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Kingston Concerned About the LVEC
Currently known as the "KROCK Centre"
Formerly the "Kingston Regional Sports and Entertainment Centre" or KRSEC
Formerly the "Large Venue Entertainment Centre" or LVEC
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Whig Standard -- January 9 2006

Entertainment centres in London, Guelph have cost taxpayers millions

Ray Quenneville isn't convinced Kingston can build a downtown entertainment centre without reaching into the pocketbooks of taxpayers.

"I have doubts that they can do it without [tax hikes]," says the 82-year-old retired Kingston Housing Authority manager.

For evidence, he points to the experience in London, Ont., where taxpayers are losing millions annually, paying off big loans that built a $52-million downtown entertainment centre.

"A lot of people are ticked [because] it's become quite a burden on them," says Quenneville.

He knows one of those ticked taxpayers personally. His brother- in-law, Bill Cockburn, has lived in the western Ontario city of 350,000 people for 50 years. Local taxes in the Forest City were hiked 6.6 per cent this year.

Cockburn, semi-retired at age 71, lives in London's east end. He has followed the debate about the John Labatt Centre, a 9,100-seat sports and entertainment venue that opened in 2002. Private companies partnered with the City of London to build and operate the centre, which is home to the city's major junior hockey team.

The facility has been wildly successful in attracting big crowds to hockey games, concerts and other events.

Last year, the centre generated $12.3 million in gross revenue, 25 per cent more than expected.

More than $1 million ended up in the pockets of the private firms.

The City of London took home just $150,000 as its share of profits. Then it had to pay $4.2 million to bankers, the cost of borrowing millions to build the centre.

Citizens like Bill Cockburn pay those millions in losses through their taxes.

Cockburn, who is not a hockey fan, says he has not been to an event at the Labatt Centre.

Tickets cost too much, he says.

"I can't afford to go and yet I'm subsidizing it," Cockburn says sourly. "When Bill Clinton was here, it was $200 [a ticket]."

Quenneville had his brother-in-law and taxes in Kingston on his mind as Mayor Harvey Rosen recently told a Rotary luncheon of the benefits of building a $37-million entertainment centre in the Limestone City.

"I would argue that with the addition of this facility, Kingston is standing on the cusp of becoming the arts, culture and sports hub of southeastern Ontario," Rosen told about 100 Rotarians who lunched on chicken fricassee, beans and pearl onions.

Kingston claims it can do what no other Ontario community has been able to accomplish - build a gleaming new sports and entertainment palace and pay off loans with profits.

The city proposes to build a 5,000-seat facility on city-owned land near the Wolfe Island ferry terminal. The facility would host major junior hockey games, concerts and other events.

Quenneville was one of the first people at the luncheon to get to his feet to quiz the mayor in a question-and-answer session after his speech.

Quenneville told Rosen what he had heard from his brother-in- law.

He asked the mayor if the entertainment centre would drive up taxes.

Rosen did not say taxes will not go up. Instead, he replied with a refrain about how the city proposes to pay for its centre.

The city will borrow $16 million and will use revenue from events at the facility to make annual payments on that debt. A market study, the mayor said, suggests estimates of revenue are conservative. The cost of servicing the debt will not be added to tax bills, Rosen said.

More importantly, the mayor said, the city will secure at least $8 million in senior government money.

"The intent of council is not to proceed if we don't get that [government] funding," he told Quenneville, who remained skeptical.

"They're committed to do it come hell or high water," Quenneville said in an interview later.

Still, he was glad to see a public pledge by the mayor.

"He's made a commitment that they won't do it unless they have the money before they start," he said. "It's pretty hard to think that this could be done."

It's not surprising that Kingston taxpayers like Quenneville remain doubtful that taxes won't be affected.

"We're suggesting that we can make $800,000 a year and use that to fund about $15 million in debt," says Don Gedge, the senior city official in charge of getting the entertainment centre built in Kingston.

In addition, he says, the city will see another $20 million annually worth of direct and indirect benefits.

Gedge is effusive in his praise for the Labatt Centre.

"You've got a very successful operation by any measurement that you might want to apply," Gedge says.

Rosen's assertion that the profit projection for Kingston is conservative is based on an analysis by consultant Ron Bidulka.

The London experience

But in London, profit available for distribution after all the bills are paid, but before the city's debt charges are paid, was just $750,000 in a spectacularly successful year.

"A building like this will generate, in gross revenue, somewhere around 10 to 13 million dollars, you net out of that, at the most, 750,000 thousand, a million, depending on how your surcharges work," says Vic Cote, the City of London's finance boss. "So it'll never cover your cost."

Kingston is guessing that its centre will bring in $3 million annually, or roughly a quarter of what the twice-as-large Labatt Centre reaped last year.

But Kingston expects to squeeze much more profit from this much smaller revenue stream.

Gedge says the city will do it by negotiating a very different deal with the private firms that will build and operate the facility.

Critically, he says, Kingston won't ask the private companies for millions up front to pay the cost of construction. London got $9.5 million from its private partners.

"When the private sector is investing money they have been looking for fairly high returns on that money," Gedge says.

London made just such a deal with a private consortium to build and operate the Labatt Centre. The agreement funnels most profits to that firm while taxpayers shoulder the burden of borrowing.

London owns the building and leases it to a private corporation, Global Spectrum. The city gets 20 per cent of net profits for the first five years, rising to 40 per cent for the next five years and 70 per cent after year 10.

By the end of the decade, London taxpayers will have shelled out roughly $20 million to repay loans, while civic boosters tout the economic spinoffs to the city.

Even critics of the Labatt Centre say it has helped spur economic renewal in London's core. Gedge, who has a master's degree in economics, said a statistical analysis of London's economy would demonstrate the positive impact of the Labatt Centre.

Can the city measure the negative economic effect of the lost millions taxpayers might have spent were it not being used to pay off the Labatt Centre loans?

"That's a good question," Gedge said.

Beginning in 2010, London's annual loss will shrink by a third because the city will have paid off a loan it took out to buy the land where the Labatt Centre was built, but the losses will continue.

In a report to London politicians earlier this year, Cote tried to address concern about the red ink.

"All municipally operated centres operate at a loss (when capital costs are included)," he wrote in a report to London councillors.

Cote says he hasn't followed the debate about Kingston's centre.

"If somebody's telling you that [profit is] going to cover the costs of the building, it won't happen," says Cote, who doesn't like the characterization of London's debt payments as losses.

"You can put whatever spin you want on it, but it was never intended to [make a profit]."

Some Kingston politicians are skeptical of the claim that the city can pay debt with profits.

Councillor Rick Downes is concerned about the long-term implications of building what will likely be a $40-million rink.

"It's going to drive the city's budget for the next 10 or 15 years because what do you do when it doesn't make money?" asks Downes. "You put more money into marketing.

"It becomes a sinkhole for money."

The Guelph experience

Taxpayers in Guelph are pouring millions into a money-losing downtown arena after a failed public-private partnership built the $21-million centre.

Citizens in the southwestern Ontario city similar in size to Kingston were assured repeatedly that the centre could be built with minimum risk to taxpayers.

In the mid 1990s, a community debate raged in Guelph about where to build the Royal City's new facility. The city preferred a suburban location with ample parking and ease of access for a two- icepad complex.

Plans changed after a coalition of downtown businesses and groups hired an economist who produced a report that suggested the city would lose $2.6 million a year if the marquee rink was not in the core.

Guelph negotiated a deal with a private firm, Nustadia Developments Inc., to build and operate the 5,000-seat facility at the site of a former downtown mall. It would be the new home of the city's major junior hockey team.

Bidulka, who was hired to advise Guelph, said in 1998 that the deal with Nustadia was "the new benchmark for such projects in Ontario."

Bidulka provided critical advice to Kingston politicians in September, when he endorsed a business plan for the city's proposed $37-million entertainment centre.

Guelph plunged ahead, putting up $10.5 million. The city also guaranteed a loan of $9 million taken out by Nustadia although the private firm was to make the loan payments.

The centre, which was operated by Nustadia, opened in 2000 and immediately began losing money.

"It didn't meet the expectations at all," Gus Stahlmann, the City of Guelph's senior manager responsible for the centre, told The Whig- Standard.

Attendance at hockey games and other events was weak and the centre has had trouble attracting non-hockey events.

This summer, Nustadia walked away from the money-losing venture, dropping the roughly $20-million debt into the laps of citizens.

Past promises that taxpayers would not be on the hook for losses proved untrue.

"Definitely," says Stahlmann. "It wasn't [true] from Day 1 when [Nustadia] couldn't make the payments."

In the last four years, Guelph taxpayers have shelled out more than $4 million for loan payments.

Stahlmann couldn't say what the annual loss totals.

Guelph also spends more than $100,000 per year subsidizing community rink users who would otherwise not be able to afford the cost of renting time in the facility.

Stahlmann insists the Guelph Sports and Entertainment Centre has helped to revitalize the city's downtown.

No study has been done to back the claim.

A cautionary tale

Guelph's failed public-private partnership is a cautionary tale, Kingston bureaucrat Don Gedge acknowledges.

"It is, but in the case of Guelph ... the relationship between the operator and the city in Guelph was fairly unique in its definition and structuring and we won't be structuring [our deal] that way," Gedge says.

Details of that agreement won't be known until the city has the chance to negotiate with the firm or firms it selects to build and operate the facility.

One thing is clear about the agreement the city will seek with a private operator: There will be high expectations about attracting events, marketing them and luring spectators to the facility.

"We need somebody who is very experienced in running events," Gedge says.

Without a steady diet of money-making events, the city will not be able to make good on its plan to use profits to cover loan payments.

Companies bidding to run the centre have been told to plan for 97 "event days" per year.

When the city first released a draft business plan for the entertainment centre, it envisioned 82 events, including roughly 35 Kingston Frontenacs hockey games.

In September, consultant Ron Bidulka offered a positive assessment of the business plan for 82 events.

"On an overall basis, the event and attendance assumptions forwarded within the [entertainment centre] Business Plan are reasonable," Bidulka wrote in a 28-page report to King-ston politicians.

Politicians seized on Bidulka's opinion to endorse the idea.

"I think the business plan is a realistic view of how this venue would operate," Bidulka said in an interview with The Whig-Standard after he gave his advice to civic leaders. "Our review of the business plan is effectively saying that there is a market here, there is a market that events and things are bypassing because there is not an appropriate venue to stage them in."

The city paid Bidulka roughly $40,000 for his expert opinion.

"I'm confident the market study is reliable to the extent that it was secured," said Mayor Harvey Rosen, in an interview. "It answered the purpose we needed to have answered."

Bidulka's report draws on interviews with entertainment industry officials, civic leaders in other cities, firms that operate similar centres and Kingston rink users.

A glaring omission

Bidulka's report also draws on the experience of other communities where new spectator arenas have been built.

He lists four centres where new facilities have been built since 1996 about which information was reviewed: Brampton, Mississauga, Sarnia and London.

His report does not include Guelph, where he acted as a consultant.

In Guelph, there's no indication the financial bleeding will stop soon as ticket sales remain soft while competition among cities for performance events is strong.

"Ticket sales over the last year or so, and this has been the trend across Ontario and Canada, have dropped off in the performance end," Stahlmann said.

In Kingston, projections that an entertainment centre will attract big crowds are footnoted.

Bidulka cautions, in his market study, that future economic conditions can change and other unanticipated events can influence outcomes.

"The results achieved in future operating periods will vary," his report states.

In his market study, Bidulka offers no comment on the revenue projections for Kingston's centre.

Stahlmann is hoping for modest success in Guelph.

"If you can operate that facility paying for the capital cost and can do that, that would be great and even if you paid for half of it," he says.

He hopes that at some point, revenue from the Guelph centre will at least pay the annual debt charges.

In London, politicians recently added a new ticket surcharge to offset the losses.

While Stahlmann says building and operating major facilities is a learning process for everyone, he isn't willing to share what he's gleaned from a problem-plagued project in Guelph.

"I'm not going to give you any advice, absolutely none," he says. "I'm not that stupid."

He suggests that even consultants learn from their experience on arena projects.

"I would also suggest Ron's learned a lot since he did the Guelph one," Stahlmann says.

Bidulka did not respond to repeated requests for an interview.

 

Last updated Jan 12 2006