JERRY-RIGGEDCONTRARY TO WHAT HE TOLD THE COUNTY, COLANGELO IS PREDICTING STRONG, EARLY PROFITS FOR BASEBALL INVESTORS
Will Jerry Colangelo and the Arizona Diamondbacks struggle to make a buck in their new, taxpayer-financed stadium? Or will they turn a huge profit right out of the gate?
The answer from Colangelo is both. It all depends on whom he's telling.
When he was convincing the Maricopa County Board of Supervisors to approve a quarter-cent sales tax to build the stadium, he said the team would lose money the first year and barely scrape by for ten years.
But as he trolls for investors to pony up the hefty Major League Baseball franchise fee, he is projecting a $12.9 million profit in the first year alone.
The new profit projections are contained in a secret financial prospectus circulated by Colangelo to private investors in the Diamondbacks. If the rosy predictions come to pass, Colangelo will have pulled off a series of stunning political and financial coups that would make Donald Trump envious.
First, Colangelo got the Board of Supervisors to impose an unpopular sales tax to raise $238 million to cover most of the expense of a retractable-domed stadium. The total cost of the stadium is expected to be $284 million.
Second, he persuaded the state's rich and powerful to kick in another $100 million of the $130 million franchise fee. The $30 million balance for the fee will be covered by bank loans.
Then, he secured control over the operation of the stadium and the team through a ten-year contract that will pay his management group a fee worth at least $2 million a year.
And, finally, once he repays his Diamondback partners their initial investments, Colangelo and his management group will pocket 25 percent of the team's profits.
Not bad for a guy who is putting only $800,000 of his own money into a project worth more than $410 million.
How did he do it?
The old-fashioned way: He played fast and loose with the numbers.
When Colangelo needed the supervisors to approve the quarter-cent sales tax, he wore his pauper's coat. A financial report prepared by Welle Consulting Group of Minneapolis for Colangelo was presented to supervisors.
The February 16, 1994, report showed Colangelo's baseball investment group losing $376,000 the first year, with losses continuing for five years. That report also showed the baseball team losing $42 million after ten years. But the loss on the team was offset by $73 million in profits Colangelo's group would earn from operating the stadium.
The Welle report overstated stadium profits, however, because the report assumed a $30 million contribution from the City of Phoenix over ten years. The city didn't agree to the contribution. Without the city's support, Colangelo's group would barely be scraping by after ten years.
The bleak financial outlook was an essential element in convincing the supervisors that taxpayer support was necessary to build the stadium. No stadium, no baseball team.
Supervisors voted 3-1 to impose the tax.
With the sales tax in place, Colangelo donned his power suit to round up investors. Earlier this year, he circulated the confidential private offering to potential investors. Recipients of the offering were warned not to reproduce or distribute the document without Colangelo's written consent.
The offering contains detailed financial projections that were kept secret for several months. Not even the Maricopa County Stadium District, which will build and own the stadium, saw the projections until last week, when the report was unveiled during a court hearing.
Colangelo's March 24 offering statement presents a far rosier financial picture of the baseball team and stadium operations than the projection given to supervisors a year earlier.
Rather than losing money the first year, Colangelo's baseball team and stadium operations would clear $12.9 million--an earnings estimate 35 times greater than the Welle report presented to supervisors. The partnership is projected to accumulate $45 million in profits after only six years of play.
What changed in the past year to cause such a dramatic swing in earnings estimates? Ticket-sales receipts are now projected to be much higher, while player salaries have declined.
In the prospectus, Colangelo estimates the team will attract 3.2 million fans and ring up $40 million in ticket sales ($12.50 average ticket) in the first year, up from the Welle report's projection of $29 million. Projected player salaries, meanwhile, have fallen from the $26 million estimate in the Welle report to $20 million in the prospectus.
The drop in salaries clearly reflects the team's goal to avoid signing big-name stars who come with hefty salaries.
"The team's intention [is] to build the team with younger players, as opposed to signing expensive free agents," the offering statement says.
More important, the dramatic increase in earnings projected by Colangelo's group raises serious questions over whether the stadium could have been privately financed. It is a question most county supervisors don't want to address. Only Supervisor Tom Rawles, who voted against the stadium sales tax, returned calls seeking comment. Colangelo did not return a phone call.
Rawles says supervisors were never given any indication in 1994 that Colangelo's investment group would generate the profits now being projected.
"The margins for baseball don't seem to be anywhere near as thin as we were led to believe," Rawles says.
The healthy profits projected to flow to investors further underscores the raw deal taxpayers got on the stadium, he says. The county will receive about a $2.5 million annual return on its $238 million stadium investment, or about 1 percent.
"This is what I call a criminally pitiful rate of return for a normal business investment," Rawles says.
But other county officials are soft-pedaling the miraculous change in Colangelo's economic forecast, saying the county never intended to make a profit from building the stadium. Instead, they say, the supervisors' primary concern was to make sure the county would be protected from any losses from the operation and maintenance of the stadium once it is built.
"We were trying to structure this deal so that once the tax goes off, that's it, period," says Eric Anderson, a consultant paid by the Maricopa County Stadium District to oversee the county's financial arrangements with Colangelo's group.
Another county official says Colangelo's higher earnings forecast is welcome news because it means the stadium will serve as a magnet to attract people downtown. "If he's right, that makes the reason for putting that stadium where it's at a stronger reason, not a weaker reason," the county official familiar with the stadium negotiations says. "If there is a pocket to be lined, it's not just Colangelo's."
How true. Another notable beneficiary of Colangelo's stadium deal will be John Teets, chairman of Phoenix-based Dial Corporation.
Teets joins Colangelo and Phoenix real estate developer Eddie Lynch as general partners of AZPB Limited Partnership. AZPB is the group that will own the baseball team and operate the stadium. The three general partners will receive the guaranteed $2 million annual management fee. Colangelo controls 80 percent of the general partnership, while Lynch and Teets split the remaining 20 percent.
Teets not only stands to benefit directly from his role on the management team; his company, Dial Corporation, also will receive exclusive concession rights in the stadium.
Restaura, a Dial subsidiary, will retain 71 percent of all concession profits, which are estimated to be $25 million the first year. The baseball team will keep the balance of the concession net.
In exchange for the exclusive concession sales agreement, Restaura will spend about $24.5 million to build out and equip stadium concession space.
Just as Teets has made sure Dial Corporation gets a healthy piece of the action, Colangelo has kept the Phoenix Suns in the baseball game. While all other limited investors must pay at least $5 million to buy a share in the Diamondbacks, the Suns bought their share for half price.
In addition, the Suns will get back all the $8 million the team has spent since 1993 to acquire a baseball franchise and get the stadium built. And, the Suns will receive a one-time $250,000 payment from the baseball team's new investors. The offering statement doesn't say what the quarter-million-dollar payment is for.
Phoenix Newspapers Inc., which publishes the Arizona Republic, Phoenix Gazette and Arizona Business Gazette, is protecting its investment, as well.
Top R&G officials were certain to have had access to the team's financial prospectus showing the partnership making $12.9 million the first year. But the R&G never published the crucial profit information until it was divulged in condemnation hearings last week. Only then did the Republic write stories about the baseball team's projected profits. The stories never mentioned the dubious profit projections Colangelo gave the Board of Supervisors a year ago.
Investors will not only profit from side deals. The offering shows the partners will earn 5 percent on their investment beginning the first year of play. The $12.9 million profit comes after the team has paid partners $6 million in dividends.
And what about taxpayers? What do they get for their $238 million contribution?
The opportunity to go to a baseball game and pay an average of $12.50 a ticket, plus an estimated $7.75 per person on concessions and $7 on parking. Expenses paid by fans, by the way, are projected to increase 5 percent each year.
The stadium district will receive about $2.5 million a year from Colangelo in rent and other income. But the district must pay $1.5 million a year out of this to cover interest on a $15 million bond it will sell to help finance construction of the stadium. In addition, the district faces the possibility of shelling out up to $15 million to cover future repairs and upgrades to the stadium.
The county's deal with Colangelo has angered several taxpayer groups and conservative political parties. Ernie Hancock, a Phoenix Libertarian, has two lawsuits pending seeking the right to circulate a citizen initiative to repeal the creation of the Maricopa County Stadium District by county supervisors.
Hancock's initiative was thwarted in March when county Court Clerk Fran McCarroll refused to accept Hancock's application to circulate petitions. Hancock filed suit, claiming McCarroll violated his constitutional right to petition the government and that the stadium district is a legislative body and subject to citizen's initiative.
The Maricopa County Attorney's Office rejects Hancock's arguments, saying the stadium district is not subject to citizen petition even though it has the power to levy taxes. Therefore, the county says, McCarroll was right to reject Hancock's petition application.
Hancock is livid over the county's refusal even to let him begin circulating petitions.
"This is a blueprint to revolution," he says.
The latest news on the profits Colangelo's partnership expects to generate leaves Hancock predicting trouble on the horizon.
"Do you think this stadium is going to be built without any incident?" Hancock asks.
He quickly adds that he does not advocate violence, and has no knowledge of any threats to the stadium project. However, he says, government officials are vastly underestimating the public's anger over the stadium deal.
"No one understands how bad this is getting," Hancock says. "But they are going to.
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