DeVos Deficit Funds Not ThereYet

May 5, 2003
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GRAND RAPIDS — All the surplus net income from the Van Andel Arena cannot be used to plug the operating deficit recently forecast for DeVos Place, the new convention center going-up on Monroe Avenue. At least, not for the time being.

Much of the money in question, $1 million a year for 10 years, was pledged from the arena surplus account by the Downtown Development Authority to the convention center construction project three years ago.

But in an agreement signed by the city and Kent County on March 29, 2000, the entire $10 million was dedicated to the building fund, meaning none of those dollars can be used to support operations at DeVos Place for 10 years.

“That’s correct,” said Dick Wendt, legal counsel for the DDA and the Convention and Arena Authority. “That $1 million cannot be [used]. The first $1 million has to go to the construction fund.

“This was the $10 million that the DDA pledged initially toward the construction of the convention center. The money was to come from net operating income from Van Andel Arena,” he added.

The CAA picked-up that pledge when the board took over operations of the arena and Grand Center from the DDA, and also took on the DeVos Place construction project.

SMG recently gave the CAA Finance Committee a forecast that has DeVos Place losing $1.8 million in its first fiscal year. Another SMG forecast showed Van Andel Arena with a projected surplus of $1.5 million for the same fiscal year, FY04.

The plan is to use that arena revenue to cover the DeVos Place budget shortfall, a move that would leave the CAA with an overall deficit of $300,000. The CAA would then fill that shortage with money from its operating-reserve account.

But if the entire arena surplus can’t be tapped for operations until construction is done, as is written in the agreement, then the CAA may be facing a $1.3 million budget gap instead of a $300,000 hole.

Even though the exhibit space opens in December, the entire project won’t be completed until January 2005.

Still, all surplus arena revenue over the first $1 million can be used to support operations at DeVos Place. Every dollar above $1 million would go into the CAA operating-reserve account and could be spent on the arena or the convention center.

SMG projected the CAA operating reserve for the next fiscal year at $3.3 million. Most of that money that was also shifted from the DDA when the CAA took control of the arena.

Although the first $1 million from the arena surplus can’t subsidize operations at DeVos Place today, it surely will before the ten years is up. To do that, the CAA will likely request the city and county to make a new agreement; one that will allow the entire arena surplus to go to building operations.

“You’d want to relieve them of that obligation at that point,” said Wendt.

If a deficit remains after the arena surplus is tapped, then the CAA operating reserve is hit. Then receipts from the county hotel-motel tax are used. Then the city and Kent County each pick-up half of any leftover shortfall.

The CAA operating-reserve fund, however, may grow larger than the projected $3.3 million once construction is finished because the cost estimate to build DeVos Place has fallen from $219 million to $211 million. Excess construction funds are likely to go into the reserve account.

DDA Executive Director Verne Barry told the Business Journal that he thought the arena surplus would go into the construction fund for four years and then get transferred to the building’s operating account for the next six years.

“That $1-million-a-year surplus will amount to about $4 million because it’s for four years,” he said. “Then it goes into an operating fund, it doesn’t go to construction. You’ve got two separate things, the construction and then the operation of the convention center.”

Barry also said that a concern expressed by DP Fox Sports, owner of the Grand Rapids Griffins and Rampage and the arena’s biggest tenant, about the building’s revenue being turned over to DeVos Place was a valid one.

“I think they have a genuine concern because they are a major tenant. Because how well we do, or don’t do, directly has some bearing on what is going on with their franchise,” he said.

But at the same time, Barry said cash for capitol replacements, about $500,000 each year, is set aside each month and not counted in any surplus the arena has.

“That money is taken out before they show a surplus,” he said. “That money is used for repairs and reconditioning, to make sure that the upkeep is first class

The $1 million from the arena surplus wasn’t a line item in the operating budget forecast for DeVos Place and isn’t part of the $1.8 million deficit projected for the building.

The reasons the arena has had an annual surplus for the past six years has been credited to good management of the building by SMG and the fact that the building isn’t responsible for its construction debt. The DDA is, and that is an unusual situation in the financing of public arenas.

“If the arena was a normal arena that most cities get involved with, if they made a surplus of $1.5 million they’d still be losing $2.5 million right off the bat by retiring the bond issue,” said Barry.

The DDA has paid about $4.2 million annually for the arena debt from a bond package the board approved in 1995. That yearly payment will rise to $5 million in two years.

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