DeVos Deficit Concerns Arena Tenant

April 25, 2003
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GRAND RAPIDS — The first fiscal-year forecast isn’t a pretty one, as it shows DeVos Place losing $1.8 million.

But the new $211 million convention center will only be operating for seven months of FY04, from December through June, as the first five months of fiscal-year red ink will be chalked up to the soon-to-be-gone Grand Center.

Still, DeVos Place is projected to register a loss of $925,939 from early December when it opens to the end of the fiscal year on June 30. (See related story.)

Over those seven months, 210 events are expected to take place in the building. At least 11 of those will be conventions and trade shows, while many will be performances from the four nonprofit arts tenants that occupy DeVos Hall.

March is expected to be the busiest month of the fiscal year with 39 events, and June the least active with 10. The only profitable month of the seven is February; projected to earn $57,401 largely because of the public shows held there each year by Showspan Inc.

Revenue, however, is only a problem because the cost to run the new building has skyrocketed. Building manager SMG has projected that total expenses will soar by nearly $1.9 million, going from $2.3 million this year for the smaller Grand Center to almost $4.2 million next year for the larger DeVos Place.

It will cost $2.86 million just to run the convention center for those seven months, and that figure is 24 percent higher than it is costing to operate the Grand Center this year. At the projected rate, it would cost about $4.9 million to run DeVos Place for a year.

Higher utility costs and a higher payroll, due to the addition of a dozen employees, are the main culprits. The cost for utilities is expected to jump by $789,524, more than double the current bill, while the added workers will cost the building another $679,415. Insurance premiums and security charges will also raise the expense tab by another $150,000.

Steven Heacock, chairman of the Convention and Arena Authority Finance Committee, didn’t feel that the predicted shortfall would add booking pressure to the Van Andel Arena, whose projected profit of $1.5 million will be used to subsidize DeVos Place. But he did feel that the stress from a looming deficit could affect overall operations in both buildings.

“Like with your home budget or with a budget at your business, it does make you think about how do we tighten up? How do we make certain that we’re getting the most out of each employee that we can? How do we make certain we have the best trained employees in each position and that we do turn off the lights when we leave the room?” said Heacock.

“It certainly makes you look at those kind of things.”

There is one thing that DP Fox Sports and Entertainment hopes the CAA does not look at, and that is to only see the arena as a revenue source for the convention center. DP Fox owns the Grand Rapids Griffins and Rampage and is the arena’s biggest tenant.

“It’s definitely a concern for us because whenever one public facility is being expected to generate a significant profit every year to subsidize another public facility, it makes the tenants of the first facility a little bit nervous that things are going to be operated so tightly that it might change things going forward, as far as how your lease is applied and those kind of things,” said Scott Gorsline, DP Fox COO.

“But with that being said, we have had a good relationship with SMG and the CAA and we obviously hope that continues. A lot of the success that the arena and tenants have had has been due to those relationships,” he added.

Gorsline told the Business Journal last week that DP Fox felt it was important for everyone not to lose sight of why the arena was built, especially after DeVos Place opens.

“The Van Andel Arena wasn’t built to serve as a funding mechanism for the convention center. It’s nice that it is making enough money that it can assist in that. But the sole focus of the arena can’t be to generate as much profit every year as possible,” he said.

“That building is also a public facility and is presumably for community enjoyment, quality of life, and all those other things that don’t fall into a bottom-line approach.”

As a tenant, DP Fox hopes that repairs and improvements needed at the arena won’t be set aside in order to fill the DeVos Place deficit. For instance, the CAA spent $65,000 last fall to add protective netting to the ends of the arena’s ice rink.

But that check was written before the board knew how much the convention center would be in the red. If that expense was to come up this fall, Gorsline wasn’t sure that the CAA would be so quick to pick up the tab.

“That’s why we’re concerned. There are a lot of interpretive issues with the Griffins and Rampage leases. If those are always determined in favor of the Authority, then that would cause problems for us. But, again, we’re hopeful that would never happen because we have had a good working relationship,” he said.

The finance committee will take a second look at the forecast next month and then send it on to the full board. Heacock has asked SMG to prepare a financial projection of DeVos Place 10 years out, but it’s not certain whether that document will be ready by next month.

With arena revenue filling much of the fiscal hole from DeVos Place, the CAA is facing an overall deficit of $300,000 for the upcoming fiscal year. The CAA, which operates both buildings, looks to have a fund balance of nearly $3.4 million on July 1, the start of FY04. So the board can cover the $300,000 deficit, if it needs to.

The good news is construction is coming in under budget. The CAA recently lowered the project’s cost from $219 million to $211 million, which should leave the board with a bigger reserve fund than initially planned. All construction work should be done in January 2005, just about halfway through the building’s second fiscal year.

By then, Heacock thinks the board will have a stronger grip on how to handle the new building’s finances.

“We’ll have a better idea of what utilities are. We’re making some guesses now but we’re not going to know until we start paying those bills on the big building. We’re also not going to have a firm grasp on exactly how many employees we’ll need to make certain that the operations are up to speed. We can guess that today, but we can’t know for certain,” he said.

“In ’05, we’ll have a much clearer idea. Then we will have seven months of experience operating the new building. We’ll also have a better idea of what (revenue) is coming in.”           

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