SMG Puts Faith In Incentives

January 30, 2006
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GRAND RAPIDS — SMG has accepted less money to continue managing the daily operations at DeVos Place and Van Andel Arena for at least three more years.

SMG will see its base fee for running both buildings fall from the current $490,400 to $350,000 in the next fiscal year, as the result of a renewal agreement the Philadelphia-based management firm signed with the Convention and Arena Authority last week.

“We have significantly reduced the base fee by $140,000,” said Dick Wendt, counsel for the CAA.

But the three-year contract, which has a two-year option that belongs to the CAA and up to a 3 percent annual increase to the base fee, contains incentives that could raise the total fee SMG earns to $700,000 a year.

“The targets are tougher. They’re higher and harder to hit,” said Tom Conner, SMG corporate executive in charge of the local account. “More of our fee is at risk and we accept that challenge.”

The agreement, which goes into effect on July 1, caps the incentive fee to the base fee of $350,000, or $175,000 for each building. Revenue has to reach $3.9 million at DeVos Place and $4.6 million at Van Andel Arena before an incentive is activated.

If SMG exceeds one or both of those benchmarks, the firm will collect 25 percent of the first $500,000 above the standard and 30 percent of the revenue above that figure, up to the base fee total of $350,000.

The forecast for this year has the convention center earning revenue of $4.1 million and the arena earning $4.6 million, income figures that are above the benchmarks.

So if DeVos Place reaches $4.1 million in revenue next year, SMG will earn 25 percent of the $200,000 that is above the $3.9 million benchmark, or $50,000. Adding that amount to the building’s base fee of $175,000, means SMG would receive $225,000 for running the convention center.

But the revenue the CAA receives from the DeVos Place underground parking ramp is excluded from the SMG revenue target in the new contract, income that has been projected to reach nearly $257,000 this fiscal year.

“In absolute dollars, we’ve reduced the fee. But we want them to hit the incentive, because it means more revenue for all of us,” said CAA Chairman Steven Heacock.

“The goal of this contract was to create some net revenue for capital improvements and the marketing of the buildings,” he added.

SMG estimated that it earned almost $673,000 in base and incentive fees from both buildings during the previous fiscal year, which ended last June 30.

The arena’s food and beverage service contract between the CAA and Centerplate also expires at the end of June. Board members hired Chris Bigelow of The Bigelow Companies of Kansas City last week to serve as a consultant in that upcoming negotiation.

“He is going to come in and do an analysis of our food and beverage revenue and then help us create an RFP,” said board member Joseph Tomaselli.

The CAA can’t spend more than $9,000 on Bigelow’s services and his going rate is $200 an hour, plus reimbursable expenses that he bills at 110 percent of cost.

Board members also re-elected Heacock as chairman, Cliff Charles as vice chairman, and Birgit Klohs as secretary-treasurer last week. The trio will serve two more years at their respective positions.    

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