Below is the text of a critique of the Business Plan as published in the Whig, on April 16, 2005:
Can a new arena really help a city's downtown?
By Derek Baldwin
Saturday, April 16, 2005 - 07:00
It's no wonder that city politicians and senior city managers have long looked to London's sport and concert arena for inspiration to build Kingston's proposed $37.3-million, 5,000-fixed-seat, large venue entertainment centre on Anglin Bay.
A new report by Vic Cote, London's general manager of finance and corporate services, suggests that London's new downtown venue is getting on with residents there like a house on fire.
Figures obtained by The Whig-Standard show the London facility has outpaced expectations by more than double, drawing 600,000 spectators in 2004.
Legendary musical acts such as David Bowie, Rod Stewart and Shania Twain have flocked to London's John Labatt Centre.
Tickets to sold-out London Knights junior hockey games are akin to gold.
As many as 121 events were held last year, 41 per cent more than anticipated.
All 38 executive suites have been leased.
And names are being added almost daily to a waiting list for the highly coveted 1,000 club seats in a complex that will celebrate its third birthday in October.
By all accounts, the John Labatt Centre is a gleaming showpiece of a city vying to live up to its ranking as the 10th largest market in Canada by investing in its downtown.
By comparison, Kingston ranks as the 20th largest city in the country economically and demographically.
"The John Labatt Centre continues to outperform pre-build expectations," Cote said.
After years of heated debate in the community in the lead-up to London council's decision to finance the $42-million facility using ever-precious taxpayer dollars, Cote says the John Labatt Centre has skyrocketed to international acclaim and has "ascended to world ranking among event centres.
"The centre was ranked number seven by Venues Today in their annual ranking of venues of similar size."
Cote says that other events-industry watchers are also effusive in their praise.
"Pollstar, the industry leader in entertainment news, rated the John Labatt Centre number 44 in their Top 100 facilities in the world, regardless of their size," Cote said in his report.
For good reason.
Not only have concerts and hockey games filled the 9,100-seat arena to the rafters (seating at the London venue is 10,300 with added seating on the floor), Cote says the facility has lived up to its multipurpose design promise by drawing an audience of varying thespian, athletic and musical tastes.
Since opening, the John Labatt Centre has hosted:
* A National Hockey League game and an exhibition NBA exhibition game.
* Broadway shows such as Fame, Cats, Grease and Saturday Night Fever.
* Family shows such as Disney On Ice, the Harlem Globetrotters, Lord of the Dance and magician David Copperfield.
* The 2005 Canadian Figure Skating Championships.
Next month, the arena will host the Memorial Cup, the coveted championship of Canadian major junior hockey.
So how does the new arena hold up financially?
Cote reported that the John Labatt Centre rang up $12.3 million in gross revenues in 2004 or "double what was anticipated" early on.
Net, or take-home, profit for the centre was $750,000.
The latter was shared by the city and London Civic Centre Corp., a private firm that brokered a 50-year lease of the complex with the city.
London Civic Centre Corp. banked $600,000 of the net profit in only its second full year of operation.
For its investment, the City of London received a return of $150,000.
While the city's share of profit will climb to 45 per cent in year six of operation and to 70 per cent in year 11, there is one drawback to the much- celebrated Labatt Centre, according to some of the city's politicians.
When beancounters posted seemingly favourable 2004 arena net profits, they omitted one critical line item -- the $4.5 million being shelled out annually by taxpayers to cover the city's cost of borrowing the tens of millions needed to build the facility.
If the cost of borrowing was added to the yearly financials, the Labatt Centre would actually show that it was in the hole $3.7 million in 2004.
London Mayor Anne Marie Di Cicco couldn't be reached for comment.
But in an interview, deputy mayor Tom Gosnell says the $150,000 return last year isn't good enough, considering city taxpayers are paying millions annually to keep the facility humming like a rock star on amphetamines.
He has called for a review by the city to reopen negotiations to seek a higher take of the profits in light of the overwhelming success of the Labatt Centre in its first couple of years.
Gosnell says he isn't impressed that "the thing is running at huge losses" for taxpayers but is making money for the private sector.
And therein lies the rub, Gosnell says, for Kingston taxpayers.
Despite assurances by Kingston officials that the capital costs to build a sports and concert facility on Anglin Bay won't require tax increases, Gosnell says he can't fathom how a city less than half the size of London with a proposed riverfront facility roughly half the size of the Labatt Centre can avoid dipping into the public purse to make its new arena economically sustainable.
Most troubling for Gosnell -- who also served as London's mayor from 1985 to 1994 -- are claims made in a new Kingston LVEC draft business plan released April 6 by arena project manager Don Gedge that revenues alone at a new Kingston facility will cover debt costs, thereby avoiding tax increases to build it.
Mayor Harvey Rosen pledged in a 2003 fall municipal election that he would start to build a badly needed new sports and entertainment complex by 2006 without foisting huge tax increases upon homeowners and city businesses.
To build, the City of Kingston would borrow $16 million over 30 years to finance the largest chunk of the cost. That debt, Gedge claimed, would be paid down yearly by the revenue generated at the facility -- not from property taxpayers in Kingston.
Alternative capital financing to complement the $16-million loan would include $3 million from downtown merchants and hoteliers, $2 million in community fundraising, $3 million from development charges, $2 million from new revenues at city-owned parking lots downtown, at least $8 million from senior governments and $3.3 million from Kingston's capital reserves.
A possible $5-million sale of the Memorial Centre has been taken "off the table" as a financing instrument for the proposed riverfront indoor arena, Gedge says.
The key number in Gedge's draft business plan -- to be finalized later by the LVEC steering committee and city council -- is the projected net revenues of $829,462 in the first year of operation if the new LVEC were operated by a private-sector professional management firm such as, for example, the Ottawa Senators' Capital Sports division.
London's Gosnell believes the assumption that a new Kingston arena would rake in $830,000 in net profits is a wildly optimistic figure given that the Labatt Centre only earned a net profit of only $750,000 last year.
The numbers don't add up, he says, when one considers London's new facility doubled its original performance projections.
"This is nonsense, this is not a full and accurate picture of the cost of running the centre," Gosnell said. "I'm not saying you should or shouldn't do it. But this is pie in the sky that you will make money. It will never make money."
For example, Gosnell says even with expanded seating on the floor at a new Kingston arena, the total capacity would be 6,800 as compared to a maximum 10,300 in London.
Last year, London held 121 events as compared to Gedge's predicted 97 events to be held annually in Kingston.
Gedge is predicting 300,000 people would attend the Kingston arena yearly, half of the 600,000 who attended the John Labatt Centre last year.
With fewer events, fewer seats and fewer tickets sold, Gosnell wonders how Kingston could possibly post a stronger bottom-line net profit than London.
He also points out that Kingston's draft business plan hasn't identified the cost of acquiring the Kingston Marina property nor the lost property tax revenue now being paid to the city from the marina site owned by John Wright.
Under Gedge's plan, the money to purchase the property will be drawn from capital reserves.
While not a direct tax increase, Gosnell says Kingston taxpayers will at some point pay to compensate for the funds drawn out of the reserve fund.
In an interview with The Whig, Gedge counters that his numbers do withstand closer scrutiny after a thorough review of sport and concert complexes across Ontario -- such as London and Sarnia, both of which Gedge had a hand in either preparing financials for or managing.
Gedge also helped the City of Oshawa in the early stages of planning for its proposed $45-million, 180,000-square-foot downtown sports and entertainment complex.
In his business plan, Gedge forecast that a Kingston riverfront facility would earn in its first year a total $7 million in gross revenue from ticket sales as compared to London's $12.3 million.
After expenses for Kingston Frontenacs and concert promoters are accounted for, the revenue for the LVEC facility alone, Gedge says, would be $3 million, minus $2 million in expenses.
Gedge's formula leaves enough money for $100,000 in the first year to be set aside for a rainy-day repair fund, which would climb annually. As much as $10 million in reserves would be paid annually by the 30th year to ensure a new riverfront rink can pay for its own maintenance.
After all expenses are accounted for, final figures show $830,000 in net profit in the first year if the Kingston LVEC were professionally managed by an outside firm.
All of the $830,000, Gedge says, would be directed to debt payments in the first year.
The annual cash flow is expected to increase over the years to $1.6 million by the 30th year of operation and would be sufficient, Gedge says, to pay down all debt as well as the added $20-million cost of borrowing over the 30-year life of the loan.
Gedge proffers that his yearly projected net revenue cash flow is higher than what the Labatt Centre took in last year for a number of reasons.
The City of London brokered an agreement with private-sector operators that gave away a larger percentage of profit, he says, than Kingston is prepared to do.
Compared to the $350,000 in management fees for a proposed Kingston LVEC, Gedge notes that the London Civic Centre Corp. was paid $600,000 in 2004. Another $470,000 was paid to Global Spectrum to manage the Labatt Centre on behalf of London Civic Centre Corp.
Gedge says Kingston's LVEC would earn $600,000 from surcharges on tickets compared to the $300,000 tacked-on ticket charges in London, excluding Knights games.
"Their ticket surcharges are half of what ours are and that's a big reason for our profits. Ours go straight to the bottom line," Gedge said.
He also insists that the $830,000 net revenue numbers proposed to be raised from a riverfront rink in Kingston include all arena and sport rental income.
The Labatt Centre's net profit of $750,000 is only representative of the London Knights hockey team activities and doesn't include other arena rental revenues such as concerts, Gedge says.
"This is apples and oranges. When they're talking about $750,000, that's what the facility is earning from the London Knights. It's not for concerts, I've got the numbers," Gedge told The Whig. "I'm really comfortable with the numbers. In the case of London, why I know you're comparing apples and oranges is because I did the original business plan."
London finance manager Cote, however, says in his March 23 report to London's board of control that the "total net profit in 2004 for the centre was $750,000." Actual budget figures provided by Cote show that all 121 events, including Knights hockey games, resulted in a net operating cash flow of precisely $750,166.
Labatt Centre general manager Brian Ohl confirms that the total year-end net profit was $750,000.
Ohl, however, declined to comment on the Gedge business plan, noting he didn't review it.
He says the London Civic Centre Corp. does share in the profits of the Labatt Centre because it has assured the city that cash flows won't dip into the red.
"We guaranteed the building an operating profit. If it operates at a loss, the city doesn't put any money in," he said.
In exchange for managing the facility, the operators have also guaranteed they'll pay for all capital maintenance over the life of the building.
With a banner year such as 2004, the Labatt Centre operators are making money.
"When you have two Shania Twain [concerts] and Rod Stewart, it was a pretty heady year for us," Ohl said.
Two-thirds of a million spectators attending the downtown arena in London haves spurred on new restaurants and entertainment businesses in the city core, Gedge says
"According to a city official," Gedge said, "the John Labatt Centre is bringing people to the downtown that haven't been downtown for years, and on event nights, restaurant and pub sales are up by 50 per cent."
Kingston, he says, could enjoy similar bounty in its downtown.
In his draft business plan, Gedge says locating "the LVEC in the downtown is critical because it offers the greatest economic return for the community … the development of new sports and entertainment facilities building in downtown areas can help revitalize the city core."
If 300,000 people attend LVEC events every year, Gedge estimates 10 per cent of those will be tourists who'll spend roughly $271 each during their visits to Kingston.
"Increased revenues from tourism will be $8.1 million" and could climb as high as $20 million for the region, he says.
Gedge draws his suppositions, in part, from 2002 federal census data for Frontenac County.
He calls the new facility an "added attractor" that would help lure tourists.
Gedge cites a report that was prepared for the City of Oshawa to gauge the economic impact of constructing a new 5,400-seat facility in downtown Oshawa that mirrors Kingston's proposal.
Obtained by The Whig, the Feb. 23, 2005, report was authored by Hemson Consulting Ltd. consultant John W. Hughes.
Hughes didn't return phone calls from The Whig.
According to Hughes's analysis of a handful of cities that have embarked on ambitious sport and entertainment complex projects, it appears some restaurants and bars in the downtown have fared well following the ribbon cuttings of the new sport and entertainment centres.
But Hughes also reported that the new levels of prosperity for the hospitality industry didn't extend to the same degree to traditional retailers.
Downtown retailers in London, he says, "have not experienced the same level of economic benefits from the arena" as restaurateurs and bar owners.
In Bakersfield, Calif., Hughes found that the $38-million (US), 9,200-seat Rabobank Arena "had a positive impact on the food and beverage establishments in its immediate vicinity but less so on the downtown area" which lies six to eight blocks away.
Guelph's sport and entertainment centre has not, according to Hughes, had the impact city officials there were hoping.
The 5,000-seat arena "has had low sales of tickets and box seats for hockey and the naming rights for the building have yet to be sold. In addition, the arena has not been able to attract the number and type of non-hockey events promised as part of the business plan for the facility. The arena recently hosted the Memorial Cup, which benefitted hotels in Guelph but did not generate the anticipated level of impact for restaurants and retail uses."
When Hughes studied the newly expanded Blue Cross Arena in Rochester, he found that "overall, the project is seen to have had limited economic impacts on investment in downtown Rochester."
He says that arena projects can make an economic impact "particularly if they are of part of a comprehensive revitalization plan" of the downtown.
Hughes offered a candid summation of his look at cities with newly completed arena projects.
"The presence of a new facility is not sufficient in and of itself for success," he said.
New York City-based Neil de Mause is author of Field of Schemes, a book that delves into a trend, popularized by American cities in the 1990s, toward building sporting arenas and stadiums funded primarily by taxpayers, not sport team owners.
In an interview with The Whig from his Brooklyn home, de Mause says he's convinced that sport and concert venues don't bring economic prosperity to a downtown.
At least, not in the United States.
"There is an overwhelming weight of evidence. I've been writing about this for almost 10 years and I still haven't found a single economist -- who isn't paid by one of the teams -- who says there is any significant impact by sport facilities," de Mause said.
"Enough of them have been built by now that you would think there is one that people could point to and say this one turned things around.
"If I had one thing to say to the people in Kingston, I would say: Don't drink the Kool-Aid," de Mause said. "Don't build a sports arena if you think it will revitalize your downtown."
The chief reason sports arenas and concert venues aren't the saviours politicians claim, he says, is that ticketholders spend their dollars inside the venue, even when they're forced to walk through downtowns to reach their destination.
"It's certainly a trend to build it without parking and force people to take public transit and then walk through the neighbourhood. There isn't enough evidence to say whether it works or not," he said.
The New York Mets are trying that approach with their new $300-million-US baseball stadium, he says.
"People go straight into the park and buy their hot dogs there. So much of these new arenas and stadiums are geared toward more room in them to buy stuff -- more food courts, more souvenir stands. If someone buys a souvenir across the street, the team doesn't get any money," he said. "The whole idea is to keep everything behind the gates."
Team owners aren't only looking for concession profits from the sale of hockey jerseys and ball hats, he says.
They're also holding cities for ransom, he says, to spend taxpayers' millions to build sporting facilities.
The usual tactic of sport team owners is to threaten to pull their team out of town if they don't get their way, says de Mause.
"There is a lot of money to be made if you own a sports team by getting someone else to build you a sports arena. In a lot of cases these [team owners] are people with big local business interests and they've got money to throw around."
Microsoft executive Paul Allen, for example, spent $10 million campaigning for Seattle to build a new football stadium, de Mause says.
"For his $10-million investment, he got $300 million in public money for a stadium," he said. "But arenas don't pay back their construction costs. Sport team owners and their allies in elected office will make all sorts of claims but it is all nonsense."
The lesson for Kingston from the Seattle experience, de Mause says, is to "keep public money to a minimum and get the biggest share of revenue as possible."
Roger Noll, a professor of economics at Stanford University, has studied new sporting facilities in detail. He edited the book Sports, Jobs and Taxes.
Noll says the location of a sports and entertainment complex is of little consequence.
"In reality, there are very few economic spinoffs so it doesn't matter where you put it," Noll said in an interview with The Whig.
The fastest growing trend in sport facilities these days, he says, is devising means to empty ticketholders' pockets once they're inside the facility.
The idea "is not to make the facility larger in terms of the number of people who can attend. It's to make it larger in the number of concessions that are available. The people who are eating and drinking from concession stands are not eating downtown. They become a source of downtown congestion. There isn't any spillover benefit."
Noll says the selling point often quoted by politicians, that sport facilities attract new tourism dollars, is a red herring.
A raft of studies has found that arenas and sport centres don't attract new money to cities with new facilities, he says. Instead, they simply take existing dollars away from places where people are already spending money on diversionary pursuits.
"The fundamental problem with sports facilities and other kinds of localized entertainment is they are complete substitutes of discretionary spending by people who live there. They're not a source of increased income. Instead, it cannibalizes existing facilities," Noll said.
"What you will observe five years down the road is you will have fewer restaurants, fewer people employed in those restaurants," he said. "It doesn't increase spending, it just redirects it. Team owners will be making more money and others will be making less."
The only way an arena can work is as one element of an overall downtown strategy to raise the bar for the entire city core, Noll says.
The City of Kingston is fully engaged in an ambitious Downtown Action Plan to revive the city core from the ground up.
"That does work," he said.
"There are lots of circumstances in which downtown redevelopment as a political matter is stabilized and made more secure and made therefore, more effective, not because the sport facility directly benefits, but because it indirectly makes carrying the plan more feasible."
Noll ventured that hockey games don't inspire the spending some would believe in restaurant and java-joint districts near arenas.
He pointed to an investigative report done in San Jose, Calif., to gauge whether the loss of the San Jose Sharks games amid the NHL labour dispute was hurting restaurants.
The investigation "managed to find only three restaurants that had lost business. For the most part, people said they didn't notice. For the city as a whole, you couldn't detect an overall effect for the whole downtown area."
If a large city such as San Jose wasn't affected economically by the loss of an entire NHL season, Kingston probably isn't going to be affected by the presence of a minor sports hockey team, he says.
"It's not a big deal to have a minor league hockey game, it's not even a big deal to have a major league hockey game. It's just not the kind of event that has an impact to it," Noll said.
University of Waterloo professor Pierre Filion is a specialist in urban planning and downtowns. He once taught at Queen's University.
While he agrees a new sport and entertainment complex isn't a cure-all, he's less fatalistic than his American academic counterparts.
Filion is fond of Kingston's downtown. He named it as one of the three healthiest downtown cores in Canadian metropolitan regions between 100,000 and 500,000 population as part of his University of Waterloo study, The Successful Few, released last summer.
Halifax and Victoria were the other two.
Kingston was recognized based on a survey in which respondents says the Limestone City's core was special given its lively streets, lots of activities and culture, says Filion.
"Kingston ranked high. Kingston's downtown is very pleasant."
Drawing from his years of analysing downtowns and the constant challenges merchants face in an age of corporate franchise and big box culture, Filion says he'd normally advise city politicians against plopping a new mega-arena in the downtown for fear of cannibalizing existing eateries and watering holes.
"I think the Stanford professor is right insofar as a new centre is not a magic cure or a magic bullet," Filion said. "If a downtown is doing very poorly and you try to save it by building an arena or stadium or other kind of venue, it won't have much of an impact because people will go to an arena and leave afterward."
In Kingston's relatively healthy downtown, however, Filion believes a new riverfront sport and concert facility would only add economic prosperity to the mix because it will strengthen the lure of an already inviting and eclectic downtown.
"If you put another magnet downtown, in fact, those people are going to stay downtown afterwards. They won't come and go, because, unlike other Canadian cities, Kingston already offers that congenial environment. Those people who go to the game, they'll drink a coffee, go to the bar, shop or go for a walk along the waterfront."
Filion estimated that at least 40 per cent of establishments on Princess Street are cafes, bars and restaurants and would readily cater to any after-game demand by consumers.
"The one point I would make is Kingston is very different from other downtowns," he said.
Filion says he liked the idea of not building a parking lot at a new LVEC in Kingston.
Kingston politicians and senior staff are on the right track, he says, by insisting on using dispersed parking that already exists in the downtown core to encourage ticketholders to walk through the central business district.
"After whatever game people have seen at the arena, when they are walking back there are bars and restaurants and venues they can go to. It's very likely to have that interaction between the downtown and the new facility," Filion said. "The idea of not concentrating all of the parking at the arena will force people into the downtown."
Filion, however, says the downside to dispersed parking could be a negative impact on residential neighbourhoods that lie in and around the perimeter of the downtown core.
"If the arena is built close to a residential neighbourhood, and because of the noise, there could be a loss of value of the houses and people may move out. The neighbourhood could start to do poorly as a result of the arena. It could cause the deterioration of a neighbourhood that was interacting positively with the downtown."
Downtown residency is needed for the health of a downtown, he says, because residents spend money every day. More residents who live in and around downtown represent a critical mass that can provide a financial backbone on which to hang the flesh of a successful central mercantile exchange.
"That is why Kingston's downtown does so well," Filion said.
Queen's University professor Ken Wong is a marketing and business specialist who served on the five-member mayor's task force that recommended in its report early last year that a new sport and entertainment complex be located in Kingston's downtown, namely on the the three-acre Kingston Marina site adjacent to Douglas Fluhrer Park.
It's here where the city may decide to build a sport and concert facility on a 78,000-square-foot footprint that would include an NHL-size rink complemented with maximum seating capacity of 6,800, more than double the city's much-maligned 3,000-seat capacity at a Memorial Centre which is the bane of local concert promoters' existence.
Other than the possible sale of the aging Memorial Centre, no other issue has been as divisive as the task force's push to build on Anglin Bay.
Wong says one must be careful when comparing smaller sport and concert facilities, such as the one proposed for Kingston, to much larger American arenas and stadiums.
South of the border, Wong says he can understand concerns about mega sport facilities because they're so large and have consumed a vast amount of taxpayer subsidies.
There are estimates that at least $2 billion in public monies have financed sporting venues while sport team owners have historically invested very little in companion capital costs for new stadiums and arenas.
"Down there, it is a very emotional issue. In all of those cases, the entire financing is covered by the taxpayer directly through taxes or through additional levies," he said.
Wong says researching the original mayor's task force report was extremely difficult as the members, led by deputy mayor Leonore Foster, hunted for meaningful and relevant comparisons to provide hard numbers to make plausible recommendations for a new facility in Kingston.
"Even when we were doing the original study, we were always conscious of the fact that there really isn't another place exactly like Kingston, half way between metro centres," Wong said.
Comparing a proposed Kingston sport and entertainment complex to American centres had, and still has, its pitfalls.
"Noll's contention is really based on the U.S. model which is the mega-stadium [and] has 40 different eateries where you can get everything from tacos to hot dogs. They have tried to make them self-contained eateries," Wong said. "We wouldn't have that at the arena with 5,000 or 6,000 seats, we wouldn't have that plethora of restaurants, just because you couldn't support them on an ongoing basis."
Wong says task force members hoped that people would "want to congregate before a game, grab a dinner or afterwards grab a drink or a bite to eat or something of that ilk."
He noted that there's a different sense of economic expectation in the United States regarding a new sports and entertainment facility.
"The other big difference in the United States, is when they talk about downtown revitalization, they expect new stores to crop up around the new arena. It doesn't really work that way. The industries that benefit the most are those in the hospitality trade. The reality is that if I'm walking to the game, I'm not shopping."
That said, Wong insisted he's convinced that downtown is the only place to put a new large venue entertainment centre because there are many advantages, including exposure for retailers who may benefit from recurrent visits by LVEC attendees who are exposed to storefront advertising.
Wong also pointed out that unlike some American cities, Kingston has an energetic downtown business improvement association that can launch collective marketing campaigns alongside big-ticket events at a new large venue entertainment centre to help retailers.
"For me this is the way to do things, absolutely. In the case of Kingston you've now created a series of anchors throughout the downtown for people to move between.
"If you think about the new Market Square, Block D, the LVEC, the existing Hub, you get a pretty good area all within about 10 minutes of each other."
Last updated 27.04.2005