CAA reups with SMG for arena and center

May 13, 2011
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The Convention and Arena Authority extended its management and food service relationship with SMG by renewing both agreements for a three-year period, with two two-year options at the discretion of the CAA.

“In each case, that option is the CAA’s option, not SMG’s option,” said Dick Wendt, CAA counsel.

The management agreement, which could run through June 30, 2018, covers both Van Andel Arena and DeVos Place. The contract gives SMG a yearly base management fee of $325,000, which is $4,000 higher than the current fee, with an annual increase for inflation that is capped at 3 percent. The base fee can go up by $50,000 annually if SMG loses the contract for food service.

Along with the base fee, SMG can collect an incentive fee if the management firm reaches a revenue benchmark of $9.1 million in the next fiscal year. The mark rises by $100,000 annually for each of the following fiscal years. But the incentive fee cannot exceed the base fee, due to the commitments made to the bondholders of both buildings. SMG can collect 25 percent of the first $500,000 that exceeds the benchmark figure and 30 percent of the revenue total that tops the first $500,000 as an incentive fee, which is the same as the expiring contract. Operating income has to exceed operating expenses by $700,000 but be less than $750,000, the incentive threshold, to collect the fee.

“This incentive fee always seems to be so convoluted, but it has to be,” said CAA Chairman Steven Heacock, because of the buildings’ outstanding debt. SMG has managed the buildings since both opened.

The food service agreement with SMG Food & Beverage could also run through June 30, 2018. Major changes to the contract include the fact that the firm no longer has to post a performance bond of $100,000 but will have to make a capital contribution of $250,000 toward a new electronic point-of-sales system going into the arena. The contribution will be made in $50,000 payments over five years and replaces a $50,000 contribution made by the firm to the board’s cost for a feasibility study concerning an outdoor amphitheater in Millennium Park.

SMG Food & Beverage still will receive 53 percent of gross revenue from concession sales, 19.5 percent from catering and suite sales, and 30 percent from the sports bar.

“The scope of services remains the same. The contribution remains the same. The pricing remains the same,” said Wendt.

The CAA has the right to terminate both contracts before the terms expire by giving a 180-day notice to SMG. The agreements go into effect July 1, when the CAA begins its 2012 fiscal year.

A related contract change will be coming to the board next month. SMG Regional General Manager Rich MacKeigan also serves as the CAA’s executive director under an agreement the board made a few years ago. That agreement is expected to be transferred to SMG soon. MacKeigan will retain the post, but under SMG instead of the CAA.

“This is a wonderful partnership,” said Heacock of the board’s relationship with SMG. “I couldn’t, frankly, be happier with how it has worked out.”

At the same meeting, SMG Finance Director Chris Machuta presented the CAA with the third-quarter financial results for both buildings, and it’s unlikely the arena will hit the $1 million-surplus mark for the first time since it opened in October 1996. Machuta felt the year-end surplus would reach $800,000, which compares to the $1.24 million margin the arena earned last year.

Machuta explained that the arena got off to its worst start in history with only one concert in the first five months of the fiscal year, and that was an “American Idol” road show that didn’t sell all that well.

“We’re down about six concerts (for the year),” he said. Normally, the building hosts about 20 concerts each fiscal year, but artists haven’t toured as much this season and some acts are only playing smaller venues such as DeVos Performance Hall, which has had sold-out shows from musicians such as James Taylor and Jackson Browne.

“We continue to be concerned about the concert business,” said Heacock. “We absolutely rely on the concert business. It’s not the local economy or anything like that. It’s the industry.”

Machuta did note, however, that the concert traffic to the arena could very well return to normal in the next fiscal year. He said the building has five shows on sale now and he felt the arena would host 20 or 21 next year. The only problem he could see with the early concert schedule is that some of those artists, such as Taylor Swift and Katy Perry, don’t have a track record of being big food and beverage sellers like others that provide a boost for the building’s ancillary sales.

“Those won’t be the big beer nights that we have with Motley Crue and Bob Seger,” he said. The Crue plays the building with Poison and the New York Dolls in August, while Seger makes another visit May 28. Through the third quarter, 10 concerts had been held at the arena. Sixteen were projected to play.

As for DeVos Place, Machuta said the convention center has performed very well for the first three quarters compared to last year and this year’s expectations. He said the building was doing about $200,000 better than the forecast. That can be attributed to higher event income from DeVos Performance Hall and smaller meetings held in the convention center. Both have earned about $260,000 above projections; the convention center was $146,000 in the red after three quarters.

One expense that has plagued DeVos Place this fiscal year is utility costs. CAA Financial Consultant Robert White said electricity charges were running 18 percent higher than last year’s tab for the first nine months. Electricity is 60 percent of all utility bills. The total utility charge for both buildings over the first nine months came to $1.64 million.

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