he said.
According to Allstate, the 2001 Prescott study covered virtually the same market area, but had much lower event and attendance projections.
As the costs for the Prescott Valley center escalated, the lawsuit claims, the center's developers fraudulently inflated revenue-potential projections to make the project pencil out.
While the Prescott report had predicted about 78 events per year, the "official statements" for the Prescott Valley facility bond projected about 133 events, according to Allstate's complaint.
But when the center began operating, the lawsuit claims that the revenue fell short.
"The Event Center failed to break even from an operational standpoint (much less generate $1.6 million in net revenue available to pay debt service), it failed to generate more than about 70 events per year, and it failed to obtain paying attendance remotely close to the inflated projections in the Official Statements," the lawsuit states.
In conclusion, Allstate claims: "The actual performance of the Event Center was actually close to the projections made for the city of Prescott in 2001. The Event Center was never worth anywhere close to $35 million and is expected to never generate any meaningful net operating revenues."
This past week, Michael Cillo, Allstate's outside attorney, said, "We stand behind the complaints, and the issues are before a judge."
Throughout the legal dispute, the Town of Prescott Valley has been adamant on one point: It did not issue the bonds, and therefore is not responsible for anything beyond its limited sales tax support.
The town's attorneys have filed a motion requesting that Prescott Valley be released from the lawsuit.
"The town moves for summary judgment on all remaining claims of Allstate and Wells Fargo because the undisputed facts show no basis for liability against the town," the town's motion states, adding that the town was "not the 'maker' of the allegedly misleading representation in the Official Statements..."
The town motion adds that no factual or legal basis exists for Allstate's claim that the town is responsible "because of alleged misrepresentations to bond purchasers in an offering document in which the town had no role."
Town Manager Larry Tarkowski noted that the town initially rejected a traditional arena deal, in which the town would have issued municipal bonds. Instead, the town pledged limited sales tax revenue toward the project. Therefore, Tarkowski said, "Those bonds are not our debt."
Deputy Town Attorney Steven Zraick also emphasized that point this past week. "They're not municipal bonds." He added that the Prescott Valley bond arrangement is somewhat foreign, as compared to recent arena deals, such as the Jobing.com Arena in Glendale.
Officials also have stressed that both feasibility studies were public information, which Allstate could have accessed in its due diligence prior to the bond purchase.
The trustee for the bond, Wells Fargo Bank also is among the plaintiffs in the lawsuit. Prescott Valley regularly makes its payments of sales tax revenue to the bank, and Wells Fargo sends out regular statements. The latest statement that the town received in April indicated that the bond has nearly $3 million past due payments.
Prescott Valley's motion maintains that Wells Fargo's breach of contract claim is "meritless," because the town has regularly paid "in full" the sales tax amount due under the four-party development agreement that set the stage for the Prescott Valley Event Center.
A ruling on the town's motion for summary judgment is pending in U.S. District Court.
In its initial answer to the Allstate lawsuit, Global made a general denial, which covered most of Allstate's claims.
For instance, the company's response denies that it made any misrepresentations or failed to disclose any material information, "including alleged factual information that indicated that the Event Center could not generate sufficient operating revenues to make the project economically feasible."
While Global's response admits that "net revenue from the Event Center, together with certain (sales tax), were sources for paying debt service on the bonds," it denies that the involved parties "fraudulently or otherwise inflated the projected number of events or attendance at events to be held at the Event Center in order to project revenues that could support an investment grade rating for the bonds, or for any other purpose."
This past week, Kozuback maintained that the comparisons that Allstate makes between the 2001 Prescott feasibility study and the 2005 Prescott Valley analysis were not valid.
"They were completely different buildings, different eras," Kozuback said of the two projects.
The proposed Prescott building was to be smaller and a "much cheaper building," he said, which would not have included a concessions area. "They're not comparable," Kozuback said.
He and other involved officials have attributed much of the revenue shortfall to the economy, which went into a recession soon after the Event Center opened.
Kozuback said Global continues its commitment to the Prescott Valley project. "We are a believer in that market." Although allowing that "it's been a struggle," Kozuback said, "We're committed and we keep working at it. Each year has gotten better for the past three years."
Like the Town of Prescott Valley, Brad Fain of the Fain Signature Group maintains that his company "had no involvement in the debt" for the Prescott Valley Events Center.
"The bond was totally outside of this office," Fain said.
He says the company has fulfilled all of its commitments in the center's development agreement.
"Do I think we did anything wrong in the entire deal? No," Fain said. "Not only did we fulfill all of our commitments, but we exceeded at some."
A decision on the lawsuit is pending. Until its resolution, the question of unpaid debt service remains unanswered.