Lost Arcos

THE CITY OF SCOTTSDALE AND WOULD-BE BUILDERS OF the $1 billion Los Arcos redevelopment project are suppressing crucial financial information related to the proposed 18,000-seat hockey arena and adjacent commercial development.

Voters in Scottsdale, Fountain Hills and Guadalupe will decide on November 2 whether to invest about $352 million in taxes in a project that is expected to generate as much as $32 billion and hundreds of millions of dollars in private-sector profits over the next 30 years.

A $185 million hockey arena would be the centerpiece of the proposed project, which also would include movie theaters, restaurants, retail space, a grocery store, a home-improvement center and a massive, 8,000-space parking garage. The complex would be built at the site now occupied by 30-year-old Los Arcos Mall on the southeast corner of Scottsdale and McDowell roads.

The overall project is expected to cost about $535 million to build, plus another $500 million in finance charges over 30 years.

Taxpayer exposure has not yet been determined. Developers would employ a complex funding mechanism that reduces their debt while increasing taxpayers' contribution. Developers say taxpayers may contribute between $352 million and $390 million toward the project over 30 years.

By comparison, Bank One Ballpark cost $365 million to construct. Taxpayers contributed $238 million to the project through a quarter-cent sales tax that has expired. The Arizona Diamondbacks are paying for the balance.

The City of Scottsdale, the Los Arcos Multipurpose Facilities District, the Phoenix Coyotes and the developer of the project, the Ellman Companies, are withholding key data that should be available for public review, including:

• A report on projected arena revenue and expenses by the national accounting firm KPMG. The report was prepared for the Coyotes and, according to Coyotes president Shawn Hunter, a copy was given to the city. Scottsdale officials claim the report is not in their files.

• An analysis of the KPMG report prepared by a consultant hired by Scottsdale. The consultant concluded KPMG significantly understated the project's revenue projections. The city and Facilities District claim they never received the report.

• The fact that developers would be granted a property-tax abatement worth about $120 million during the first 10 years of the project. (See accompanying story.)

• The Coyotes' audited financial statements.

• The Ellman Companies' profit projections.

The lack of information presented to voters has already spawned a lawsuit against the city and the Facilities District -- the public body that would own the arena and collect taxes for the project.

Opponents of the redevelopment project last week sued the city and the district, alleging they failed to tell voters that Scottsdale must match the funds the Facilities District plans to raise by keeping one-half of the state sales taxes generated at the development for 10 years. Developers say the sales tax would generate $97.5 million.

Scottsdale plans to pay its share by giving developers the city's 1 percent sales tax and 0.2 percent transportation tax generated at the development for the next 30 years. The city would also reinvest nearly $16 million in property taxes collected from the development and $30 million in fees collected from developers.

Maricopa County Superior Court Judge Barry Schneider will hear arguments in the case on October 28.

The city and the Facilities District have refused New Times' public records requests to provide copies of the KPMG report and the subsequent analysis of that report by the city's private consultant.

The two reports could provide details on how much money the private interests expect to make from the project. The sketchy information that has been released indicates developers stand to reap a fortune.

Phoenix-based Ellman Companies projects that the arena and surrounding development will generate anywhere from $16 billion to $32 billion in sales over 30 years, depending on the economy.

The company refuses to state how much profit it and its partner, the Phoenix Coyotes, expect to pocket.

However, if private investors net even a slim 5 percent return on total sales, profits would range between $800 million and $1.6 billion over 30 years -- or about $26 million to $50 million a year.

Meanwhile, under the financing plan being promoted by developers and Scottsdale officials, taxpayers would be required to sink more than $352 million into the project over its life.

Furthermore, as the election approaches, Scottsdale taxpayers have no guarantee of benefiting from any of the lucrative revenue streams that will be created by the project, beyond the $30 million contribution from developers spread out over the first 10 years. That $30 million, however, would be spent on the project.

Unlike other major arena and stadium projects negotiated in recent years in the Valley, including Bank One Ballpark, Scottsdale has not yet hammered out the framework for a development agreement with the Coyotes and Ellman Companies.

Arena development agreements typically address such crucial provisions as who will pay for construction cost overruns and how revenue from such sources as arena naming rights and luxury suite proceeds will be divided between the public and private sectors.

Officials say the development agreement will be negotiated after the election -- a strategy that is drawing criticism from at least two Scottsdale City Council members, George Zraket and Cynthia Lukas.

"This is a decision for the voters to make, and I think they have the right to know all the information so they can make an informed and reasonable decision," says Zraket. "They don't have that information."

Lukas says the general terms of the development agreement should be completed prior to funding the project. She's concerned about the high cost of the project for taxpayers.

"I've been uncomfortable with the financing since day one," she says.

Based on statements made by Ellman Companies senior vice president Bob Kaufman, the public shouldn't expect to receive much of the billions in revenue the project is expected to generate.

"Let's figure out what the revenue streams are, let's figure out what the project needs," says Kaufman. "So at the end of the day, if there is money left over, then we can discuss how it's going to be split up."

The state law that allows for sales-tax recapture for sports facilities also contains a quirk that requires municipalities to team with other cities and towns to create the stadium district, even if those cities are not contiguous. Hence, Guadalupe. It could have been Ajo.

The Los Arcos Multipurpose Facilities District board is made up of two representatives each from Scottsdale, Fountain Hills and Guadalupe. But the Facilities District's day-to-day operations are controlled by Scottsdale's redevelopment department.

The Facilities District will eventually own the arena, but at what point is unclear. The district's primary task is to collect one-half of the sales-tax dollars generated by the project and turn the money over to developers.

Facilities District operations are being funded by a $500,000 contribution from private developers.

So far, the Facilities District and Scottsdale officials are following the developers' lead in designing a project financing plan. Little information has been released by the developers or the public bodies to date.

Los Arcos proponents are refusing to release a detailed financial report prepared this summer by national accounting firm KPMG that would shed light on how much money private investors could expect to make off the project. The KPMG report projects revenue and expenses that would be generated by the arena during the first five years.

The Coyotes say they won't release the report and Scottsdale officials claim they don't have it, even though Coyotes president Hunter says he gave the city a copy.

Perhaps more important, the city is refusing to release a detailed analysis of the KPMG report prepared by a private consultant the city hired in July.

Consultant Allen Flexer -- who is being paid $175 an hour, and has racked up 100 hours -- tells New Times he prepared his written critique of the KPMG study and presented that report, along with a four-page memo on managing the arena, to Gary Roe, who wears two hats -- he serves as Scottsdale's redevelopment director and as the Facilities District executive director.

Asked about Flexer's work, Roe said he had nothing in writing from Flexer.

"He hasn't given us any written reports, but he has given us verbal briefings," Roe said when New Times asked for copies of Flexer's reports.

Scottsdale officials later produced a copy of Flexer's management memo after New Times' attorney Dan Barr contacted the city and demanded production of Flexer's documents.

Scottsdale, however, still has not produced Flexer's critique of the KPMG study.

Scottsdale Mayor Sam Campana is out of the country and could not be reached for comment.

Flexer tells New Times he concluded that the KPMG analysis of arena operations understated revenue and overstated expenses that would be generated by the arena.

"I came up with significantly more revenue than they forecasted," Flexer says.

Flexer's company, Flexer Enterprises LLC, is based in Phoenix. Flexer says he started the concept of "public/private" partnerships for arenas in the early 1980s while serving as president of Philadelphia's Spectrum arena. Flexer says he also helped develop Desert Sky Pavilion.

Flexer says he was hired by Scottsdale to undertake a broad range of work, including:

• Assessing the feasibility of the project.

• Analyzing arena marketing plans.

• Reviewing arena design and construction costs.

• Determining ways to increase public revenue from the arena.

• Analyzing the arena's projected revenue and expenses.

Meanwhile, the Ellman Companies also refuses to provide details of how much money it expects to earn from the arena and adjacent development.

When asked to provide projections of the project's profitability, Ellman senior vice president Bob Kaufman's response was direct: "I'm not going to do it."

Kaufman says the public is not entitled to the information because taxpayers are not taking any risk, nor are they putting any money into the project on the front end.

Since private money will build the project and public money will only be invested after construction is complete, Kaufman says the public has little say in how profits will be divided.

The Ellman Companies and the Coyotes will be first in line to profit from the arena and surrounding development, Kaufman says. Taxpayers, he says, will get what's left over, if anything.

"Put up your money, take the risk with us -- then we can talk about sharing revenue streams," he says.

The Coyotes also refuse to discuss how much money the team anticipates making from the new arena. The team will not release its audited financial statements, but claims it is losing $10 million a year playing at America West Arena.

Professional sports teams, however, are notorious for understating profits. Last December, Forbes magazine estimated that the Coyotes had a net operating income of $700,000 for the 1997-98 season.

When asked about the Forbes assessment, Coyotes owner Richard Burke laughed and said, "They didn't ask me."

Burke says he hopes the team will "break even" once it moves into the new arena.

Simply breaking even is not something Burke is accustomed to. Burke is a shrewd businessman who made a fortune founding and operating United Healthcare, one of the nation's first and largest HMOs.

While Burke no longer runs United Healthcare, he owns stock in the company valued at about $35 million. In recent years, he's turned his attention to First Cash Financial Services Incorporated, a Texas-based operator of more than 110 pawnshops and check-cashing stores nationwide that charge interest rates of up to 300 percent. Burke is the majority shareholder in the company, controlling stock valued at more than $15 million.

The 55-year-old Burke owns a 25,000-square-foot mansion in Minnesota worth more than $5 million. The property taxes on that estate are nearly $100,000 a year, records show. He also paid cash in 1997 for a $2 million home in Paradise Valley.

Burke has been seeking a public subsidy for his hockey team since he purchased the Winnipeg Jets in 1995 for $68 million. The Minnesota Legislature turned down his request for approximately $20 million in assistance before Burke skated to Phoenix and became a tenant at America West Arena.

There, Burke was confronted by another shrewd businessman in Jerry Colangelo, who controls the city-owned facility. After a brief honeymoon, the men had a falling out over 4,200 limited-view seats for hockey and a dearth of sponsorship and luxury suite revenue available to the Coyotes.

Last year, Burke convinced Scottsdale to take advantage of a state law (set to expire on November 3) that allows developers to recapture half of the state sales tax generated in a redevelopment project that has an arena component.

In May, voters in Scottsdale, Fountain Hills and Guadalupe created the Los Arcos Multipurpose Facilities District, and on November 2 those same voters will be asked to allow the district to collect half of the state sales taxes generated at the project for 10 years. The district will give the money to developers to reimburse a portion of their costs.

A yes vote would also require Scottsdale to give developers an amount equal to the sales-tax collections.

If voters approve the tax Tuesday, Burke and his partners stand to benefit from a public subsidy of at least $352 million.

Burke won't just profit from sales generated in the new development, he also stands to see the value of his hockey franchise soar.

Arenas are crucial to the profitability of National Hockey League teams. The Coyotes currently are worth about $80 million, based on about $41 million in annual revenue, according to the analysis by Forbes magazine.

Burke says revenue would jump to the mid-$50 million range the first year of operation in the new arena. According to Forbes, NHL teams generating similar revenue are worth about $125 million.

Don Hinchey of the Denver-based Bonham Group, which specializes in sports marketing, says the Coyotes' increase in value "will be significant, simply because of the fact that they will control the revenues that flow into the arena."

The Ellman Companies' Bob Kaufman believes he's being candid with voters.

"We are an open book," Kaufman says during an interview at the nearly abandoned Los Arcos Mall, where developers and the Coyotes have their campaign headquarters.

Kaufman says he and the Coyotes have been forthcoming in answering questions about the development.

"We have provided dozens and dozens and dozens of answers to questions concerning the financing of the project," he says.

Yet many questions persist.

Here's the game plan, which all hinges on voters agreeing first to divert at least $352 million in taxes from state and city coffers and shunt it into a project that promoters say will "revitalize" south Scottsdale.

The exact amount of money taxpayers will contribute is unknown. "We know what the private side is going to be," Kaufman says. "We've built in some flexibility on the public side for those numbers to fluctuate."

In exchange for the use of taxpayer funds, Kaufman says his company and the Coyotes would invest up to $125 million in equity in the project and line up another $400 million or so in short-term construction loans to build the arena, retail shops, parking garage and supporting infrastructure.

Once the project is built, developers would tap public funds to reduce their debt. (Imagine someone suddenly reducing your home mortgage by one-third and asking nothing in return for the favor.)

No sales taxes would be collected until the arena and adjacent businesses open their doors.

Developers project that Scottsdale's matching contribution and the state sales tax diversion would total $195 million after 10 years.

But the Ellman Companies and Coyotes have no intention of waiting 10 years for the public contribution. They want the public money the minute construction is completed. They would get it through the sale of bonds.

Kaufman says developers want the Facilities District and Scottsdale to sell about $151 million in revenue bonds the day the project is completed, and give them the proceeds.

How do developers come up with the $151 million figure?

Kaufman and city officials claim the $195 million collected over 10 years would be worth $151 million if it were available on the day the arena opens -- an accounting concept called "present value."

The bonds would then be repaid primarily by state and city sales taxes and other revenue generated by the project. Of course, the bonds are debt, and the interest paid on that debt would cost taxpayers.

Depending on the interest rate and how much sales tax is generated at the project, the bonds could take anywhere from 15 to 30 years to pay off.

If it takes 30 years, developers project $352 million in public funds will be needed to liquidate the $151 million debt.

Critics of the project say developers are trying to deceive the public by using the revenue bond to actually collect far more money than they are entitled to under the Facilities District law.

For example, Facilities District records indicate that the present value of the $195 million that would be collected from the state and city over 10 years should be $128 million rather than $151 million. The difference, critics say, amounts to an unnecessary gift to developers.

(The $151 million bond is not set in stone. Developers already are suggesting selling a bond worth $185 million, which would take as much as $390 million in public funds to liquidate. If the bond increases to $185 million, taxpayers are being forced to provide another $57 million in current dollars to the project.)

So what will developers do with the $151 million they receive in bond proceeds?

Kaufman says the bond money would be used to pay down approximately $400 million in private construction loans that would be outstanding when the construction is completed.

"The take-out financing will be in the form of bonds from the [facilities] district," Kaufman says.

By using the $151 million in bond proceeds to reduce the amount of outstanding private loans -- from $400 million to, say, $250 million -- the developers would dramatically reduce their loan payments.

Meanwhile, revenue streams from the hockey arena and leasing income from adjacent retail shops and restaurants are projected to more than cover the principal and interest payments on the developer's remaining long-term debt.

And, more important, the hefty revenue combined with lower debt payments (thanks to the $151 million bond) would provide the Ellman Companies and the Coyotes a healthy profit.

Kaufman's open book slams shut when it comes to discussing how much profit the Ellman Companies and the Coyotes expect to make.

"I hope we make a nice return on our money, a good return on our money, because we are taking a tremendous risk," he says. "I hope the Coyotes are very successful, because if they are not, this project will not be successful."

Kaufman is equally reluctant to discuss how arena revenue might be shared with the public, which would be saddled with a massive bond debt that could take up to 30 years to repay.

Kaufman dismisses the fact that interest on a bond would add $157 million of taxpayer expense that would be unnecessary if developers would simply wait for 10 years to collect the state sales taxes and Scottsdale's matching share.

In fact, Kaufman says taxpayers are not "entitled to have a conversation" about dividing arena revenue because the public is not bearing any risk.

"In this situation, we are putting up all the money, we are taking all the risk," he says. "Whatever money is coming in [revenue] takes care of my risk and my investment first. If there is money left over . . . then I would be happy to have a conversation with you about sharing additional revenue streams.

"But we are going to take care of the private investment first. And that's only fair. And that's only right."

Scottsdale lawyer Alan B. Kaufman (no relation to Bob Kaufman) is leading a small but determined group of citizens that is trying to derail the Los Arcos project.

No one has been a bigger thorn for developers than Alan Kaufman. He files lawsuits, helps organize initiative drives, issues press releases and digs up financial minutiae on the Coyotes and Ellman Companies.

His vigilance has earned him the antipathy of the developers. Last week, Bob Kaufman angrily called Alan Kaufman "a bottom feeder" after Alan Kaufman filed a lawsuit challenging the legality of the upcoming election.

A former in-house lawyer for NBC Sports, Kaufman and his wife moved to Scottsdale nine years ago and were immediately stunned by the city's politics. They had spent several decades closely observing New York politics -- Kaufman's father-in-law was former New York mayor Ed Koch's chief political adviser for 30 years.

"It didn't take more than a year or two before we had our eyes open," he says. "It is really gross the way this place is run."

A Columbia University-trained lawyer who received his undergraduate degree in psychology from the University of Michigan, Alan Kaufman says he's astounded by Scottsdale's willingness to give away millions of dollars to wealthy developers.

The city's largess, Alan Kaufman says, is only exceeded by the city's deceptions.

"At least people tell the truth in New York," he says. "They don't tell the truth in Scottsdale. In Scottsdale it matters more if you are friendly and smiling."

Alan Kaufman dissected the Los Arcos financing plan and found nothing to like.

He says developer projections of $16 billion to $32 billion in sales over the next three decades is evidence enough that public money should not be involved.

"They don't need any public money, for God sakes," he says.

Alan Kaufman says the developers want even more public money than the stadium district law requires, and Scottsdale officials appear happy to oblige.

He cites the developer's demand for the $151 million bond, as opposed to collecting public money over 10 years and keeping the public's debt much lower.

"You can't believe these people would do this," he says. "They are unbelievably ballsy here."

Kaufman also takes aim at the planned construction of the state's largest parking garage. An 8,000-plus-space garage would snake across the southern and eastern flank of the development.

The garage would vary from two to four stories in height and be about 110 feet from the closest residential areas, developers say.

The city is promoting the parking garage as a public amenity and promises parking will be free for all events.

Alan Kaufman scoffs at the notion that parking will be free. He notes that taxpayers will pay for the garage.

"Free parking?" Alan Kaufman asks. "Free? I'm paying $100 million to build the son of a bitch."

Kaufman says developers and city officials are ignoring complaints from neighbors who are concerned about their proximity to a massive parking structure that would be used up to 200 nights a year.

"No attention at all is being paid to the thousands of people who live in residential neighborhoods who will be negatively impacted by this," he says.

The neighborhood is one of Scottsdale's oldest and most affordable places to live. The modest tract homes have been generating property taxes for the city for more than 40 years, Kaufman notes.

Alan Kaufman is also incredulous that Scottsdale has failed even to insist on reaching a definitive development agreement prior to the election.

"Throughout the rest of the country, when people have to vote on these stupefying sports packages, at least they know what the deal is," he says.

With the election less than a week away, there is no formal agreement between Scottsdale public officials and developers over a number of crucial issues, including:

• Sharing lucrative revenue streams from naming rights for the arena, which could be worth $50 million.

• Sharing revenue from the sales of luxury suites.

• Sharing revenue from the sale of advertising inside the arena, and proceeds from radio and television deals.

• Obtaining an ironclad agreement protecting taxpayers from any cost overruns.

• Defining who will pay the operating costs of the arena.

Developers and Facilities District officials says all these details and more will be negotiated after the election. They point to pledges by Ellman Companies to cover all cost overruns and promises that the Coyotes will pay all operating expenses.

But nothing is in writing.

"All you have is the Ellman Companies' general agreement that they will take care of all cost overruns," Kaufman says.

Councilman George Zraket says the lack of a development agreement is the project's fatal flaw.

"It's tantamount to me handing you a blank contract with blank spaces on it for all the salient terms and conditions of our deal. Then I ask you to sign it and fill all the blanks later," Zraket says.

Facilities District chairman James Wellington says serious negotiations between the district and the developers would begin immediately after the election, assuming voters approve the tax.

"My feeling is a very positive and sensible package can be hammered out," Wellington says.

Alan Kaufman has his doubts.

The bottom line, he says, is Coyotes owner Richard Burke and his partners, the Ellman Companies, should finance the project privately.

"Richard Burke didn't build my house, I don't want to build Burke's house," he says.

In addition to withholding key financial information from the public, Scottsdale and the Facilities District are being sued over their handling of the November 2 election.

The ballot and the official publicity pamphlet mailed to registered voters earlier this month leaves out crucial information, alleges a lawsuit filed on October 18.

Voters are being asked whether to allow the Facilities District to keep 50 percent of the state sales taxes collected from purchases made on the site for 10 years. The district would use the money to help pay for the project.

If voters approve the measure, state law also requires Scottsdale to contribute an equal amount of money to the project during the same time period.

Neither the ballot nor the publicity pamphlet mention Scottsdale's required contribution.

The publicity pamphlet is supposed to provide voters with nonbiased information, Alan Kaufman says.

This is particularly important in this election because the Coyotes and Ellman Companies have outspent opponents by 167 to 1. Developers have spent more than $350,000 on publicity while opponents have spent about $2,100.

Alan Kaufman's lawsuit demands that voters be provided with new ballots and more accurate information concerning the election.

Kaufman told the court that he is concerned that many votes already have been cast by mail.

If the court rules that election organizers failed to follow state law, "that would then cause us to challenge the election," Kaufman said.

Instead, Kaufman suggested that the court order Scottsdale and the Facilities District to send additional information and new ballots to voters prior to November 2.

But time is running out. Maricopa County Superior Court Judge Barry Schneider will hear additional arguments on the case today, October 28.

The lawsuit potentially could postpone or invalidate the election, which could sink the entire project. The state law that allows for diversion of state sales taxes for stadium projects expires on November 3.

State law requires the Facilities District to be formed by three cities, even though sales taxes will only be diverted in Scottsdale.

Avondale and Carefree originally joined the district, but then withdrew under legal and political pressure applied by Alan Kaufman and his supporters.

Arena supporters then pulled out their checkbooks and offered up to $1 million to Fountain Hills and Guadalupe if they agreed to join the district and approve the tax. The city council in both cities accepted the offer and joined the Facilities District.

Voters in only one of the two cities -- along with Scottsdale -- need to approve the taxing authority for the Facilities District for the project to move forward.

If voters in Fountain Hills and Guadalupe reject the measure, then those cities won't receive a dime.

If voters approve the measure, Fountain Hills and Guadalupe residents will receive $2 million -- a windfall that conceivably could come out of the $352 million in taxes Scottsdale residents will give to developers.

Contact John Dougherty at his online address: jdougherty@newtimes.com


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